Conference 7.286::digital

    We have some of the best module mfg lines in the country. Can we
    sell our services to other manufacturing firms in a sub contract
    role?
    

    
    re. 1
    
      Good idea. I think there will be more government regulation or tariff
    incentives and trade agreements resulting in partial US manufacturing
    of imported equipment (tools, cars, consumer electronics, etc.). One
    area you might look at in High Definition TV which the govt and several
    US manufacturers (including DEC) are specifying. I think there is real
    concern not to give the US market ago to off-shore competitors. So 
    in order for a foreign company to sell their new HDTVs, they may not only 
    have to meet the US technical spec but manufacture part of the unit here. 
    Since we are a customer of Hitachi, Phillips, Sony, ..., etc. maybe a deal
    can be made here.
    
     clay
     

    
    Let's manufacture REALLY INEXPENSIVE devices that the average consumer
    can buy, using his TV as a terminal and his phone to connect to
    a worldwide VAXnotes Computer Conferencing network created and run
    by Digital, thereby linking the minds of everyone in the world who
    owns a TV and a phone.
    
    Who knows what might develop with the accelerated exchange of ideas
    among hundreds of millions of people.
    
    Just an idea.
    

    
    just noticed there is an article about HDTV in today's Boston Globe.
    
    clay

    re: .3
    
    That's what my $69 ATARI does.  You should see my monthly
    Compuserve bill!
    
    Geoff

re: .3

Funny you should mention that idea.  Someone brought that idea up vis-a-vis
VTX at an industry meeting last night.

David

        Do HDTV, VTX, and Notes have relevance to the topic note?
        
        Tom

    re .0 The issue you raise is closely linked to the
    advantages/disadvantages of vertical integration.
    
    ie. Vertical integration is the most profitable way to go when you can
    consistently fully load your capacity, but is a poor way to operate
    when under utilization of capacity is likely to be a frequent
    condition.
    
    While the idea of sub-contracting our excess manufacturing capacity is
    an idea that deserves exploring I suspect that the demand would be
    greatest when the economy is strong and therefore our excess capacity
    might be limited. When the market is slack and we could use the
    sub-contracting business the demand for sub-contracting might be
    slight.

    re .8 Let me be clear what I mean by cutting capacity. I mean closing
    Manufacturing Plants, Like Franklin, Like Salem, Like Westminster
    etc.  I realize these buildings are being used, but the % of the
    company that is the manufacturing base is shrinking, while the
    "overhead" is expanding.  What I am asking for is suggestsions for
    other things we could manufacture that would keep this asset in
    tact and help balance the weight of the buearacracy that Digital
    has become.

    I think the base note brings up an excellent topic for discussion.
    One that scares me and makes me fear for the company as a whole
    in the future.
    
    When we look at specific product lines we used to associate them
    with DEC mfg plants. Think of printers - it's Phoenix, DECSystem
    10's and 20's? That would be Marlboro. VAX 11/750 Comets? Take a
    trip to Burlington, VT. VAX 11/785's? That would be Franklin. Raw
    cabs and 11/40's? Good old Westminster.
    
    The times they are a changing. Lord knows what is going on in Phoenix
    now. Franklin, Westminster and Marlboro no longer manufacture anything.
    Niether does Salem. DEC no longer manufactures any of our printers.
    And, if I'm not mistaken, the only video product DEC actually
    manufactures in the US is the yet to go to volume VR295. DEC has
    an agreement with Honeywell to have them build keyboards in Mexico
    for us. What does this mean to Boston?
    
    Better yet, what does this mean for DEC as a corporation in the
    future? Will we become nothing more than a design and support company
    in the'90's? Will we become dependent on others to make everything
    with a Digital logo on it? Are we going the same direction of the
    consumer elctronics inductry?
    
    Rich
    

    
    Yes, it would appear.
    
    We cannot compete with the offshore facilities when it comes to
    manufacturing. This is a fact of life. 
    
    The costs to run a plant in Mass. have got to be prohibitive.

    re.11 The cost of not maintaining a manufacturing capability can
    be worse. I have seen off-shore manufacturing in other companys
    get Nationalized, Confiscated, and otherwise removed from the compay's
    availability. 
    
    Re .10 You hit my concern dead center. 
    
