Executive Briefings

IBM's New Transformation: Services Supply Chain

IBM is truly one of the world's great business success stories, not so much because of its products and technology but because of its ability to reinvent itself again and again to meet the challenges of a fast-changing global marketplace, business model advances and shifting customer needs. IBM's supply chain strategy has been important throughout this evolution, and it continues to be the leading agent of change as Big Blue morphs once again, this time into a services company.

The latest reinvention began about three and a half years ago. Before that time, IBM had many separate supply chains for various product groups and divisions.

"Supply chain was about cost-cutting and functional excellence within the business units," says Patrice Knight, IBM's vice president for business transformation and strategy, which is part of an organization created in 2002 called Integrated Supply Chain. "There were no common processes, let alone client-facing processes. That has all changed."

ISC jump-started IBM's reinvention. Its scope spanned the company, its suppliers and partners, and then tied it all together with shared measurements to ensure success at both the business unit and IBM level.

"The orientation shifted to a customer focus," says Knight. "The company saw supply chain as a competitive weapon."

Understanding its customers' needs and making sure that the entire supply chain is flexible and resilient was at the heart of IBM's new global business model, which it called "on-demand."

IBM defines on-demand as "an enterprise whose business processes--integrated end-to-end across the company and with key partners, suppliers and customers-can respond with flexibility and speed to any customer demand, market opportunity or external threat." It is no coincidence that on-demand sounds very much like supply chain.

"We brought supply chain strategy into the boardroom and put it on equal footing with the main businesses of the organization," she says. "Everyone is working off of the same synchronized supply and demand information across the entire ecosystem from our salesforce to our suppliers. We have solved supply-demand imbalance and shortened cycle time."

For example, just before IBM started its integration, it held three months of inventory for basic products such as servers. By 2004, such backlogs had largely disappeared and inventories overall reached a 30-year low. This turnaround was achieved by implementing demand-driven processes, including build-to-order and direct shipment to customers, not to mention improved sales.

By any measure, ISC has produced impressive financial and operating results. While 2004 revenue grew about 50 percent over 1993 levels to $96.5bn, profit as measured by cash flow of $9.2bn increased nearly 300 percent.

Cycle time performance increased by 16 percent, and order turn 32 percent faster. Client satisfaction has climbed by two full percentage points. The transformation greatly helped sales as well because it reduced the amount of time the salesforce spends on activities like checking on order status, proposal generation and contracts by 25 percent.

"Our sales people are now spending 38 percent more time with clients, which increases sales and give us much better marketplace insights," says Knight.

Service Supply Chain
Perhaps the greatest change at IBM in the last few years has been the growing emphasis on services as opposed to product sales. More than two thirds of its revenue now comes from services, including consulting, equipment delivery and implementation, service, training and maintenance. As a result, IBM is breaking new ground to apply supply chain principles to its service and its product business.

"We are looking at the total delivery of a solution to a customer, not just the hardware," says Knight.

Most of IBM's engagements combine IBM hardware and services, and a growing number are entirely service-based. These engagements require putting together teams with various technology expertise, consulting expertise, industry specific expertise and pulling them all together very quickly.

"The bill of materials for our service business is labor, skills and talent," she says. "We are buying contract labor, third-party software, hardware, niche consultants, industry experts, and high-end engineering skills to solve a specific problem for a customer."

Knight says this service orientation for supply chain management forces it to view its responsibilities for customers much more broadly.

"For each engagement, we combine what we have plus what we need to acquire to deliver the total solution to the customer," she says.

For example, just before Hurricane Katrina hit the mainland, a client near Gulf Coast arranged with IBM to have teams of people with specific skills available after the storm to implement a recovery plan. While there were many employees and contractors that had the skills needed, IBM wanted to make sure the teams were based near enough to the client's locations to be immediately accessible without having to depend on air travel. A recently developed database of people, skills, availability and location made the task relatively easy.

"We were able to have these people on the ground working within 24 hours," says Knight

IBM sees this service-oriented supply chain as a huge opportunity because customers are looking for total solutions, not just products, which in many ways are becoming a commodity. Also, no other major competitor is as far along as IBM in applying supply chain concepts to a services business.

"We are leveraging many years of experience with a hardware supply chain to achieve one that is service-based," she says.

"We are building a very good understanding of how to identify key skills, experience and availability," she says. "As we apply supply chain principles to human assets in a services-based business, we are creating competitive advantage the same way we did in our product supply chain," she says. "We are bringing the customer much higher levels of service flexibility, responsiveness and lean inventory, so they can be more successful."

That total level of responsiveness for products and services is what IBM needs to offer its customers an on-demand solution, says Knight.

