A Little Help From Their Friends

Dec. 21, 2004
Texas Instruments believes it can use off-the-shelf software to address its supply-chain needs, yet remain ahead of the pack.

A basic assumption behind the endless admonitions to focus on "core competencies" is that companies in fact have "cores" and are better off sticking close to them; the farther away a function is from the heart of your business, the argument goes, the greater the odds that someone is better at it than you are. But what if youre Texas Instruments Inc. (TI), a company that can not only claim to have invented the microchip, but which has, in the course of supporting its far-flung empire, spun off a number of successful information-technology ventures--ranging from object-oriented software design to techniques for facilitating business-process reengineering? A company like this, long admired for the capabilities of its internally developed software, cant be expected to walk away from an investment that can be measured in millions of dollars and tens of thousands of work hours and simply buy the same products any upstart could get its hands on. Could it? TI already has. The same company that was among the first to automate its supply chain right down to the factory floor by writing millions of lines of its own computer code has begun a bold move to achieve even greater functionality by teaming up with established software vendors and consultants. While acknowledging that leading the pack has not come cheaply, TI says its new approach is not simply an effort to cut costs. "If you give a layman and a master carpenter identical hammers," says Shari Temple, director of business planning systems, "they wont build the same things. We may be using software that anyone can buy, but our business processes will still set us apart." As an example of its superior business processes, TI points to globalization. "Everyone talks about going global," says Pallab Chatterjee, TIs CIO, "but it is very difficult. What happens when one of your European sales agents wont support a policy because they dont like the fact that the revenue gets counted in the U.S.? Weve addressed issues like this. Weve been truly global for many years. Our processes are sound, and thats a value not easily replicated." TI is chest-deep in putting into practice the grand vision it developed during a massive reengineering effort launched about four years ago. "One important supply-chain issue that came out of that," says Todd Jochim, systems and process manager for procurement and logistics, "is that we knew we wanted to move away from a traditional approach to a supplier-managed approach: show them our inventory levels and manufacturing schedules, and let them manage how to supply us." Although this will cut down on paperwork and cut leadtimes, the bigger issue for TI is that by streamlining various aspects of its supply chain it can focus more of its energies on optimizing the productivity in its factories. "Semiconductor manufacturing is so resource-intensive," Temple says, "that anything we can do to improve our cost structure there has a big impact on the bottom line." In fact, driving down the costs associated with information technology has been a top priority at TI for almost a decade. In 1989 the company threw a party for 500 employees at the Southfork Ranch (of "Dallas" fame) after they had labored mightily to consolidate 36 worldwide data centers into just three megacenters (in Dallas, Italy, and Japan). The company estimates the consolidation has saved it more than $24 million a year. And effective Jan. 1, 1997, TI signed a five-year, $200 million contract with Andersen Consulting to outsource the companys move from a mainframe system to a client-server architecture that will handle financial applications and manufacturing processes, including the new approach to supply-chain management. Under the terms of the contract, 250 TI employees were hired by Andersen, and Andersen will also train remaining TI employees. "These are big cultural, philosophical shifts for TI," says Temple, referring not just to the outsourcing, but the entire move away from internal development. She adds that with the uncertainty and tumult of the outsourcing deal now behind it, TI is poised to make the most of its new approach for several reasons. "If we had stayed with custom development, we could not have afforded the high levels of R&D needed to always remain in the lead. And the move to off-the-shelf software is where, we believe, the entire industry is going anyway." In fact, TI believes it has certain advantages in jumping on the bandwagon now rather than later. "If we can influence how these products are shaped, by teaming up with vendors early and making sure that they meet our needs, then that will be better than waiting and finding out that the products have been optimized for some other approaches to business," Temple says. Chatterjee adds that third-party software vendors now bring collective muscle to the game. "We had two decades of success with our homegrown systems," he says, "but the third-party market is now doing about $260 billion in business, and theyre spending 10% to 15% a year on R&D. We need a piece of that." The company is grappling with where to draw the line between adjusting its business processes to suit the needs of the software, versus working with the software vendors to customize their packages to suit TIs preferred ways of doing things. "Were moving to a system where we have two key software suppliers," says Jochim. "For the back-end database and process-related functionality, were using SAP [from SAP AG]. For the applications that are specifically around the supply chain and related aspects of distribution and logistics, were using i2 [from i2 Technologies Inc.]