Please read the Pride Industry case and answer the following questions
1.
Define the case main problem / problems and articulate them
2.
Define the SMT operation s and discuss its characteristics
3.
Discuss what could be the appropriate operation s strategy for SMT
4.
Based on your assessment, discuss whether the company should go ahead in SMT proposal
5.
Define SMT process type and layout design. Discuss the appropriateness of SMT process type and layout in the light of the SMT operation s characteristics and strategy

Steve Twitchell, the vice-president of sales operati ons for PRIDE Industries (PRIDE), was deep in thought, contemplating what had just transpired in a staff meeting where a proposal for a $2.6 million capital equipment expenditure had b een debated. If approved, the project would replace PRIDE’s aging electronics surface mount technology (SMT) machines with newer, faster and more capable machines.
The capital expenditure was a large sum for PRIDE, a nonprofit social enterprise, and thus represented a significant investment. The proposal looked good on pa per, and Twitchell had a hunch that it was the only way to keep PRIDE’s current electronic manufactur ing services (EMS) custom ers happy, as well as capture new business. Still, the investment also repr esented a risk. What if the projected new business opportunities never materialized? Twitchell couldn’t he lp thinking about a recurring phrase mentioned in the meeting that seemed to offer only two options for moving forward: “Close it, or build it.”

THE HISTORY OF PR
IDE INDUSTRIES
PRIDE Industries began in 1966 when a group of parent s met in the basement of a church in Auburn,
California. The parents wanted to start an organizati on that could find meaningful work for their adult children with disabilities. Through this work experi ence, it was hoped that they would rise above their disabilities and become contributing and productive me mbers of society. The people who met in that basement and created PRIDE that day probably ne ver imagined how large the organization would eventually become.
The number of Americans with some sort of disability is quite high, some estimates putting it as high as one in five. Despite this fact, more than two-th irds of working age Americans with disabilities are unemployed, and many not by choice.
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PRIDE’s mission is to create jobs for people with a wide range of cognitive, intellectual, sensory, physical and emo tional disabilities. The company provides the support, training and opportunities necessary to help people with disabilities overcome obstacles to employment by creating jobs through its own business enterprises and by partnering with others in the community.

Over the years, PRIDE evolved and diversified its businesses, offering manufacturing, supply chain and facilities service solutions to businesses and government agencies nationwide. The consolidated PRIDE organization consisted of two en tities: PRIDE Industries and PRIDE Industries One, Inc. Contracts employing individuals meeting a st rict federal definition of “severe” disability were organized in PRIDE
Industries. PRIDE Industries One, Inc. managed all ot her contracts and employed individuals with a wide range of disabilities.
The PRIDE organization was composed of two ma jor service divisions: Manufacturing and Logistics
Services (MLS) and Integrated Facilities Services
(IFS). Both divisions incorporated support for individuals with disabilities.
The IFS division provided a full line of faciliti es services to public and private sector customers, including commercial custodial, cleanroom and f acilities maintenance, military base operating support services, transportation and a wide variety of specia lized services, such as commissary operations, food service, grounds maintenance and shipboard provisioning
. Over the years, PRIDE’s IFS division helped many companies achieve national Leadership in
Energy and Environmental Design (LEED) and
Environmental Protection Agency (EPA) recognition fo r environmentally friendly maintenance and waste reduction programs.
The other major service division, MLS, offered contract manufacturing to original electronics manufacturers including Class I and II medical device ma nufacturers. The division also provided services such as contract packaging, supply chain and fulfillment solutions, l ogistics, and accompanying print, mail, and e-store solutions to Fortune 10+ compan ies. In 2010, the MLS division received global recognition when Hewlett Packard (HP) named PRIDE its
“Service Supplier of the Year” for its work on
HP’s supply chain and fulfillment services.
As of 2012, PRIDE had approximately 4,700 empl oyees, including 2,600 with disabilities, making it one of the largest non-profit employers of people with disabilities in the United States. Headquartered in
Roseville, California, PRIDE operated in 11 states a nd Washington, DC. PRIDE facility locations as of
2012 are shown in Exhibit 1. Some financial hi ghlights and trends are shown in Exhibit 2.
