Executive Briefings

Supplier Empowerment at Celestica Lowers Total Cost of Ownership

A conversation with John Boucher, executive vice president for supply chain management at Celestica, Toronto, Canada.

Celestica, an $8bn multinational electronics manufacturing services (EMS) company, is dedicated to delivering end-to-end product lifecycle solutions for its global customers. To enable these solutions, the company implemented a unique supplier strategy, designed by John Boucher, that improved supplier collaboration and reduced total cost of ownership. E2open, Redwood City, Calif., provided solutions and technology support for the redesigned network.

Q: Tell us a little about how you came to your current position at Celestica.

Boucher: I spent about 17 years with Digital Equipment Corp. I held a variety of positions at Digital, working my way into a senior management position where I drove the supply chain for the company's personal computer division as well as its network product division. After doing that for four or five years, I became part of a management team that started up sites in low-cost geographies. During that time, one of the former executives at Digital left to join Sun Microsystems and later started an EMS company called Manufacturing Services Limited or MSL. I went to work for MSL and spent about 10 years there, during which time it grew to a $1.8bn company and went public. Then, in 2004, MSL was acquired by Celestica and I was named head of operations for the Americas. In late 2005, Celestica's CEO asked me to take on the global supply chain function and since then I have been running the company's supply chain and procurement activities. Recently, we merged all the services organizations -- from design engineering to fulfillment services to aftermarket services -- into the supply chain organization. So now I am responsible for driving the growth of end-to-end solutions for our key customers and for identifying key business opportunities in the market.

Q: Can you give us a profile of Celestica's supply chain?

Boucher: Celestica is a tier one EMS company. Our revenue was in the $8bn range last year and we have roughly100 customers and maybe 5,000 suppliers. We manage approximately 400,000 component SKUs. From a facility standpoint, we have about 30 sites within our operating network, with a significant focus on eight mega-sites, two in the Americas, two in Eastern Europe and four in Asia. These mega-sites handle 80 percent to 85 percent of our entire throughput, so you can see that we really have consolidated our operating network.

Q: Tell us more about your network strategy.

Boucher: Well, we approached our supply chain strategy by asking ourselves how we could provide our customers with flexibility and quick response. How could we provide them the best possible solutions? With that as the backdrop, we created a road map of things we wanted to go after and one of those was total cost of ownership. This is not just the invoice price from our suppliers, but the invoice price plus the cost of quality, the cost of transportation, the cost of delivery performance - all the major cost attributes. So we wanted to understand the real, true cost of the supply chain, more as activity-based costs. That was one of the first things I wanted to go after when I took this job.

Then, to drive the flexibility angle, I wanted to work on getting a simplified operating network. Our vision was to have a global network of operating sites that worked in concert with one another to deliver end-to-end solutions to the customer. I know that is a mouthful, but in the EMS industry, as OEM [original equipment manufacturing] companies have outsourced to EMS providers, the providers have acquired many sites from their OEM customers. So as an industry and as a company, we ended up with a lot of fragmented sites around the globe. The challenge was to bring these together, develop supplier agreements and try to drive them to become more efficient.

Celestica's goal and the goal of our supply chain was to create an operating network around a set number of mega-sites that would have reach into all our markets. That is why our eight mega-sites are dispersed pretty uniformly across the globe. It was important to us not just to consolidate, however, but to consolidate based on certain types of technologies, certain types of customers, certain types of operating requirements. So one mega-site might concentrate on the consumer space with its particular set of components, while another concentrates on a different group of customers and components. This way, we are able to synergize and eliminate redundancies even within the eight sites, which minimizes the fragmentation of our capabilities across the globe or even across a single geography.

We then looked at developing supply chain solutions and flexibility around those sites, which is how we came up with what I call our ring strategy. This is a very simple concept. If a supplier is in ring one, it is on site or within our campus. Ring two suppliers have a delivery lead time of seven days; ring three suppliers have a delivery lead time of 14 days. So the rings are a measurement of lead time and flexibility. By designing the supply chains in rings around the mega-sites, for the types of components and the technology specific to those sites, we are able to get thousands of folks around the company driving toward improvement of our lead times.

Q: What was the role of E2open in this project?

