building the on demand supply chain: driving growth through

Integrated Supply Chain

© 2004 IBM Corporation

Building the On Demand Supply Chain: Driving Growth through Innovative Management

Dr. Brian Thomas EckDirector, SCORBoard and Program Director / Business Growth, IBM Corp.

IBM at Nikkei © 2004 IBM Corporation2


Agenda

The Supply Chain Council and using the SCOR FrameworkBackgroundSome IBM examplesResults

SCOR in context: IBM’s supply chain journeyLooking back – last ten yearsRecent organizational changesTransformation drivers and results

Future OpportunitiesManaging the Services Supply ChainEvent-driven supply/demand• The potential of RFID• Wake Up Call: Sense and Respond supply chains

Supply chain as a driver of growth



The Supply Chain Council was formed to build a common language for supply chain, and advance state of the practice

The SCC is an independent, not-for-profit, global corporation with membership open to all companies and organizations interested inapplying and advancing state-of-the-art supply chain management systems and practices.

~ 800 Company Members Cross-industry representation

Europe

Japan

SEA

ANZ

USA/Canada/Mex

ROW

SAfrica

PractitionersSoftware VendorsConsultantsNon-Profits



SCOR is structured around five distinct management processes

Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver

Your Company

Source

Return Return Return Return Return Return Return Return

Plan

Customer’sCustomerSupplier CustomerSuppliers’

SupplierInternal or External Internal or External

SCOR Model SCOR Model



Opportunity Assessment Project outline

Steering Committee Interim Review11-12 weeks

Steering Committee Final Review Additional 6-7 weeks

Phase One

SCOR metrics SCOR metrics data collectiondata collection

Current performanceCurrent performance versus competition versus competition

Level 3 Level 3 process maps process mapsDiagnostic metricsDiagnostic metrics

Performance Performance drivers drivers

Business andBusiness and supply chain supply chain

initiativesinitiatives

Sized Sizedimprovementimprovementopportunitiesopportunities

SCOR Level 2 physical SCOR Level 2 physical and process maps and process maps Best practices Best practices

Process GapsProcess Gaps

Business cases for selectedopportunities

Phase Two

Project: To identify opportunities for significant improvements in a division(s) supply chain(s) and provide business casesto help prioritize these opportunities



Phase: Current performance versus competitionExample: Level One SCORCard

Supply-Chain Performance Versus Custom Population0% - 20% 21% - 40% 41% - 60% 61% - 80% 81% - 100%

Key Perspectives Level 1 MetricsMajor

Opportunity DisadvantageAverage

or Median AdvantageBest-

in-Class

DeliveryPerformance/

Quality

Delivery Performance to Commit Date– Direct shipments only = 80% of total

85% 92%

Order Fulfillment Lead Time– US data only

32.0 Days 8.3 Days

Flexibility &Responsiveness

Material Availability 20.5 Days 1.7 Days

Direct Labor Availability 7.5 Days 0.0 Days

UpsideProductionFlexibility

Manufacturing Capacity 2.0 Days 0.0 Days

Cost Supply-Chain Management Cost 8.7% 4.1%

Warranty Cost 3.0% NA

Total Inventory Days of Supply 55 Days 21 Days

Assets Cash-to-Cash Cycle Time 82 Days 22 Days

Net Asset Turns 2.9 6.2Inte

rnal

-faci

ngC

usto

mer

-faci

ng

Divisional Performance



Example: SCOR Level 2 Process Maps

NA DirectNA Distributor

RaleighRaleighDeliver Stocked Products

P1

LA Customer via CDCLA Distributor via CDC

AP South Customer via CDCAP South Distributor via CDC

P2

Other Accessories

D2

Paperloading Accessories

Japan

Network Interface Cards

D2Texas

Engines w/controllers

D2

D2

S2

S2

S2

S2

NA

P4

D1 S1

P4

D1 S1

P4

D1 S1

M2

Make-to-Order

SCMO

Controllers

CA

Engines

Asia

D2

D2 S2

S2

Note: Fujisawa integration facility hasLevel 2 process structure similar toILC but serves Japan only

XIPXIP

Mgmt & Planning

EndicottEndicott

P2

Components/Accessories

D2

Paperloading Accessories

Japan

Network Interface Cards

D2Texas

Engines

D2

Asia

D2

S2

S2

S2

S2

NA

Controllers

D2CA

S2

ILCILC

P3 P4

S2 D2EMEA DirectEMEA Distributor

P1

EndicottEndicott

M2Integrate-to-Order



SCOR Projects see a wide range of adoption, and set the foundation for a robust supply chain

Consumer FoodsProject Time (Start to Finish) – 3 monthsInvestment - $50,000 US1st Year Return - $4,300,000 US

ElectronicsProject Time (Start to Finish) – 6 monthsInvestment - $3-5 Million USProjected Return on Investment - $ 230 Million US

Software and PlanningSAP bases APO key performance indicators (KPIs) on SCOR Model

Aerospace and DefenseSCOR Benchmarking and use of SCOR metrics to specify performancecriteria and provide basis for contracts / purchase orders



A robust supply chain is essential for an on demand business

An enterprise whose business processes–integrated end-to-end across the company and with key partners, suppliers and customers–can respond with flexibility and speed to any customer demand, market opportunity or external threat.

