Lessons from an early adopter

Last year IBM’s personal computer manufacturing and assembly plant at Greenock, Scotland delivered more than 90% of its customer orders on time. That was some achievement considering that only six years before, the plant was one of the worst in terms of delivery reliability, with only just over half of orders delivered on the due date. “At that time IBM’s PC business was losing its shirt to the competition,” says Robin Gordon, principal of IBM’s business to business (B2B) services, Northern Region. “It was only able to schedule 40% of customer orders coming into Greenock, with the result that it lost the other 60% to alternative suppliers.” The IBM group turns over $70 billion and there are multiple routes to market – through distributors and resellers, and now direct to customers, both through its website and telesales. Its Greenock site is 51 years old, now with 5,500 employees – half now in services, the rest manufacturing, assembly and test. Transforming the site, which supplies Europe, Middle East and Africa with PCs, laptops and servers, involved sweeping changes to its supply chain: re-engineering for global (rather than local) procurement; going for economies of scale; outsourcing much of manufacturing to the supply base; and re-siting much of it nearer to Greenock. Many changes were dictated by IBM’s global business re-think, which started in 1994. At this time the company had just announced an $8 billion loss, and procurement was seen as an early target to turn that around. “People tended to bypass the procurement process with the result that maverick buying accounted for about 30% of transactions,” says Gordon. “Our strategy at that time had led us to become a confederation of units, badly out of synch with the market and our customers,” he adds. “In 1994, there were 25 major fulfilment systems; more than 50 ERP software systems; 30 configurators for hardware and software; 1,000 product and services announcements each year; multiple customer interfaces; 400-plus contract documents per country; more than 1,000 promotions per country per year; and 500 service offerings per country. The result was cycle times and expenses went up and the number and complexity of information systems increased.” So, in 1994, the company created the position of chief procurement officer and brought in Gene Richter (ex-Compaq). He found hundreds of IBM procurement offices – and the average number of contracts per supplier was five. In addition, only 5% of the company’s procurement staff were involved in sourcing (strategic negotiations and supplier approvals), with 75% involved in fulfilment and 20% on contracts. “IBM was being managed by its suppliers,” admits Gordon. There were EDI systems with some suppliers, but Gordon says that, on the whole, purchase orders and invoices were paper-based or manual. “Escapes [the number of times materials were procured outside formal process] in 1990 were at 30%. That’s now dropped to less than 0.5%.” And just as impressive, PO processing cycles have dropped from 30 days to one hour. “This means the administration side of procurement has been greatly reduced.” For two years IBM focused on creating global commodity teams, each responsible for global sourcing. “This was our survival phase and only when the business started to grow in 1996/97 did we begin to implement systems to support procurement,” says Gordon. Then, from 1998 on, the company’s thoughts turned to the web and e-procurement. At that time, few off-the-shelf e-procurement systems existed. IBM started to develop its own to cover every aspect, from gathering market intelligence, to RFQs (request-for-quotes), supplier evaluation and drawing up contracts, initiating purchase orders, invoices and auto-replenishment. “We quickly focussed on the procurement models and decided on a strategy based on centralised sourcing with decentralised fulfilment. This way, we get clear accountability and an integrated framework led by the CPO.” Global commodity teams have now been set up within each of IBM’s six divisions of IBM that now drive procurement. The teams monitor price indices of every material and component used throughout the IBM product range. To make it work, there are now production or direct materials ‘councils’ with representatives from each division, and the same approach has been adopted for indirect materials side. Gordon points out: “The global sourcing approach is not about getting rid of buyers in your local offices and centralising it in one country. It’s about deciding where the best resources reside and the skills they possess at division level. Which team has the strongest, closest relationship with suppliers.” Indeed, e-procurement software should be a catalyst for this kind of business process re-engineering. Gordon explains: “Phase one was the process design phase which took us from 1994 to 1995 to complete, about six to 12 months in all. There was lots of business process modelling to do and this meant the organisation had to be centralised, commodity councils set up, globalisation of marketing teams, skills enhancement