Talking Tactics with IBM

The global outsourcing trend has generated enough excitement in the media and the business community to heat a small Midwest city for a year. At issue is the concern that outsourcing strips away many U.S. jobs, and does detriment to America’s general long-term economic well being.

The fact that outsourcing is by no means new to the United States changes little. What’s worrisome is the pace with which the fundamental capacity to create real things in America is being stripped away and exported to the Pacific Rim, creating a real tension between short-term profit goals and long-term diminished economic power.

As an enterprise director, do you go for the cost reductions outsourcing can deliver, or not? Some will remind us that only about 10 percent of manufacturing cost is directly related to labor costs. But, outsourcing has not been confined to labor alone. Today, more and more services, as well as intellectual capacity, are being outsourced.

In the long run, enterprise directors will have to ask themselves, “how do we balance concerns about outsourcing with the need to gain immediate profits?”

Over the past few decades, large companies have concentrated on overarching enterprise strategies such as the quest for superior product and service quality, customer satisfaction, a dominant web presence, reengineering of business processes, and IT integration. Those who manage the global supply chain have added integrating the outsourcing issue into this mix.

In light of current events, and to understand supply chain management’s role in global competition, let’s take a look at one company that has effectively addressed these concerns for the past decade: IBM.

How does IBM come to terms with the changing dynamic of managing the global supply chain? We put that and other logistics-related questions to one person at the center of the supply chain maelstrom: Gary Smith, IBM’s vice president of global logistics.

MALONE: How and why did IBM commit so strongly to global logistics a decade ago?

SMITH: IBM created a Global Logistics initiative in 1995 after deciding to keep all its business units together versus spinning them off as separate entities.

It was clear that IBM needed to significantly reduce global operations as it pared down its cost structure. The company also knew that it had to substitute a reliable, responsive, and efficient logistics network for physical assets.

As a result, IBM placed all logistics assets and human resources into a single line function that had full responsibility for strategy development and operational execution. Today, Global Logistics has 1,500 team members in 54 countries, and is responsible for a budget of more than $1.5 billion annually.

The reorganization paid off. Global Logistics has significantly enhanced its skills, changed its fixed/variable cost structure from 50 percent variable to 93 percent variable, reduced IT logistics applications by 80 percent, and achieved more than $1.1 billion in year-to-year cumulative cost savings.

From 1996 through 2003, IBM cut logistics costs by more than 20 percent, while increasing shipping weight and product shipments by 9 percent and 31 percent, respectively.

These accomplishments are more impressive considering the significant sourcing migration of components and finished products from mature countries to emerging countries. During the same period of time, Global Logistics cut its logistics supply base in half, and significantly consolidated spending.

MALONE: How is the IBM logistics network set up?

SMITH: IBM’s logistics network is comprised of a team of logistics service providers (LSPs) with proven capabilities to meet IBM’s demanding expectations, and those of its customers. Global Logistics orchestrates these LSPs into a series of choreographed physical movements with a maniacal focus on reliability and flexibility to meet changing market and customer requirements.

SMITH: Global Logistics is a critical link in IBM’s Integrated Supply Chain (ISC). It plays an instrumental role in ensuring that all physical logistics across the company are optimized for efficiency and aligned to meet specific brand-driven customer expectations.

Global Logistics is viewed as the ‘shock absorber’ of IBM’s end-to-end supply chain due to the flexibility and responsiveness of its physical logistics network. While logistics employs a set of reflective measurements to ensure continuous improvement, it also shares several end-to-end metrics with other ISC functions such as customer fulfillment, manufacturing, and procurement.

In this way, all supply chain elements stay coordinated and focused on their mutual objectives: to maximize customer satisfaction, reduce costs, and generate revenue for IBM.

MALONE: You once said that the supply chain is on the front line of business. What did you mean?

SMITH: The supply chain—and its ability to positively impact business performance—is being elevated to the highest levels within the world’s top companies, and enlightened senior executives are leading the charge.

In 2003, our Integrated Supply Chain enabled the IBM salesforce to be 20 percent more productive by allowing them to sell, instead of dealing with inventory, procurement, or logistics.

Bob Moffat, senior vice president, ISC, made an aggressive promise to the sales team. He stated that ISC would provide them with the critical information they need to deliver more competitive products and services, including details on what it will cost to source, make, deliver, and support a product offering—before investments are made.

The supply chain is no longer viewed as a ‘back-room’ operation, but as an important and integral part of IBM’s strategic business model. That means we have an equal and up-front seat at the executive table.

By integrating all the elements in the supply chain with a focus on end-to-end execution, productivity, and speed, IBM has clearly repositioned its value proposition to one based on effectively balancing cash, cost savings, and customer satisfaction.

