Supply Chain Strategies: On-Demand is In Demand

“We’ve always had a supply chain. But until fairly recently, it was an adjunct to the ‘real’ business. Something to be managed rather than used as a strategic weapon.

“The supply chain was plumbing. It was back office—the unglamorous work of negotiating contracts, procuring parts, getting them to the people making the products, then loading products onto planes, trains, trucks, and ships to get them to our client’s loading dock on time.”

Surprisingly, that’s how IBM described its global supply chain in a 2001 white paper. In January 2002, however, the world’s largest technology company embarked on a journey to transform its supply chain.

The company set out to revolutionize the very concept of a supply chain—to transform it into a powerful force that drives efficiency, makes life easier for clients, and improves their satisfaction with IBM as a strategic partner.

At the heart of this change is a fundamental shift in how the company operates—from a “push” model to a demand-driven business model. IBM calls this new approach the “on-demand business.”

From the start, IBM had high expectations for this new on-demand supply chain. It would enable the company to gain market share, grow revenue and profit, improve cash flow, and enhance customer satisfaction. At the same time, IBM expected to cut up to $2 billion from the nearly $40 billion it spends on its supply chain.

Today, three years into the supply chain transformation effort, IBM’s results have outstripped even the optimists’ projections. By 2003, the company cut its supply chain costs by $7 billion, or $27 million a day. Inventory was at its lowest point in 20 years, and customer satisfaction was at an all-time high.

So just what is an on-demand supply chain? The Demand-Driven Supply Network (DDSN) is “a system of coordinated technologies and processes that senses and reacts to real-time demand signals across a supply network of customers, suppliers, and employees to improve operational efficiency, streamline new product development and launch, and maximize margin,” according to Boston-based AMR Research.

“DDSN is a supply chain driven by the voice of the customer,” explains Kevin O’Marah, an AMR Research analyst. “It simply means building all supply chain processes, infrastructure, and information flows to serve the downstream source of demand—whether a consumer in the supermarket or the Department of Defense—rather than the upstream supply constraints of factories and distribution systems.”

Pioneers such as Procter & Gamble have migrated toward this model for a decade or more and, in the process, redefined what is possible in 21st-century supply chain practice.

With DDSN, companies switch from a “push” method of moving product, based on incomplete or inaccurate demand information, to a “pull” method, based on responding quickly to real-time demand signals. Better demand forecast accuracy translates into better perfect order fulfillment, lower inventory, and shorter cash-to-cash cycle times.

Specifically, companies that are 30 percent better at demand forecasting average 15 percent lower inventories, 17 percent stronger perfect order fulfillment, and 35 percent shorter cash-to-cash cycle times, according to AMR’s latest research. Companies with stronger demand forecasting capability also average 0.5 percent stockouts, compared to similar companies with weak demand data that average 5 percent stockouts—a full 10 times higher.

“DDSN matters to your company’s growth, profitability, and valuation,” O’Marah says. “Early adopters are already saving 5 percent of top-line revenue compared to laggards, according to our benchmarking research.”

Additional metrics include getting paid by customers 70 days sooner, holding half the inventory, and delivering 92 percent perfect orders versus the laggards’ average of 81 percent, O’Marah notes.

“Increased levels of supply chain service—on-time delivery, order accuracy, and in-stock performance—correspond with lower levels of supply chain cost—inventory, transportation, and materials handling—for the best performers,” O’Marah says. “DDSN gives leading companies cost, time, and efficiency advantages that boost profits.

“It also positions winners to grow with dramatically faster response to business opportunities—at the level of lower stockouts for current products, and as much as 70 percent faster time to market for new products,” he adds. “More innovation with a better perfect product launch performance means more new business opportunities seized as customer or market demand evolves.”

Information technology is a driving factor behind the increasing use of DDSN. Supply chain visibility, execution, and event management tools enable companies to see across the extended chain, to track and coordinate material, and to keep it moving.

Lucent Technologies, for example, relies on supply chain execution solutions to increase customer service capabilities while cutting costs.

“When Lucent puts together a data center, cell tower, or router switch for large customers such as AT&T or Sprint, it draws components from as many as 25 suppliers,” explains Kevin Hart, president and COO of Optum Inc., a supply chain execution systems developer. “These components all have to show up at a specific location at the proper time.”