programmes, supplier feedback surveys, establishing a common management system and agreeing cost savings metrics. “We even had to monitor commodity prices from the DTI and industry reports, then set targets for our sourcing staff based on these... If they beat the going rate they got their bonus,” he quips. “Each global commodity manager owns the overall procurement and supplier strategy. That includes being responsible for all strategic sourcing, setting standards and strategy, carrying out regular supplier reviews and performance management.” Then it’s on to the actual execution stage of the process. The teams place purchase orders on suppliers, monitor supplier performance, participate in supplier performance reviews and assess compliance with the business controls standards. They also have technical sourcing responsibility. Phase two, between 1996 and 1997, involved deployment of the strategy globally. This meant process re-engineering, transaction automation, integration to other re-engineering initiatives, supplier involvement, deploying common procurement software world-wide and change management. Phase three started in 1998 and is ongoing, with web integration, including bringing on e-procurement with supplier integration and collaboration, total cost management and a joint supplier score card approach. “When people talk about e-procurement, they often focus on electronic purchase orders and invoices but these have very little impact on the cost of acquisition, accounting for about one to three per cent of the total,” insists Gordon. “We looked at the entire cycle of activities.” More than 25 systems were developed – some now being replaced by packaged software from Ariba – to support procurement of direct and indirect goods. In 2001, to ease system access, the company introduced a global procurement portal, which suppliers and buyers can log on to and select what they need. Today, 98% of all procurement transactions are carried out this way. Contracts originally had a six to 12-month cycle time. It’s now just 30 days as a result of standardisation and supporting software. The size of a typical contract document has also decreased – from an average of 40 pages to six. Gordon says purchase ledger miscodes have also dropped from 30% to 5%, mainly as a result of 33,000 IBM suppliers now connected electronically over the web or EDI. IBM reckons it’s saved several billion dollars, and adding e-procurement software has saved a further $300-400 million. e-spend today amounts to $44 billion with estimated e-procurement savings of $376 million (8.5% drop). There are now 24,000 e-enabled suppliers. The number of quotations submitted through the IBM portal in 2001 amounted to more than 6,000, involving 2,200 suppliers and 1,400 buyers. There are also 170 supplier electronic catalogues available. “In our opinion, e-procurement … is crucial for sustaining the re-engineered processes,” says Gordon. But there is still another key side to this story. Even in 1996, changes in procurement were having a positive impact on the supply chain. By this time the PC production facility had outsourced manufacture of all of products and components – except those containing proprietary technology – to third parties, and had switched from manufacture-to-forecast (which led to $1 billion of finished product inventory on the site) to 100% build-to-order. However, it was still an unreliable supplier, being unable to respond quickly enough to customers’ demands. Further examination of the Greenock supply chain revealed two major areas needing work: supplier management and planning. Having established procurement strategies with its suppliers, the company was strongly placed to request that they should either have a local manufacturing facility or a replenishment hub within four hours of the facility. 13 such hubs were set up around Greenock and, by the end of 2000, 95% of parts, representing nearly 98% of the site’s spend, were delivered on the basis of four-hourly replenishment agreements. To make the process even more efficient, in 2001 IBM started to shift the external hubs into a bonded warehouse at its Greenock site. Only when parts exit the warehouse for IBM’s assembly lines do they become part of IBM’s inventory. “The benefit of this,” says Gordon, “is that the parts in the bonded warehouse are in our material logistics system, which gives us greater visibility of supplier inventory – but they are not on our books.” The result: from receipt of order to shipment, he reckons that parts now spend only a few hours on IBM’s inventory. Jim Campbell, IBM’s operations director EMEA: “We’re really a massive fulfilment centre now rather than a manufacturing facility, as it was 10 years ago, with high volume standard configuration dumb terminals, card punch machines and typewriters. It’s virtually 100% configure-to-order with manufacturing and assembly triggered by each new customer order. Assemblies and sub-assemblies come in and products are pulled through the factory as quickly as possible, configured at the last possible moment. It’s lean in every sense of the word.”