Lessons from an early adopter

By the end of 2002 IBM expects its personal computer manufacturing and assembly plant at Greenock, Scotland to deliver more than 90% of its customer orders on time. This is some achievement considering that only six years ago, the plant was one of the worst in terms of delivery reliability with just over half of orders delivered on the date the customer requested. “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 Greenock site is 51 years old and there are currently 5,500 employees based there. About half of these are now in services-related roles, the rest manufacturing, assembly and test. The IBM group as a whole turns over around $70 billion a year and there are multiple routes to market these days. The company used to sell only through distributors and resellers, but now it sells direct to customers too, both through its website and direct telesales. Around 50% of IBM’s sales are now to multi-national organisations. But transforming the Greenock site and operations, which supplies Europe, Middle East and Africa with PCs, laptops and servers, involved sweeping changes to the plant’s supply chain. This involved: re-engineering the procurement operation into a global (rather than local) organisation, enabling the company to capitalise on the scale of its operations; the outsourcing of much of manufacturing to the supply base; and the re-siting of the supply base to within easy reach of Greenock. Many of these changes were dictated by IBM’s global business re-think, which started back in 1994. At this time the company had just announced an $8 billion loss. And procurement was seen as an early and obvious target for re-organisation. “People tended to bypass the procurement process with the result that maverick buying accounted for about 30% of transactions [by value and volume],” 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.” Procurement strategy So, in 1994, the company created the position of chief procurement officer and brought in outside help in the form of Gene Richter (ex-Hewlett Packard) who found a picture of poor health. He discovered there were hundreds of IBM procurement offices around the globe, by country, by division and by business unit. And the average number of contracts per supplier was five. In addition, only 5% of the company’s procurement staff were involved in sourcing (ie 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 some dedicated EDI systems in place with some suppliers, but Gordon says that, on the whole, purchase orders and invoices were paper-based or manual tasks. “Escapes [the number of times materials were procured through bypassing the formal process] in 1990 were at 30% [by value and volume]. That’s now dropped to less than 0.5%.” And just as impressive, purchase order processing cycle times have now dropped from 30 days to just one hour. “This means the administration side of procurement has been greatly reduced, freeing up our purchasing staff to concentrate on sourcing and negotiating with suppliers,” he adds. For two years IBM focused on creating global commodity teams, each responsible for global sourcing of a particular product or service. It was business process reengineering without the aid of IT. “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, very quickly, from 1998 onwards, the company’s thoughts turned to the web and e-procurement. At that time very few off-the-shelf e-procurement systems existed. IBM started to develop its own to cover every aspect of procurement, from gathering market intelligence, RFQs (request-for-quotes), supplier evaluation and drawing up contracts to purchase orders, invoices and auto-replenishment. But how did the company manage to achieve these results? Gordon explains: “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 [cheif purchasing officer.” So ‘global commodity teams’ have been set up within each of the six divisions of IBM (by geographical area), that now drive leveraged procurement at a commodity level. The teams monitor price indices of every material and component used throughout the IBM product range. This commodity management approach means there are now production or direct materials ‘councils’ with representatives from each division (ie memory devices, cabling, monitors, logic, keyboards, etc). The same approach was adopted on the indirect materials side. This is split into administrative services, telecommunications equipment and services, MRO (maintenance, repair and operations) suppliers, office equipment and travel. In 2000, payments to IBM’s 3,500 core suppliers amounted to some $45.8 billion, split roughly 50/50 between direct and indirect spend. Gordon is quick to point out though: “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.” e-procurement software should be a catalyst for BPR. Gordon explains: “Phase one [termed the survival phase by the company] 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 (the growth phase), between 1996 and 1997, involved the actual 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 (the leadership phase) started in 1998 and is ongoing. This is the web integration stage and includes e-procurement enablement, 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 different systems were developed (some of which are now being replaced by e-sourcing software from Ariba) to support procurement of both direct and indirect goods and services. In 2001, to ease system access, the company introduced a global procurement portal, which suppliers and buyers can log on to and select the service they require. Indeed, today about 98% of all procurement transactions are carried out electronically – some feat. Contracts originally had a six to 12-month cycle time due to beaurocracy. It's now down to just 30 days as a result of standardisation of this process and supporting software. The size of a typical contract document has also decreased – down from an average of 40 pages to six today. So far so good; but there’s more. Gordon says purchase ledger miscodes have also dropped from 30% down to 5%, mainly as a result of there being 33,000 IBM suppliers now connected electronically over the web or via EDI. By introducing these systems and processes, IBM reckons it’s saved several billion dollars from its bottom line. And adding all the e-procurement software has saved a further $300-400 million. “In our opinion, e-procurement is the catalyst for the business process re-engineering work,” says Gordon “and is crucial for sustaining the re-engineered processes.” 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 with 98% of all purchase orders and invoices now dealt with over the web. 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. That really is an achievement. But there is still another key side to this story. Even in 1996, changes in procurement were also having a positive impact on the supply chain. By this time the PC production facility had also outsourced the manufacture of all of its products and components except those containing proprietary technology, to third parties, and had switched from manufacture-to-forecast (which often led to $1 billion of finished product inventory being on the site) to 100% build-to-order. However, it was still an unreliable supplier overall, being unable to respond quickly enough to customers’ demands. And further examination of the Greenock supply chain revealed that two major areas needed to be addressed: specifically supplier management and advanced planning. Local replenishment hubs Having established procurement strategies with its suppliers, the company was strongly placed to request that those supplying Greenock should either have a local manufacturing facility or a replenishment hub within four hours of the facility. Eventually, 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 with its suppliers. 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,” according to 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 20 or 30 years ago, with high volume standard configuration products. 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.”