    A suggestion to add to the short list follows:
    
    	Manufacture much of what we buy. Ie Fab, (we do some now),
    Transformers, IC's, Resistors etc.  We should recognize that as
    the Japanese come into the market, they may use the fact that we
    are dependent on them for many comodities to shut us out. We should
    not assume that they will always be willing to sell us chips at
    a price that will allow us to be competative with them.
    
    	The list should include Chips, Monitors and Power at a very
    minimum.

    re:  "Manufacturing" vs. "Design"
    
    This is an old and neverending debate, but it still points up a
    few interesting notions.  My own are:
    
    Everyone thinks of Japan as only a "manufacturing" threat, but
    few seem to realize that they are world-class R&D competitors.
    They took over the consumer electronics market because we *gave*
    them the manufacturing part, and they *took* the engineering part.
    We just didn't work at keeping our lead, and they worked very hard
    to catch up, and in some ways surpass us.
    
    Manufacturing *is* important to us, but it can't survive well in
    the current U.S. socio-economic environment.  The bulk of DEC's
    money goes to salaries, not raw materials or imported components,
    or land and facilities, or any other c  If DEC can't get
    a good return on those salaries, then we will not have to worry
    about being held hostage over foreign goods; we will already have
    suffered a fatal wound in the balance sheet.
    
    Geoff

    If running a manufacturing plant in the US is so expensive, why
    is Tandy opening a new one every year?  Just about all of Tandy's
    computer gear is made in the US.  What are they doing right that
    we're (supposedly) doing wrong?
    
    					Steve

    re .13 and .14
    
    And the Japanese are opening lots of manufacturing plants in the U.S.
    because the cost savings of manufacturing in low cost countries are
    both ephemeral (yesterdays low cost country becomes a high cost country
    pretty quickly these days), and the advantages of being "in-house" in a
    politically stable country are high.  (Short distance to market,
    protection from many tariffs and quotas, etc.)  Apple discovered this
    some time ago and pulled back manufacturing to U.S. plants.  They were
    saving assembly costs by putting computers together in Asia.  The
    savings were completely eaten up by transportation and inventory carrying 
    costs (something like 6 months worth of production sitting on the high 
    seas at any given time - that's a BIG stockroom!).
    
    Of course, you still have to be an extremely efficient manufacturer,
    a lesson that too many U.S. companies still have not learned.  This
    does *not* mean automation, either.  It means careful design for
    manufacture and attention to good layout, high quality of both parts
    and assembly, motivating your people at all levels, etc.  *After* you
    have those, you then can automate.  If you automate first (as GM has
    discovered) you actually increase expenses and degrade quality.  The
    NUMMI joint venture with Toyota was a good lesson there.  Toyota took
    one of the worst plants GM had and turned it into one of the best
    without adding any automation and using most of the original unionized
    workforce.
    
    /Dave

    Somebody from  Manufacturing correct me if I am wrong, but automation
    has  definitely  helped our productivity, and is  still  expected  to
    increase.  I think we have openly stated  that  we expect to continue
    growing without increasing manufacturing headcount.
    
    Another factor is that  we  have openned plants in different parts of
    the    world  sometimes  for  economic  costs,  i.e.    lower  labor,
    transportation costs,  but  also for political reasons, i.e.  we will
    be in a better position in 1992 when the European market consolidates
    by manufacturing most of  our  products within the EC as opposed to a
    US company without European manufacturing.
    
    In other cases, a country will restrict our sales if we don't provide
    local contents, e.g.  India, Mexico, Brazil.
    
    In still other cases could be just a matter of "being a good citizen"
    (the government  will  look  at  us with good eyes) and provide local
    manufacturing or engineering, e.g.  Japan, Australia, Canada.
    
    All this are just reasons why we may have  excess capacity in the US.
    It doesn't start to  address  the base note question of "are we doing
    the right thing with the US excess manufacturing capacity"
    
    /OLD

    re .16
    
    Manufacturing in the high tech field is actually turing away from
    massive automation. Structured, in-place automated assembly lines
    are very inflexible and carry a tremendous initial cost. We have
    found that ROI's that were done when this equipment was purchased
    missed the mark because product life cycles were so short.
    
    There is room for some automation but the trend now is to rip them
    out and pay more attention to Just in Time techniques.
    
    re Mfg in US
    
    In my opinion DEC never really dedicated itself, as a company, towards
    being a world class manufacturer. It was left up to plant managers
    and some group managers to have the initiative to make their businesses
    competitive. But, as a corporation, DEC is still an Engineering
    company first - IMHO.
    
