Business Model Mastery: Hitachi Global Storage Technologies

Disk drive manufacturer acquires IBM business unit and quickly relaunches new technology platforms.


Companies Mentioned
Posted on Nov 03, 2006

Acquiring a business unit of IBM is a lot like trying to rip an oak tree out of the earth. Its roots are deeply embedded within the resource that has nourished it for decades, making it difficult to break away. That's the experience that Hitachi Ltd. had when it purchased IBM's hard disk drive business in January of 2003. To ease the transition the newly formed entity, called Hitachi Global Storage Technologies (San Jose, CA), was given the option to license code from IBM and continue using its homegrown production procurement system. But it would be an expensive approach that could cost the company its autonomy. After a careful assessment, Hitachi executives decided to sever the IBM tie and buy a procurement application from vendor E2open Inc. (Redwood City, CA). It was then that the separation of all IT systems in the IBM disk drive operation -- a 40 year old business, with engineering and manufacturing spread throughout the world -- became inevitable. Hitachi, like many other companies operating in a Darwinian business climate, has adopted consolidation as a key strategy. According to research analyst firm International Data Corp. (IDC, Framingham, MA), over 25 vendors competed in the hard disk drive market in the '90s. Today there are seven. Hitachi knew this acquisition was vital to its survival. When it came down to separating the drive business from IBM and uniting it with Hitachi's IT architecture and supply network, it wasn't so much the scope of the project that worried Hitachi executives. It was the project's one-year timeframe. "By the time we made the decision to go with the commercial approach, it was well into 2003," says Ranga Jayaraman, vice president of IT at Hitachi GST. "So we really had about four or five months to do this." Wasting no time, Jayaraman pulled together a team comprised of an IBM service provider, engineers from E2open and representatives from Hitachi GST's IT, manufacturing, logistics and procurement departments. The group spent many late nights aligning business-to-business (B2B) processes and formulating data sharing methodologies between Hitachi and its band of suppliers. And in the allotted timeframe, the company went live with a system that was self-sufficient and separate from IBM. Hitachi GST's Web-based solution is hosted by E2open. The setup is based on E2open's Multi-Company Process Management (MCPM) on-demand software, a B2B hub. The entire IBM-Hitachi integration effort, which entails fusing different versions of SAP ERP installations, combining product lifecycle management (PLM) applications from Agile Software Corp. (San Jose, Calif.) and adding more procurement capabilities, won't be complete until sometime in 2006. But the first phase of Hitachi GST's effort has introduced company-wide common processes using E2open's Web technology, increased visibility across the supply network, allowed the company to balance supply with demand and will save over $3 million in total cost of ownership through 2007, compared to what it would have cost the company to license proprietary code from IBM. More importantly, the decision to outsource the management of the supply chain process, through E2open's Web-based hosted solution, was key to keeping order and focus during a challenging acquisition. "Hitachi's merge had to be deliberate and measured without disrupting existing commitments [while] providing clarity for the future," says Dave Reinsel, director of storage research at IDC. The company needed to present a clear roadmap to customers so they were not confused about the new combined product portfolio. "They also needed to make sure ... there was no interruption in supply," he adds. According to IDC, in 2004 Hitachi GST was the number one supplier of mobile-class drives, 1.8-inch to 2.5-inch formats for use in notebooks and handheld devices. The success of the risky decision to rip the IT roots out of IBM's disk drive business, the judicious delegation of procurement processes to E2open and the speed at which it was able to merge disparate operations is what distinguished Hitachi GST from other nominees in Managing Automation's first Progressive Manufacturing Awards. For these reasons, Hitachi GST has been given the Business Model Mastery Award. To understand the scale of Hitachi GST's business model change, it is helpful to understand the company. Hitachi GST operates 10 manufacturing sites in seven countries and its 100 suppliers are scattered across the globe and, depending upon whether they worked with IBM or Hitachi in the past, use different data structures. With the E2open software, however, none of that mattered. "The beauty of the approach is that the supplier just needs basic connectivity," says Jayaraman. "If they can access the Internet, they can be in business with us." Easy Connectivity