CONTRACT MANUFACTURING AND THE SURFACE MOUNT TECHNOLOGY BUSINESS
Surface mount technology (SMT) is a method for c onstructing electronic circuits in which small components, such as capacitors and resistors, are m ounted directly onto the surface of printed circuit boards (PCBs). PCBs are used in a wide variety of electronics devices, such as cell phones and handheld tablet devices. Traditionally, circuit boards containe d numerous tiny holes, and then “through-hole parts”
(components with wire leads designed to go through holes) were inserted into the holes and soldered together on the reverse side of the board. Thro ugh-hole components have largely been replaced in consumer electronics by capacitors and resistors th at are designed to be surface mounted, do not have wire leads and so are called surface mount devices
(SMDs). SMT has many advantages over through-hole mounting techniques: smaller components can be used
, many more components can be mounted per unit area (i.e., higher component density), fewer holes need to be drilled, simpler and faster automated assembly is possible, components can be placed on both sides of the board and many SMDs cost less than equivalent through-hole parts.
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As early as 2005, PRIDE began thinking about re-e nergizing its SMT operation. Its machines were becoming outdated and would not be capable of ha ndling the ever smaller components that customers required. At the beginning of 2010, PRIDE started to consider specific options for improving the SMT line. It seemed as if many potential PRIDE customer s were simply waiting in the wings for PRIDE’s capability to improve. Indeed, Twitchell knew of a num ber of potential customers that wanted to do business with PRIDE but who were not interested until PRIDE’s SMT technology became more current.
For example, the quality assurance manager from one pot ential customer had stated: “PRIDE Industries is a qualified supplier, but the aged equipment is a diffe rentiating concern compared to other prime contract manufacturing partners. We’d hope to see upgrades befo re we could consider PRIDE to become a prime.”
Initially, in order to start its electronics contract manufacturing business, PRIDE had purchased used SMT machines from Flextronics, buying machines “piecemeal,” including second-hand machines (15- to 20- year-old equipment) from Singapore and Mexico. Th ese machines, although they performed adequately, were considered to be an inferior quality by many
, including the PRIDE director of operations, Tracy
Weatherfield. PRIDE’s early efforts in SMT, however
, did keep the business alive and proved that the prospects for the SMT operation were real. These initia l successes encouraged PRIDE to consider how to take the business to the next level. Even during some of the darkest days of the economy, with other companies shutting down everywhere, PRIDE’s SMT line was able to thrive.
Weatherfield, who had a background in electronic contract manufacturing, had worked at PRIDE for seven years. Prior to his arrival, the operation ser ved some customers well, but the company had not continued to invest in the operation. PRIDE wanted to stabilize and re-energize the operation and hired
Weatherfield to help them accomplish this goal.
In consumer products such as the iPhone, iPad a nd other smart cell phones, electronic components were shrinking, allowing manufacturers to pack more capab ility into them. Commonly used flat chips, such as capacitors and resistors, have a footprint (i.e., length by width size) traditionally identified by a four-digit code. In the United States, the four-digit code repr esents chip dimensions measured in inches. For example, a size code of “0402” represents a chip dime nsion of approximately 0.04 inch x 0.02 inch, and
“0603” represents a chip 0.06 inch x 0.03 inch. PRID
E’s older equipment from its original SMT line could accurately place and solder components sized
1206 and 0603, as well as some 0402 components.
Even though PRIDE could place a few 0402s, it was with limited success and with relatively low yield. A growing number of current customers required placem ent of components as small as 0201 or even 01005.
The latter size component, the smalle st available as of 2012, measured a miniscule 0.01 inch x 0.005 inch, a size so small that it required the coding standard s to expand to five digits. Components designated as
0402 and smaller were so tiny that they looked similar to grains of black pepper. See Exhibit 3 for a size comparison of electronic components.
PRIDE found success with its first SMT line, despite the older machinery, tough competition and an economic recession, an indication that it had progre ssed beyond “survival mode.” It doubled electronics revenues in FY 2010—11 even with the old equipmen
t. With the proposed new machines, revenues were expected to grow by 20 per cent during the transiti on period (an interim time period during which both the old and new machines would be runni ng) and would see continued growth and scalability in the future.