Boucher: E2open is one of our cornerstone technologies. Using E2open, we created a program for our use internally that we call LiveShare. I mentioned earlier that we have roughly 5,000 suppliers, which means there is a lot of fragmentation in our supply base. LiveShare is a supplier e-collaboration tool that automates a lot of previously manual activities that occur between our operating network and our suppliers. With LiveShare, we are able to pull our forecasts from our ERP system and transmit them to our suppliers. We also transmit our purchase order requirements and receive back commitments from suppliers. And we use LiveShare to inform our suppliers of the inventory positions that they have at our sites, which enables them to participate in vendor managed inventory programs. One of the important things about this tool and E2open is that it eliminates the lag time that previously existed when we had to go through a number of steps to get the ERP output and transmit it. LiveShare does this in real time. Because we are able to provide our suppliers this information in real time and in an automated fashion, we can shift more responsibility to them for designing a supply chain that meets our needs. We can say, 'now that you have the information we have, we want you to position yourself so that you can provide ring one service, or ring two service for the key components that you supply to our sites.'

Q: Have you also changed the way you measure supplier performance?

Boucher: Yes. We now measure first-pass yield in addition to traditional measures like on-time to request and on-time to commit. First-pass yield is based on the fact that our suppliers may receive 50, 60 or 70 transmitted requests after we run MRP at one of our mega-sites. These are order actions, asking the supplier to delay or push forward a delivery date or to cancel an order or add something to an order. With E2open this process has been completely automated so suppliers get these order actions automatically. What I want back is their commitment to accept the order action. What we are measuring is how often we get that acceptance on the first pass. In other words, if I give a supplier 100 requests today, how many come back with a positive response. If they achieve a 90 percent first-pass yield, that means very little human intervention would be required to get their performance up to the 95 percent level. If their first-pass yield was 10 percent --  and when we first started this, we had a few of those -- it would take a lot of work to get their supply chain to deliver 95 percent to 100 percent. The suppliers that score higher on first-pass yield are the suppliers that cost me the least amount in terms of my TCOO [total cost of ownership] program. And they are the suppliers that enable me to provide better customer service, because the bottom line for me is to be able to respond to customer queries instantaneously and with a high level of integrity.

Q: Can you tell me a little more about the TCOO program?

Boucher: We have a supplier scorecard where a supplier can score 100 points. That means that for every dollar I spend buying components, I get $1 in value. If a supplier scores less than 100, say 50 points, that means that for every dollar I spend, it is costing me $1.20, according to our equation. A supplier gets points for which strategic ring it is in, its payment terms, its quality level, whether it participates in LiveShare or some other measure of its position in our strategic supply chain. All of these items are weighted so we can come up with a very specific score for every supplier with which we do business. We have an annual partnership performance program and this year awards were based on two things: the highest TCOO scores and the most improved scores year over year.

We also share TCOO scores with our customers because it is a vantage point that our customers don't always see. They probably don't know that a supplier they select is in our ring five, which means they have to transfer those goods over the ocean. So now I can go to my customer and say, 'I would like to work with you to expand your authorized vendor list because I could get your total cost of ownership score down if I could use a different vendor in this situation.' The item invoice price may not change, but I know I can help reduce the rate I charge for freight by getting a supplier with a better TCOO score. It is a numeric way to take the subjective elements out of the equation.

Q: Are there any other supply chain initiatives you are working on?

Boucher: One other program that we are driving vigorously is our enterprise lean supply chain program. We have created a complexity factor for every supply chain so we now can measure each supply chain relative to how complex it is. This is tied to our drive to minimize supply chain complexity. For example, if I am looking at a customer-specific supply chain, I would look at how many components are involved, how many of these are in each of our rings, how many require barcoding, how many suppliers are on the LiveShare program - all of the cost drivers, in other words. Then we create a formula that says this supply chain has a complexity factor of 100, for example. It is very similar to TCOO, but what we are trying to do is drive the complexity factor down, down and down. By default, as I remove complexity I am removing costs and removing time. This is a very unified program across the company that has been enabled by our ring strategy and our mega-site strategy and our TCOO strategy.

Q: Have you quantified any results from these strategies?

Boucher: I can tell you that over the last 12 months our flexibility, which we measure, has improved by 35 percent. That is a number we watch closely and that the team is measured on as well. Also our inventory velocity has improved substantially as a result of this program plus several other programs. We moved from last place in inventory velocity in the industry to first place in the last six to nine months.

