Supply-Chain Superstars

Dec. 21, 2004
Squeezing the supply chain to reduce prices isn't a novel idea. Harnessing it to cut system-wide costs and bolster revenue growth is. These high-level supply-chain executives are leading the way.

Early last year they were calling him "The $5 Billion Man" and wondering what he was going to do for an encore. This year, he reported more than $7 billion in productivity gains, streamlined efficiency and other cost savings over the course of 2003, and that the company achieved its lowest inventory levels in 30 years. Bob Moffat's Integrated Supply Chain group within IBM Corp. oversees almost $40 billion of annual spending. The group's activities include everything from raw material procurement to manufacturing, logistics, customer support, order entry and collections for IBM's operations worldwide. That's 19,000 people, 33,000 suppliers, and 2.2 billion pounds of product shipments per year in North America alone. As impressive as the 2-year-old group's net savings have been, it's not how it ultimately measures success. "When people work on a supply chain, they work on cost, but it's really how do they take that cost and cash advantage and use it as a competitive advantage or weapon in the marketplace," says Moffat, a senior vice president who sits on the company's management committee. "The thing that I'm most proud of, if you look at what IBM has been doing, besides having some pretty laudable financial results, we've been able to gain a share in every one of the key categories of the marketplace that we participate in." The Integrated Supply Chain group's contribution to market performance comes on a number of fronts. Yes, as you'd expect, procurement has consolidated buying activities and is more effectively leveraging the company's buying volume across the company's global business units. But the procurement teams also are working more closely with development people to create products for cost competitiveness, making sure designers specify an industry standard versus a proprietary component in a server, for example. At the other end of the fulfillment process, members of Moffat's organization have been working to reduce days of sales outstanding. For a corporation with more than $89 billion in annual sales, speeding collections by one day frees up almost $250 million in cash. That doesn't happen by changing terms and conditions, says Moffat. It comes from making sure the right data is in the billing system, that bills are accurate, and the necessary backup documentation is attached, all of which minimizes the number of billing disputes that arise with customers. "A lot of people ask, 'What's the big gee whiz?' The answer is there is no big gee whiz," he says. The $7 billion in cost and productivity savings is the result of many independent initiatives. Ultimately, as he sees it, such tactics give IBM salespeople more pricing flexibility, which is one factor driving those market share gains, while protecting or improving margins. One of the integrated supply chain group's core goals in fact is to reduce the time sales representatives spend on fulfillment by 25% per year. "We did have a burning platform here. The organization was formed when IT wasn't growing. The only way to get share was to be able to have a better product at a lower price," Moffat adds. He isn't the only senior manufacturing executive charged with improving the alignment between the supply chain and business objectives. Kent Brittan, vice president of United Technologies Corp. (UTC), oversees purchasing, procurement and supply-chain management, which includes $14 billion in annual spending across seven major businesses. While leveraged buying -- consolidating spending across the seven business units of the aerospace and industrial conglomerate -- will always continue, Brittan says most of the low-hanging fruit has been captured there. As a result, his focus has shifted. "It was clear to us four to five years ago that in the early years of the 21st century, we were going to have to do this," says Brittan. "The leverage thing would diminish, and we would have to move into taking costs out." This means helping suppliers improve quality and speed cycle times. Such initiatives support UTC's lean manufacturing efforts, which "won't mean a hill of beans if we don't have a supply base that can deliver complete, on-time, zero-defect product to flow lines." Many manufacturing executives talk about building relationships and helping suppliers, but resources are scarce, and few companies are actually doing it. The challenge for UTC: How to financially assess and develop the capabilities of several thousand suppliers. The near-term solution is an internally developed remote-diagnostic tool that scores suppliers on their operational capabilities and suggests corrective actions. The automated evaluation process is supported by one-on-one reviews with UTC buyers. It's a new and welcome role for procurement personnel, Brittan says. They now have an opportunity to see how the materials and parts they're buying are made, and work with suppliers to improve their processes. The results of these assessments also factor into decisions over ongoing supply-base reductions. "The problem is companies traditionally viewed purchasing as something they couldn't do much about. It was a given. That's what people charged you. It was market driven, and you had to pay whatever the market price for steel was." It's not that way, he says. "The more you get into it, the more you understand what the opportunity is." To raise the visibility of one area of opportunity, UTC put senior executives in charge of general procurement, which includes travel, office supplies and furniture, marketing and advertising. The president of the Pratt & Whitney division also is in charge of real estate, for example. Each functional leader and business head has a particular indirect commodity as well as their own division to run and report on every month. Successful oversight of this indirect spending involves more than analyzing how much the company spends flying from New York to Paris every year, approaching a carrier and getting a good rate based on that volume. Greater savings can come from changing company policies, banning all first-class travel, for example, and allowing business-class only on flights of eight hours or more, or even encouraging video conferencing. Such efforts helped UTC save $500 million on indirect procurement through the end of last year. It has targeted another $500 million in savings by the end of 2005. It all comes down to alignment of business processes with business objectives, and leveraging spending activity to support those objectives. "What we're really talking about is competitiveness and growth," notes Brittan, referring to the alignment of supplier development and lean manufacturing initiatives. "If I can produce something three times faster than I used to be able to produce it, yes, my inventories will go down. Yes, my costs will go down. But what is really happening is that I'm three times closer to my customer." To better align it's own activities, Motorola Inc. has also elevated the supply-chain responsibility to a senior leadership level. A year ago, Theresa Metty was promoted to the newly created position of senior vice president and chief procurement officer. She watches over the Schaumburg, Ill.