IBM is truly one of the world's great business success stories, not so much because of its products and technology but because of its ability to reinvent itself again and again to meet the challenges of a fast-changing global marketplace, business model advances and shifting customer needs. IBM's supply chain strategy has been important throughout this evolution, and it continues to be the leading agent of change as Big Blue morphs once again, this time into a services company.

The latest reinvention began about three and a half years ago. Before that time, IBM had many separate supply chains for various product groups and divisions.

"Supply chain was about cost-cutting and functional excellence within the business units," says Patrice Knight, IBM's vice president for business transformation and strategy, which is part of an organization created in 2002 called Integrated Supply Chain. "There were no common processes, let alone client-facing processes. That has all changed."

ISC jump-started IBM's reinvention. Its scope spanned the company, its suppliers and partners, and then tied it all together with shared measurements to ensure success at both the business unit and IBM level.

"The orientation shifted to a customer focus," says Knight. "The company saw supply chain as a competitive weapon."

Understanding its customers' needs and making sure that the entire supply chain is flexible and resilient was at the heart of IBM's new global business model, which it called "on-demand."

IBM defines on-demand as "an enterprise whose business processes--integrated end-to-end across the company and with key partners, suppliers and customers-can respond with flexibility and speed to any customer demand, market opportunity or external threat." It is no coincidence that on-demand sounds very much like supply chain.

"We brought supply chain strategy into the boardroom and put it on equal footing with the main businesses of the organization," she says. "Everyone is working off of the same synchronized supply and demand information across the entire ecosystem from our salesforce to our suppliers. We have solved supply-demand imbalance and shortened cycle time."

For example, just before IBM started its integration, it held three months of inventory for basic products such as servers. By 2004, such backlogs had largely disappeared and inventories overall reached a 30-year low. This turnaround was achieved by implementing demand-driven processes, including build-to-order and direct shipment to customers, not to mention improved sales.

By any measure, ISC has produced impressive financial and operating results. While 2004 revenue grew about 50 percent over 1993 levels to $96.5bn, profit as measured by cash flow of $9.2bn increased nearly 300 percent.

Cycle time performance increased by 16 percent, and order turn 32 percent faster. Client satisfaction has climbed by two full percentage points. The transformation greatly helped sales as well because it reduced the amount of time the salesforce spends on activities like checking on order status, proposal generation and contracts by 25 percent.

"Our sales people are now spending 38 percent more time with clients, which increases sales and give us much better marketplace insights," says Knight.

Service Supply Chain
Perhaps the greatest change at IBM in the last few years has been the growing emphasis on services as opposed to product sales. More than two thirds of its revenue now comes from services, including consulting, equipment delivery and implementation, service, training and maintenance. As a result, IBM is breaking new ground to apply supply chain principles to its service and its product business.

"We are looking at the total delivery of a solution to a customer, not just the hardware," says Knight.

Most of IBM's engagements combine IBM hardware and services, and a growing number are entirely service-based. These engagements require putting together teams with various technology expertise, consulting expertise, industry specific expertise and pulling them all together very quickly.

"The bill of materials for our service business is labor, skills and talent," she says. "We are buying contract labor, third-party software, hardware, niche consultants, industry experts, and high-end engineering skills to solve a specific problem for a customer."

Knight says this service orientation for supply chain management forces it to view its responsibilities for customers much more broadly.

"For each engagement, we combine what we have plus what we need to acquire to deliver the total solution to the customer," she says.

For example, just before Hurricane Katrina hit the mainland, a client near Gulf Coast arranged with IBM to have teams of people with specific skills available after the storm to implement a recovery plan. While there were many employees and contractors that had the skills needed, IBM wanted to make sure the teams were based near enough to the client's locations to be immediately accessible without having to depend on air travel. A recently developed database of people, skills, availability and location made the task relatively easy.

"We were able to have these people on the ground working within 24 hours," says Knight

IBM sees this service-oriented supply chain as a huge opportunity because customers are looking for total solutions, not just products, which in many ways are becoming a commodity. Also, no other major competitor is as far along as IBM in applying supply chain concepts to a services business.

"We are leveraging many years of experience with a hardware supply chain to achieve one that is service-based," she says.

"We are building a very good understanding of how to identify key skills, experience and availability," she says. "As we apply supply chain principles to human assets in a services-based business, we are creating competitive advantage the same way we did in our product supply chain," she says. "We are bringing the customer much higher levels of service flexibility, responsiveness and lean inventory, so they can be more successful."

That total level of responsiveness for products and services is what IBM needs to offer its customers an on-demand solution, says Knight.