    DEC has taken manufacturing for granted. We felt that we had such
    a superior product that customers were willing to wait a long time
    to get our product or were willing to put up with mucho bugs while
    the product(s) were being installed.
    
    However the competition has grown more fierce and it seems we have
    gone to great lengths to keep our manufacturing community out of
    the company-wide effort to modernize, streamline and excell.
    
    The US worker can make a quality product at a reasonable cost. I
    own two Nissans; one made in Tennessee and one made in Japan. I'd
    have to say the the US built Nissan is just as well built, perhaps
    a bit better built, than the Japanese built car. Mazada, Toyota,
    Honda and Nissan have all erected plants in the US to produce cars
    and, in some instances, the quality is better and the cost of doing
    business is less than in Japan.
    
    This places the onus on American management to get their heads out
    of the sand and concentrate on manufacturing the goods we use and
    the goods that can compete with anyone in the world market.
    
    DEC, in my opinion, needs to make a commitment to it's employees
    and it's US customer base that it will follow this path.
    
    Rich
    

    An interesting story. A few years ago I was talking to a friend who 
    is a long time AT&T employee. This was during a round of the recurring
    rumors about AT&T buying DEC. My friends comment was that he hoped it
    happened so that DEC could teach Western Electric how to become a low
    cost manufacturer. I guess we are not the worst around.

    Part of the problem, perhaps the biggest problem, DEC and many other
    manufacturers have is quality. How many DEC systems that reach a
    customer are just hooked up an run? Or are their DOA parts? I worked
    for an other vendor where systems were generally running in half to
    a tenth the time that equivalent VAXes at the same customer site were
    running. I don't thing the difference was in the technicians doing the
    work either.

    I also don't think that our quality problems (which appear to have
    been much reduced in the last 5 years BTW) are the result of the
    people putting our systems together either. The problems are usually
    process related and made worse by the way we do things
    administratively.

    For example, a few years ago one final assembly plant was getting a
    lot of bad boards from an other plant. Someone asked what was being
    done to get the supplying plant to correct the problem. The answer
    was nothing. They were re-working the boards themselves (at no small
    cost). Reason: The plant was judged on the amount of work they did
    and all that time in re-work was making their numbers look better.
    I hope things have changed but I would not bet on it.

    		Alfred

    .16 has a good point, but doesn't go far enough.  Digital is an
    international corporation, with over half its sales overseas.
    It doesn't make sense for all or even most manufacturing to be in the U.S.

    I heard from a DEC lecturer on MRP II, that labor only accounts for
    about 5% of manufacturing cost for Digital's products (those that we
    still manufacture). Domestic content laws/bias and tax advantage are
    the major reasons for manufacturing outside the US.
    
    If you look at Japanese and European manufacturing companies, they
    typically are a conglomerate of a lot of little companies that work
    to mutual benifit. This keeps each subsidiary highly efficient
    because of direct profit/loss responsibility.
    
    In Digital, manufacturing is a huge bureaucracy. Our semiconductor
    manufacturing technology is substandard (just about every major semi
    house can pack 3 to 4 times what we an on a chip) because we're not a
    the semiconductor manufacturing company. Our storage systems is
    substandard, e.g., no read/write optical disks, because we not a
    storage systems company. Our printers were substandard, and no longer
    made in Digital (except for laser printers, and even there most of the
    components are bought out -- little Digital content). And now, we're
    even buying CPU chips outside, because we've fallen so far behind
    in performance.
    
    We make a little of everything, and make nothing particularly well. As
    a consequence our manufacturing capacity is being idled, as we find
    suppliers that specialize in particular businesses. We're simply buying
    from others that specialize and integrating it. You can expect this
    trend toward closing up manufacturing sites to continue as we move ever
    more to simply being a just systems integrator -- unless we do some
    major re-organization very quickly. 
    
    -George

    There's another large piece to the picture here:
    This discussion makes it sound as if the only thing Digital sells
    is hardware.  That just isn't so! We once sold hardware, and wrote
    enough software so that customers had something to do with it. 
    
    More and more, we sell software/custom services, and put together
    enough hardware so that customers have something to run the software
    on.

    I think there's a lot value in the "B" school lesson with respect
    to Digital. Yes, (according to a presentation give by Jack Shields
    and his cadre) 140% of profits come from software, i.e., the profits
    from software compensate for losses in hardware. That doesn't
    mean we'd have made as much profit without the hardware. We shouldn't
    liquidate that end of business. What Digital has to realize is that
    the hardware market is becoming a commodity market and organize
    the hardware product lines to be profitable in a commodity market.
    