PRIDE’s leadership was committed to the electronics contract manufacturing business because it created great high technology jobs for people with disabilities, a key differentiator for the company. At the time, the SMT machines employed only a few people, a nd none of them with disabilities, but the real opportunities for job creation resided in the processe s both preceding and following the SMT line. What
PRIDE really wanted to do was assemble the box that the circuit board went into and then package everything up, because of the labour content associated with that work (the “downstream” steps).

This assembly and packaging activity w as often tailor-made for workers with significant disabilities. PRIDE wanted people to snap things together, test them, package them, etc. If all PRIDE built were the PCBs
(and they had a few customers for whom that is all they did), there would be profit made but not much labour content. Due to PRIDE’s unique company missi on, it looked to provide labour, not for ways to remove it. Processes had to be efficient, to be sure, but finding ways to add steps that could be done by employees with disabilities was part of PRIDE’s core mission.
Weatherfield summed up the goal of the new SMT operation:
The work we’re hoping for is th e work to build the electromech anical assembly associated with the board. This includes all sorts of manual asse mbly related with puttin g the product together, and then that gets packaged and shipped to another warehouse in Sacramento, our national warehouse facility, and then the finished goods go out from there. The board is just the starting point. We really want the downstream work.
PRIDE’s customer base was predominately in the Unite d States, but one of its goals was to start looking for customers that were unhappy with their offshor e suppliers. For example, suppliers such as Jabil
Circuit, Foxconn (manufacturing products for Apple, Foxconn is the world’s largest maker of electronic components) and Flextronics operated predominantly offs hore. But there were literally hundreds of other, smaller contract electronics manufacturers (CEMs) operating with minimal equipment. For large production volumes on products such as the iPhone and iPad, manufacturing in China and other low-wage locations in Asia was the lowest un it cost alternative. PRIDE was awar e of this economic reality but was confident that there were business opportunities in the middle-tier volume and custom volumes, particularly for companies looking for offshoring alternatives that were
“Made in America.”
In the federal arena, PRIDE had a large footprint on the services side but not on the product side. One obstacle was that lead solder was required by Depart ment of Defense (DOD) contracts, whereas most of the commercial work PRIDE performed used non-lead solder. Various directives such as the Reduction of
Hazardous Substances (RoHS) were designed to re duce hazardous waste, including lead-based solder.
THE PRIDE SMT PROPOSAL
Both MLS and IFS were vying for business. The largest part of the IFS business was on federal facilities.
The division needed $5.1 million, primarily for equi pment acquisition in a contract expansion with a major military base and to purchase office equipment, pickup trucks, vehicles, street sweepers, etc.
Because its request was backed up by contracts from the federal government, it made no sense not to spend the money. Also, 100 employees (including many with disabilities) were to be added to the IFS division as part of this appropriation. By contrast, in the case of the MLS busin ess, the justification to purchase the SMT machinery was backed up sole ly by a forecast of future profits.
One of the important pieces of the capital expenditure analysis was to study trends in the manufacturing sector. The PRIDE team discovered some signs of manufacturing returning to the United States from offshore. This “onshoring” or “b acksourcing” phenomenon wa s in its early stages, and the amount of work returning was still relatively small, but the discovery of this trend gave the PRIDE team encouragement and confidence that they were head ing down the right path. Media reports on TV networks such as NBC, as well as a report by the Bo ston Consulting Group, seemed to support the idea that some types of manufacturing activities were slowly returning.
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Due to its rising wages, quality problems and other factors, China was no longer cons idered the “default” option for a growing number of manufacturers. There was a general feeling that PR
IDE should get ahead of the curve and lead by example in terms of onshoring. In its capital expendi ture proposal for the SMT line, PRIDE referenced the onshoring trends noted in an article by McKinsey & Company.
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Encouraged by this new evidence,
PRIDE expected to see a growing number of opportun ities, virtually all requiring new SMT technology, as work migrated back to the Un ited States from offshore suppliers.
James Womack, one of the world’s b est known lean management experts,
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had argued for years that offshoring to low-wage countries posed significant ri sks. He felt that most decision makers simply compared piece price costs for a product or service with corresponding costs in a low-wage country and then added in the cost of slow freight, usually by container ship, when deciding whether or not to move production offshore. Womack argued that a manufacture r needed to consider many hidden costs before relocating work offshore and use a more realistic anal ysis of total costs, which he referred to as “lean math.” 6
For example, lean math would include the cost s of expensive expedited shipments from the low- wage supplier, the costs of engineer visits to help the new supplier get the product or service right and the costs of senior executive visits to establish or correct relationships with new suppliers.
