Gregory Schmidt is vice president of logistics and business systems for OSRAM SYLVANIA, the North American lighting operation of OSRAM GmbH, a wholly owned subsidiary of Siemens Corp. OSRAM is the second-largest lighting and materials enterprise in the world, serving customers in more than 140 countries. It manufactures and markets a wide range of lighting products for industrial and commercial users, original equipment manufacturers and consumers. These are sold primarily under the SYLVANIA brand name but also under the OSRAM brand. Greg has spent his entire career with SYLVANIA, where his responsibilities have ranged from managing distribution centers, to human-resource management and project leadership of an SAP/3 implementation in North America. The latter position evolved into overall responsibility for business systems and later expanded to also include responsibility for logistics and the supply chain.
Q: Can you draw us a picture of the supply chain for OSRAM SYLVANIA's general lighting business?
Schmidt: As with many companies in the market today, we manufacture products all over the world. We have 53 production plants in 18 countries. Because of various costs and technical and engineering pressures, we have developed these plants as centers of manufacturing excellence, which means that each plant specializes in specific components or products. In terms of the supply chain, this means that we need to be able to move products from these production plants around the globe, to all markets. From a sales and marketing perspective, OSRAM participates in virtually every country in the world.
A significant amount of activity takes place in North America. We manufacture in the U.S., Canada and Mexico. Goods manufactured in these countries are sent all over the world and our North American plants receive product from all over the world. So we have moved away from the model where each country or region had its own production facilities to service that country or region. Today, efficient manufacturing takes place around clusters of products and these plants in various combinations are the OSRAM source worldwide for the products they produce.
We pay close attention to transportation and logistics because the cost of getting our product to market is high, relative to the product's cost - in some cases, more than 50 percent. This is because of the nature of the product - lighting products are very light and typically fragile. These factors create complexity, but we see part of our task as de-mystifying this whole global supply-chain business for our people. The reality is that there are certain fundamentals that never change. Whether your supply chain is defined as a single metropolitan area or whether it stretches around the globe, it can be categorized in terms of speed and flexibility. Can we do what the customer wants, even though it may be a little bit different than the last customer, and can we do it very, very quickly? Certainly here in the U.S., and just about anywhere in the world, peoples' appetite has been whetted for near instant gratification. So we have to have supply-chain techniques that respond accordingly. And along with the need for speed is the requirement for variety that the American consumer, at least, believes is an inalienable right. They want lots of choices on the shelf.
Q: Are your products sold primarily through retailers?
Schmidt: We use traditional retail outlets to reach the consumer, but our largest volume is in the industrial, commercial sector - electrical wholesalers and lighting wholesalers that supply products as part of large construction projects, for example. And then there is another large commercial sector that includes hotel chains, hospitals, state university systems and so on. The industrial commercial channel has its own challenges because it is tremendously diverse. Unlike in retail, where consolidations have led to a handful of players really making the market, the opposite is true in this sector. There are thousands of different customers in the industrial channel. With a population that size, trying to get any momentum going with new techniques to drive speed and flexibility is one of our greatest challenges.
Q: How do you go about that?
Schmidt: Well, first we develop a plan. That is certainly nothing new or different, but we do try to construct a well-conceived plan that is rooted in a good understanding of our marketplace. We are really trying to do a better job of understanding all of those different types of consumers that I was just talking about - the industrial consumer, the hospitality industry and so on. What does each market segment want in terms of product offerings? What does it need in terms of surrounding services, such as delivery lead times, shared information, barcoding - all of those things. So, in a very segmented fashion, we have tried to understand their requirements all the way back through our supply chain.
I guess what we strive for can best be described as orienting our supply chain in the direction of a pull-through from the consumer. That is what many have done, but the electrical industry is not always at the forefront, so we are proud of pushing as hard as we have on these issues. We actually have used a lot of what the garment industry and the consumer electronics industry have done - these have been very good benchmarks for us.
The lighting industry is unusual because it is an old industry - our company is 102 years old - and we are selling products made with essentially the same technology that was used in the beginning. That makes us very different than many other companies, but the common thread that we have is that our customers still expect us to be innovative and to introduce new and better products.