    Alas, we have a 30 year history of where the hardware design engineers
    (electrical engineers) were like little gods and the rest of the
    employees were second class citizens. These little gods created the
    "unique" products that made Digital a huge success -- manufacturing
    were semi-talented engineers that stamped out the gods' designs, sales
    were only order takers, marketing of no 'real' use at all, and software
    engineers were a necessary evil. 
    
    Some of those little gods are now senior managers and exectives. They
    are still emotionally tied to the notion that the hardware design
    engineers are still what makes this company tick. Until we can retire
    most of those senior managers and executives, it's unlikely we'll
    see a more balanced company strategy. Note that IBM retires all
    senior executives at age 60.
    
    -George

    re .23
    
    Please explain the "140% of profits".  According to my 'old math',
    even if hardware was a loss leader, if all of the profit was software,
    it would still be 100%.
    
    Sorry if this is a nit!
    
    	-Barry-
    

re:.24  -< possible math error >-

>    Please explain the "140% of profits".  According to my 'old math',
>    even if hardware was a loss leader, if all of the profit was software,
>    it would still be 100%.

Consider this (contrived) example:

Revenue from H.  =  60		Revenue from S.  = 240
Cost of Hardware = 100		Cost of Software = 100
======================		======================
Profit from H.   = -40		Profit from S.   = 140

Total profit from Software and Hardware = 100

Therefore, profit from Software would be 140% of total profits.

Ray

    Re .23 . Not so fast. Those h/w engineers took Digital from zero to
    multi-national status. Once s/w engineers get Digital to the stage
    where our profits exceed IBMs - then retire the "originals".
    
    Anyway, no one group alone produce results. I do agree, however,
    that heavier emphasis needs to go on Marketing. Again considering
    IBM , their hardware, and certainly their software, has never been
    either elegant or leading-edge. One could be ruder ...
    
    But their Marketing ..
    
    Mike Day 
    

	  Arguinug about whether software or hardware brings in the
	revenues is just plain stupid. Neither would sell without
	the other. I didn't need to go to the "B School" to figure
	that out.

	  We need to look at the whole profitability picture, not
	point fingers.

	Roy

No one believes the "Digital myths" more than Digital.

Speaking with the authority of an ex-customer, I can testify
that many Digital sales were made inspite of, not because of,
the hardware.

It was the software that got us to "put up" with truely
terrible hardware --- especially disk and tape drives.

Sure, there were sales made because the hardware provided
easy-to-connect busses, and because it was often the far-
and-away best price, but there were also many sales based
strictly on DEC's innovative software offerings.

There were also many sales lost because commercial enterprises
could not entrust their business systems to unreliable
(and slooooow) peripherals (the terminals were pretty
nifty though!).

It is amusing that what DEC viewed as a "necessary evil"
the customers viewed as DEC's competitive advantage.
And that what DEC still perceives as its strong suit,
was also its weak suit.

However, to the extent that myth decides our business
strategies and organizational structure today, it is
sad rather than amusing.

- greg

re: .28

>	  Arguinug about whether software or hardware brings in the
>	revenues is just plain stupid. Neither would sell without
>	the other.

I see your point and it is valid.  BUT we still must assess these
individually.  If we misunderstand where the real revenues and
profits derive, then we may well misprice our products, or make
bad investment decisions.  Worse, it puts us at the mercy of
companies who are hardware or software only, and who therefore
can price in a way to take market from us.  For example, if we
continue to put too much profit burden on software, then we're
exposed to a competitor who sells a competing software product
based only on their software engineering costs and ROI.

IBM had to confront this dillema in the 60's when they were
forced to unbundle software from hardware.  We have to face
it now.

>	  We need to look at the whole profitability picture, not
>	point fingers.

Objective analysis isn't finger pointing, which is not to contradict
you, since non-objective analysis is.  But there's a difference.

- greg

    Being in Mid Range I have seen one of the frequently passed around
    financial analyses which 'proves' that Mid Range hardware is a loss
    leader. 
    
    One of the positions of the analysis was that the H/W Engineering group
    which developed the CPU module, the I/O adpater module, the power
    system, the system cabinet & cooling, and the DVT/RQT/Field Test that
    validated that the S/W worked on the system --- got the revenue benefit
    from the cabinet and CPU modules only. 
    
