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The supply chain and business transformation: rethinking ...

  1. 1. IBM Global Business Services White Paper The supply chain and business Supply Chain Management transformation: rethinking corporate growth strategies Insights from the 2005 IBM Supply Chain Management Executive Conference
  2. 2. IBM Global Business Services Page 2
  3. 3. IBM Global Business Services Page 3 Table of Contents Introduction Supply chain management (SCM) executives face unique challenges with respect 3 Introduction to integrating supply chain-specific strategies with the overall corporate business 4 SCM perspective: global integration strategy. In recent years, given changing business realities related to globalization, 6 The globalization of supply the supply chain has moved up on the chief executive officer’s (CEO’s) list of chain operations priorities. But not always for the right reasons. In many cases, CEOs only pay 9 Supply chain security attention to the supply chain when they want to cut costs or when something is 11 Conclusion: toward greater collaboration wrong. Since the supply chain essentially moves the lifeblood of the organization, process efficiency on a global scale is essential to optimized business operations. In today’s marketplace, a well-managed supply chain not only can help cut costs — it can also help drive top-line growth. Held November 14 and 15, 2005, at the Tysons Corner-Ritz Carlton in McLean, Virginia, the IBM SCM Executive Conference brought together a diverse group of SCM executives from 16 leading companies — in industries ranging from automotive to high tech to retail and manufacturing — to discuss the latest trends in SCM and how to make SCM a competitive advantage. The combined revenue of participating companies is more than US$400 billion, which is more purchasing power than 205 of the world’s 232 nations. Together, all of the companies employ approximately 3 million people, not counting any partners or suppliers. The conference, hosted by Tig Gilliam, IBM Partner and Global Supply Chain Management Leader, provided a forum for participants to learn about new ideas in SCM and a unique opportunity to exchange ideas among peers who have innovative approaches to supply chain management. During the 2005 conference, attendees explored three topics in separate sessions, each of which was followed by a roundtable discussion. The topics were: • SCM perspective: global integration • The globalization of supply chain operations • Supply chain security
  4. 4. IBM Global Business Services Page 4 This white paper summarizes key points from each of the conference topics, including insights from the presenters and roundtable discussion overviews. SCM perspective: global integration Bob Moffat, IBM senior vice president of Integrated Operations, presented this section of the SCM Executive Conference. Kevin O’Marah, vice president of Research for AMR Research, facilitated the roundtable discussion. The forces of globalization and commoditization in today’s business world are unstoppable. Consider Moore’s Law, which essentially states that processors will be engineered to be twice as fast every 24 months. The flip side of this says that at the same performance point, prices drop 30 to 40 percent a year. This is a long-term trend because it is built on foundations that aren’t going away — increasing commoditization and intense global competition. Globalization and commoditization have created a challenge for companies that is as tough as it is clear: How to cut costs and grow simultaneously? During the industrial revolution, companies looked for new markets, new sources of raw material and new sources of labor. The revolution was fueled by globalization and companies thrived by taking advantage of economies of scale. In today’s world, size no longer confers all of the same advantages. For example, small companies can quickly become major players in a market and take on very large companies by creating a true value chain and leveraging expertise from around the world. As a result, many large companies now emphasize using economies of expertise, which means finding new and innovative ways to integrate skills and resources anywhere in the world — leveraging their multinational presence for operational advantage. This kind of global integration has been made possible largely thanks to Internet and business standards, which lead to tighter integration, greater flexibility and efficiency. The companies that are thriving today make use of the capabilities available to them in unique and innovative manners to create opportunities and value. And senior executives now understand that they can’t just focus on supply chain operations to create efficiencies. The challenge is to integrate supply chain execution with the overall corporate business strategy, and to use the supply chain as a catalyst for business transformation or business reinvention.
  5. 5. IBM Global Business Services Page 5 A new model of business is emerging in response to our increasingly interconnected world. This isn’t the “international” company of the 19th century or the “multinational” of the 20th century. We call it the globally integrated enterprise. IBM’s supply chain transformation experience Fundamentally, becoming a globally integrated company requires thinking, organizing, acting and optimizing operations globally in ways that make the entire business more efficient. IBM itself is transforming into a globally integrated enterprise, and our global strategy is based on two objectives: • We are extending reach into local markets — particularly in high-growth areas — by establishing deep local roots and putting more people in front of clients. At the same time, we are removing layers of decision making to help IBM quickly integrate capabilities. For example, today in Europe, 80 percent (versus 20 percent previously) of our executive population now sits in-country, closer to the client. • Our global integration is about optimizing key operations in the right places in the world and integrating them horizontally and globally. IBM is automat- ing processes wherever possible and integrating functions into centers of excellence that offer expertise and talent that can be shared globally. If your company is ready to transform supply chain operations — and link them to the operations of the entire business — it’s critical to design processes for a nomadic world. Where you locate resources today may not be the same place you want to locate them in five years. You must also create excitement around the idea of reinvention and convince employees that they can make a difference. People in your organization need to constantly understand where you want to go, so they can come up with ways to get there. Roundtable highlights Every company faces a different set of challenges and issues with respect to transforming their supply chains and integrating with companywide growth strategies. This fact was reinforced in the diverse responses that conference attendees offered about the issues they face.