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Despite all of this recent evidence, PRIDE realized that manufacturing of goods with relatively high labour content in high volumes would likely remain in
China for the foreseeable future. Thus, PRIDE’s proposal focused on work it could capture in the middle-tier volume and custom volumes.
A potential marketing benefit of onshoring by PRIDE that should not be understated was the “Made in
America” element. Indeed, both customers and consumer s increasingly shopped for products that were at least assembled in the United St ates (using foreign components, in many cases). In the automotive sector, it had been common practice to tout that vehicles we re “Assembled in the U.S.A.” PRIDE seemed in a perfect position to capitalize on this trend by creating jobs in the United States, many for workers with disabilities no less, and in its own way help contri bute to the resurgence of U.S. manufacturing.
The new SMT line was projected to generate 60 to 80 new high tech jobs for people with disabilities and to create another 40 to 50 jobs for people with disabilities in distribution, pick/pack/ship and warehouse operations indirectly related to a growth in electr onics work. Capacity of the SMT line was projected to increase fourfold to a minimum of $40 million per year
. In addition to improved quality and the increased capacity, the new SMT line would allow PRIDE to expand its medical device manufacturing service business and compete in the new LED circuit board assemb ly industry. PRIDE would be the only contract manufacturer in the Sacramento Valley offering these services.
PRIDE spent eight to nine months going through de tailed cash flow projections for the new SMT equipment, during which time the financing options changed several times. The new SMT operation would consist of two lines, with each line containi ng three machines to place the electronic components

into PCBs. Most SMT equipment was highly automated.
In fact, even the original line required just two workers, and the new line was projected to require onl y three or four workers.
Each 54-foot line also contained (1) a board-loader, (2) a printer, (3) a solder inspection machine, (4) a tray changer, (5) a reflow oven and (6) a board un-loader (see Exhibit 4). In theo ry, a printed circuit board would start at one end, come out the other end and then automatically move to testing and packaging. The original line ran for one shift, sometimes a shift and a half, and it was an ticipated that the proposed line would operate in the same manner.
PRIDE considered several SMT machine manufacturers, but ultimately narrowed its list down to two:
Panasonic and Juki (the world leader in sewing m achines). The Juki machines were considered more flexible but were not as fast as the Panasonic machin es. Either machine would be faster and more precise than the used machines or iginally purchased by PRIDE. For buildi ng a million iPhones, Panasonic was a good system, but PRIDE was not looking to compete in the high-volume market. Settling on the right platform was an important decision because of th e long-term commitment it represented. Many additional electromechanical elements of the operation such as the programmers and controllers and all the component feeders would need to be purchased from the selected manufacturer, both now and well into the future. Juki had a strong track record in the business, and because of th e flexibility its machines offered, PRIDE selected Juki as its machine supplier.
The new machinery represented a capital equipment investment of $2.6 million. PRIDE anticipated a return on investment (ROI) period of 39 months a nd expected to have positive cash flow in 10 months.
The current fiscal year forecast of $14.9 million in re venue and $700,000 surplus included $1.5 million in business that was dependent upon the upgraded SMT lin es. A five-year forecast model had revenues with the new SMT lines growing by 20 per cent per year, whereas revenue without the upgraded equipment was projected to shrink by $1.5 million in the first year, followed by 20 per cent per year going forward.
PRIDE looked at revenue projecti ons and made some assumptions around customer losses versus customer gains. It felt that if it did nothing for th e next five years, it woul d see revenue eroding and lose existing customers as well.
Tim Yamauchi, PRIDE’s chief financ ial officer played “devil’s advocate” in reviewing the proposal. He carefully reviewed what the proposal team provide d and asked additional probing questions such as whether or not PRIDE really needed to invest in the SMT machinery and whether or not there was a better way that the money could be spent. Would the proposed SMT line create more and better jobs?
Was there some other way to accomplish this that di d not require investing in the new machinery? The team created detailed cash flow projections in order to prepare a proposal that would stand up to scrutiny.
