When a global heavyweight manufacturer endeavors to clean up its supply network, the results are bound to be big.
In 2002, IBM Corp. (Armonk, NY) established its Integrated Supply Chain (ISC) division. By 2005, the high-tech giant was saving $25 million per business day, a feat that produced cost reductions of $6 billion for the year and helped deliver $7.9 billion in net income on revenue of $91.1 billion. During the same period, average payment terms shrank by two days and cycle time accelerated 6%. Speeding inventory turns and improving collections and supplier payment terms generated more than $580 million in cash for the company in 2005.
With the ISC initiative now in its fourth year, customers are more satisfied and internal synergies have materialized. But most indicative of the initiative's success is its expansion to the company's services organization, where it not only is being implemented in-house, but also is being offered to customers.
A Sizable Challenge
This dramatic transformation of its supply network from something to be managed to a strategic weapon has earned IBM Managing Automation's 2006 Progressive Manufacturing Supply Network Mastery Award.
IBM's supply network, one of the largest and most complex in the world, carries an annual price tag of nearly $40 billion. It consists of 33,000 suppliers and 45,000 business partners. The company offers 78,000 products with millions of possible configurations, orders more than 2 billion component parts each year, operates nine manufacturing locations in nine countries, manages extensive outsourced operations, processes more than 80,000 import entries per year, and ships 2.2 billion pounds of products annually, including 50 million spare parts. In North America alone, it handles more than 1.7 million orders each year, maintains 6.5 million client records, and makes an average of 350,000 updates to them every day.
IBM's ISC has its roots in the early 1990s, during what is widely referred to as the company's "near-death experience." Louis V. Gerstner Jr., who arrived in 1993 as chief executive officer, recognized the inefficiencies inherent in the fragmented way the company worked. One of his first actions was to create a centralized procurement organization. The benefits to the bottom line were immediate due to the consolidated purchasing power and synergies created by the different lines of business working together.
In fact, the results were so positive, management began looking for other entities to centralize, and quickly applied the concept to global logistics and then to fulfillment. "Again, there was an immediate pop of benefits," says Tim Carroll, vice president, Integrated Supply Chain Operations at ISC, who has been with the division since its inception. Not only were there bottom-line improvements, but customer satisfaction increased.
In 2002, when Samuel J. Palmisano became CEO, his vision was to carry the concept a step further. Senior management balked at first, but Palmisano was convinced that broader consolidation and creation of an on-demand operating environment represented the right course. His ability to convey that to company leaders led to the ISC transformation.
The new ISC division pulled together 19,000 people from the various functional areas across 56 countries. Bob Moffatt, Jr., senior vice president, Integrated Operations, was tapped to run the ISC, while retaining his responsibilities as head of the company's Personal Systems Group. Wearing both hats supported the goal of driving efficiencies in the supply network as well as in the lines of business.
The ISC focuses on four key imperatives:
- Drive focus, flexibility, quality, and cost competitiveness
- Complete the rollout of core strategic IT platforms
- Extend supply network principles to IBM's services businesses
- Provide industry-leading solutions integration and delivery capability
Three teams were formed to manage issues cross-functionally in the areas of operations, strategy, and talent development. The teams are diverse and drawn from all levels of the organization. Silos remain, but now are linked by the teams to achieve the end-to-end supply network visibility needed to create an on-demand enterprise.
Last year, Carroll, a 25-year IBM veteran, began looking at ways to move to the next level. He focused on the need to bring more functional entities under an ISC operations umbrella. Thus, the centralized procurement, global logistics, and fulfillment functions were joined by engineering, manufacturing, supply/demand/inventory, and business transformation. Each now has a single global leader.
"It may seem obvious, but [until July 2005] we had never had one executive operationally responsible for all our manufacturing facilities around the world or for all engineering," Carroll says. In addition, three brand advocates link the ISC with general managers in the lines of business responsible for the company's server lines, retail store solutions, and software.
To reinforce the integration concept, the company switched from measuring execution solely within silos to measuring supply network performance. This means capturing quantitative data across and between functions as well as qualitative insight into supplier and partner relationships. This provides the visibility IBM needs to see how the supply network is operating and how it is responding to customer needs.
Tools of the Trade
IBM has made considerable progress in standardizing core IT platforms, and work continues. The company relies on enterprise resource planning software from SAP AG (Walldorf, Germany). Most of its manufacturing operations also rely on SAP software, although a few are still running legacy systems. Customer relationship management is provided by Siebel Systems, now part of Oracle (Redwood Shores, CA), while supply/demand planning is supported by i2 Technologies (Dallas). i2 also provides B2B applications, as does E2open (Redwood City, CA). The company relies on its own WebSphere and DB2 software for integration and database needs, respectively. Finally, Selectica Inc. (San Jose, CA) provides configurators for Internet selling platforms.
The success of the ISC unit has encouraged management to adopt the on-demand supply network concept across non-manufacturing segments of the company such as Global Services and service parts/maintenance.
"Up until now, everything has been based on hardware. But in a 329,000-employee company, the number-one asset is labor," Carroll says. This is especially true in Global Services, where short-term and long-term consulting contracts start and end every month. In the past, for example, if a contract was ending in France and another was starting in Germany there was no way to communicate this information, so France would be overstaffed while Germany was hiring.
To bridge this information gap, IBM created a Workforce Management Initiative, which maintains a database of personnel and their skills and also tracks contract status worldwide so personnel on projects that are ending can move to new projects without skipping a beat. Although the process is still being streamlined, the company has already saved $500 million and improved the utilization of labor 7% globally since the database was put into place. "We think we've just touched the tip of the iceberg in potential savings," Carroll says.
Customers have taken notice, too. For the past two years, Carroll has found that increasing numbers of customers he visits are no longer interested in discussing how IBM is going to deliver on requests for proposals. "Instead, they want to talk about IBM's supply network experience and how they could apply it to their business," he reports. "We realized we had something saleable," he adds. As a result, the company has enlarged its supply network consulting practice and services offerings, and regularly pulls together teams that not only include Global Services personnel, but also experts from the ISC division and IBM Research.
The ISC mindset also is spreading elsewhere in IBM. The sales organization, for example, is using opportunity management tools to take a more disciplined approach to the sales effort and present a single face to the customer, who often buys hardware, software, and services from multiple segments and is looking for a solution rather than a list of products.
"We need to build on the strengths of IBM's traditional supply chain and evolve it to the point where it can deliver complex combinations of all the products and services we have to offer -- hardware, software, consulting, services, and financing -- as easily and efficiently as it delivers low-cost products in large volumes," says a booklet published by IBM in 2004. "Doing this will create a unique and sustainable advantage for IBM -- a competitive weapon," it concludes.
A competitive weapon indeed. By the end of 2004, the ISC had reduced IBM's inventory to its lowest level in 30 years. Synchronized demand and supply have pushed unfilled order levels to historic lows and the supply network transformation has helped the sales force increase face time with customers by more than one-third because less time is spent on tasks like checking order status, generating proposals, and other paperwork. As a result, the IBM client team spends 33% of its time in direct sales contact and 55% in total client-focused time, putting them at the top of the stack in benchmark studies.
In addition, over the past decade, the time to process a purchase order has dropped from a month to less than a day and saved more than $2 billion. And, thanks to ongoing automation, 99% of purchase orders are now processed electronically.
Future goals call for continued improvement in sales productivity, cash conversion, inventory turns, payables, receivables, and customer satisfaction.