Resource Links:
Celestica, www.celestica.com
E2open, www.e2open.com

Celestica, an $8bn multinational electronics manufacturing services (EMS) company, is dedicated to delivering end-to-end product lifecycle solutions for its global customers. To enable these solutions, the company implemented a unique supplier strategy, designed by John Boucher, that improved supplier collaboration and reduced total cost of ownership. E2open, Redwood City, Calif., provided solutions and technology support for the redesigned network.

Q: Tell us a little about how you came to your current position at Celestica.

Boucher: I spent about 17 years with Digital Equipment Corp. I held a variety of positions at Digital, working my way into a senior management position where I drove the supply chain for the company's personal computer division as well as its network product division. After doing that for four or five years, I became part of a management team that started up sites in low-cost geographies. During that time, one of the former executives at Digital left to join Sun Microsystems and later started an EMS company called Manufacturing Services Limited or MSL. I went to work for MSL and spent about 10 years there, during which time it grew to a $1.8bn company and went public. Then, in 2004, MSL was acquired by Celestica and I was named head of operations for the Americas. In late 2005, Celestica's CEO asked me to take on the global supply chain function and since then I have been running the company's supply chain and procurement activities. Recently, we merged all the services organizations -- from design engineering to fulfillment services to aftermarket services -- into the supply chain organization. So now I am responsible for driving the growth of end-to-end solutions for our key customers and for identifying key business opportunities in the market.

Q: Can you give us a profile of Celestica's supply chain?

Boucher: Celestica is a tier one EMS company. Our revenue was in the $8bn range last year and we have roughly100 customers and maybe 5,000 suppliers. We manage approximately 400,000 component SKUs. From a facility standpoint, we have about 30 sites within our operating network, with a significant focus on eight mega-sites, two in the Americas, two in Eastern Europe and four in Asia. These mega-sites handle 80 percent to 85 percent of our entire throughput, so you can see that we really have consolidated our operating network.

Q: Tell us more about your network strategy.

Boucher: Well, we approached our supply chain strategy by asking ourselves how we could provide our customers with flexibility and quick response. How could we provide them the best possible solutions? With that as the backdrop, we created a road map of things we wanted to go after and one of those was total cost of ownership. This is not just the invoice price from our suppliers, but the invoice price plus the cost of quality, the cost of transportation, the cost of delivery performance - all the major cost attributes. So we wanted to understand the real, true cost of the supply chain, more as activity-based costs. That was one of the first things I wanted to go after when I took this job.

Then, to drive the flexibility angle, I wanted to work on getting a simplified operating network. Our vision was to have a global network of operating sites that worked in concert with one another to deliver end-to-end solutions to the customer. I know that is a mouthful, but in the EMS industry, as OEM [original equipment manufacturing] companies have outsourced to EMS providers, the providers have acquired many sites from their OEM customers. So as an industry and as a company, we ended up with a lot of fragmented sites around the globe. The challenge was to bring these together, develop supplier agreements and try to drive them to become more efficient.

Celestica's goal and the goal of our supply chain was to create an operating network around a set number of mega-sites that would have reach into all our markets. That is why our eight mega-sites are dispersed pretty uniformly across the globe. It was important to us not just to consolidate, however, but to consolidate based on certain types of technologies, certain types of customers, certain types of operating requirements. So one mega-site might concentrate on the consumer space with its particular set of components, while another concentrates on a different group of customers and components. This way, we are able to synergize and eliminate redundancies even within the eight sites, which minimizes the fragmentation of our capabilities across the globe or even across a single geography.

We then looked at developing supply chain solutions and flexibility around those sites, which is how we came up with what I call our ring strategy. This is a very simple concept. If a supplier is in ring one, it is on site or within our campus. Ring two suppliers have a delivery lead time of seven days; ring three suppliers have a delivery lead time of 14 days. So the rings are a measurement of lead time and flexibility. By designing the supply chains in rings around the mega-sites, for the types of components and the technology specific to those sites, we are able to get thousands of folks around the company driving toward improvement of our lead times.

Q: What was the role of E2open in this project?

