Former IBM PC Business Struggling to Fix Supply Chain

In a recent report to analysts in Hong Kong, William Amelio, the CEO of Chinese PC-manufacturer Lenovo, pointed to extensive supply chain problems as its main barrier to better performance in its second quarter. The revelation is surprising for an organization that until April 2005 was part of on-demand supply chain promoter IBM Corp. (location), which still owns 13% of the company.

“While we’re moving forward, we still haven’t hit that tipping point when we start to see some amazing improvements with respect to our supply chain,” said Amelio. “This part of the business requires deep overhaul in our processes and we need to lay more plumbing down in order for us to be more effective.”

The company reported revenue of $3.7 billion for the quarter--up slightly from $3.65 billion last year--and pre-tax income of only $43 million (after restructuring charges), which were hurt by severe market competition that pushed down margins. Lenovo’s worldwide market share remained relatively constant at 7.8%. During the period, its PC shipments grew 10% worldwide, increasing 25% in China, but falling 9% in the Americas.

While the company’s supply chain is functioning okay in China, Amelio said there’s an operational gap between its home country and the rest of the world. Closing that gap will take “a few more quarters.”

“We get frustrated because we’re not able to deliver on the demand because of some of the stubborn supply chain problems that we have in place. Our supply chain improvement is clearly at the top of my priorities,” Amelio said.

Key initiatives include the ongoing rollout of an SAP information system that will provide a single global supply chain infrastructure. The system will reportedly enable managers to make more informed and rapid decisions. Lenovo has already seen overall cycle time and service improvements in China where system installation is further along than the rest of the world, according to Amelio.

Lenovo is working to reduce complexity by 50% by reducing the number of end-user SKUs that it has to manage. “You can imagine the difficulty of having to forecast 100,000 machine type models,” said Amelio.

The company is also changing its design process to rely less on single source parts and it is creating a supply chain center of excellence. This command center will allow it to do more effective demand and supply planning, inventory management and pricing. It will bridge the gap between business silos and streamline the introduction of new products.

“In the transaction business,” said Amelio, “it’s important to be able to make pricing decisions very rapidly. The competition doesn’t sit still, they change prices on a regular basis. We have to make sure that we stay in a price position.”

Lenovo is reportedly on track to deliver on a promise of $100 million savings from operational improvements this year. On top of that Amelio pledged to achieve another $250 million in operational savings next year.

“While we have some heavy lifting to do as we overhaul our supply chain, I’m encouraged that the right activities are in place for us to see improvement,” said Amelio. When it reaches that tipping point, he added, “We’ll be a PC powerhouse like no other.”

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