Internal Collaboration: A Bright Idea
Leading companies are plugging into current economic volatility to switch up their supply chains and make a connection between internal logistics departments.
“You never want a serious crisis to go to waste…it’s an opportunity to do things that you did not think you could do before,” said Rahm Emanuel, Barack Obama’s chief of staff, in a November 2008 Wall Street Journal interview. Certainly, his words ring true in the supply chain arena as many companies are working hard to ferret out costs, inefficiencies, and redundancies. One of the most powerful tools they’ve found is collaboratingnot just within supply chain departments, but across the entire enterprise.
“Companies have been slow to recognize cross-functional collaboration’s importance,” says Jeff Karrenbauer, president of INSIGHT, a Washington, D.C.-based supply chain consulting and software solutions firm. “Part of that is our fault. When logisticians get an audience with a CEO, we talk about goals such as reducing LTL cost per hundredweight by 10 percent. The CEO may have no idea what that means. We have to demonstrate how supply chain metrics directly relate to senior management goals.”
FLIPPING THE SWITCH
In the past few years, companies have worked to streamline external supply chain partner connections and processes linking their global business networks. The topic of internal collaboration was cast in the shadows.
In challenging economic times such as these, however, internal collaboration takes on greater importance. Breaking down silos, busting up the inefficiencies they create, and changing reward systems to compensate based on business performance as a whole, requires continuous effort.
Many leading companies are turning their high-powered analytical lenses inward. They are going back to the drawing board to rethink how internal departments can collaborate to take cost, time, and redundancies out of their businesses. Because it touches all aspects of the enterprise, supply chain management is right in the thick of these efforts as companies such as Intel and CVS Caremark attack collaboration head on.
Intel: Illuminating Process Change
In March 2008, Santa Clara, Calif.-headquartered Intel introduced a family of low-power processors designed specifically for mobile Internet devices and a new class of simple, affordable Internet-centric computers called Netbooks. The new processor, dubbed the Atom, is based on a micro architecture designed for small devices and low power. Intel expects the Atom to open up a significant market by providing highly capable small processors at low cost.
The Atom presented a logistics challenge, however. Intel expected to price the new microprocessor at one-fifth the average price of current base products. “We needed to create a supply chain to deliver billions of parts into the marketplace at remarkably reduced costs,” explains Jim Kellso, Intel’s senior supply chain master.
In early 2008, Kellso and a small team kicked off a project to evaluate the challenge. Intel has supply chain masters in every major business operation who, while they primarily focus on their individual areas of purchasing, logistics, and planning expertise, are also considered supply chain authorities. Together, these experts form a practice community within the company.
The cross-functional team set out to define Intel’s current supply chain costs and assess how they would line up against the new product suite. “We needed to determine if we had an affordability problem, and if so, its size,” Kellso says.
The first step was establishing supply chain costs relative to total product cost. This exercise included breaking out items such as direct labor to support supply chain activities; inbound, outbound, and interplant freight; and all inventory costs. Some of these costs find their way to product spend, others are balance sheet items. Regardless, they had never been assembled into a single number. Once this calculation was complete, the team could identify the appropriate cost range for the new product line and the key drivers for those costs.
The supply chain team identified a solution, then gathered vice presidents from purchasing, logistics, IT, and finance, among others. “We told them we had a significant cost gap,” Kellso recalls. “Given the Atom’s drastically lower price structure, our current total supply chain costs, as a percent of unit price, were unacceptably high. We needed to decide how to cut supply chain costs nearly in half.”
The group opted to launch a larger cross-functional team of approximately 40 people—including representatives from design, business unit manufacturing, production, supply chain planning, materials and equipment acquisition, and customer interaction—to design a new supply chain to handle the tens to hundreds of millions of Atom microprocessors Intel would ship.
The team began with the premise that product would be manufactured at Intel semiconductor fabrication plants around the world. “After that, all other processes were open to discussion,” says Kellso. “We asked, ‘What does the customer want, and what does that drive? Where are our costs, and how can we reduce them?'”
In answer to the first question, customers want a supply guarantee. “They want the right parts delivered when they need them, in the configuration they request,” he adds.
As to the second question, the majority of Intel’s supply chain costs center on two areas—inventory and adjusting to change. “Our assembly test cycle is fairly long—eight to 10 weeks,” Kellso explains. “At 10 weeks, though, customers’ ability to predict what they want is poor. So we are constantly re-planning production closer to the time of need. We create excess inventory because we’re guessing what the customer wants.
“We are successful at running a large manufacturing engine effectively,” he continues. “But we don’t always build the right product.”
The team believed the better alternative to Intel’s traditional push-based production model was to plan and build fast enough to get inside the order variability window. If production cycle time collapsed, the company could build the Atom on a pull-based system, therefore reducing inventory and obsolescence.
The cross-functional team spent four months challenging paradigms to produce high volumes of the right product more efficiently. “We believed we could be equally effective using a pull model without affecting the rest of our product costs,” Kellso says.
The key is taking time out of the entire process. “For example, if we can simplify the product suite design so that we build fewer variants, we can collapse planning time significantly,” explains Kellso.
PULLING IT TOGETHER
The cross-functional team developed a pull-based model to drive production operations from the assembly test point onward, thereby addressing the moment where extreme product differentiation occurs. The team did this by bringing together all the different silos to problem-solve inaccurate inventory volumes.
One key question that had to be answered was whether a pull-based system would negatively affect assembly-test equipment utilization. Intel had always assumed plant utilization would suffer too much under a pull system because frequent conversions and changeovers would be too costly. Assembly test plants cost hundreds of millions of dollars to build, so maintaining utilization is crucial.
