It all started with a simple phone call.
Jabil Circuit Inc. wondered if it could be of more assistance to SGI in Chippewa Falls, and SGI happened to be looking for a company to help with supply chain services.
The more the companies talked, the more it became clear that they each had something to offer the other.
“This really is a win/win for both companies,” said Jim Luginbill, vice president of computing and storage for Jabil.
A $6 million deal is in the works for Jabil to purchase the manufacturing portion of the Chippewa Falls SGI plant at 100 N. Cashman Drive. The deal is expected to be completed in February.
With the agreement, Jabil will be SGI’s primary company for manufacturing services and supply chain management. Jabil also will buy parts for SGI, which is one of the world’s leaders in high-performance computers.
But initially, purchasing a portion of SGI was far from the minds of executives at Jabil, Luginbill said.
And vice versa.
“Jabil taking over the facility was not even an idea (at first),” Luginbill said. “It was never discussed. It wasn’t an option. The idea was that we could offer them a lot of different supply chain services, but we thought we had a better global footprint.
“Then, as we progressed, it became clear that really what was interesting to us was the capability of that plant.”
Forming a partnership
Jabil is a $15 billion electronics manufacturing services company with its headquarters in St. Petersburg, Fla. It was founded in 1966 and has more than 60 plants in 25 countries. It’s the third largest company of its kind.
When Luginbill toured the SGI plant in the summer of 2013, it became clear that the two companies could make a great partnership.
The Boise, Idaho native appreciated the scenery as he drove from the Minneapolis-St. Paul airport to Chippewa Falls. But even more so, he was struck by what awaited him inside the plant.
“I was very impressed with the capabilities of the team,” Luginbill said. “They knew what was going on, and they were down-to-earth Midwestern folks — hard working.”
When the conversation between the companies first began in 2012, SGI was focused on obtaining supply chain assistance, he said. But quickly the companies realized that both had better potential for profit if SGI was willing to sell.
“SGI isn’t just putting servers together,” Luginbill said. “What they are really good at is assembling and testing high-performance computing systems. That’s what I got excited about. What we wanted, they could do.
“We came to a mutual decision: ‘Let’s see if this can work.’”
At that point, SGI wanted to make sure that Jabil was the best fit. It began speaking with other companies. But when it came down to it, SGI chose Jabil.
“We were fortunate in that process to be selected,” Luginbill said.
Dick Harkness, SGI senior vice president of operations in Chippewa Falls, said the sale makes sense.
“SGI in Chippewa is a great facility but only manufactures in Chippewa Falls,” he said. “Jabil has worldwide facilities. It’s an opportunity to improve SGI’s cash position. It enhances our balance sheet if we don’t have that level of inventory on our books.
“We hope it will provide leverage to spend to a much larger supply base.”
Jorge Titinger, CEO and president of SGI, has similar thoughts.
“We expect significant benefits to SGI and our customers as a result of this relationship, including a more variable cost structure, greater flexibility to respond to changes in volumes or customer requirements, shorter cycle times for certain products and enhanced quality management," Titinger said.
Luginbill said that Titinger had partnered with Jabil previously and he was impressed with the work Jabil provided.
“We did many different things for him in his previous company,” Luginbill said. “Here, we worked with his team for a year and determined what we could do in different areas. We realized this really could be mutually beneficial for both of us.”
For Jabil it works because its capability can work for other customers like it has for SGI, Luginbill said.
“This is a capability we need in order to successfully grow with other high-performance computing customers,” he said. “If Jabil is doing it for SGI, we have a better chance in bringing in others.”
For SGI, the price is steady, the company can use Jabil’s economies of scale, more cash is available on its balance sheet and it gets better pricing with Jabil’s leverage, Luginbill said.
As soon as Jabil began seeing a solid opportunity with SGI, Jabil’s senior business unit director, Jeff Farrand, was called.
“I worked with SGI as they were contemplating their strategy,” Farrand said. “I was definitely willing to step in and take this on. It’s an exciting opportunity.”
Farrand made a few trips from his base in Dallas to Chippewa Falls to understand the site.
“We started with the focus of, ‘Can we bring SGI in as one of Jabil’s customers? How do we get this to make sense for both parties?’ ” he said. “We began to sell Jabil’s capabilities to satisfy what we thought SGI could use.
“Now I’m focused on satisfying SGI as a customer going forward and helping other customers as we see a fit.”
Looking to the future
“We’re still servicing SGI,” said Farrand. “It’s just coming from a site that will soon become a Jabil site. What the people do today for SGI, they will do in the middle of February. They will do the same thing, they will just wear a different badge.”
About 130 SGI employees that work in the manufacturing sector of the business were given the opportunity to transition to Jabil when the sale is final in February, Farrand said. A few people will remain with SGI, but about 99 percent of the offers were accepted.
“We’re really excited,” Farrand said. “It’s a good indicator that the team is excited about the change.”
SGI will be left with about 200 employees in Chippewa Falls after the transition.
The other excitement for Jabil is the knowledge and the skill set of the employees.
“They can put up to 72 racks together, wire them, turn them on, test them, and debug them,” Luginbill said. “The room is set up for the right cooling, and electrical infrastructures are in place. Not everybody has the capabilities to do that.
“That was something they knew how to do in high-performance computing. They know how to do it and they know how to do it well. Customers can see that.”
Luginbill said the workforce is stable and solid. All of this combines to make the perfect scenario for customer satisfaction, he said.
“The product is going to very high-end and esoteric customers. They’re going to look at it very carefully,” Luginbill said. “They’re going to make sure the quality is there. That’s what we liked about SGI. There’s a lot of internal manufacturing with customers that we have for high-performance computer systems.”
Harkness is well aware of the high-quality product that SGI provides. He also knows a good opportunity in bringing in Jabil.
“I think at a high level SGI has continued to review our supply chain and are continually on the lookout for partners that can add value to specific areas,” he said. “There are a couple of high-level items that we believe prove beneficial. SGI will pay Jabil once SGI ships product. Jabil is 25 times larger. We hope we can leverage their supply chain and get some of our assemblies and parts at a better cost.”
Harkness also can’t say enough positive things about SGI’s workforce in Chippewa Falls. He said SGI is a “uniquely differentiated facility.” The workforce is greatly experienced — average tenure at the plant is from 15 to 17 years — and it’s what Jabil was looking for.
SGI isn’t solely about manufacturing. Harkness said the 200 remaining employees will still provide significant operations in Chippewa Falls. The company will continue to provide design engineering, customer services and other jobs.
“Hopefully (the change) will benefit the area,” Harkness said. “Jabil brings more work than just SGI and can grow without being solely dependent on SGI business cycles.”
Jabil plans to market the Chippewa Falls plant as a center of excellence for high-performance computing and to customers of cloud services.
Cloud services refers to pulling together all different computing and networking pieces so people can use computer power remotely instead of having a machine or hard drive under the desk or in the back room, Luginbill said.
“You have the server — you have to have storage,” he said. “You are tying all of those elements together in a cloud environment. When someone wants a cloud application, they don’t want to do it themselves, they want to expand what they have.”
With SGI and Jabil, it all fits, Luginbill said.
“We have this capability. We’re going to make sure Chippewa Falls is understood and start the process. It gives Jabil a chance for growth, and Chippewa Falls people a chance for new opportunities,” he said.
“All of that takes effort. Our value proposition here has to be better than what (SGI) or any other customer is getting today — if it’s in quality or cost of supply chain management.”