  6. 6. IBM Global Business Services Page 6 The supply chain executives for a major automotive company and a major clothing retailer received very different responses from their executive teams regarding suggestions to transform the supply chain, but face many of the same challenges. The automotive executive talked about how his company is resistant to change and wastes a lot of time on nonessential tasks, and the executive emphasized that strong leadership is critical to driving change. The retail executive, on the other hand, was given supervisory permission to transform the supply chain. However, this executive soon realized that buy-in and a budget were the easy parts. The bigger — and equally critical — challenge is to capture the minds of employees throughout the organization. A major home electronics retailer highlighted the complexity of its supply chain, which relies on a network of horizontally integrated companies. One hurdle is to convince merchants that a cost takeout is as valuable as a revenue increase, which is more tangible. Another clothing retailer highlighted its success by rethinking where the supply chain stops. To save money, it uses shared digital images to enhance collaboration throughout the clothing design process, instead of much more expensive travel, for example. An executive from a major technology manufacturer stressed the importance of improving supply chain operations by supporting its clients’ ability to innovate. Again, the challenge is to convince the executive team of the connection between the supply chain and increased profitability. The globalization of supply chain operations Tim Carroll, vice president of IBM Supply Chain Operations, presented this section of the SCM Executive Conference. Dave Seybold, Supply Chain Management Partner for IBM Global Business Services, facilitated the roundtable discussion. In the past, running the supply chain was about managing the latest crisis and protecting the hierarchical organization at all costs. Today’s integrated supply chain management is focused on driving the business strategy by using a completely focused supply chain operation that emphasizes measuring results based on client satisfaction and the ability to create shareholder value. The
  7. 7. IBM Global Business Services Page 7 performance of the integrated supply chain is evaluated two ways: the first is based on the supply chain’s overall performance, which illustrates how well the team comes together. The second evaluation measure focuses on the differentiated contribution an individual brings. IBM has transformed and globalized its supply chain. Our integrated supply chain is organized both by function — procurement, customer fulfillment, global logistics, and manufacturing — and integrated end to end by three cross- functional teams: operations, talent and strategy. Today, IBM manages operations globally, performing work based on where it makes the most sense for the corporation. IBM also transformed procurement from an administration-intensive process to a value-added process. In 1995, IBM spent 70 percent of procurement resources on administrative and transaction processing work. Today, 85 percent of procurement resources perform high-value tasks, such as procurement engineering, strategic sourcing and cost management, international trade and risk analysis, and supplier collaboration. Additionally, more than 200 internal procurement resources help provide commercial procurement outsourcing solutions to IBM clients. By using common, global processes and enabling procurement technologies, IBM accomplished the following: • Reduced purchase order processing time from one month (in 1995) to less than 24 hours • Consolidated 300 transaction processing centers into 3 • Reduced maverick purchasing from close to 40 percent in 1995 to less than 0.2 percent today • Increased electronic purchases through electronic procurement applications from less than 20 percent in 1995 to 98 percent today, resulting in more than US$2 billion in savings over five years. One of the greatest testaments to the IBM procurement operations transformation is the nearly US$400 million in total contract value for procurement business process outsourcing offerings that IBM has signed.
  8. 8. IBM Global Business Services Page 8 IBM used a similar strategy to transform and globalize customer fulfillment. For example, IBM combined disparate customer fulfillment operations across the company into a single globally integrated operation, and immediately realized synergistic savings of 10 to 15 percent. As part of this effort, we eliminated many redundant process steps and automated others. For example, we streamlined the order process to eliminate the redundancy of clients ordering from IBM Business Partners and then Business Partners ordering from IBM. With respect to customer service, IBM automated client support processes, providing a combination of Web, teleweb and self-service applications to enhance client satisfaction and improve employee productivity. And the results have been stellar. In 2004, with the help of more advanced telephony, IBM addressed more than 70 percent of client questions in a single call. We also avoided more than 600,000 calls to sales by using customer support applications in 2005. In global logistics, IBM achieved a 93 percent variable cost structure by setting up optimal networks and routes, resulting in a more than 20 percent reduction in shipping costs, even though shipping weights and product shipments have increased. And for manufacturing, IBM plans to implement a new round of network optimization, so it can improve product line or product platform characteristics. Prior to the early 1990s, IBM sourced 80 percent of production and components internally. Today, we source only approximately 5 percent of components internally. IBM’s supply chain transformation and transition into an On Demand Business is successful because we make sure that everything we do has a known cause and effect, emphasizes ease of use and is measurable. All of our executives know their roles, both within their own organizations and across IBM, resulting in better efficiency as the supply chain is continually strengthened. Roundtable highlights Conference attendees had a range of perspectives about the benefits of global supply chain integration and its challenges. IBM said that although the main benefits it received from optimized supply chain operations in the past couple of years had to do with reduced costs, it is now figuring out how to use the supply chain to drive revenue.
