At some point, every multinational must ask the question: Are we a truly unified, global organization, or just a collection of local operations, each with its own way of doing business?
For Sun Microsystems, Inc., the answer was largely the latter. The Santa Clara, Calif.-based seller of high-end servers and networking technology fell on hard times after 2000, with the dot-com crash and a plunge in sales. When business declined, it could no longer mask the inadequacies in its organization.
Sun set out to fix the problem on a number of fronts. One of its biggest efforts came in the area of service-parts logistics, which lacked coordination across regional units. "It didn't look like we were behaving globally," says Steve Simpson, senior director of global supply chain, who was charged with the task of unifying key operations.
Simpson's research, consisting in part of benchmarking against other high-tech giants such as IBM and Hewlett-Packard, revealed that the service-parts organization was in dire need of an overhaul. During the high-tech gold rush of the 1990s, Sun had pumped up its parts stocks in order to meet service commitments. Inventory management was fragmented among five geographic units, deploying everything from off-the-shelf software to homegrown systems to spreadsheets. "It was an eye-opener," says Simpson.
Looking for a new system, Sun drew up some strict requirements. The company had to meet all service-level agreements (SLAs). It had to reduce obsolete parts and "orphaned" parts revisions. Service contracts with the installed base had to yield a profit. And the whole organization had to be aligned on a single plan, achieving global economies of scale.
At a service-parts logistics conference in Europe, Sun managers ran into representatives of software vendor Servigistics Inc. Mike Landry, founder and chief technology officer, recommended that Sun run a pilot of the Servigistics application. While the test would be restricted to Europe, the system could be applied globally. Recalls Simpson: "The opportunity was big enough to separate the sales pitch from possible reality."
Although the benefits of the system were compelling, Simpson and his team still had to convince top management to spend the money. At the time, Sun was entering a downturn from which it has yet to fully recover. Thousands were laid off, and the company was suffering through quarter after quarter of losses. To complicate matters, Sun wanted to adopt a single instance of enterprise resource planning software.
Simpson admits to encountering "raised eyebrows" among senior management when he laid out his case for investment in the Servigistics software. "I said that this was a big bet that we needed to make," he says. Finally, after a painstaking budgetary process, the project got the go-ahead. It was selected as one of Sun's top three IT investments for 2003 and 2004, says Eric Hinkle, CEO of Atlanta-based Servigistics.
Helping the case was Sun chief executive officer Scott McNealy's recent conversion to the rigorous Six Sigma quality process. Serving on the General Electric board of directors, McNealy had been inspired by Jack Welch, G.E.'s CEO, who was busy weaving Six Sigma into his massive organization. Service parts were too critical to be left out of a Six Sigma program at Sun.
"The intestinal fortitude of Sun as an organization really shone through," says Hinkle. "They took an aggressive mind-set-that there was no better time to position themselves to come out of this down cycle."
Sun brought in a number of vendors for discussion, taking nearly nine months before choosing Servigistics for global implementation. The vendor "seemed more nimble and aggressive" than its competition, says Simpson. In fact, the Servigistics tool was up and running in a relatively short period of time. Sun turned on the system in Europe in mid-January of 2004, extending it to the Americas in April, and Asia-Pacific in June.
Plugging in the technology was no easy task. Servigistics had to work with all three of Sun's logistics planning teams around the world. The software had to be integrated with multiple back-end operations, and best practices had to be shared and standardized, says Hinkle.
Then there was the global ERP project to be considered. In the end, Sun activated the Servigistics software in Europe before consolidating ERP systems around the world. The former, says Hinkle, promised a quicker payback. And Servigistics had plenty of experience in linking up with multiple applications. According to Hinkle, the typical Servigistics customer runs six to seven different back-end systems.
Simpson had sold the system to management on a promise of $36m in benefits, mostly through cost avoidance and top-line savings, within 12 months. It beat that target handily. By the end of 2004, he says, benefits derived from the software had exceeded $40m.
Much of the savings came from not having to purchase additional inventory. Efficiencies triggered by the new system meant Sun needed less product to meet customer requirements. In addition, because new parts were more readily available at forward stocking locations, the company could put off repair of returned items until required by actual demand. In the past, says Simpson, every unit that came back would be repaired at once.
Carrying Costs Drop
Inventory carrying costs fell dramatically. According to Simpson, amortization expense for spares is at an all-time low. Inventories at each location have been re-balanced to reflect frequency of demand. Currently, Sun stores more than $400m worth of spare parts for its servers, storage arrays and other equipment globally. Availability stands at around 98 percent, Simpson says.
The technology had to handle a complex network and rapid expansion. At the outset, says Hinkle, Servigistics was dealing with around 32,000 Sun parts at 2,000 forward stocking locations. There were nearly 500 users of the system overall; at any given time, 200 could be accessing it concurrently. In total, Sun's global service-parts business consists of 125,000 parts at 5,000 locations in Europe, Asia-Pacific and North America. But Servigistics managed to get the software running system-wide in less than 25 weeks, while integrating with an ERP backbone, various legacy systems and even a customer relationship management (CRM) application.
The Servigistics system begins with a demand forecast, coupled with lead times for every part and location in the network. Demand variability is also figured into the mix. From there, Sun can optimize its stocking plan, deciding on the right quantity and location of spares. Decisions can be made on what to buy, repair, move, scrap and sell. Potential shortages can be identified. With complete information at their fingertips, service reps can propose a wider variety of options for customers looking to replace critical parts.
The system ranges across the parts lifecycle. It generates a forecast for introduction of new product, recommending a plan for seed stock as well as end-of-life deployment, says Hinkle. Alerts are issued on an exception basis, along with recommendations to planners for corrective action. The information is then fed into back-end systems for execution and refinement of the planning tool.
What turned out to be the largest deal in Servigistics' history also has provided big benefits for Sun, which honored the vendor with a Meritorious Supplier Award for fiscal 2004. "They're well ahead of their business case," notes Hinkle. "They paid for the entire application after the first three months."
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