-based company's $17 billion in annual purchases, which range from components and materials to travel and consulting services. By becoming more effective in how the company buys, Metty says it will save an incremental $1 billion by the end of 2004. Moving beyond cost-cutting, her organization is focusing on improving relationships with key suppliers, including second- and third-tier suppliers. This relationship building involves better coordinated planning and forecasting as well as more frequent and detailed technology reviews to make sure everyone is investing where they need to be. To preserve these vital linkages, Metty announced in October of last year that the company would no longer release volume-purchasing price information to its contract manufacturers. An example of how the supply chain should support corporate strategy, the move is intended to protect the margins of preferred suppliers, and the competitive advantages of Motorola's supplier network. "When Motorola started outsourcing manufacturing and distribution operations several years ago, the decision was made to have the contract manufacturers purchase the required components directly from our component suppliers using the discounted contract prices that we had negotiated with the component suppliers. What was not obvious to the people that made that decision so many years ago was that this 'sharing of prices' eventually led to the elimination of the competitive advantage that we had worked so hard to achieve," writes Metty in an e-mail interview. "To ensure we capture the full benefit of our size and scale, we negotiate directly with the component and material suppliers for our total requirements, regardless of who will assemble the end product." Navi Radjou, a vice president with Forrester Research, an information technology research firm, compares the new role of the corporate supply-chain organization to the difference between a sprinter and a hurdler. If the old supply-chain competency was about running faster and faster to squeeze prices and cut costs, the new skill is still about running faster, but also overcoming obstacles without stumbling. "The new focus of supply-chain management should be around managing risk in your supply chain so that you gain more flexibility," he adds. Flexibility requires that functional activities be synchronized, not through some feel-good oaths to work better together, as is usually the case, but by concrete structural changes. The type of structural changes only a senior supply-chain person can implement. IBM's Moffat says companies that fail to reengineer the supply chain away from its traditional functional silos to a more horizontal structure forget to focus on the fundamental cultural drivers. "People do what you pay them to do. You can go out and give the greatest speeches in the world. If you don't follow through with your measurements, with your compensation scheme, your incentives scheme, they'll quickly revert back and forget your speech." Individual pay incentives must also be aligned with operational metrics. IBM is beginning to track supply-chain performance with more end-to-end measures. "Sure we understand the individual functional measurements so we can understand root cause and go deal with them," Moffat notes. Using such indicators as customer satisfaction, cash generation and total cycle times, the normal friction between marketing, production and logistics is diminished. "It's more the team wins or the team loses." Common metrics are a good first step. "The stovepipe mentality is still very strong in most companies I work with," says Scott Elliff, a supply-chain consultant with Capital Consulting & Management, Alexandria, Va. "If you're in purchasing, you're measured based on your purchasing efficiency, not on being a player in the supply chain. The manufacturing guy still gets measured on the throughput of his plant." If people are going to think about more noble, end-to-end measures, they have to get out of the transaction processing business, he says. Purchasing, for example, has to spend less time placing purchase orders, tracking down expedites and making sure suppliers get paid. "When you have this mountain of paperwork going on, you never have time to think about how you could improve the overall supply-chain performance," says Elliff. This is where IT comes in. When supply-chain executives are asked to describe IT's role in their strategy, one phrase always comes up: "It's an enabler." Ongoing IT investments have allowed these companies to really understand their total "spend." Still, competitive advantage in terms of information technology comes not from how much companies invest, or how much technology they own, but how cleverly they are at using it, notes Forrester's Radjou. In a Forrester survey of supply-chain executives at $1 billion-plus companies, 54% of executives reported that their supply-chain IT applications had failed to meet their expectations. They blamed immature technology standards, but also their inability to change their own business processes as the primary causes of failure. Indeed, when the supply-chain executives were asked about the factors standing in the way of improved performance, the No. 1 factor was the difficulty of changing processes and people's behavior. The maturity of the technology was a distant third. Changing behavior requires a different set of skills, and a higher caliber of talent within traditional supply-chain functions, talent that the new supply-chain leaders are working hard to develop. In her first year in her new role at Motorola, Metty counts among her key accomplishments building a world-class leadership team in procurement, establishing clear career paths for procurement professionals, and rewarding buyers for the competitive advantages they deliver, not just year-on-year cost reductions. UTC's Brittan calls purchasing an "MBA heaven." "It plays to all of the strengths people learn in business school. How to take a whole bunch of data, format it, analyze it, formulate a strategy and go out and execute the strategy." It's satisfying work, he says, because the impact of such efforts will often show up on the P&L statement in a couple of months. Based on his energy and enthusiasm for the subject, IBM's Moffat would agree that it's satisfying work. He also believes companies need senior-level supply-chain leaders in order for it to become a solid engine for growth, and that those people must be business people who really understand what it takes to make money. Being appointed by the CEO is not enough. For someone to successfully coordinate cross-organizational activities, he or she needs to be accepted as a peer by business-unit leaders, he says. "They need to have a voice at the table."

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