By Steve Banker
Service Director, Supply Chain Management
ARC Advisory Group
When one thinks of a global, just-in-time, make-to-order supply chain, the first company that comes to mind is Dell. Dell's model might be characterized as a Command and Control model. This, however, is not the only model for running very lean with a global supply chain. Sun has a different model — which we call the Empowered Trading Partner model — that is also worth studying.
Dell’s fiscal third quarter results somewhat tarnished their sterling reputation as a paragon of supply chain efficiency. Fiscal third-quarter profit fell by 28 percent on charges. In a pre-quarter warning, they announced that weak sales in the UK business and excess inventories in that area were part of the problem. Inventory write-offs are not something you expect from a smooth running supply chain. However, even make-to-order manufacturers must forecast, and forecasts are not always accurate. Dell has historically used pricing as a mechanism for balancing supply and demand. In its second quarter, Dell said that price cuts that normally lifted sales had failed to provide enough of a sales lift to offset the fall in product prices.
This report compares and contrasts Dell's Command and Control supply chain with Sun's Empowered Trading Partner model. The Command and Control and Empowered Trading Partner models exist on a continuum. Neither Dell nor Sun can be categorized as being purely in one camp. Nevertheless, within the high tech industry, Dell is the best example of Command and Control and Sun is the best of the Empowered Partner model.
Dell's Command and Control Supply Chain
Dell is a $53 billion public company that manufactures a range of computer systems. The company is headquartered in Round Rock, Texas. The broad outlines of Dell's supply chain are well known. Dell has a direct to the consumer model — it does not sell to retail outlets or use distributors. Global component suppliers ship goods to warehouses generally located within 15 minutes of Dell regional plants, including Dell's newest factory in Austin.
Every twenty seconds, Dell aggregates its telephone and Internet orders and analyzes the material requirements. Dell uses i2 SCM to compare their on-hand raw material inventory with their suppliers' inventory and create a supplier bill of material to meet their order requirements. Suppliers have 90 minutes to get their parts to the assembly line.
Dell offers their suppliers a secure extranet that they can use to get a customized view of their materials at Dell, performance management scorecards, and other pertinent reports. Supplier's truck trailers line up in front of the cargo bays encircling the factory, 110 of them in Austin. When an assembly line runs low on a key component, a signal goes out and a forklift pulls the components from a trailer. Only once the forklift crosses a white line in the factory, and the shipments bar code is scanned proving that it has crossed the line, does Dell take ownership of these components.
Dell holds inventory only for the six to eight hours it takes to build and configure their computers and for the 18 hours it takes for the completed PC to be trucked to a merge center in Reno, Nevada where the unit is bundled with a monitor and shipped to the customer. Most suppliers, in contrast, are required to stage eight to ten days worth of buffer stock in multi-vendor warehouses. FastCompany has estimated that Dell's suppliers hold anywhere from 20 to 80 days' worth of total inventory.
ARC recently talked with a supply chain manager that previously worked for Dell. What is not broadly known is how important the use of Supply Chain Event Management (SCEM) is for synchronizing their global supply chain. "We were pulling information from almost 200 supplier systems. They were very different systems. We were pulling product extensively from the Far East into the US and then trying to integrate it with the production planning modules. (We had to build a) reporting overlay (to the SCEM solution) to pare down the events to the 20 or so you might be able to manage." Those events included shipment notification from each supplier's factory in Asia.
"We wanted to know what product, quantities, and model numbers or serial numbers by SKU being shipped by each one of our suppliers. And then we wanted another alert when it was on the vessel, either the ship or the plane. We would get an alert once we cleared customs. Once the plane landed, we needed to know where the product was and how it was being routed. We wanted to know when it hit the dock at the (DC) and when it was in inventory, (that is) when it was actually put-away. When the part hit the factory floor, we wanted to know that as well. We extended it so that each time the product comes off the assembly line it will tell us, 'this type of product is ready for shipment.'"
Dell's supply chain can be characterized as Command and Control because Dell is doing much of the overall planning and synchronization and asking its suppliers to react to the signals it sends them.