Lucent coordinates this process with Optum’s ECO-Execution (Eco-X), a technology solution that gives the company the visibility it needs. Lucent can see at any point in time where all its boxes are and what is in them, as well as view their status.

This same solution allows Lucent to manage exceptions—a supplier can’t make a delivery date, perhaps—and automatically notify other suppliers to re-synchronize the order based on new information. Lucent has more than 300 suppliers in North America, Latin and Central America, Europe, and Asia. They are all integrated, and run one instance of Optum’s solution. With Eco-X, the company can optimize the entire multi-tier network.

“Lucent can’t allow a $3-million contract order to be held up by a $2 part,” Hart says.

IBM’s Massive Undertaking

At IBM, the decision to re-think its supply chain was not taken lightly. Its supply chain is, after all, massive. And recent developments, such as a new long-term strategic alliance between IBM’s personal computing division and Chinese company Lenovo—slated to take effect in the second quarter of 2005—will create an even larger and more complex supply chain.

IBM’s supply chain incorporates 33,000 suppliers and 45,000 business partners worldwide. IBM offers 78,000 products with millions of possible configurations; orders more than two billion component parts a year; operates 13 manufacturing locations in nine countries; processes more than 80,000 import entries a year; ships more than two billion pounds of products annually, including 50 million spare parts; and, in North America alone, handles almost two million orders a year, and maintains 6.5 million client records, with an average of 350,000 updates every day.

For IBM, the on-demand supply chain is integrated end-to-end across a company’s entire operations—and with key partners, suppliers, and clients—from opportunity to cash. The on-demand supply chain can sense and respond with flexibility and speed to any client demand, market opportunity, or change in the marketplace—no matter how frequent or sudden.

“In traditional push supply chains, companies own and operate warehouses, staff them with employees, own trucks, contract with airline fleets—all to move products from point A to point B,” explains Arvinder Surdhar, director, Global Logistics, Americas, IBM Integrated Supply Chain. “These are fixed capacities that companies carry on the books as infrastructure.

“In an on-demand supply chain,” Surdhar continues, “companies don’t own any such assets. Instead, they work with partners who can supply them in the capacity needed within a reasonable cycle time.”

IBM Latin America, for example, doesn’t own any warehouses. But the company still has to move product manufactured in China, via various carriers or freight forwarders, to a warehouse before delivering it to customers in that market.

“We don’t lease a finite amount of space and pay to store the goods in that warehouse,” explains Surdhar. “Instead we pay our service provider for the number of times our product goes into and out of that warehouse—by transaction. If a transaction takes place, we pay the warehouse.

“We found significant benefits in not owning space, people, and capacity,” he continues. “Instead, we incur transactional costs at certain times of the month. That’s ‘on demand.'”

To operate its on-demand supply chain effectively, IBM requires close coordination with suppliers and service providers.

“Our suppliers need to see what we are doing—how much and how fast we’re selling—so they can calibrate their operations on factors such as product inventories or warehouse space,” says Surdhar. “Our third-party partners need to have the same information we have. Everyone in the supply chain must be on the same page.

“We treat our partners as part of our supply chain,” he explains. “If all you are trying to do is move inventory off your books and onto someone else’s, then you are not on demand. If you are doing on-demand business, then everyone is an equal partner.”

Organizational Steps

To build the foundation for its on- demand business, IBM did away with entrenched functional silos, bringing procurement, manufacturing, logistics, and client support teams together from almost every division of the company. It created a single business unit, the Integrated Supply Chain (ISC) division, with 19,000 employees spread out across 56 countries worldwide.

Today, IBM’s supply chain stretches from “opportunity to cash”—from raw materials at one end of the manufac­tur­ing operation, to the ongoing client support at the other end.

To reinforce its commitment to supply chain integration, IBM overhauled its performance measurement and reward system.

“We used to measure execution solely within silos,” the company writes in an internal white paper it produced on the supply chain transformation effort. “But today, traditional methods of measuring supply chain performance through purely functional metrics are no longer sufficient.

“We also need to capture critical quantitative data across and between functions, as well as qualitative insight into our supplier and partner relationships.”