For instance, a supply partner can log onto the E2open Web site using a Web browser, or through standards-based integration technologies like EDI, RosettaNet and Web services (XML, SOAP) or by downloading spreadsheets via Microsoft Corp.'s Excel. Sounds simple, but there was a much deeper involvement that required Hitachi GST to invest time in training its suppliers on the new framework. The company worked with E2open and an IBM service provider to establish rules around data sharing and the transportation methods for supplier access. Then the team launched its worldwide deployment, which included educating supply partners. "When we turned the system on it was flawless," says Rubik Babakanian , Hitachi GST's VP, operations strategy and planning. According to Babakanian, cooperation between Hitachi and its suppliers intensifies around issues of supply and demand. The plants are building different products around the world and the need for interaction with the appropriate component or electronic supplier is imperative. For instance, information about HItachi's production output, stored in a particular plant's ERP system, is moved to E2open, which passes the information to the appropriate supplier. The supplier then issues an invoice back to the plant and to Hitachi's supply chain planning team -- through E2open -- so that Hitachi can prepare a product shipment commitment for its customers, which are the OEMs that make mobile devices, desktops and enterprise systems. E2open acts as a multi-enterprise exchange, enabling Hitachi to send a "pull signal" for just-in-time manufacturing. Supplier invoices and purchase orders are matched up automatically. "That information is vital for the manufacturing operations," Babakanian says. "Our customers place orders on us and expect a commitment. The suppliers can see our demand electronically through E2open in a lot of detail -- by day, week, part or plant. They can then respond with their commitment." In phase two of the E2open project, ongoing this year, the company will integrate IBM and Hitachi's ERP systems. Both use SAP America (Walldorf, Germany), but the configurations differ, which means the systems must be reconciled. Assimilating ERP installations is an important step in getting all of Hitachi's suppliers and plants synchronized with E2open. "When we integrate a plant we have to deal with the interaction of the ERP system that runs the plant, that's the dependency of the relationship," explains Babakanian. In addition, phase two will expose more information about inventory that the suppliers hold in their just-in-time hubs that sit close to the Hitachi GST factories. It will allow more accurate planning for Hitachi GST, but the company is also sensitive to the fact that suppliers must benefit as well -- or they won't stay onboard with the program. In that regard, having visibility into inventory levels allows both companies to see the entire pipeline, which means suppliers don't have to hold a lot of inventory. Keeping inventory orderly was essential since the merger opened a floodgate of suppliers. "Both [companies] are vertically integrated," IDC's Reinsel says. "Be it heads or media, Hitachi and IBM did their own. And they had to bring those together. But then the supplier base -- from motors to screws to filters to electronics -- became an issue. The last thing they wanted was for there to be confusion about demand for a particular family of drives." Not Your Father's B2B
E2open can best be described as a B2B exchange because it is a common area where trading partners can collaborate. However, it is more flexible than the B2B e-commerce setups of old, which were designed for a couple of companies interacting with each other. These days, there are multiple tiers in the supply chain, not to mention the need for companies to be increasingly flexible as to where and when product is manufactured. Hitachi recognized the benefit of creating an exchange for the extended supply chain of the electronics industry, which is why the manufacturer is one of more than a dozen companies that invested in E2open, founded in 2000. "The concept we are trying to create is what I think of as a business object exchange capability," Jayaraman explains. "It's not a one company effort; it really is a network effect ... that slowly becomes part of the company fabric." Hitachi GST leverages E2open's Supply Chain Process Manager (SCPM), which not only provides visibility across the extended supply chain, but also gives users control over inter-company processes, regardless of size, technology sophistication or geographic location. SCPM is delivered as an on-demand service including four basic modules: forecast, inventory, order and Multi-tier visibility, which enables companies to extend demand/supply planning, order management and inventory workflows beyond first-tier partners to monitor disconnects through the extended supply chain. Hitachi GST has not implemented the multi-tier aspect of the technology yet, but it is on the company's project roadmap. "Our goal is to have 100% electronic collaboration and transaction," says Jahidul Khandaker, manager, E2open project team. Just as important as integrating the suppliers electronically is servicing customers. Hitachi GST also uses E2open as a gateway for interacting with a small number of its customers on purchase orders, invoices and general information exchanges. The plan, according to Jayaraman, is to incorporate more customers into the E2open collaborative circle within a year. Now that Hitachi GST is not bound by a strict timeframe in which to complete its project, company executives can sit back, take a deep breath and figure out the next logical path. Tackle one big project at a time, that's the secret to success. "Set a vision, find the correct partner and try to achieve the vision -- don't focus so much on failure," says Babakanian.

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