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When Bob Moffat set out to transform IBM's global supply chain, he had little trouble getting people to take him seriously. All he needed was a few hundred million dollars of savings in the first few months.
Actually, it was a bit harder than that. First, Moffat had to shed his other identity - as head of IBM's Personal Systems Group, which makes personal computers and printing systems. With the additional title of senior vice president of the Integrated Supply Chain (ISC) organization, he was essentially holding down two full-time jobs. In January of this year, IBM president and chief executive officer Samuel Palmisano released Moffat from his Personal Systems duties, freeing him up exclusively to shepherd the year-old ISC.
He would need the extra hours. Moffat was charged with overseeing creation of what IBM's brass (and public relations types) are calling "the world's first on-demand supply chain." But the words are more than another promotional slogan. IBM sees the effort as crucial to maintaining its position as the world's largest provider of IT software, systems and services. It's also an attempt to correct what IBM executives concede are some serious deficiencies in the company's level of customer service.
Moffat was appointed to head up ISC in February 2002, shortly after the group's formation. There was "no cathartic moment" that triggered the move, he says. Palmisano, who took over as CEO from the legendary Louis Gerstner that same year, saw an opportunity to grab competitive advantage in a down economy. "Many people were distracted," recalls Moffat. "These were difficult economic times."
Until that moment, IBM seemed a bit distracted, too. Its 2001 revenues of $85.9bn were down by $2.5bn from the previous year. And while the high-tech giant was good at traditional procurement, manufacturing, sales and distribution, these were treated as discrete tasks, lodged within a series of corporate "silos." The setup was hardly conducive to the offering of products and services "on demand."
The term's definition can be a bit fuzzy. IBM is deploying it throughout the organization, attaching the words to e-business, computing services, global financing and the supply chain. In the case of the last, "on demand" means an organization that can rapidly respond to changes in customer requirements and the marketplace.
To do that, systems and processes must be integrated in an end-to-end fashion (defined by Moffat as "opportunity to cash"). Customers were increasingly asking for a tailored mix of hardware, software and services. In response, IBM would have to integrate its systems for manufacturing, procurement, distribution and overall IT. Not an easy task for an organization with operations in more than 150 countries.
Palmisano gave Moffat another vote of confidence in January of this year, by granting his request to fold all customer-oriented processes and systems into the ISC. In the category of Be Careful What You Wish For, Moffat was suddenly in charge of nearly 20,000 people at 56 locations, controlling $40bn in expenditures. The good news was that he finally had an organization that could truly be called "end-to-end." The challenge lay in getting everyone to think in terms of the total supply chain, not just their individual jobs.
The Six Principles
At the outset, Moffat crafted six "overarching principles" that would guide the ISC team. None was particularly earth-shaking or new. They were: measuring success in customer satisfaction and creation of shareholder value; building competitive advantage in productivity, efficiency, cost, quality, responsiveness and cash management; delivering a "superior end-to-end customer experience"; executing with speed and urgency through simplified processes; demonstrating IBM's leadership in "e-business on demand" while being recognized as the industry's supply-chain leader; and developing employee skills under the auspices of an integrated team.
Like everyone else in ISC, Moffat was feeling his way through the job. He had previously engineered a remarkable turnaround in the personal computers line. And, with his strong background in economics, he had served as chief financial officer of multiple units within the company. Still, he admits, "I didn't know anything about supply chain when I took over the organization. My strength was figuring out the business reasons for doing things."
He would also need strong people skills. "People are very comfortable operating in their silos," Moffat says. "If you ask them to think horizontally, they get nervous." His vision was of an organization that cut across individual tasks, both in terms of process and communications, all with an eye toward serving the end customer.
To get everyone on board, Moffat employed the time-honored strategy of announcing a wildly ambitious goal - $5bn in savings within the first year. That commitment came scarcely two weeks into his tenure. It was followed by a scramble to show immediate results, in order to gain credibility and "traction" with the ISC team.
Moffat and his people first went after some relatively easy wins. Drawing on his experience in the personal computers division, he looked intensively at the company's sourcing - and, ultimately, outsourcing. The idea of letting an outsider perform key manufacturing tasks was unthinkable to many IBM managers.
Moffat recalls Gerstner demanding to see his employee badge when he first brought up the subject of outsourcing. "He said no IBM'er had ever suggested such a thing before."