On Demand Business–A Definition

RESPONSIVE VARIABLE FOCUSED RESILIENTKEY ATTRIBUTES



For IBM, we’ve been transforming both our company and supply chain for the last ten years

ReinventionCost Cutting

True external electronic collaboration withsuppliers and partners

Development of better functional skills and increased inter-business unit communication

Static supply chains with business unit andgeographic “silos”

2002200120001999199819971996199519941993

Revenue: $64B Net income: $3B

Profit DriverCost CenterDrives value primarily by saving money and increasing cash conversionStill primarily product focused

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Fragmented and not mission criticalDistributed & hard-wired to business unitsPockets of integration in functional silos No client-facing processes No common processes or leveraging experience A corporate staff function



Then tied it all together with shared measurements to assure success at both the business unit and IBM level

Financial Results

OperationalResults

Client Facing Results

COST REDUCTION

CASH GENERATION

CLIENT SATISFACTION:- Delivery- Solutions

EASE OF DOING BUSINESS

UNLEASHING SALES FORCE PRODUCTIVITY

DEMAND/SUPPLY SYNCHRONIZATION

CYCLE TIME

QUALITY OF INSTALLATION



Logistics—Major Logistic Sites 28

Electronic Component Trading Centers 4Customer Solutions Centers 6

Customer Fulfillment Competency/Client Support Centers 11

Contract Manufacturers 28 Procurement Operations Centers 3

Logistics—Major Logistic Sites

Manufacturing (IBM/Joint Ventures)

Contract Manufacturers

Customer Solutions Centers

Procurement Operations Centers

Electronic Component Trading Centers

Customer Fulfillment Competency/Client Support Centers

Control Towers

11Control Towers In-country Customer Fulfillment 61

Manufacturing (IBM/Joint Ventures) 22

When we put it together, it made an impressive footprint



…with unmatched economies of scale and expertise

19,000 employees at 100 locations in 61 countries worldwide

Approximately $40 billion, or roughly 50%, of IBM’s total cost and expense

Handles over 78,000 products, with over 3 million configurations

45,000 business partners worldwide, 33,000 suppliers are connected to IBM through the Web

Over 25% have advanced degrees; 200+ PhD’s

Current staff holds 14 supply chain related patents and have published more than 45 books and articles

IBM supply chain was named one of the 10 best by Supply Chain Technology News in 2002



Forming an organization with a compelling vision was a start. But to drive change and deliver sustainable results we had to:

Transform & strengthen the functions while building end-to-end capability

Reduce fixed costs and drive flexibility in infrastructure

Implement common global processes & technology

Apply governance, performance goals and reporting disciplines

Tend to the culture, emphasize talent and improve skills



By creating an on demand supply chain, we achieved some impressive 2003 resultsIBM: $89B REVENUE $33B PROFIT $7.6B FREE CASH FLOW #2 IN CUSTOMER SATISFACTION

Financial Results

OperationalResults

Client Facing Results

95% DELIVERY$7BCOST ANDEXPENSESAVINGS

ON TIME

20%IMPROVEMENTIN SALES FORCEPRODUCTIVITY

INVENTORY AT THELOWEST LEVELS IN

YEARS30DSO REDUCED

BY NEARLYDAYS2

CUSTOMER USE OF WEB-BASED SERVICES RESULTED IN

$207ME-SUPPORT COSTREDUCTION IN 3Q03

GENERATED

$700M+ CASH



The on demand model is giving us:Greater efficiency

Server volume growth contained with minimal spending increases yielding ~10% productivity gainsProcurement "hands free" transactions up from 78% to 90%Logistics volumes up 31%, costs down 21%

A more variable cost structureFixed spending for high volume systems manufacturing down 33% over 3 years Logistic warehousing from 100% owned to 100% vendor managed

Improved responsiveness and flexibilityAbility to respond to shifts of hardware demand inside quarterly lead time by up to 50%Customer fulfillment e-Applications reduced annual calls from clients by over 600,000, saving 2.9MReduced number of non-strategic suppliers by 80%

Better business process controlsReduced escapes (maverick buying) from a high of 35% to less than 0.2%Acceptable business controls (audits) from 85% to 95%+



What’s next: The transformation continues with a focus on both cost take-out and driving top line revenue

Reinvention

One integrated and fully-enabled organization (ISC) that hasre-invented IBM operations

Revenue: $89B Net income: $7.6B

Business OptimizationProfit DriverGoes beyond products to servicesExtends success past financial metrics