The original plans were budgeted for half the cost (t o install one SMT line), but then PRIDE realized it needed two complete SMT lines. The desire for a sec ond line was partly due to the need for a backup to provide critical redundancy — in case one line went down, the other could take over. Therefore, the cost of the original proposal doubled. After this decision was made, the team had to go back and reconsider its assumptions again, taking a look at the new numbers and performing a new cash flow analysis. This revised proposal was then submitted to Yamauchi, w ho examined it carefully and asked some follow-up questions. The team convinced him that PRIDE n eeded two separate SMT lines because it could not approach world-class organizations without a prop er production backup plan. Exhibit 5 shows some images of the dual SMT Juki lines at PRIDE, al ong with views of other production areas, including packaging and electronics assembly.
PRIDE’S UNIQUE MISSION
One could argue that PRIDE’s founders, during that fi rst meeting in a church basement in 1966, were acting as “social entrepreneurs.” Social entrepreneur ship is defined as “the recognition of a social

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problem and the uses of entrepreneurial principles to organize, create and manage a social venture to achieve a desired social change.”
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Most business entrepreneurs measure an organization’s performance in terms of profit and loss. A social entrepreneur, ho wever, also considers and measures where and how their business makes a positive impact on society and if it is helping to solve some societal problems.
The idea of social entrepreneurship originated in the 1960s. One well-known contemporary social entrepreneur is Muhammad Yunus, founder and mana ger of Grameen Bank and its group of social venture businesses. Yunus, a native of Bangladesh, was awarded a Nobel Peace Prize in 2006 for his work helping people in developing countries to st art small businesses by providing micro-loans at reasonable interest rates and giving them a basic un derstanding of financial pr inciples. Yunus has often been called “the banker to the poor.”
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Social entrepreneurship has gone mainstream recently with major magazines publishing lists of the “best” or “most promising” social entrepreneurs. For example,
Fast
Company Magazine publishes an annual list of the 25 best social entrepreneurs, and
BusinessWeek
has kept pace, publishing a review of the 25 most promising social entrepreneurs in the United States.
From a practical perspective, despite the company’s mission, PRIDE still had to make money to stay in business. There was an unofficial slogan among mana gement: “No money, no mission.” So PRIDE was run as a business with a social mission; the non-profit d esignation in the end was a tax status that did not mean that PRIDE could run the company without a positive cash flow.
Yamauchi considered social entrepreneurship the most important ingredient in PRIDE’s mission. He was involved with an organization in the San Francisco area called “Hub Bay Area,” part of a network of other Hub affiliates “designed to facilitate the cr eation of sustainable impact through collaboration.”
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An annual conference affiliated with Hub, operating out of the Bay Area and known as Social Capital
Markets (SOCAP), was held every year in San Francisco.
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SOCAP connected global innovators such as investors, foundations, institutions and social entrepre neurs to build markets at the intersection of “money and meaning.” Yamauchi used his involvement with
Hub and the SOCAP conference to stay up to speed on the latest developments in social entrepreneurship.
Yamauchi felt that traditional ROI approaches were th e easy part of the appropriation process. It was the softer, qualitative aspects of the pro cess that were more difficult. For example, how do you balance the social capital? Would the capital expenditure help PRID
E to continue meeting its social mission? Did the project align with “living the values” of the organiza tion? This was one of the critical differences between
PRIDE’s process and more traditional approaches to capital appropriation requests.
A big part of PRIDE’s mission was to support empl oyment. PRIDE employed many “job developers” who were out working in the community, looking for jobs for people with disabilities. In fact, PRIDE had more job developers than it had salespeople. PRIDE had only two people trying to sell electronics work but eight people trying to sell jobs in Northern California.
Since the elimination of waste and minimizing non-va lue-added steps, including excess labour steps, represented the cornerstone of lean management, at first glance it would seem that PRIDE’s focus on
“looking for labour opportunities” was counterproductive and outmoded.
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However, PRIDE was focused on productivity and setting up efficient operations, in cluding proper work cells; it was not trying to create waste. It needed to be competitive when designing jobs
, just like everyone else, but the people that were performing the jobs might have a disability. PRIDE w ould go out of its way to define work for people with disabilities, but it still had to achieve high qua lity, low costs and on-time delivery to be able to compete at a world-class level.
THE NATURE OF THE LABOUR FORCE
PRIDE provided individuals with a wide range of disabilities with jobs at every level. The paths to employment were equally varied.