Sun's Empowered Trading Partner Supply Chain
When it comes to Logistics Service Providers (LSPs), some companies use Command and Control while others empower trading partners to make the right decisions, within a set of predetermined guidelines, and then measure the results. What is interesting is that Sun has used the latter approach not just for selected LSPs, but for managing a global supply chain of server manufacturing and shipping that runs very lean. This was an audacious undertaking.
Sun Microsystems is an $11 billion public company headquartered in Santa Clara, California. The company sells it products and services for network computing both directly and through indirect channels. In recent years the company has restructured its supply chain for server products. This restructuring included:
Moving a growing percentage of manufacturing, currently over 90 percent of production, to partners in lower cost geographies
Rationalizing their supply base and cutting tiers out of their supply chain so that key strategic partners engage in a greater number of supply chain activities
Migrating from a Command and Control business model to one in which trading partners are provided visibility to forecasts and orders and are then expected to reliably fulfill orders according to fixed competitive lead times that range from four to thirteen days, depending upon the product, and with one day expedited delivery if customers are willing to pay a premium.
Sun built portals for three tiers of their supply chain that include key component suppliers, contract manufacturing partners, and LSPs. This portal shares information residing in Sun’s Oracle enterprise applications with partners through customized views that support their data needs. Sun also built their own customized Supply Chain Event Management solution, using internal resources and Sun middleware and development tools.
Sun’s SCEM supports three key events. The first event is the order schedule date. Exception events are created whenever a partner reports that they cannot make and ship by the required date. Exceptions run at less than 1 percent for this event. The second event is notification from their contract manufacturer one day before they are scheduled to ship. Exceptions occur when their partner has not sent the required acknowledgement or if they send a message that they will not be able to ship as scheduled. This class of exceptions occurs about six percent of the time. Contract manufacturer ASNs are routed to Sun's LSPs. The third event occurs when an LSP confirms delivery. Again an exception is created whenever there is a failure to confirm delivery or an acknowledgement that they will not be able to pick up the goods on the required day. Such exceptions are very rare at this level, less than 1 percent.
Why do we characterize Sun’s strategy as an Empowered Trading Partner model? Because, they don’t plan the production or fulfillment activities; they set goals for performance, provide appropriate visibility tools, measure performance, and hold partners accountable. One benefit of this approach is reflected in the way that partners can bring additional intelligence to the table in this environment. An incident occurred in Singapore in early September of this year that highlights the value. Eugene McCabe, Executive Vice President for Worldwide Operations, was on a panel with this analyst at SCMLogistics World when he read an email from a second tier component supplier. The supplier had reviewed orders that Sun had issued to their contract manufacturer in China. Based on what they saw, they doubted the size of the component order that they were receiving from the contract manufacturer. They queried Eugene to see if the contract manufacturer was ordering too much. They were. This visibility, and the empowerment to operate on that visibility, ended up saving everyone money.
Other advantages of this model are lower fixed costs, the ability to run with a much leaner supply chain organization, and less total (supplier plus OEM) inventory in the supply chain.
ARC Recommendations
Selecting strategic partners, particularly in Asia, takes a considerable amount of work. Sun has discovered that contract manufacturers that have other Command and Control style customers are unsuitable for the Empowered Trading Partner model. They have developed a habit of waiting for commands and struggle to do the planning and execution themselves.
High tech companies working with contract manufacturers in Asia tend to operate in Free Trade Zones. Not only does this provide lower duties, they have discovered the logistics and IT infrastructure to be far superior.
Source: Manufacturing Business TechnologySolectron, a provider of electronic manufacturing services (EMS) to high-tech OEMs, says a lean/Six Sigma initiative to reduce waste within its global production facilities is especially effective because of its extension to suppliers.
During a Supplier Day at its Milpitas, Calif.-based headquarters last September, top executives from 100-plus suppliers showed up eager to learn more about Solectron's new supplier collaboration program, which uses a so-called "co-prosperity model."
"Typically, a procurement officer sits down with suppliers to debate how much margin they're going to relinquish to get the contract," says Perry Mulligan, chief procurement officer, Solectron. "This program attacks waste so as to improve quality and responsiveness, reduce costs for both parties, and maintain or improve margins."