In fact, Moffat dislikes the word "outsourcing." He prefers to call it "optimizing sourcing" - the difference being that IBM isn't ceding control of the process after all. It's simply turning over the physical piece to a specialist.
At the same time, ISC took a close look at where and from whom it purchased supplies and components. Economies in that area, driven by a consolidation of vendors and lower prices, reaped big savings at the outset. In ISC's second quarter of existence, the group took hundreds of millions of dollars out of procurement costs in its server division alone.
Moffat's quick success caused the organization to sit up and take notice. "From pushing my way through the door," he says, "I got invited in the door in many places."
A Wave of Results
The strategy yielded rapid results throughout IBM. Through automated procurement, 96 percent of purchasing transactions became "hands-free," saving more than $430m in 2002. In the process, IBM connected up with some 33,000 suppliers via the internet. It reduced the time for contract writing from between six and 12 months to just 30 days. And the period between requisition and supplier order placement went from two or three weeks to a matter of hours.
Another big win came from shortening the time it takes for IBM to get paid by its customers for goods and services. Suddenly, the company was taking in revenues up to 30 days before having to pay suppliers. The resulting $900m in internal cash flow helped to fund IBM's $3.5bn acquisition of PwC Consulting, which brought thousands of additional supply-chain and systems integration experts into its Global Services unit. The deal led AMR Research analyst Larry Lapide to call IBM "the supply-chain management consulting gorilla."
Moffat ended up exceeding his first-year promise, racking up $5.3bn in savings for the organization - $2.5bn in hardware costs, $1.5bn in customer solutions procurement, and $1.3bn in general procurement. The total represents roughly 6.5 percent of IBM's 2002 revenues. According to J. Stuart Francis, managing director and group head of global technology investment banking with Lehman Brothers, that translates into $56.8bn in preserved incremental value, or 43 percent of IBM's market capitalization.
But top management wasn't satisfied. For his pains, Moffat was immediately put on the hook for another $5bn in savings over the coming year. And this time, it wouldn't be quite so easy.
The first six to nine months of ISC's existence was focused mostly on internal matters, such as process streamlining and cost cutting. When the group expanded to include customer-service staff, it took on a whole new perspective. Now it would look for improvements that were evident to the customer. Says Moffat: "You don't drive a business on just being able to save, save, save."
IBM was all too aware of its number-three ranking in customer satisfaction, a position it had occupied for the past three years. It also knew the reward for improvement. According to Moffat, an increase of just one percent in customer satisfaction translates into $2bn to $3bn of additional revenue.
The Road Ahead
It's too early to assess concrete results on the customer side, although Moffat is confident he can pull at least another $5bn in expense out of the organization while boosting service quality. More than 200 transformation initiatives are under way in the IBM supply chain. Moffat divides them into the categories of learn, shop/buy, make and deliver.
In the "learn" space, where customers get basic information about IBM's products, some 35,000 sales reps are using common processes, data and architecture to synchronize communications. The move allows IBM to target its marketing efforts and better manage demand.
Under "shop/buy," Moffat is spearheading process synchronization, giving the organization real-time, end-to-end visibility of product in the pipeline. IBM will be able to substitute product if an item isn't available. And it will gain a better picture of what customers really want.
Under the "make" category, IBM continues to seek closer alliances with outsourcing partners wherever feasible. Moffat also wants to be more receptive to suppliers. Out of every 100 opportunities presented by suppliers for cutting costs or improving processes, IBM has been accepting just 10. A major competitor takes 50. To boost that number, says Moffat, "requires a cultural transformation."
Under "deliver," ISC is implementing distributed order fulfillment, so that any order can be sourced from any factory. The system will make IBM more flexible in times of supply disruption, such as last summer's West Coast ports shutdown, or sudden shifts in demand.
Recent IBM announcements related to the "on-demand" effort include a pair of new outsourcing deals with Sanmina-SCI and Solectron, two of the leading electronics manufacturing service (EMS) providers. Taking over IBM plants in Mexico and Scotland, Sanmina-SCI will make "a significant portion" of IBM's eServer xSeries systems and IntelliStation workstations. It will also fulfill orders for options related to IBM NetVista desktop systems, ThinkPad notebooks and eServer xSeries systems. The three-year deal is worth $3.6bn.