One was through a typical recruitment and hire process. Individuals requiring support and training were referred to PRIDE through state agencies such as a department of rehabilitation. They could choose employment in PRIDE’s business enterprises or request support and preparation with the ultimate goal of community employment.
In many cases, an observer walking the floor at PR
IDE could not tell which employees had disabilities, at least not from their work performance or productivity.
To be sure, many of the jobs did not have a complicated nature and did not require extensive trai ning or education, but those sorts of activities were the nuts and bolts of the organization.
PRIDE looked to help people be successful in the jo bs that suited their interests and strengths, breaking through stereotypes of “good jobs for people with di sabilities.” In the case of th e electronics department, and also with the work PRIDE did for HP, it took jobs that were done in the market by people without disabilities, brought them internally and then hired people with disabilities to perform those activities.
Consequently, it created an integrated work envi ronment within its own walls, with much more meaningful jobs than might typically be found in the rehabilitation arena. To many managers, the fact that
PRIDE employed 30 people with disabilities in the electronics division, out of a total staff of 80, represented a much more integrated environment th an companies where three or four people with disabilities were hired to work in a more traditional work setting.
TURNKEY CONTRACT MANUFACTURING SERVICES
PRIDE’s flexibility led to many new business opportun ities, including providing customers with turnkey manufacturing solutions and assistance with product d esign improvements. For instance, PRIDE worked with SynapSense on its product design and “desi gn for manufacturability and assembly” (DFMA) improvements. SynapSense sold wireless systems that were used in server rooms and hi-tech environments where monitoring of the design and manuf acturing of products was required. Customer files were reviewed using DFMA principles, as well as design for testing (DFT) methodologies. As a consequence, the product configur ation evolved from a box requiring 17 different screws that was a considered a “nightmare” to assemble to a box that had no screws, creating vastly improved assembly efficiency and a final product that worked very well.
Another example of turnkey work that PRIDE ha d captured was a product for Blackboard, a company whose core business was a suite of software soluti ons aimed at the educational market, such as
Blackboard LEARN. One of their software solutions required hardware capable of reading student ID cards through either magnetic swipe or proximity technology (e.g., security/door access, vending readers, laundry readers, copy readers). Bl ackboard had been performing final assembly, test, distribution and service repair in-house and was looking to become more efficient by focusing its efforts on design and
For use only in the course International Business Operations and Supply Chain Management at Royal Roads University taught by Hassan Wafai from Oct 18, 2013 to Mar 21, 2014.
Use outside these parameters is a copyright violation.
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sales and outsourcing other manufacturing and dist ribution activities. PRIDE was able to offer
Blackboard a cost-effective full turnkey solution ba sed on its existing infrastructure and capabilities.
Whereas before Blackboard had worked with several suppliers and performed so me activities in-house to fill orders, they could now work with one supplier to take care of all of their manufacturing, distribution and service/repair needs.
The contract work that PRIDE performed for Bl ackboard was particularly successful and echoed
PRIDE’s desire to provide top-notch service while also providing work that benefited society. In fact,
Mark Gunter, the vice president of strategic operations for Blackboard Transact, said:
We are excited to work with PRIDE Industri es; they deliver first-rate manufacturing and distribution solutions to our business and provid e Blackboard with a very scalable manufacturing and distribution solution. In a way, by teaming up with PRIDE, we not only have a world-class manufacturing and distribution partner, we also become partners in a very worthy social mission. 13
FUTURE GROWTH AND DIRECTION AT PRIDE INDUSTRIES
The decision by PRIDE to move forward with the ne w SMT line certainly offered many potential rewards but also some risk. A capital expenditure of $2.6 m illion represented a significant expense. Twitchell and the others appreciated this and understood the inherent risks but also felt that PRIDE needed to move forward with new technology or move out of the way. Indeed, the timing seemed right, given onshoring trends, the encouraging feedback from current customers and the potential for providing PRIDE employees more assembly work downstream. Still, woul d the projected increase in downstream business ever fully materialize? Would the new SMT line al low PRIDE to provide additional work for employees with disabilities in the future? How could the co mpany capitalize on the growing “Made in America” sentiment? All the while, PRIDE needed to conti nually balance its unique social mission with the practical aspects of running a business. Twitchell and others were always mindful of PRIDE’s unofficial slogan: “No money, no mission.”