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Every business faces periodic moments of truth, when it must redefine itself to face the future. For IBM, the latest turning point came about 13 years ago. Challenged by younger and nimbler rivals, the company was hemorrhaging money, people and market share. Then Louis V. Gerstner Jr., former chief executive officer of RJR Nabisco and a well-known turnaround expert, was named CEO. Among his moves was to keep the behemoth in one piece. The decision had huge ramifications for IBM's supply chain and logistics strategy.
Nine years later, senior vice president Bob Moffat would lead the charge to create an integrated supply chain organization for all of IBM. But first, the company had to get its arms around the logistics function. Gary Smith, vice president of global logistics, came aboard back in 1995 to revamp the way IBM moved and managed inventory worldwide. Outsourcing was a key part of his plan, with the company handing off big pieces of its transportation and warehousing management to independent providers.
Fast-forward to 2006. IBM is still committed to logistics outsourcing, but in an even more meaningful way, says Smith. In fact, the company's evolving philosophy on outsourcing mirrors the development of logistics service providers as a whole. LSPs today are bigger, better and more comprehensive in their offerings. The grand outsourcing experiment has been a success, and changes in the way global business is done are driving even more companies to embrace the practice.
IBM's initial foray into outsourcing derived from a determination that logistics wasn't a core competency that deserved a hefty strategic investment. At the same time, says Smith, it wanted to take an end-to-end view of the global supply chain. LSPs, still a young industry, provided the answer. Gradually, IBM shed unwanted logistics assets, including trucks, warehouses and other equipment.
Ten years ago, IBM's ratio of fixed to variable logistics cost was about 50-50. Today, fully 93 percent of its cost structure is variable, says Smith. He intends to bump that up by another two percentage points within two years.
Cost is an obvious factor in choosing to outsource. IBM cut logistics expense by around 20 percent before even putting contracts out to bid. Then it negotiated another 15-percent reduction with the chosen partners. Overall, says Smith, IBM's savings on logistics over the past 11 years are approaching $1.5bn. But the real reason why it went to outsourcing-and a growing motivation behind many such contracts today-was to improve the way it moved product around the world.
"Prior to us coming together as a team, outsourcing was done on a very localized basis," says Smith. "There wasn't an overall underlying strategy. I was brought in because IBM wanted to create a global logistics function."
Bertrand Augere joined the company's logistics team around the same time as Smith. Today he is director of global logistics for Europe, the Middle East and Africa. He says IBM's prior dealings with outside partners were more a case of "vendorizing" than true outsourcing. Key logistics functions were kept in-house.
IBM was an early believer in minimizing the number of partners, another trend in logistics outsourcing today. It had a vision of one LSP for each major part of the world. And while that goal initially proved unfeasible, IBM got close: currently it works with two LSPs for all of Europe, Geodis for finished goods and UPS Supply Chain Solutions for service parts, and two for North America, Menlo Worldwide for finished goods and UPS SCS again on the service-parts side. IBM continues to rely on multiple providers in Latin America and Asia, due to issues of distance, culture and a less-mature LSP industry in those regions. But the "ultimate vision" remains one provider for each geography, Smith says.
A big customer like IBM, with $2.1bn in global logistics spend, can help to make that happen. According to Smith, the company nudged Geodis into areas well beyond its primary operations in France. The existence of IBM logistics assets in other European countries gave the provider an instant presence there, with the transfer of some 1,500 people and 1.5 million square feet of warehouse space to Geodis. (Globally, says Smith, around 2,500 IBMers made the switch to an LSP.) Boasts Augere: "We helped to drive the transition of LSPs to pan-European scope."
Outsourcing doesn't mean abdication. IBM runs an "operational control tower" in each region, staffed by internal logistics experts who not only monitor vendor performance but suggest new and innovative approaches. The company's trade compliance program, covering import and export regulations, remains in-house. "That's extremely important to our image," says Smith.
The Concept Spreads
The early days of outsourcing saw only the biggest companies embracing the concept. In the last few years, that has started to change. Companies well outside the Fortune 100 have seen the benefits of relying on partners to handle their logistics needs. In 2001, 24 percent of companies ranked 400 through 500 on the Fortune list were outsourcing, according to Richard Armstrong, chairman and CEO of Stoughton, Wis.-based Armstrong & Associates. Today, the figure is 52 percent.
Infinera, a seller of optical networking systems to telecommunications providers, didn't even consider doing its own logistics when it was formed five years ago. Still, the company has complex needs in the area of customer service. Spare parts must be rushed to users within a matter of hours.
"Logistics is not our core competency," says Lonny Orona, vice president of customer service, echoing the conclusion of a growing number of companies. "We don't have logistics facilities around the world."
Infinera hired D.W. Morgan Co., an LSP based in Pleasanton, Calif., as its exclusive provider of logistics and supply chain management services. Spare modules flow from Morgan-owned depots in Frankfurt and Tokyo, as well as Infinera's own manufacturing site in Sunnyvale, Calif. Orona says the provider can support deliveries within four hours or next business day, depending on the customer's need. Full systems move on pallets in truckload service, while replacement modules travel via planes and express courier services.
Having an LSP on tap means Infinera can quickly adjust to changes in the business. "Within a matter of 30 days or less, we can have a depot set up and running," says Orona. Discussions with Infinera are already under way for additional locations, he says, with Europe a prime target.
|"The future logistics provider will be more global, concentrated, segmented around customer types and better at execution."|
- Tig Gilliam of IBM Business Consulting Services
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