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With
a long history of manufacturing in China, International Smart Sourcing is taking advantage
of the outsourcing trend and has turned the corner on profitability
Basic Materials
Fabricated Plastic
(OTC: ISSG)
International
Smart Sourcing, Inc.
320 Broad Hollow Road
Farmingdale, NY 11735
Phone: 631-293-4796
David
Hale
President
Interview conducted by:
Lynn Fosse, Editor
CEOCFOinterviews.com
March 2003
BIO:
David R.E Hale, President
David R.E. Hale has
over 20 years of senior level experience in optimizing and synchronizing a broad spectrum
of financial and operational programs. Mr. Hale assumed the position of
President of International Smart Sourcing, Inc. in 2002, after having been the Chief
Operating Officer from 2000-2001. A dynamic leader of change and growth, he developed a
plan that transformed a major subsidiary in ISSI from a manufacturer to a
distributor-manufacturer and increased the gross profit of domestic operations by 50%.
Additionally, he assumed responsibility for the operations of an international outsourcing
subsidiary and led ISSI in turning the corner into profitability.
Mr. Hale previously
worked as an independent management consultant after having served and been promoted early
to every rank in military service before retiring as a Major General. His military
positions include: Commanding General of the US Army forces in Southeastern Europe, Deputy
Commanding General and Chief of Staff of US Army Forces in the Pacific, Assistant Division
Commander, Deputy Director for Politico-Military Affairs, Joint Chiefs of Staff. He is a
veteran of Vietnam and Desert Storm, and was awarded the Silver Star and Purple Heart.
Mr. Hale graduated on the Dean’s
List from the United States Military Academy, West Point. Later he was number 1 in his
class while achieving a Master of Science in Operations Research/Systems Analysis. He was
an assistant professor at West Point teaching business management, engineering, and
systems analysis and was the first recipient of the Department of Defense Excellence in
Education Award for outstanding achievement as a teacher.
Company Profile:
International Smart
Sourcing (OTC:ISSG) specializes in assisting companies to substantially reduce their cost
of manufacturing by outsourcing all or part of their manufacturing to China. Its services
include project management, source selection, engineering coordination, quality assurance,
logistics, and cost reduction. Product specializations are tooling, injection molding,
die-castings, metal stampings, electronic manufacturing services, and contract
manufacturing. The Company has offices located in Farmingdale, New York and Shanghai,
China.
International's EHC subsidiary designs, markets, and manufactures injection-molded plastic
components used in industrial, consumer, and military products. The Company also offers
secondary operations on its molded products. Services, such as hand painting, pad
printing, hot stamping and engraving, are provided at a customer's request. These marking
systems can be used on most materials and varying contours.
Industries served include: Pneumatics, Liquid Pumps, Air Pumps, Fitness Equipment,
Computer Components, Printers, Communication, Hardware, Sports Equipment, Home Security
Devices, Power Tools, Home Appliance, Consumer Products, Locks, Vending Machines,
Lighting, Construction Supplies, Plumbing Parts, Electrical and Gas Motors, Spray Guns and
Sensors and Gauges.
CEOCFOinterviews: Mr. Hale, please give us a brief
history of International Smart Sourcing.
Mr. Hale: We started as a manufacturing company about
45 years ago called Electronic Hardware Corporation, specializing in plastic injection
molded parts. Prior to going public in 1998, we added two other subsidiaries and
brought it under the name of International Smart Sourcing Incorporated.
CEOCFOinterviews: What is your focus today?
Mr. Hale: Our focus today is two fold. Two of those
subsidiaries remain active. First, Electronic Hardware is in the business of
supporting electronics through plastic injection molding. It’s done that
through two things: First, through government contracts where we provide plastic parts to
the government with a second focus on our commercial customer base. The second part of
this is International Smart Sourcing and this is our growth opportunity that is focused on
outsourcing manufacturing from the US to China. The areas that we outsource manufacturing
for them are plastic injection molding, tooling for that, die casting, metal stamping, and
electronic manufacturing services.