Solectron started its program of lean/Six Sigma improvement in September 2003, ramping up from zero projects for identifying, isolating, and eliminating waste to more than 5,000 to date. The program is spearheaded by Marc Onetto, Solectron executive VP of worldwide operations and a former protégé of GE's Jack Welch.
Nypro, a Clinton, Mass.-based plastics injection molding supplier, is one participant in the program. "We're of like minds with regard to lean," says Mark Hemphill, Nypro's director of business development. "It started with discussions between the CEOs of both companies, which led to joint kaizen [i.e., continuous improvement] projects."
Hemphill sees the collaborative approach as refreshing. "Usually with supply chain partners, it's 'We need it tomorrow'—which means getting the parts there as quickly as possible. It's not about working with the supplier. But Solectron's approach is, 'Let's fix this together.' As a supplier, it makes you want to be open with them. You have a sense of trust in the relationship."
Mulligan believes lean and Six Sigma to be an essential combination for making this collaboration work. "In the Solectron Production System, we look at lean and Six Sigma as opposite sides of the same coin," says Mulligan. "Lean is a tool to attack any issue that is visible to the naked eye—too much product in one place, a missing component. And anything for which you need statistical data to validate a premise makes it a Six Sigma project.
"When we talk about engaging with our suppliers," Mulligan continues, "it is many small steps."
Over the last year, Solectron has engaged with partners in approximately 80 kaizen projects. "This year we have an obligation to increase that by a factor of 10—to do between 800 and 1,000 projects," Mulligan concludes.
Tying Supply Chain To Customers
Industry Week
How Dell succeeds in an increasingly competitive market.
Friday, December 16, 2005
By Dick Hunter, vice president, Dell Americas Manufacturing & Distribution Operations
Succeeding in today's competitive operations landscape requires patience, ingenuity, focus, an obsessive adherence to a clearly defined strategy and unwavering commitment to core values. For a manufacturing organization to succeed, it must have a tightly integrated supply chain that is constantly monitored and improved, but moreover it requires tying that critical end of the business directly to your customers -- an operational leap of faith that many in our industry are beginning to embrace.
At Dell we analyze our operational performance on an hourly basis and align our supply chain, manufacturing and logistics operations to meet our customers' needs. From a supply-chain standpoint, Dell is structured around its customers -- literally. A significant portion of our revenue comes from our business customers, and our operations strategy reflects that. We help our business and public-sector customers establish standard configurations that keep their total cost of ownership low and, in turn, make it easier to forecast future demand. Our strong consumer business gives our customers an opportunity to own the latest technologies at affordable prices while giving our suppliers the fastest route to market.
Dick Hunter, vice president, Dell Americas Manufacturing & Distribution Operations
This can all be tied to our direct model, which is remarkably simple: Customers generate demand for custom-configured technology solutions that Dell provides (with the help of our suppliers). In order to build any configuration at any time for any customer and do it quickly, we operate with a "lot size of one" mentality and couple that with lean manufacturing techniques to eliminate waste in the process. As simple as it sounds, keeping it tuned to the needs of a growing global customer base is challenging and requires complex solutions, particularly with regard to maintaining a flexible supply chain.
Our primary focus with suppliers is around continuity of supply. We organize around that concept and focus on the velocity of inventory throughout the entire supply chain. Virtual integration, rather than vertical, gives us the crucial ability to focus on our core competency and leverage those of our suppliers, such as their R&D investments. As such, we are able to keep operating expenses low while focusing resources on areas where we can truly add value for our customers.
Regarding inventory, it's clear that the technology industry is headed toward a zero inventory model. This is primarily because the value of that inventory declines rapidly over time -- 25% per year on average or 0.5% per week. Dell's inventory philosophy stands in contrast to the industry paradigm of inventory equaling service. Inventory equates to cost, since no matter how much inventory you have, it's usually the wrong material. Under those circumstances, you should have as little as possible -- especially if it loses value rapidly.
Dell's procurement decisions are made using four criteria: quality, cost, delivery and technology. We are uniquely organized around these criteria because we separate contracting (cost negotiation, contract terms and conditions, and source selection and development) from commerce (purchase order release, tactical delivery management and payment). Cost is managed on a centralized basis while delivery is managed on a regional basis, aligning with our global manufacturing assets. Responsibility for quality is shared between the central and regional organizations.
