Jon Pershke vp strategy  transformation global supply chain Lenovo

How to Create a World-Class Supply Chain

Lenovo has transformed three parts of its supply chain: 1. Implemented a new direct ship enablement program that allows it to integrate new partners quickly to meet new demand. 2. Added a new capability that called “sell on the water,” which allows it to allocate product to customers while a ship is in transit. 3. An end-point vision to leverage the platform to go fully “touch-less” in order processing.

Whether they are consumers or businesses, customers today have unlimited access to information, which can be shared instantly around the world. As a result, they want transparency and simplicity in how they order. They’re using social networks, mobile devices, websites and influencers to make buying decisions. And they’re using social media to broadcast their opinions.

All this makes it very tough on manufacturers. In particular, these raised expectations have significant implications for how manufacturers should run their supply chains.

Recognizing this, we recently worked with IBM Corp. to revamp key end-to-end supply chain processes. We recognized that an outstanding customer experience is more than just making ordering easier; it requires a fully aligned supply chain to ensure complete satisfaction from the order to fulfillment to invoicing and post-sales service.

We’re leveraging IBM’s Smarter Commerce as an important element in our drive to create a world-class supply chain. Under that strategy, we’re using IBM’s unified integration platform to improve significantly the way Lenovo does business with its various trading partners and customers, resulting in a more highly synchronized supply chain.

This has enabled us to transform three parts of our business:

  1. We’ve implemented a new direct ship enablement program that allows us to integrate new partners quickly to meet new demand.
  2. We’ve also added a new capability that we call “sell on the water,” which allows us to allocate product to customers while a ship is in transit.
  3. And finally, going forward, we have an end-point vision to leverage the platform to go fully “touch-less” in order processing. In this vision, there would be no scenarios requiring manual intervention, regardless of how a customer places an order.

Direct Ship Strategy vs. the Perfect Order

Lenovo’s supply chain strategy uses a carefully balanced mix of in-house production facilities and outsourcing partners, such as original design manufacturers (ODMs) and electronic manufacturing services (EMS) providers. This approach gives Lenovo optimal supply chain flexibility, agility and cost-competitiveness, while mitigating risk associated with market volatility.

Direct shipping is an important part of our supply chain process. It makes us more customer-focused, improves order visibility and lowers costs. However, execution can be challenging, particularly on orders for products built by outsourcing partners.

This is a key decision for any OEM: Should they receive finished goods from the ODM or EMS supplier, and then ship to its customers? Or should they ship directly from the outsourcing partner to the customer?

Unless the OEM is doing some final assembly or packaging, it usually makes sense to do direct shipments rather than introduce an intermediate stocking point that may lead to increased inventories, costs and lead times. Within our mixed supply strategy, the large majority of customer orders today are direct shipped.

As part of our new direct ship enablement program, we developed a highly standardized methodology for on-boarding ODMs and EMS providers, both for those using electronic data interchange (EDI) connections and those using the web portal. The results have been impressive, with a more efficient process that enables us to start up and integrate a new ODM or EMS in an average of 12 weeks.

We found that the key benefits of the direct ship program were reductions in three categories: cost, cycle time and inventory. The result has been higher margins, higher perfect order attainment and leaner inventories (higher turns).

Managing the Outsourcers

As we deployed the new platform, we studied a sample group of new ODM partners to assess the benefits of the solution. We found an annual cost savings in 2011 of nearly $1 million, and order cycle time reduction of two work days compared to the legacy process.

Further, one ODM that produces Lenovo notebook PCs and uses the EDI Direct Ship enablement solution cut its cost per box by 1%, reduced its order cycle time by five working days and improved quality by avoiding a second touch.

A major challenge, however, is carefully managing the outsourcing relationships to ensure good performance. The customer’s perspective on perfect order attainment is largely in the hands of these partners, but Lenovo’s brand and sales suffer if things don’t go smoothly. Once an order is sent to an ODM, it normally takes three days for the ODM to ship. Although there is some lack of visibility during this period, Lenovo still can monitor this time window to measure fulfillment rates within the cycle time. We’re looking to expand our analysis capabilities in this performance area in the future.

With the help of automatically generated reports and purchasing information updated daily by ODMs, we’ve greatly improved visibility to customer order status. Once Lenovo receives the dispatch advice (ASN) from the ODM, it immediately sends this electronic information to the carrier, along with the routing guide and consolidation instructions. The latter two are fairly static, and are selected when the ASN is sent. From this point, Lenovo has visibility of the shipment all the way through to delivery at the customer’s dock.

Lenovo controls suppliers for both its own internal production and ODMs. Like most OEMs that rely on outsourcing partners, Lenovo employs processes to maintain confidentiality of negotiated volume pricing agreements with parts suppliers while they produce finished products through ODMs. These partners have visibility to approved suppliers, but not pricing, in many cases initiating replenishment orders to the suppliers on behalf of the OEM. This gives us better control of both spend and quality of sourcing.

Lenovo currently has about 100 customers that place orders electronically via EDI. All e-commerce orders flow electronically via business-to-business (B2B) links from a web portal to the Lenovo fulfillment system. Other customers place orders via the call center or fax, but use EDI to report inventory positions and usage. This process tends to cover very-low-volume customers.

With retailers, we now use a modified “pseudo” EDI process, but we’re migrating to IBM’s B2B platform. The next step is to use a portal for smaller customers. With this change, we expect on-boarding times to drop dramatically and this improvement will make it possible for Lenovo to shift more of the order mix to an automated B2B environment such as EDI/XML.

Optimizing the Customer Order

One of Lenovo’s objectives in creating the optimal customer experience with its supply chain is to enable “touch-less” ordering. Regardless of how a customer places an order – EDI, web, portal, mobile device, etc. -- there should be zero exceptions that require manual intervention.

In general, the level of touch-less ordering is much higher in mature markets than emerging markets, which is to be expected. As Lenovo further expands our use of EDI, portals and the web to do business with customers, we expect the percentage of touch-less orders to increase over time.

By establishing a unified, global integration platform, we’ve eliminated some “information black holes” that limited our ability to serve our customers. And in fact, this improvement has enabled us to implement a new process, called “sell on the water,” that gets product in the hands of our customers faster. With this process, a ship can be loaded at the point of origin with product based on forecasted demand, and then can be seen as a “virtual warehouse,” through which we can begin allocating product to customers while the ship is in transit.

Previously, this was not possible because Lenovo didn’t have a complete view of inventory. Now when a shipment is loaded on board a vessel, this event triggers a receipt into a virtual warehouse location in the U.S. This allows allocation of customer orders against the expected stock up to six weekssooner than actual physical receipt of the goods in the warehouse.

The bottom line? With our advanced, stable collaboration platform implemented with IBM, we literally have millions of transactions flowing through the system each month with multiple trading partners. We have visibility into the entire supply chain, which means we can now work smarter and make the data work for us in a way that wasn’t possible before. This will be a significant leap forward in our drive to be a leading supply chain and provide the ultimate customer experience.

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