  9. 9. IBM Global Business Services Page 9 The representative for a holding company described how two recent mergers created supply chain challenges. Although standardizing systems and processes is not a big deal, putting the technology-enabled rules and policies in place will be a struggle, because the company’s existing rules are very loose and there are no systems for measurement. The representative expects that changing the culture will be difficult, despite the CEO and executive team’s support. A technology manufacturer would like to see more emphasis placed on optimizing different parts of its manufacturing network, rather than simply finding ways to add capacity. This capability is important because when forecasts are off by just four or five percent over a few years, plant capacity requirements can change dramatically. Supply chain security Josh Kussman, senior policy advisor to the commissioner of U.S. Customs and Borders Protection, presented this section of the SCM Executive Conference. Stefan Reidy of IBM Business Consulting On Demand Innovation Services presented the roundtable discussion. Since 9/11, the U.S. Customs and Border Protection (CBP) department’s priority mission has been homeland security, in addition to its traditional mission of stopping the flow of drugs and contraband across borders. The immediate effect of the 9/11 terrorist attacks on processing goods at the U.S. and Canadian border was sudden and dramatic. On September 10, 2001, processing wait times at ports of entry were approximately 10 to 20 minutes. On September 12 and 13, 2001, they skyrocketed to 10 to 12 hours. Such extreme wait times led to automobile plant shutdowns in Michigan, because companies were not receiving their parts in time to build cars. Based on this experience, the U.S. government knew that it had to find a way to secure borders without impeding the flow of goods.
  10. 10. IBM Global Business Services Page 10 To accomplish this goal, the CBP implemented a “smart border” strategy that relies on five interrelated activities to accurately and quickly process shipments, including: • Gathering advanced electronic manifest information • Leveraging a national targeting center that more carefully scrutinizes goods coming from suspect companies or countries • Implementing a container security initiative that enables CBP personnel to access containers before they reach U.S. ports, providing a host of policy and security benefits • Leveraging sophisticated detection technology, such as radiation detection equipment, to enhance security and increase processing speeds • Implementing the Customs Trade Partnership Against Terrorism (C-TPAT) initiative, which relies on the cooperation of and collaboration with private companies that control the international supply chain to help enhance and maintain effective border protection. Since its inception, more than 9,000 companies have joined C-TPAT. The CBP is continuing its efforts to make borders more safe and efficient by working with the World Customs Organization (WCO) to adopt a framework of standards that are designed to secure and facilitate global trade. The WCO approved the framework in June 2005, and 79 members quickly signed on to use it. It is critical for the private sector to put pressure on the governments of the countries in which they operate to implement this framework. The framework is based on four core principles. The first is to use advanced electronic information to facilitate efficient, secure trade. The second is to leverage a risk management approach that zeroes in on high-risk inbound and outbound shipments at the customs authority. The third is to allow outbound inspections by representatives of a destination country when they request one. The final principle is for governments to establish close partnerships with business.
  11. 11. IBM Global Business Services Business Transformation Outsourcing Page 11 Roundtable highlights A key takeaway from the roundtable discussion about security was related to the importance of companies increasing their involvement in standards efforts and the WCO framework. Only 4 of the 16 participants were currently C-TPAT- certified. The advantage of the WCO framework is that it provides a way to overcome collective action challenges. Businesses have an opportunity to influence government policies that might add costs to and slow down supply chains. For the WCO framework ultimately to work, companies will have to agree to ship through locations that meet WCO standards and thus provide greater security and efficiency. It’s critical for the private sector to help the countries in which they operate to agree to certain rules and standards that will meet the objectives of enhanced security while improving the business process and product flow through the supply chain. Being proactive rather than reactive has the potential to help make the international supply chain more secure and effective while helping to increase the resiliency of individual company’s operations. Conclusion: toward greater collaboration Although there is an increased awareness in many companies about the importance and potential of efficient, secure supply chains that are closely aligned with business strategies, supply chain executives have their work cut out for them to drive changes. Since the supply chain is such a complex and collaborative entity, supply chain professionals can often benefit from working together to overcome the business and political challenges they face. Meetings like the IBM Supply Chain Management Executive Conference provide an ideal venue for facilitating an ongoing dialogue. IBM would like to thank everyone who participated in this year’s conference. As part of our commitment to success and to encourage an ongoing dialogue about innovating SCM operations, IBM plans to hold this conference in 2006 and beyond. And we hope to see you there.
  12. 12. © Copyright IBM Corporation 2006 For more information IBM Information Technology Services Route 100 To learn more about supply chain Somers, NY 10589 U.S.A. management strategies for responding Produced in the United States of America to the new realities of today’s 05-06 All Rights Reserved marketplace visit: IBM and the IBM logo are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. Other company, product and service names may be trademarks or service marks of others. References in this publication to IBM products or services do not imply that IBM intends to make them available in all countries in which IBM operates. BCW00016-USEN-01