But with a simpler product suite, the assembly test site could consolidate orders for a few days without impacting utilization. “We have to delicately balance how many days we can consolidate orders and still do pull-based manufacturing,” Kellso says.
Currently, Intel is in phase two of the supply chain redesign project—proof of concept. “The concepts have been approved, but we have to prove they work,” says Kellso. “Our goal is to drive inventory down by reducing cycle time and building the right product. We also reduce labor costs by doing things once and doing them right.
“People know their roles well. But they may not know how what they do affects everyone else,” he adds.
Working on a project of this magnitude requires constant communication and education so all parties understand how the pieces fit together.
“I had 40 people on this team, and each one at some point said, ‘I’ve never learned this much in my life,'” Kellso continues. “When you sit down together and go through the entire product process flow—- from concept and design, through manufacturing to customer interaction—- you see where your job connects with other peoples’ jobs. You understand what they do and how you impact each other.”
In particular, the supply chain redesign project created “one of the strongest partnerships between corporate finance and supply chain management that I have ever seen,” he adds.
Historically, finance simply acts as the gatekeeper of spending. In this project, however, finance helped the project team find costs that the company typically did not capture, and build models to identify and track them. “Finance was on the project team from the beginning. They were our rudder on where we were spending money,” Kellso says.
The project offered a tremendous learning opportunity for everyone involved. “Even if we stopped now, 40 people understand the supply chain so much better that it was worth the effort,” Kellso concludes.
CVS Caremark: Rewiring the Network
In 2006, CVS Caremark, the largest provider of prescriptions in the nation, launched an initiative to reassess its supply chain after a steady dose of mergers and acquisitions. The project consisted of three phases: first, creating a supply chain roadmap or master plan; second, rebuilding internal logistics infrastructure; and third, using the new infrastructure to engage with internal and external business partners to drive strategic collaboration.
“We had completed several major acquisitions and, in the process, acquired a diverse network of operating technologies,” explains Ronald Link, senior vice president of logistics for the company, which fills or manages more than one billion prescriptions annually. “This meant we weren’t as efficient as we needed to be, so we decided to standardize our logistics systems. As a result, we’re rolling out a new warehouse management system, which includes real-time slotting and labor management functions.”
To execute the systems overhaul, CVS Caremark had to forge a significant partnership with its information systems organization. “Without that partnership, we could not have rebuilt our infrastructure. We needed a close relationship to align goals, resources, training, and technology rollout,” Link observes.
With the IT partnership solidified, the supply chain organization reached out to store operations “to ensure that when we think about our future, we create a model that will enhance service to stores,” Link says. “We needed to work with our merchants, so that we would tie phase three—supplier collaboration—to the stores’ way of doing business.”
CVS Caremark will kick off phase 3 this year. The goal is to work collaboratively with suppliers to pull cost out of the supply chain.
The infrastructure project team worked together to ensure that systems requirements were well-defined. The team identified its warehouse and labor management operational needs and spent a great deal of time evaluating various solution platforms, using the supply chain roadmap to guide its decisions.
As an important component of successful implementation, CVS Caremark developed a corollary “PRIDE” effort with its DC workforce.
“The PRIDE initiative is about personal responsibility,” Link says. “We held large rallies in our DC facilities and within our logistics organization. We talked about our best-in-class service model and the high-performance work environment. We focus on reliability, productivity, quality, safety, and continuous improvement, then reward individuals with incentives based on personal performance.”
The logistics team also works closely with the retail leadership team, which defines the organization’s strategic initiatives and oversees the company’s daily operations. The group discusses improvement initiatives and conducts cost-benefit analyses on these ideas.
Recently, the two groups met to rethink store deliveries. CVS Caremark delivers product to stores via private fleet and contract carriage. The company’s transportation team, headed by Joe Estrella, director, transportation and logistics network, worked with store operations to identify cost-reduction opportunities.
Collaborating with the stores, Estrella and his team dynamically re-routed and re-aligned territories in CVS Caremark’s DC network. By doing this in one DC, for example, the company cut 1,900 routes annually. At the same time, it makes 98.9 percent of store deliveries within 15 minutes of their estimated arrival time.
The route reduction saves approximately 330,000 miles annually. “With fluctuating fuel costs, we needed a solution to address the issue. The re-routing project saved a lot of money,” Estrella notes. “It’s also good for the environment and saves wear on the fleet.”
To demonstrate to the stores that they would benefit from the route/territory redesign, the transportation team modeled the new delivery network, met with the stores, and presented a “before and after” picture of anticipated outcomes and benefits. “To date, our results are exceeding expectations,” says Estrella.
CVS Caremark has made significant progress toward becoming a collaborative enterprise. “We’ve seen good movement in this direction,” Link reports. “Logistics is in the middle of many activities, so we tend to challenge other departments, ask the tough questions, and supply the analytics that fuel corporate decision-making.
“All business units need to work together more closely and consider what’s right for the business as a whole. We have to tear down silos, and make the right decisions for the company,” Estrella adds.
THE REAL MOTIVATOR
Intel and CVS Caremark offer excellent examples of internal collaborative efforts and their actual and potential benefits. But these two companies are still in the minority among U.S. firms, according to INSIGHT’s Karrenbauer.
“True supply chain management is a boundary-spanning set of activities that is collaborative by nature,” he notes. “Although we have renamed job titles, invested in software, and called the field ‘supply chain,’ few companies practice true supply chain management.”
There’s a simple reason for that, suggests Karrenbauer. “We pay people not to collaborate. As long as performance metrics are silo-based, we will get silo behavior,” he says.
Companies must change their performance and evaluation metrics. “People will resist if their own hides are on
the line,” Karrenbauer says. “They have to feel safe, otherwise they will fight collaboration like crazy.”