MALONE: You say the global market will be a battle between supply chains. What kind of battle?

SMITH: Companies that view the supply chain as an adjunct to the real business will find themselves at a disadvantage. Companies willing to radically re-think the role a supply chain plays in their business—from merely a cost-cutting machine to an engine of innovation and growth—will lead in the era of on-demand business.

When it comes to commodity products, in particular, your supply chain could be the only difference between you and your competitor. The winner is the company that has the product in stock, ships it in 24 hours, and delivers an experience that delights the customer.

Supply chains have always existed but only recently have they been viewed in a strategic and integrated way. IBM’s experience shows there is substantial value in transforming supply chain components from stand-alone centers of competency to a completely integrated team that looks at its processes and technology on an end-to-end basis. The results in terms of revenue, cost savings, and customer satisfaction have exceeded all expectations.

SMITH: Available to promise means that we don’t want to schedule a customer order based on an assumption about our supply. We want to know with 100-percent certainty that we have the product for the customer and that we can deliver the order when promised. That’s why it’s crucial to know how long it takes to ship from China to Mexico, for example.

Our order-entry tools take into account every aspect of shipping, from the time of year to local regulations, to provide an accurate delivery date. Customers would rather be notified up front if a shipment is going to take longer than usual rather than us missing a deadline or rushing an order with inferior quality.

The alternative to supply-based scheduling is lead-time scheduling—making assumptions based on history. This wouldn’t work for IBM because we offer thousands of configurations. If a customer needs a unique feature with a large multiple for a specific period of time, there is no history to make assumptions on, so we cannot accurately provide a delivery date.

Knowledge also gives us the ability to provide customers with options. We can easily tell them that Configuration A+B+C will take three weeks to ship, but if they take Configuration A+B they can have it in one week, with the ability to add option C at a later time. Customers tell us they like having these options.

The results speak for themselves. Last year we delivered 95-percent on time.

SMITH: It’s easy for IBM, because we have a centralized supply chain model. Since 1996, we have centralized all the logistics within IBM into one organization. Even within a specific country or region, all departments are coordinated, with the same views, metrics, processes, and rules of engagement.

With respect to suppliers, all the IBM teams globally, and across all brands and divisions, use the same logistics service providers. For example, the IBM division in France, along with divisions in the rest of Europe, all use the same vendor for surface transportation. There is no misalignment.

MALONE: How does IBM collaborate internally to ship from multiple departments to the same warehouse, distributor, or wholesaler?

SMITH: We do it in a centralized, coordinated way. For example, One IBM zSeries eServer may come from Poughkeepsie, N.Y., while another may come from Dublin. ThinkPads come from China. If these products are going to customers, our network knows our customers’ shipping requirements.

The system is also set up so orders drop with enough lead time for shipping. This is all built into the system. Transit times are negotiated in a set of spreadsheets that drive the schedule. This keeps us flexible and able to avoid delays.

MALONE: Does IBM use a master control station or visible database to track orders, shipments, vendors, receiving, and on-time delivery?

SMITH: Yes, we have a centralized dashboard of indicators. The dashboard includes a series of metrics that management and ISC teams use to measure benchmarks for customers and cycletime. These metrics start from the time the order is placed to delivery, which fits ISC’s principle of delivering a superior end-to-end customer experience.

MALONE: To achieve the company’s goals, you have suggested pooling the best experts from various departments and divisions. How does that work?

SMITH: How can companies apply supply chain principles to better manage their most important and valuable assets—their people? It requires a fresh and more disciplined approach to matching work demands with global talent resources.

We think of it as a supply chain for talent—getting the right skills to the right place at the right time, and doing it in a faster, more efficient way.

While radical, this approach is the future. That’s why, in January 2004, IBM developed a labor-based supply chain strategy called the Workforce Management Initiative. This initiative is based on developing common expertise to request, identify, assess, and fulfill resource needs across IBM.

The Workforce Management Initiative will enable IBM to increase profitability and create a flexible resource pool. It also allows us to adapt to changing business conditions and market needs in a much more efficient and structured manner.

SMITH: As a part of the ISC, one significant benefit for Global Logistics team members is career development and advancement. Team members are strongly encouraged to move from one ISC function to another so they can experience the supply chain firsthand from several vantage points.

The cross-movement of talent has been a key factor in the success of ISC and Global Logistics because it results in greater insight, a broader perspective, and a higher level of understanding about the implications of functional decisions.

An important theme within the ISC is to ‘look left and right’ from wherever one sits in the supply chain in an effort to fully understand and improve the upstream and downstream processes.

Here’s another real benefit that we all find deeply rewarding. Our Workforce Management Initiative and our other efforts—once fully implemented—will deliver approximately $1 billion of expected savings to IBM annually.

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