Shape up your supply chain

Jan. 5, 2005
At IBM Corp., supply chain is a powerful force delivering impressive business results. During the past two years, IBM has reduced overall costs to the

At IBM Corp., supply chain is a powerful force delivering impressive business results. During the past two years, IBM has reduced overall costs to the tune of $12 billion ($5.6 billion in 2002 and $7 billion in 2003), in large part through integrating its supply chain.

The impetus for the technology giant's supply chain overhaul was recognizing its industry's move into the on-demand world. IBM knew it had to transform its supply chain to compete. In other words, IBM's supply chain planning team was on top of changes in the industry and incorporated needed changes in its supply chain plan.

Similarly, National Semiconductor Corp. believes that keeping a close eye on economic trends is a key element of supply chain planning. The chip maker consults analysts who use sophisticated models to forecast industry trends. They also look at general economic conditions, notes Si Gutierrez, vice president central planning and production control with National Semiconductor.

"Because a large percentage of National's analog devices go into consumer products, there is a close correlation between our business and the gross domestic product," Gutierrez observes.

"You have to know your industry to know what you need from your supply chain," insists Gus Pagonis, chairman of short line and regional rail service provider Rail America Inc. and vice president of Genco, a third-party logistics service provider (3PL). "Knowing what you need from your supply chain is the first step in supply chain planning. Every company must define what its supply chain is. 'Supply chain' differs for each decision and each business," Pagonis asserts.

"There are many factors in supply chain planning," agrees Rich Hume, vice president operations and strategy with IBM's Integrated Supply Chain. "Every proposed idea or change at IBM must meet certain criteria. Initiatives must improve customer satisfaction, increase the flexibility of the supply chain, improve economics and improve functional excellence. Proposals must be executable and include measurable economic results," Hume adds.

"Most of our supply chain planning is done internally, using the traditional talents found in any supply chain organization — fulfillment, logistics, manufacturing and manufacturing engineering," he continues. In addition, IBM's supply chain planning team uses a couple of related internal groups — business consulting and business transformation. IBM's business transformation group is comprised of functional experts with deep process knowledge in functional areas.

"In other companies, these professionals are typically aligned with corporate functions like procurement or logistics," explains Hume. "Having them in one organization allows us to take advantage of their expertise within each function, while also benefiting from their integration across the supply chain."

The supply chain planning structure and process differ at Dow Corning Corp. Identifying constituents is a key part of the diverse chemical company's supply chain planning process.

"Within each of three business units, we've identified eight individual supply chains," notes Lori Schock, site supply manager with Dow Corning. "We further subdivide into supply chain threads. The supply chain might cover commodity sealants while a single thread might differentiate-the special needs for construction sealants."

For the past five years, each business unit within Dow Corning has been operatedby a global business planner, tying together the commercial side of the organization and the supply chain side, Schock explains. Global supply chain planners report to each global business planner.

"The business planners manage assets for each business; supply chain planners get their portion of this business plan to manage. This organization allows customers to see who the decision makers are top to bottom, anywhere in the world," she says.

Within this corporate structure, Dow Corning brings a three-dimensional approach to supply chain planning, breaking the process into strategic, tactical, and operations or execution planning. "Strategic planning looks at where we want to be in five to 10 years," explains Schock. "Tactical takes a three-tofiveyear focus. Operations planning includes anything less than three years. These timeframes may be a characteristic of our company where capital expenditures are large and lengthy to install. To increase capacity takes years," she adds.

"In tactical and strategic planning, we look at our business strategy and model," continues Schock. "Our model includes a geographical dimension. It incorporates information such as actual and expected market growth in Asia and asks what is our focus in Asia. Then we look at behavior of product in our supply chain. Is it a commodity — easy to predict demand? Is it a new commercialization area — difficult to predict? What level of detail do we need to see? Do I need to plan at the SKU level or the chemical level?" asks Schock.

"We then look at our strategy and goals," continues Schock. "If I'm striving for double-digit growth in the healthcare business in a specific region of Asia over the next five years, what do I need to understand about the market?"

Dow Corning's supply chain planning team needs to know the age and gender of the customer, the transportation infrastructure available, how seasons and holidays might affect a particular supply chain. In short, they must know what dimensions and characteristics of the supply chain will help meet their objectives.

Within the rapidly changing semiconductor arena, three years constitutes long-term planning.