    The memory, mass storage, and S/W which did not have to pay a piece of
    the system development costs (such as bus design, I/O subsystem design,
    power design, obtaining regulatory approval, etc ..) and who have an
    add on business with fairly healthy markups, looked like they were the
    organizations making money. 
    
    This was a artifact of the accounting method used, how development
    costs are assigned, and the realities of pricing. We build systems
    which is an integrated effort of many organizations.
    
    To use a suspect analogy; considering splitting revenues between H/W,
    S/W, and Storage would be like Ford Motor company deciding the forego
    building cars so it could concentrate on the Ford spare parts business,
    because the spare parts business is so profitable. 
    
    /jim 

	  I agree that some analysis of the various parts of the
	profitability picture is necessary. But each area should be
	judged not only as a part of the whole (ie. we lose money on
	widgets, but for every widget sold we make a million bucks
	on the accompanying doohickey), but against their respective
	*expected* profits.

	  That's where planning has to come it. We can't just say,
	"software is making all of our money, so let's cut our
	hardware costs". There may be inherent costs in hardware
	development that are not seen in software development, and
	inherent advantages in software that don't exist in hardware.

	  Rather, we must say "how much *should* this have taken to
	develop, and how much *did* it take, and do the same type of
	thing with expected and actual profits.

	  Unfortunately, all of this is probably very complicated,
	and then you get into justifiable and necessary cost
	overruns versus unnecessary ones, etc.

	  All in all it's something that has to be done. I just get
	very wary when people looka t only the bottom line and start
	making blanket statements and generalizations.

	Roy

re: .32

Yep, I think we agree.

>	We can't just say, "software is making all of our money,
>	so let's cut our hardware costs".

Is anyone saying this?

- greg

    Re: [.33 (Greg Robert)]:
    
[.32] >>	We can't just say, "software is making all of our money,
      >>	so let's cut our hardware costs".

    > Is anyone saying this?

    > - greg
    
    Some people, observing Digital closing down manufacturing facilities,
    buying chips from external sources, and signing contracts to obtain
    peripheral devices from third parties, get that impression.
    
    I don't know if I endorse that viewpoint, but I see where it comes
    from.

I think what they are saying is much more complicated than that,
though this is not an appropriate place to comment or speculate
upon corporate investment decisions.

People may choose to attribute various reasons to those decisons.
Everyone has the inalienable right to think what they like.  On
the other hand, voiced speculation has a way of becoming rumour.

There's an old reporter's trick where you get "information",
distorted or otherwise, by invoking a string of denials.  Come
to think of it, it's an old lawyer's trick too.

Although, you picked an interesting example, because it is just
the kind of thing that, handled incorrectly, can cause all sorts
of problems with the SEC.

- greg

    re: .28
    
    >      Arguinug about whether software or hardware brings in the
    >        revenues is just plain stupid. Neither would sell without
    >        the other. I didn't need to go to the "B School" to figure
    >        that out.
    
    
    Wrong.
    
    Ever heard of Microsoft?
    
    What kind of hardware do they make?
    
    We can run future operating systems and layered software on other machines
    that are already on the market like Sequent (just an example, albeit a
    good one) etc.  A VAX is a VAX is a dinosaur.
    

    RE: .36
    
    I concur. MicroSoft is now the second largest independent software
    vendor doing $625M world wide ($325M in the US) in packaged software
    for 1988. That's more than double their $300.9M world wide in 1987.
    
    Oracle (a relational database management vendor) grew from being the
    eigth largest software company to become the fourth largest this year
    ($424.6M in 1988). Now, Digital's RDB is a lot better than Oracle. If
    it were spun off as a seperate company to be able to port whatever
    platform it desired and market strictly for it's own benifit, it could
    be bigger than Oracle. RDB's revenues could be a half billion dollars
    if it weren't shakled to the hardware business.
    
    -George

	I'll have to agree with .-1..  Unfortunately we don't have RDB
	running on ultrix, which is costing us sales... Look at ORACLE,
	yes it available on every machine under the (excuse the expression)
	sun.  We must support Ultrix, and VMS.  So why not support our
	products (Rdb etc) across both platforms.  I know one company
	who selected Oracle because Rdb did not run on the DEC station 3100.

	How much has this cost us in sales $$??

 - Mike