We need to be flexible because that is part of what is expected, and we need to focus on speed, speed and more speed and to take these concepts all the way back up the chain. Here is another thing that is unusual about the lighting industry and, certainly, OSRAM SYLVANIA: we are still very vertically integrated. So the components that go into assembling our lighting products - the glass, the bases, the lead wires and so on - actually are produced in plants operated by OSRAM and SYLVANIA. Again, the plants that make these components are making them not only for the U.S. and North American market but also for markets all over the globe. So our challenge is to take these demand signals we are receiving from all over and make sure they get to our assembly plants and back to the plants making the components.
Here in North America, for example, we receive sales signals from throughout South America for our plants, because we make certain products here that are destined for those markets. We supply product into Europe as well, and likewise, Europe supplies a number of products to us. We have similar relationships with OSRAM plants throughout Asia. So the challenge is getting these signals harmonized, getting them understood and acted upon in a timely fashion.
These signals are not only coming from different countries, they are coming from our different customer segments. And we want to respond to them equally, whether the signal is from a big retailer - so many four-packs of bulbs were purchased by consumers today - or whether it is from a hospital or university that is re-lighting a group of buildings. The idea is to be able to receive and respond to those signals in basically the same fashion.
Q: And what techniques do you use to do that?
Schmidt: Well, we have made sizeable investments in technology. Our core is SAP. We are on SAP in North America and Europe and will add a third regional platform for what we generically refer to as Asia. We are using SAP APO, which enables true global supply planning and visibility. We have been using SAP in some form or fashion for some time, but we are now addressing the need to standardize it across the enterprise.
Q: Is APO your primary supply-chain solution?
Schmidt: We are on our way to full use of APO. We have really waited for the product to mature over the last several years. Of course, the proof is in the pudding and we will have to see if it all hangs together when everything is up and running.
We still use Manugistics for certain elements here in the U.S., particularly transportation management. That is a niche that Manugistics does very well and we hope SAP will fulfill our expectations for continued improvement in this area. But, yes, APO will be our primary supply-chain tool.
We also have invested heavily in certain industry initiatives like UCCnet to make sure our data quality is among the best. We have come to realize a very valuable lesson internally over the last few years: data integrity can never be underestimated.
We do regular executive reviews of all the process improvement projects under way in our business. Just this morning we had a meeting where we reviewed 14 projects. Four of them involve improvement in master data. We are very proud of the quality and integrity of the data throughout OSRAM - and it's because of the discipline that the SAP implementation forced into our processes that I am able to say that. But we have learned that synchronizing data within our four walls is just the start. Now comes the challenge of having to connect to the marketplace and to all our customers. Keeping the integrity of that data as it passes through an intermediate distribution partner, whether a wholesaler or retailer, and then on to the consumer through a web site or even on the package itself, is a tremendous challenge.
I mentioned our involvement in UCCnet. We also actively participate in electrical industry organizations - the National Association of Electrical Distributors and the National Electrical Manufacturers Association - that are doing some very forward-thinking work in this area. It's so critical because everything is based on information. When the corner restaurant needs new lighting, the owner picks up the phone and calls his contractor to ask him to come in and put in new fixtures and he describes the type of fixtures or look that he wants. The contractor then goes to the electrical distributor to see what might work best and the electrical distributor looks in the SYLVANIA catalog. He wants to find a light that has all the necessary safety features and also provides the look the owner wants - and all of that information has to be translated into data and passed from one system to the next system to the next system in order to eventually satisfy the restaurant owner's concept for an inviting, ambient light for dining. Data is what makes all that happen. And it has to be two-way - not only do we need to get the data to the customer but we need to feed back data to our physical plant. So, first, is data integrity internally and then data synchronization among all of your supply-chain partners. This all ties back to our central theme of speed and flexibility. If you have a solid foundation of data integrity and synchronization it gives you the speed and the ability to be innovative.
Q: And all that also provides the foundation for collaboration?
Schmidt: Absolutely. And we collaborate all day, every day. You know, a lot of what we used to refer to collectively as e-business has become commonplace - it is how our processes are defined and many of these keys off the "C" word. We look at what is essential in the relationship between our distribution partner, end customer and ourselves as supplier. We want to know their business objective. With retailers, for example, some want to be viewed as high-end merchandisers, some want to be low-cost providers, some fall somewhere in the middle. All of that impacts the formulation of inventory and stocking plans, which we then take into our own sales and marketing plans and out manufacturing plans. So we have a variety of different types of collaboration.