Through virtual integration, we are able to quickly incorporate new technologies into our products and get them to our customers. Our suppliers appreciate it because they can get this technology into the market quickly and our customers love it because they have access to the latest technology. Because we don't have 45 days of old technology in the supply chain, we constantly press our supplier partners for the newest technologies for our customers.
By organizing around the concept of continuity of supply, Dell is able to mitigate supply issues and reap tremendous operational efficiencies, which are at the heart of how we do business. We do not produce anything in our factories until after the customer places their order. Customers benefit from this approach because: 1) our focus on continuity of supply ensures consistent global supply, 2) we can immediately respond to their needs (because we do not have to guess) and 3) Dell's efficiencies translate into consistently lower costs because we pass along material cost savings through our forward pricing techniques.
Tying all of this into one strategy and adhering to it, particularly in an environment ripe with price fluctuations, resource instability and natural and man-made catastrophes, is challenging but rewarding. It is proven to provide short and long term benefits for both the organization and its customers. As Dell has grown into a truly global organization, we've learned valuable lessons from our customers, our own growing pains and our suppliers. I view our supply-chain efficiencies as one component of a perpetual success engine -- it allows us to pass savings on to our customers which drives demand and market share and subsequently helps our suppliers drive their business. Rarely has such a seemingly disparate connection become so crystal clear.
Keeping Up With The Times
Industry Week
Switch to demand planning reflects changes in consumer habits.
Friday, December 16, 2005
By Lawrence J. Mosner, chairman and CEO, Deluxe Corp.
Whether your business is cars, computers, or corn flakes, it's generally safe to build inventory based on yesterday's demands. That is, of course, if today's demand is the same as yesterday's.
At Deluxe Corp., our primary product is checks -- paper checks. And consumers are writing fewer of them as they move to payment alternatives (plastic, electronic and online banking). In a mature business, basing inventories on yesterday's demands creates excess and risks the possibility of large obsolete write-offs.
Confident the demand for paper checks wasn't likely to reverse itself, we created a team to find ways to reduce and better manage our inventory levels. In effect, we needed to convert the structure of our supply chain from consumption/replenishment to demand planning. By definition, demand planning is a lean practice. But it would be another year before Deluxe went lean in an official sense, and 12 to 18 more months before we began implementing lean practices throughout our manufacturing facilities. Although our initial efforts were successful in lowering inventories, once we had rolled out lean concepts, our supply chain was able to borrow from them to reduce inventories even further.
Lawrence J. Mosner, chairman and CEO, Deluxe Corp.
The list of tools and methodology we employed reads like a lean manufacturing primer: kaizen events, just-in-time, work cells and pods, shorter make-ready times, and reduced spoilage. In the process, we also cut down our average press-run times, supported employee education, and installed the IT systems necessary (e.g., SAP) to align inventories with demand.
We couldn't have been more pleased with the results. We reduced inventory and manufacturing costs while improving our accuracy rate, in-stock rate and product-cycle times. Ultimately, our supply-chain organization not only had less inventory sitting on shelves, but also and more importantly providing the manufacturing facilities with the right product in the right quantity in the right place at the right time.
While the need to manage inventory was, and is, crucial to our mature business, we knew that if less inventory resulted in out-of-stock orders and delayed shipments, our clients and customers would be dissatisfied, offsetting any financial benefits. However, lower inventory did not jeopardize delivery, and in fact, during this same time, we actually improved customer satisfaction.
Given its scope, this endeavor required an enormous number of hours from employees all across the organization, in both planning and execution. But when the plan came together, the benefits were -- and continue to be -- considerable. Serendipity provided an unexpected bonus in the form of:
Employees with a higher degree of engagement because of a more challenging and stimulating work environment.
The knowledge and confidence to apply these same concepts to non-manufacturing areas of the company.
Awards for manufacturing excellence from organizations in some of the cities in which we have facilities.
We appreciate the external validation for our lean manufacturing efforts. However, the real value from transforming our supply chain to a demand planning structure lies in an improved ability to manage our business efficiently and effectively as we serve our small-business customers and financial-institution clients.
