It ain't easy being blue. Actually, it hasn't been easy for some time. Once the ruler of the technology domain, IBM, widely known as Big Blue, has learned a lot about the vagaries of the market. Over the past two decades, the glob- al giant has confronted a downturn in business tech spending and a wide-scale shift in demand away from IBM's original flagship product, the mainframe computer, to the PC. And it has withstood assaults on virtually every aspect of its global busi- ness hardware, software, IT services, semiconductors and more.
or a company that had long dominated the industry, IBM proved unexpectedly vulnerable to attack. Time and again, its more nimble rivals managed to undercut IBM on price and respond more swiftly to a capricious market. In comparison, the corporation looked like a lumbering giant.
Part of its problem was sheer size. The company, which reported $91 billion in revenue last year, has diverse operations in more than 60 countries and customers in 161 countries. Its global supply chain alone, according to a 2005 white paper from Forrester Research, represents a $39 billion spend, 78,000 products with almost infinite configurations, 33,000 suppliers, and 16 manufacturing plants in 20 countries. It's safe to conclude that IBM is not an easy ship to steer.
The company was also handicapped by history. As recently as a decade ago, each of IBM's 30 divisions operated its own supply chain, according to the Forrester study. Every business PCs, hard drives, servers, semiconductors, mainframes handled its own supply planning and demand forecasting, chose its own parts suppliers, ran its own manufacturing operation, used its own billing and invoicing systems, and picked its own carriers, brokers, forwarders and so forth.
Predictably enough, the result was a fragmented, high-cost operation that frequently proved to be its own worst enemy particularly where customer service was concerned. The company's sales force was spending 20 percent of its time on fulfillment issues. The divisions were unable to work together for the customer's benefit. And at every turn, IBM forfeited opportunities to take advantage of economies of scale.
Time for an overhaul
That began to change four years ago. When he took over as IBM's CEO in 2002, Sam Palmisano announced an initiative to transform the slow-moving giant into a flexible and responsive competitor. As part of that initiative, he created a new division, Integrated Supply Chain (ISC), whose mission would be exactly what the name implied: to dismantle the 30 networks and create a single unified supply chain. The ISC would be responsible for procurement, manufacturing, logistics and fulfillment across the company and around the world.
To boost the corporation's agility, the ISC would outsource non-core functions (which would allow it to, say, redesign its distribution network almost overnight). To improve responsiveness, the ISC would link all of the players in the supply chain from the raw materials supplier to the customer. To boost efficiency, it would adopt a unified set of processes that would transcend divisional and geographic boundaries. A business process in New York would be mirrored in New Delhi; a process in the PC business would be echoed in the server business.
That seems straightforward enough, but it wouldn't be easy. Carrying out the plan would require commitment from the top. It would require managers accustomed to running their own shows to cede control of their processes. It would require changing the way the company measured supply chain performance. And because all supply chain partners internal and external would need to be linked, it would require technology integration on an unprecedented scale.
When in doubt, send it out
When Palmisano's marching orders came down, the logistics operation found itself well ahead of the game. Unlike its peers in, say, manufacturing or fulfillment, logistics had already begun its transformation.
As part of an initiative that predated the ISC, IBM had already centralized logistics functions worldwide, creating a unit that today represents a cost center of about $1.5 billion. The 1,200-person group manages inbound and outbound transportation, import and export operations, and reverse logistics. Each year, it ships more than two billion pounds of goods everything from semiconductors to mainframes.
That earlier initiative had done more than just bring logistics under a single governance structure, however. It had set another transformation in motion the logistics unit's shift from an asset-based service provider to a non- asset-based lead logistics provider that plays a strategic, rather than a tactical, role in the business.
"You look back [more than] 10 years, we were an asset-based distribution business for IBM," says John Drury, manager of global logistics in ISC."We had warehousing,trucks and material handling equipment." That might have represented a big advantage if IBM had been able to coordinate all the pieces. But the company was unable to pull it off. "We were very fragmented, with a lot of loose pieces," Drury reports.
Those assets also saddled IBM with high fixed costs, a problem for a company that experiences wild swings in demand. "We have highly skewed demand," Drury says. "We could have as much as 80 percent of demand during the last two weeks of a quarter." As a result, the company frequently ended up paying for capacity it didn't use.
In 1995, the logistics organization began to shed those assets. "We knew we had to be asset free," Drury says. "As we rationalized manufacturing and the supply base, we had to be nimble and flexible."
A little help from its friends
It wouldn't be running warehouses or fleets anymore, but the logistics group was about to find that managing a stable of service providers brought challenges of its own. One of them would be integrating the technology used by suppliers with IBM's (and other partners') systems. Information technology-related tasks would represent a large part of the suppliers' responsibility. To cut down on redundant IT costs and processes, IBM wanted the suppliers to take over as much of the IT work as possible.