." Jochim says that the company is willing to adapt somewhat to the SAP system, because it can be configured in many ways right out of the box, and "we want to avoid spending a lot on customized tools in this area." But with the i2 software, TI is doing significant codevelopment. "We have i2 employees right here every day working with us," Temple says. "And since their headquarters is just 20 miles away and the company was founded by former TI employees, theres a good cultural fit that makes it easy to work together." Chatterjee says that TI is not merely placing orders for software, but "challenging vendors to match our internally developed software and surpass it." Current systems allow TI to ship more than 25,000 line items with 95% on-time delivery, so the bar for the vendors has been set fairly high. Much of the focus of the collaboration between TI and its vendors involves TIs plans to move away from a priority approach to an optimization approach. This goes back to the need to get the most from each factory. "In the past," Temple explains, "when orders came in wed put them into the factories based primarily on who the customer was and when they needed the product. But the i2 software has an optimization engine that can take into account far more factors than any manual process could, and it can automatically route the orders and schedule their production and shipment in a way that lets us get the most from our facilities, while still meeting all our customers needs." Because its focus right now is in getting its SAP and i2 software up and running, and adjusting to a client/server world after decades of reliance on mainframe computers, Temple says that most of TIs focus on supply-chain issues has been internal. "We do use customer surveys, and many of the TI employees involved are those who have a lot of supplier and customer contact," Temple says, "but right now were focusing on getting this software optimized for our internal needs; once thats done well pull in customers and suppliers in a more meaningful way." "Weve had some good discussions with some key suppliers," Jochim adds. "Companies that supply us with essentials such as wafers, lead frames, spares, and consumables will be in on the ground floor, since thats a big part of what well need to get to a supplier-managed inventory." Another critical issue for TI will be just how to pull its business partners in. The companys semiconductor group processes almost 200,000 EDI (electronic data interchange) messages a month, most transmitted over value-added service providers. That adds up to a yearly tab of almost $1 million, according to industry estimates. Given the companys focus on cost-cutting and flexibility, its not surprising that it has already begun kicking the tires on the Internet to see if some of this traffic can move essentially for free. A four-month pilot in 1996 indicated that its not only possible to send EDI messages over the Internet, but doing so can save money, greatly improve transmittal times, and offer the chance to use a number of new tools that produce better documents, incorporate multimedia, and even let business partners interact in real time. Chatterjee adds that about 80% of TIs orders flow in via EDI today, but its "a somewhat customized version." TI plans to move more of this traffic to public networks. Then, if business partners happen to use the same SAP software that TI has turned to, Chatterjee says "we can talk about a second level of integration, but thats down the road." Despite all those positives, Temple says it will be a while before suppliers and customers are all linked via the Internet. "At this point, traditional EDI versus the Web is still an unanswered question. We think well have to do both, at least for now." Temple also says that a full migration to Internet communication may ultimately be influenced more by customer demands than by TIs driving such a move. Customer demands and capabilities are shaping TIs efforts in another way, as well. "Much of what were doing is to facilitate our move to a build-to-order approach to manufacturing," Jochim says, "as opposed to a build-to-market. That brings us back to the need to be flexible and responsive in our factories, while also making sure that were running at the highest capacities possible." Some might argue that if flexibility is key, isnt TI taking a chance by relying heavily on external vendors for key parts of its strategy? The company admits that once partners are chosen, it can be difficult to switch if things dont work out or if another vendor comes along with a better solution. "Our major goal is to define a plug-and-play environment so that we can always go with best-of-breed," Temple says. "Whether well be able to actually do that in reality remains to be determined; the industry is moving toward open systems, but progress is slow." "There is always some risk in choosing the horse that doesnt win," Chatterjee says, "but we study not only our vendors current technology, but also their overall futures in the market, as if we were investment bankers." And for now TI is much less concerned about other vendors offering better products than about simply making the products theyve chosen work to their fullest. "Weve concluded that software is a tool," Temple says. "Its how you use it that counts." Jochim agrees. "We once benchmarked one of our homegrown financial applications against 20 other companies," he says, "and we determined that ours was either the best or one of the top two. But we also saw that the gap between first place and 20th really wasnt that big. We saw that we didnt really need to spend so much to get to the top, and thats a lesson were taking to heart this time." With its new software in place and its factories running on optimum schedules, TI will not only seek to pull its business partners closer to its operations, but also will turn its attentions to other aspects of the supply chain. "We know were not a leader in materials," Jochim says. "We can learn a lot from progressive companies like Wal-Mart, the pharmaceutical industry, and the auto industry. And right now we can afford to carry inventory, since its relatively inexpensive for this industry. But as we move more into build-to-order, we know well have to revisit those assumptions again."

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