IBM adapted its measurement system to support the dynamics of an end-to-end operation. “We haven’t tossed out the individual metrics—we added new ones that tie the entire supply chain together with common goals and objectives,” the paper explains.

These metrics include the following:

Customer satisfaction. How well does the company perform end-to-end in meeting the expectations of its clients?

Cost reduction. How much has the cost of doing business decreased through end-to-end operational integration, innovation, and increased efficiency?

Cash generation. How well has the company created positive cash flow through end-to-end operational integration, innovation, and increased efficiency?

Demand/supply synchronization. How well has the company created true visibility of supply and demand to effectively and efficiently manage the needs of clients and the business?

Cycle time. Has the company been efficient and effective in driving competitive end-to-end process excellence and responsiveness?

Salesforce productivity. By mini­mizing the time the salesforce spends on ISC activity and by playing a more active/direct role in the support of its clients, how much time can the company give back to the salesforce to spend with clients?

“We’re not talking about whacking away at the structure and putting the squeeze on our suppliers,” explains the IBM whitepaper.

“Ultimately, those approaches will debilitate our ability to compete. This imperative is about taking down the actual cost of doing business, working side by side with the business units to identify and close any opportunity for savings. It’s also about making our cost structure more variable by establishing a strong network of alliances and partnerships.”

In the area of product design, for example, ISC is involved at the earliest stages. Manufacturing and customer fulfillment teams work together to make products easier to manufacture, configure, order, and support. Logistics teams influence the design of IBM products to optimize shipping costs and quality.

IT Support Structure

As part of the transformation effort, IBM unraveled its complex IT architecture and rolled out core strategic IT platforms to address every aspect of its business.

“We’ve decided on a common set of core platforms and, in the process, begun to create the on-demand operating environment for the Integrated Supply Chain,” the company says. “This will not only reduce our operating expenses and improve productivity, but it will be easier to manage the supply chain across the entire company. Our clients, suppliers, and business partners will find it a lot easier to do business with IBM.”

The integrated, simplified IT architecture delivers better visibility across IBM’s supply chain.

“My colleagues in manufacturing, procurement, and fulfillment, as well as our partners outside the company—component and technology providers, carriers, and others—all have access to what is going on in our extended supply chain,” explains Surdhar. “They have live information so they can respond most effectively. When we negotiate contracts, we know the more information we share, the better our partners can respond to our needs.”

IBM offers suppliers a high-level view of production capacity and lift requirements within certain time horizons. “I start by laying out what our requirements will be for the coming year,” Surdhar says.

“Right now, I am discussing our potential tonnage and lift requirements out of Hong Kong into the United States for the next year. Then we trim the forecast down into smaller increments to be more specific and accurate—a rolling three-month forecast, a one-week forecast that is very accurate, and daily requirements for every product type.”

Equipped with this information, service providers can plan their asset and resource deployment to meet IBM’s needs effectively and profitably.

Positive Results

“When all of this is working properly, our supply chain hums,” says Surdhar. “The benefits are incredible.” At the end of 2003, IBM had the lowest inventory levels in 20 years, and in the first quarter of 2004, it decreased inventory by another $168 million.

“The supply chain accounts for 50 percent of IBM’s cost and expense,” says Surdhar. “As part of the $40 billion IBM spent on the supply chain in 2003, we cut our costs by $7 billion. And that’s just in inventory reduction.

“Not having that inventory frees up tremendous cash resources,” he continues, explaining that by improving accounts receivables and reducing inventory excess in the supply chain, ISC generated $700 million of additional cash. In 2002, IBM’s supply chain reduced costs by $5.6 billion and generated more than $4 billion in cash.

“We’ve improved days sales outstanding by nearly four days over the last 12 months,” he says. “For us, one day equals $250 million in cash.

“In the second quarter of this year,” Surdhar adds, “our synchronization of demand and supply resulted in the lowest number of unfilled orders in the history of the company. We clearly see a reduction in inventory, but more importantly, we don’t have unfilled orders.

“The supply chain executives have garnered a lot of respect in the company in the last three years,” Surdhar says. “When you produce these kinds of results, people start to notice you. Our 19,000 ISC employees are not just a cost center. They provide a competitive weapon for IBM, they provide an advantage to our shareholders, and they help us hit our quarterly earnings.

“Supply chain has come out from behind the curtain.”

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