"At National Semiconductor, we look at what we need, potential new markets, and where we can best use our expertise," states Gutierrez. "Several years ago, for example, we decided we wanted to be a major player in cell phones. We mapped out the technology needed, design talent and skills, factories, and capacity."

After building a three-year plan, National creates an annual plan in more detail — how much to spend on increased capacity, how much for research and development, and expected return on investment.

"With the annual plan in place, we look at forecasting for each month, planning six months ahead," continues Gutierrez. "Sometimes we're surprised. Something we thought would do just OK goes like gangbusters. So we monitor the plan weekly and can revamp it weekly. Each day, we plan factory starts based on what happened the previous day. This allows us to maximize customer service and optimize inventory to maintain customer service levels," he adds.

Reexamining a constantly changing supply chain is ongoing at financial electronics company NCR Corp. as well. "We've always had a global focus but our manufacturing points are changing," notes John Mascaritolo, director of global logistics with NCR. "We have more manufacturing points within a region. As these manufacturing points come online, we can source from more local suppliers. To accommodate these changes, we revamped our supply chain model two years ago and are implementing the new model," he continues.

"Supply chains must be managed continuously and all functions must be managed simultaneously," adds Genco's Pagonis. "Break down the functions into measurable objectives. That allows you to delegate to quantifiable objectives everyone has agreed to. Everyone knows what's going on."

Everyone at IBM knows that everything the company does must fit within Big Blue's strategic framework.

"Within the framework, projects are selected for implementation based on competitive challenges or threats in the marketplace, changes in the industry, or technology changes," states Hume. "IBM's strategic imperatives are the basis for assumptions about what we need to do to be successful. We need information, we need integrated processes, and we need a global workforce that thinks and acts like one team."

IBM's strategy department initiates projects within the long-term strategic framework, constantly working on ways to improve supply chain performance.

"Quarterly, we assemble the strategy team — representatives from fulfillment, manufacturing, manufacturing engineering, business transformation and logistics. We recommend changes we should make and guide those changes as they are adopted and integrated," reports Hume.

Throughout this process, guiding principles are to emphasize focus, flexibility, quality and cost competitiveness. IBM is concentrating on completing the rollout of core strategic information technology (IT) platforms and extending supply chain principles — already well established in manufacturing — to IBM's services business.

Using common platforms and processes is a sure way to improve flexibility in the supply chain.

"Within IBM's laptop business, for example, if we can use common parts across product families, we lower our stocking levels while improving service capability," notes Hume. The same commonality approach adds flexibility in procurement agreements. "If the box we're building uses specialized IBM parts, suppliers have less flexibility than if parts are common to the industry."

Taking a macro look at its business and supply chain yielded even more flexibility for Big Blue. "Look at the value you bring to the field," urges Hume. "Then look at what is non-core and outsource it. Three years ago, IBM recognized part of the PC business was being commoditized. Other businesses within our industry could do certain steps better than we did. SSI is best at desktop assembly so we outsourced to them. We garner more flexibility and improved results."

Taking a similar tack, Dow Corning identifies where it has commodity business, where it's involved in new venture type business, and where it has truly high-profit business. "Our commodity businesses don't need flexibility — we just produce as much as we can as cheaply as we can," explains Schock. "In the high-profit businesses, we need flexibility to deal with fickle markets."

While it serves a somewhat more stable market, NCR constantly reviews its supply chain to make sure it remains flexible, not just in what transportation mode is used but also with respect to the supplier lineup. "If our primary supplier doesn't have sufficient capacity to meet our needs, we can use a second or third supplier," claims Mascaritolo.

On the other hand, the more suppliers and the more products a company offers, the more complex the supply chain. Offsetting the complexity, the more products you offer, the more opportunities to drive sales, explains an executive with a large consumer products company.

"From forecasting to production, with more products, you have more chances to be wrong," he quips. "If there is no opportunity to reduce the number of products, we focus on different ways to simplify the supply chain. Instead of producing to support forecasts, can we make to order or work with customers to commit to a purchase quantity? We work with customers to look for joint supply chain improvement opportunities. For example, wholesalers have many distribution centers (DCs) around the country. If we ship to a limited number of their DCs to serve as hubs, can they redistribute to their other DCs? If total cost is lower, we look at how to share the benefit."

Dow Corning and IBM were recently named to Logistics Today's ranking of the 10 Best Supply Chains. Click here to view that article


Dow Corning Corp.


IBM Corp.

National Semiconductor Corp.

NCR Corp.

Rail America Inc.

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