Impacts customer satisfactionImpacts sales team productivity

Fully synchronizes supply and demandIgnite growth

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Resource Sourcing Strategy

RM OperationsStrategy

ConductOptimization

Update/Maint.Resource Plan

Recruit/ Source

Plan & ExecuteTransitions

・ Recruiting/Hiring・ Applicant Tracking・ Contractor Sourcing

Plan Individual Development

・ ID Devel Needs・ Create Devel. Plan

Execute Devel.Actions

ForecastDemand

Human ResourceStrategy

Develop LearningPrograms

・ Out of business・ Across LoBs

Mg. Taxonomy/Employee Profile

Resource SupplyStrategy

・ Alt Workforce Modeling

DetermineSourcing

・ Request・ Decision Support ‐internal vs. contractor

Onboard/Deboard

Supply

Assess InternalInventory

(skills, CVs, availability)・ Internal・ Outsourcing Fcst.

Strategy PlanAcquire & Transition

Develop

Assess External Supply

Assess Subcon.Supply

Focused: Managing the Services Supply ChainWorkforce Management Process Framework

ID RecommendedResource

・ Decision Support ‐resource type

・ Skills・ Experience/CV・ Availability

Deploy

RequestResource

Qualify & SelectResource

Assign/ Commit/ Adjust

Business Measurements

Performance, Pay & Incentives

Workforce Programs

EmployeePrograms

Benefits



Responsive: Fully synchronizing supply and demand requires a fundamental paradigm shift

• New product ramp-up challenges

• Demand is unreliable and changes daily

• Customers exercising their pricing power

Demand “given,”condition supply

Recognize Demand can also be conditioned

Event-driven supply / demand balancing

Past Present Future

Supply Shocks Demand ShocksShort Product Life Cycles



RadioFrequencyIdentification

RFID tags have many advantages over the barcode…

Barcode / UPC RFID ‘Smart Tag’

Prices reflect adoption

RFID Tags on face of a Dime

Today + 3 Yrs* + 6 Yrs*

Hi

LowTags

Readers

10.00$ 0.10$ 0.05$ 1.00$ 0.05$ 0.02$

1,500.00$ 500.00$ 100.00$ Reader on temporary mount

* Cost figures are projected estimates only, and tag cost estimates assume passive tagsSource: IBM Business Consulting analysis, Auto-ID Center

Limited amount of data can be assigned

Significantly higher data capacity to capture detailed information about product

Ability to read one tag at a time (line of sight required)

Ability to read multiple tags simultaneously (no line of sight required)

Efficiency

Labels easily damaged

Tags less susceptible to damageDependability

Data Capacity

Potential for read / write capability, making tags reusable

Flexibility Static information



The internet provided supply chains an ocean of data…RFID promises to step that up a notch.

Visibility is more than data, it’s data turned into information

ISC needs to leverage IBM’s expertise in analytics

New approaches from AI, motivated by agent technology and emergent behavior

RFID provides technology for sensing; the bigger idea of adaptable, autonomic supply chains rests on a broader concept: Sense & Respond.Reprinted with Permission: Best of Latin America



Adoption of Sense and Respond processes and technologies represents an approach to create a responsive, on-demand supply chain

Decide&

Plan

Decide what response is best and plan to implement it

Interpret&

Evaluate

Interpret the information and evaluate if it is something to react to or to ignore

EventEvent

Monitor &

Sense

Monitor the environment and sense critical demand signals, events and changing conditions

Reconfigure&

Adapt

Reconfigure or adapt, operations to meet requirements, change course of action

Respond&

Execute

Response

Respond to the needs.

Execute and redeploy.

Manage the sense & respond cycle to insure completing the process

as rapidly and effectively as required



Controlled pilots allow learning and adjustment – expanded scope and span is needed to drive an autonomic supply chain

Selected IBM Sense and Respond Projects

● PCD Demand Conditioning● Quality Management System for Server Manufacturing● Adaptive Manufacturing Routing● MD’s 300 mm Plant● MD Demand / Supply● Transportation Management System (TMS) with Manugistics

Observations

● Redesign efforts must balance between accountability and procedure● IBM Research and SWG are defining architectures and reusable

components to enable Sense & Respond capability● Agent classification emerging● Opportunities for reusable analytics● Risk can be managed through simulation of possible actions (responses)● Software tool capability is improving, and though still relatively immature, is

not a primary constraint on moving forward● “Sense and Respond” versus “Make and Sell” is a shift in mindset● Centralized management of information becomes a prerequisite for

decentralized use of information



Building on our combined strength across organizations, allows IBM to bring the needed depth to bear on clients’ supply chain challenges

deeperSolutions for clients’supply chains

On Demand Innovation Services

IBM ResearchMarch 2003

Business Growth Initiative

Integrated Supply ChainFebruary 2004

Oct 2002

Business Consulting Services

Technology GroupJune 2002

E&TS

building the on demand supply chain: driving growth through

Business

supply chain

integrated

demand supply

supply chain

business unit

sense amp

sight required

ibmjoint ventures