CEOCFOinterviews: What are the advantages for having it done in
China?
Mr. Hale: I think part of it is obvious; the first is the
price of the product, the cost of the product. In most cases, we are able to talk to
our potential customers and show them that the direct savings on the cost can be anywhere
from 30% - 50%. Actually, the cost savings go beyond that. We’ve been able to
demonstrate that with one of our subsidiaries, Electronic Hardware, because as you
transfer the manufacturing offshore you are able to greatly reduce your overhead cost,
labor cost, and operating cost as a factory. Then, you can turn your organization around
and have it become focused on sales and marketing while your manufacturing is being done
elsewhere.
CEOCFOinterviews: Is there an industry trend towards outsourcing?
Mr. Hale: Absolutely. It’s not only in the
manufacturing field, but there is also an outsourcing trend to use all of the back office
processes, such as accounting, information technology, and service support. Take all of
those functions and put them in outsourcing mode to allow your firm and the remaining
organization to really concentrate on the core competency of selling and marketing.
CEOCFOinterviews: What is your role in connecting US companies with
China manufacturers?
Mr. Hale: If you talked about a middleman, you would
think in terms of a broker or rep., someone who puts you in contact with a company in
China and then leaves it up to you to coordinate it with them. There are a lot of people
who try that approach and find that there is tremendous difficulty and a tremendous amount
of risk associated with dealing with a factory that you don’t know. You are
talking twelve time zones away and you have the Chinese to English and English to Chinese
translation barrier that isn’t just in language but through technical drawings and
engineering specifications. We take all of that away and provide a full service. We
are an ISO certified company and have been in manufacturing for over 40 years so we know
what US customers expect in terms of quality and delivery. You deal directly with us. You
place your order with an American firm and then all of the work with China is transparent
to our customers. That is because we have an office in Shanghai of 15-25 project
engineers, project managers, logistic coordinators, and quality control staff. Most of
these people are bilingual and deal with a network of about 75 factories that we have
contractual relationships with. We are able to provide the full service to a US
manufacturer, which from his point of view is transparent. The risk along with the pain
and frustration of trying to deal with an entirely new entity is minimized.”
CEOCFOinterviews: Is there much competition for the service that
you provide?
Mr. Hale: There is and there isn’t. Let me
explain. The larger corporations are able to do this on their own. What they
do is invest in infrastructure in China, India, or some other location. That is to say
that they will go over and form a joint venture or buy a factory and they will set it up
and over a period of time they will train the people in the factory to deliver the
product. Smaller and mid sized corporations either cannot afford that kind of investment
or they could and don’t have the time to set up an office and start a factory or
start a relationship with the factory. So there is very little competition at that
targeted small and mid sized manufacturer. They don’t have the means to
accomplish this on their own. That is where we come into play. Not only are we full
service, but also we provide those organizations that don’t have those resources,
time and money, the opportunity to outsource their manufacturing to China quicker at a low
price.
CEOCFOinterviews: Are you paid by the amount that they are
producing in China or a flat fee? What is the revenue model?
Mr. Hale: We base our pricing on the service that we provide
to a customer. Some of our customers are already dealing with China and what they
want us to do is make some of their headaches go away. They started and placed an order,
and didn’t have good results, and so they ask us to provide only part of the menu of
services we provide. They may ask us to do quality surveillance for them, coordinate the
logistics of shipping their product, whatever their problem has been. Other customers want
the full menu. They want everything. They want to place an order with us and have those
products show up on their door, the right part at the right time, exactly what they would
expect from a US manufacturer. Our pricing is based on the quantity and level of the
service that we provide.
CEOCFOinterviews: How do you market your services?
Mr. Hale: The marketing is principally to select the smaller
and mid sized companies where we feel we have strong factory connections to in China. In
addition, we have a strong engineering and quality staff in China that is our office, to
work the relationship with those factories. Next is to identify which one of those
industries in the United States are interested in those types of products, and which of
those organizations can benefit the most from outsourcing and manufacturing.