One example is the traditional vendor-managed inventory programs where we essentially shoulder the entire process. In other cases, we stop short of managing the inventory on behalf of the customer or the distribution partner, but we do exchange forecast information for promotional planning purposes - we use SAP and some of the Manugistics tools for that.
Probably our greatest progress over the last 12 months has been taking some of the fundamentals in our ERP system and in our Manugistics supply-planning system and extending those out to our partners using web technologies.
We believe a good collaborative relationship should eliminate duplication. We decide right up front, in the framework for our collaborative relationships, which of the partners can do a particular task best. Is it the retailer or the manufacturer or someone else? Whoever it is, let that party do it and then share the results. Now that's a simple premise but oftentimes it is very difficult to execute and not end up with 57 different varieties. You need some standardization to be efficient.
Q: What are some of the issues relative to managing a vertically integrated supply chain?
Schmidt: Well, let me be clear. We do buy a significant amount of product - nowhere near as much as we make, but we need to supplement our own production to some degree.
I would compare and contrast it this way: culturally, as a vertically integrated company, we share common management objectives and expectations. That certainly helps. The tendency can be, however, to take things for granted, to presume, to make assumptions - all the things that we are taught in business school not to do. So you have to fight the tendency to be somewhat less disciplined in your thought and execution than you are with external parties. When we do source products or buy from third parties, there is a certain accepted discipline to the purchase and to the sales relationship. This is basically because you want there to be clear financial accountability if there are failures in the process. Internally, the question of who bears responsibility can move around somewhat.
But we have tried to take the best of our external processes and instill them in our internal processes. Collaboration actually helps with that and is forcing these processes closer together. I would say now that our external and internal processes are essentially the same.
Q: Do you use a third-party logistics provider?
Schmidt: We use a combination of common carriers and a dedicated fleet. Sometimes we spot buy for services conducive to that type of tendering, but for most of our moves we have contracts. As a wholly owned subsidiary of the Siemens Corp. we are able to leverage the whole of Siemens' spend for transportation. OSRAM SYLVANIA is a big part of that spend and we often take the lead in negotiations. That is how we secure our transportation services.
Q: What other initiatives are you working on?
Schmidt: Over last five years we have introduced, with very good success, a Six Sigma process. We have created a specific structure for training our people so that they are now skilled in the use of Six Sigma improvement techniques. Our next step is to incorporate the Supply Chain Operational Reference Model (SCOR) as a driver to harness the value of process improvements and to really apply our capabilities in that area, in a very concerted way, to the supply chain. We are continuing to focus on the idea of speed, because we believe it is good to keep the message simple and forthright. We want to reduce time in the supply chain. We want to be quicker to market. We want to move shipments faster. We want to respond to that consumer more rapidly. We want to be quicker in every respect. So we are using Six Sigma techniques and SCOR as lanterns to guide the way. And we are adding to this lean technique. The elements of lean in the supply chain are speed, time and responsiveness. So if you take all of that with the technologies we have touched on and the investments we have made in systems, we believe we have some very fertile ground that will allow us to harness significant benefits in the supply chain. And those benefits, again, are characterized by flexibility, innovation and speed. We know those are the elements that give us competitive advantage.
Q: Can you share any of your quantitative results?
Schmidt: Over the past couple of years we have reduced our cycle time on the order of 20 percent to 25 percent. More importantly, we think there is a powerful chemistry in bringing all of these things to bear. The technology is ripe. As RFID comes online, the tremendous visibility it will provide will translate into speed. Connectivity to our customers is now reaching critical mass. Seventy percent or more of routine transactions to and from all of our customers are now electronic. That was unheard of just three 3 years ago. We are really at the jumping off point for quantum improvements in our responsiveness and cycle times. We have a pilot right now, just to use one example, in which lead times of 90 days will be knocked down to seven days. So there is a very powerful intersection of technology, process thought and collaboration with partners - all coming together and coming together very quickly.
To me, it is like being a farmer. We have planted seeds for many years - Investments in R/3, investments in strategic partner relationships. We have seeded and cultivated, we have benchmarked and paid attention and now we are at the stage where the harvest is coming in. It is very exciting.
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