For help building interfaces that would allow suppliers to use their own systems but still integrate smoothly with IBM's, logistics harnessed the brainpower of IBM's internal experts. "We leverage as much as we can from our brethren," Drury says.
The corporation's world-class tech specialists designed Web-based middleware, for instance, that simplifies the process of connecting (or disconnecting) a carrier or supplier. "We now have a common global 'onboarding' process," Drury reports. Today, when a new supplier comes into the system, the first thing the team does is look at requirements downstream, he says. "Then we figure from a technology architecture standpoint what we need to do to map them into the pipeline."
Drury estimates that to date, IBM has brought about 200 logistics suppliers on board using the new process. That has gone a long way toward streamlining operations, even though the company has cut its supplier base in recent years. Today, its top 10 logistics providers account for a whopping 78 percent of the logistics spend. For instance, a single supplier manages all outbound product shipping in Europe. Another manages all parts logistics for the Europe/Middle East/Africa region.
IBM's internal experts have helped the logistics staff resolve other technical difficulties as well. For example, says Alan Kohlscheen, international trade compliance manager in ISC, there was the problem of missing documents. "We were spending way too much time looking for them. But if you followed them upstream, [you learned that] they originated in someone's ERP system. It makes no sense to print them when they are available in the pipeline." With assistance from the IBM Research staff, the logistics group was able to rein in those wayward documents, he reports. "Now we have the ability to put documents in the pipeline and associate them."
These and other projects have helped slash costs and improve logistics performance. In the Forrester Research white paper, Navi Radjou, a vice president of Forrester's IT Management research team, provides the example of a joint ISC/IBM Research initiative to improve customer service. Radjou reports that the team developed a logistics algorithm that allows IBM to deliver 95 percent of the 50 million spare parts it ships each year within a two- to four-hour window.
All for one and one for all
By unifying processes, IBM's logistics group has eliminated untold duplication and waste. Kohlscheen cites invoicing systems as an example. "It was unbelievable how many invoicing systems we had," he says. "We had well over 100. Once we converged all those, we got real cost savings and streamlined processes."
It has also brought other unexpected yet welcome benefits. One of those is a reduction in border crossing delays. As part of its effort to develop standard import management procedures, the company worked out a common trade compliance process. "We [now] have a strict set of standards for complying with trade regulations," Kohlscheen says.
Coming up with that process wasn't particularly difficult, Kohlscheen notes. "What it really comes down to is a good instruction set that we communicate early on with the contract manufacturer or other [supplier]," he says. But it has nonetheless reduced the risk of delays caused by Customs problems, Drury reports. Today, fewer shipments are held up at border crossings over compliance issues, which has had the net effect of cutting cycle times. "That makes a big difference," he says.
In fact, a January report by the research firm Aberdeen Group cited IBM's re-engineered import processes as a best practice in international logistics. In particular, the report cited the progress IBM had made toward increasing the visibility of import transactions. Among other benefits, improved visibility lets staff members fix problems before they can cause shipment delays and gives the company a better handle on landed costs and cycle times. Further, the Aberdeen report says, IBM improved its ability to outsource or "in-source" parts of the import processes as conditions warranted, which required developing "plug and play" IT capabilities both internally and with suppliers.
As with many IBM outsourcing initiatives, the solution shifted greater IT responsibility to brokers but also implemented tools to give IBM greater visibility into import transactions and to make greater use of electronic data feeds to reduce manual data entry. On top of that, IBM designed middleware that enabled the creation of a single "data services gateway" that collects all commercial invoice and customs clearance data, so it can be automatically fed to internal IBM systems.
IBM began rolling out the import management processes in South America. It has now expanded them into India, Australia, Canada and the United States, the report says, and will continue with the expansion. The company has connected its brokers and more than 33,000 suppliers to the gateway, along with carriers, forwarders and even some government agencies. The Aberdeen report says that as a result of the effort, IBM's electronic integration costs have plummeted to 3 cents from 35 cents per transaction which represents a $400 million reduction in data processing costs.
$20 billion and counting
The results of the ISC initiative to date have been nothing less than sensational. By the end of 2004, according to the Forrester report, the changes had saved IBM a total of $20 billion. Logistics costs had dropped by 21 percent, and inventory had been trimmed to its lowest level in 30 years. Furthermore, IBM's measure of customer satisfaction had improved by two full percentage points. That may not sound like much, but each point of improvement represents the equivalent of $3 billion a year in revenue.
Despite the success IBM has enjoyed so far, the search for ways to cut costs and streamline operations continues. "We need to dig deeper," Drury says. Adds Kohlscheen, "Continuous improvement is baked into the global process."
Gartner, Inc.