Solectron will acquire an IBM refurbishing center in Research Triangle Park, N.C., in support of the Global Asset Recovery Services arm of IBM Global Financing. The $120m program, also for three years, calls for Solectron to restore end-of-lease PCs and other IT equipment for resale.
Moffat says both deals will allow IBM to improve efficiency and focus its resources on design and engineering. Apparently, investors agree. According to Francis, the notebook manufacturing agreement with Sanmina-SCI drove up the company's stock price by 2.9 percent, adding $4.1bn to its market capitalization.
Experts Weigh In
Outsider reaction to the IBM supply-chain revamp has been broadly positive. "It's really going to be something," says David Closs, John McConnell professor of business administration at Michigan State University. (MSU is one of three colleges - the others being Penn State and Arizona State University - selected by IBM as partners in logistics and supply-chain research.) "They have put a lot of emphasis on integrating their supply chain in the last five to eight years."
Of particular note, Closs adds, is IBM's application of supply-chain concepts to traditional non-supply-chain sectors, such as consulting and global services. Those are now being managed through scheduling and "just-in-time" principles, similar to classic manufacturing processes.
Closs says IBM's actions are essential to competing in a business marked by shrinking product lifecycles. "You don't really have a choice," he says. "You need to do it, to make yourself competitive for the long term."
Skip Grenoble, executive director of the Center for Supply Chain Research at Penn State (another of IBM's research partners), praises the company for doing what others are still talking about - defining the supply chain as an end-to-end series of processes. He says IBM has made huge strides in embracing e- business, by placing nearly all of its suppliers on line.
At the same time, he says, IBM hasn't taken its eyes off the customer. "They realize that e-business is not a goal - it's an enabler."
AMR industry strategist Bob Parker says IBM has successfully extended the "on-demand" concept to computing, e-business and human expertise. But he cautions that the program hasn't been fully tested, with much remaining at the conceptual level. Still to be resolved is the long-term status of EMS providers, who are in danger of taking on excessive risk if they acquire too much fixed capacity. A successful on-demand program must involve shared risk and reward between the EMS vendor and original equipment manufacturer, he says.
IBM's supply-chain project sets an example for the company's potential customers, Parker says. In theory, they will be prompted to follow suit through similar outsourcing deals with their own vendors - in particular, IBM. "I give IBM credit for having the courage to do internally what they're telling others to do," he says.
Francis praises IBM for embracing "the next wave of supply-chain management" - customer contact. "They have done a superb job of getting their supply chain integrated from quote to cash," he says.
When it comes to supply-chain prowess, Francis divides businesses into four stages of development. In the first, supply-chain management is seen as a tool marketed by smaller technology and outsourcing providers. In the second, the concept starts making inroads into users' systems, and yielding revenues. In the third, where most companies are today, the focus is on SCM as a means of boosting profitability. And in the fourth, where IBM is virtually alone, companies begin integrating customer-oriented processes into their SCM strategies.
Francis says IBM's model is especially attractive to investors because it leads to greater production flexibility, quicker responses to customer requests, lower SCM costs overall, and reduced cash-to-cash cycle times. "Wall Street is really beginning to care about this issue," he says.
So are corporate boardrooms. This year, Moffat spoke to IBM's board of directors about supply chain for the first time. He also was among the company's featured speakers at a meeting of financial analysts.
Customers, too, are getting the message. Moffat says IBM has been dutifully measuring its customer-service performance, "transaction by transaction." It has also launched an exhaustive customer-satisfaction survey, to gauge the program's ultimate impact.
Moffat hasn't set a deadline for meeting management's goal of a global, on-demand supply chain. The process is ongoing, he says. Following this year, with the delivery of another $5bn in savings, his group intends to "take a deep breath" before targeting additional improvements.
Francis is optimistic that Moffat and the ISC unit will continue to cut costs while improving customer service. "In many ways," he says, "the best is yet to come for IBM."
IBM Partners with Three Schools on Supply Chain
IBM and Michigan State University's Eli Broad College of Business are setting up a center for joint research and study of advanced supply-chain practices. The new Center for On Demand Supply Chain Research will be funded by approximately $1m in hardware, software and storage technologies provided by IBM. The result, says the company, will be a laboratory for the modeling and analysis of "on-demand" supply chains, mirroring IBM's current internal efforts.
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