Boucher: E2open is one of our cornerstone technologies. Using E2open, we created a program for our use internally that we call LiveShare. I mentioned earlier that we have roughly 5,000 suppliers, which means there is a lot of fragmentation in our supply base. LiveShare is a supplier e-collaboration tool that automates a lot of previously manual activities that occur between our operating network and our suppliers. With LiveShare, we are able to pull our forecasts from our ERP system and transmit them to our suppliers. We also transmit our purchase order requirements and receive back commitments from suppliers. And we use LiveShare to inform our suppliers of the inventory positions that they have at our sites, which enables them to participate in vendor managed inventory programs. One of the important things about this tool and E2open is that it eliminates the lag time that previously existed when we had to go through a number of steps to get the ERP output and transmit it. LiveShare does this in real time. Because we are able to provide our suppliers this information in real time and in an automated fashion, we can shift more responsibility to them for designing a supply chain that meets our needs. We can say, 'now that you have the information we have, we want you to position yourself so that you can provide ring one service, or ring two service for the key components that you supply to our sites.'

Q: Have you also changed the way you measure supplier performance?

Boucher: Yes. We now measure first-pass yield in addition to traditional measures like on-time to request and on-time to commit. First-pass yield is based on the fact that our suppliers may receive 50, 60 or 70 transmitted requests after we run MRP at one of our mega-sites. These are order actions, asking the supplier to delay or push forward a delivery date or to cancel an order or add something to an order. With E2open this process has been completely automated so suppliers get these order actions automatically. What I want back is their commitment to accept the order action. What we are measuring is how often we get that acceptance on the first pass. In other words, if I give a supplier 100 requests today, how many come back with a positive response. If they achieve a 90 percent first-pass yield, that means very little human intervention would be required to get their performance up to the 95 percent level. If their first-pass yield was 10 percent --  and when we first started this, we had a few of those -- it would take a lot of work to get their supply chain to deliver 95 percent to 100 percent. The suppliers that score higher on first-pass yield are the suppliers that cost me the least amount in terms of my TCOO [total cost of ownership] program. And they are the suppliers that enable me to provide better customer service, because the bottom line for me is to be able to respond to customer queries instantaneously and with a high level of integrity.

Q: Can you tell me a little more about the TCOO program?

Boucher: We have a supplier scorecard where a supplier can score 100 points. That means that for every dollar I spend buying components, I get $1 in value. If a supplier scores less than 100, say 50 points, that means that for every dollar I spend, it is costing me $1.20, according to our equation. A supplier gets points for which strategic ring it is in, its payment terms, its quality level, whether it participates in LiveShare or some other measure of its position in our strategic supply chain. All of these items are weighted so we can come up with a very specific score for every supplier with which we do business. We have an annual partnership performance program and this year awards were based on two things: the highest TCOO scores and the most improved scores year over year.

We also share TCOO scores with our customers because it is a vantage point that our customers don't always see. They probably don't know that a supplier they select is in our ring five, which means they have to transfer those goods over the ocean. So now I can go to my customer and say, 'I would like to work with you to expand your authorized vendor list because I could get your total cost of ownership score down if I could use a different vendor in this situation.' The item invoice price may not change, but I know I can help reduce the rate I charge for freight by getting a supplier with a better TCOO score. It is a numeric way to take the subjective elements out of the equation.

Q: Are there any other supply chain initiatives you are working on?

Boucher: One other program that we are driving vigorously is our enterprise lean supply chain program. We have created a complexity factor for every supply chain so we now can measure each supply chain relative to how complex it is. This is tied to our drive to minimize supply chain complexity. For example, if I am looking at a customer-specific supply chain, I would look at how many components are involved, how many of these are in each of our rings, how many require barcoding, how many suppliers are on the LiveShare program - all of the cost drivers, in other words. Then we create a formula that says this supply chain has a complexity factor of 100, for example. It is very similar to TCOO, but what we are trying to do is drive the complexity factor down, down and down. By default, as I remove complexity I am removing costs and removing time. This is a very unified program across the company that has been enabled by our ring strategy and our mega-site strategy and our TCOO strategy.

Q: Have you quantified any results from these strategies?

Boucher: I can tell you that over the last 12 months our flexibility, which we measure, has improved by 35 percent. That is a number we watch closely and that the team is measured on as well. Also our inventory velocity has improved substantially as a result of this program plus several other programs. We moved from last place in inventory velocity in the industry to first place in the last six to nine months.

Resource Links:
Celestica, www.celestica.com
E2open, www.e2open.com