CEOCFOinterviews: So how do you do that?
Mr. Hale: Principally you start with your strength; you have
to play where your strong factories are and your expertise is. That is why when the
organization first started, it was built upon the plastics industry because the one
subsidiary, Electronic Hardware, had tremendous experience in the plastic markets and knew
the people who could benefit from the outsourcing of manufacturing. It’s really both
an art and a science. The science part is to do the market research and identify the
organizations that fall into certain revenue categories within some of these industries
that we look for. Then, we do further research and look at the specific products that they
are making and ask if that product can be made in China by our existing factories and do I
have the expertise in China to supervise the quality and delivery of that?
CEOCFOinterviews: How has the economic downturn affected the
company?
Mr. Hale: Actually the economic downturn hasn’t
influenced us much because it has provided an incentive for the smaller and midsize
companies who are facing tremendous pressure and trying to find solutions to remain
competitive. While there are fewer potential customers for us, those potential customers
certainly are much more eager to do outsourcing to remain competitive and to remain in
business.
CEOCFOinterviews: Do you tend to have long-term customers or is it
more of a project-to-project basis?
Mr. Hale: Actually, it is the long term customers, the long
term relationship, particularly someone who is looking at the long term impact of this
where they are able to shut down their factory, sell off their equipment, not worry about
environmental constraints and the cost of those constraints, reduce their labor force
dramatically and rely upon us to be their manufacturing link. That is the long-term
relationship where we continue to supply the product to them, while they continue to do
the marketing, sales, and distribution of the inventory that they want to hold on hand.
CEOCFOinterviews: Tell me a little bit about the cash and credit
position of the company.
Mr. Hale: The corporation has been in the loss mode until the
last two quarters. The report of 2003/2002 showed a profit and the unaudited report
for 2004 will show a profit as well. Therefore, we’ve turned a corner and that has
been based on two things. One, we’re above the learning curve on how to support the
manufacturing in China and we have a market for this concept. Two, we have been able to
benefit in Electronic Hardware Corporation from outsourcing its manufacturing in China and
that has seen a gross profit. The picture right now is we have turned the corner as of
2003 and the projection is to continue to increase profitability over the next year.
CEOCFOinterviews: How much of the business is the Electronic
Hardware Corporation?
Mr. Hale: There’s about $11 million dollars in revenue
and approximately $8 million of that is associated with Electronic Hardware.
CEOCFOinterviews: How do you see that area developing?
Mr. Hale: Actually, that is a pretty stable platform and
foundation on which we have been able to grow the outsourcing business and will continue
to grow the outsourcing business. The reason it is stable is because we have a
governmental contract for five years and we are so competitively priced on the commercial
side of that business on the outsourcing and manufacturing to China. We not only
practice what we preach with the one subsidiary, we’ve actually put it to practice
with the other subsidiary.
CEOCFOinterviews: Are there manufacturing areas you would like to
do business in that you are not involved with now?
Mr. Hale: We haven’t identified any right now.
However, there are times when we know a demand for a certain type of item. Right
now, we are in the business of sharpening our focus of the products and services that we
are able to offer in each of the areas of plastic, tooling, die casting, metal
fabrication, as well as electronic manufacturing services. Our feelings are that those are
broad enough right now and as we narrow our focus within each one of those areas on
specific products and services, that is sufficient in terms of growth opportunities. That
is not to say that we would not be opportunistic and take advantage of something that came
along that we saw was of great demand in the United States, once we were able to identify
again the strength of factories in China as well as our strength to staff in China in
satisfying that kind of demand.
CEOCFOinterviews: What should shareholders and investors know about
International Smart Sourcing that they might not recognize?
Mr. Hale: I think the key thing is to recognize that we have
a strong foundation in Electronic Hardware Corporation and we have a growing concern here
called International Smart Sourcing that is growing rapidly. Much more demand is in the
wave of the future for outsourcing, and we have a very strong relationship in China that
we are able to leverage.
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