Reshaping Supply

Chain Management
Vision and Reality

Pearson Custom Publishing

Pearson Custom Publishing
 Reshaping
Supply Chain
Management
Vision and Reality
A group of specialists in the industry talk about factors that are reshaping
the future of supply change management and how to succeed in today’s
complex environment

Editors: Tig Gilliam, Mark Wilterding, Colin Taylor, Harris

Goldstein, James Kalina, and Karen Butner, Editor-in-Chief
Document1 9/8/06 10:40 AM Page 1

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 Dedication

This book is dedicated to our clients who are changing the

way we live by changing the way they work.

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Pearson Custom Publishing
 Table of Contents

1 Preface

3 Acknowledgements

5 Authors

Chapter 1: Executing differentiated supply chain strategies

7 Introduction
By Karen Butner

9 Developing a specialized supply chain strategy

By George Pohle, Peter Korsten and Shanker Ramamurthy

13 Transformation to consumer-driven supply chain networks

By John Nelson, Simon Terry and Charlie Hawker

32 Sense-and-respond supply chains for optimized performance

By Karen Butner

41 Scoring high on the supply chain maturity model: Leading practices

and benchmarks
By Karen Butner and Dietmar Geuder

64 Building a roadmap to the innovative supply chain strategic vision

By Karen Butner

70 Executive interview: Ramin Eivaz, Vice President of Strategic

Planning and Demand Change Management, Kimberly-Clark
Corporation

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 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

77 Executive interview: Linda Cantwell, Vice President, Supply Chain

Management Operations, IBM Integrated Operations

Chapter 2: Innovation, the perfect product launch and lifecycle

management

85 Introduction
By Mark Wilterding

87 The perfect product launch: Innovation drives growth in the

consumer products industry
By Karen Butner and Mark Wilterding

102 Cost-effective supply chains: Optimizing product development

through integrated design and sourcing
By Robert McCarthy, Jr.

114 Product commonality and reuse

By Stavros Stefanis

136 Executive interview: Dan Kochpatcharin, Director, eBusiness for

Chartered Semiconductor Manufacturing

Chapter 3: The global sourcing phenomenon

139 Introduction
By Harris Goldstein and James Kalina

141 Procurement takes center stage: The IBM Chief Procurement

Officer Study
By Charlie Hawker, Theo Theocharides and Marc Bourdé

157 Low-cost sourcing in emerging markets can benefit a company’s

bottom line
By Frank Crnic, Udo Kleemann and Christian Seider

169 Executive interview: Christine Breves, Chief Procurement Officer,

Al coa Inc.

177 Executive interview: Farryn Melton, Vice President and Chief

Procurement Officer of Amgen; Tyson Popp, Associate Director
of Manufacturing Materials for Amgen; and Steven DeClercq,
Associate Director of Fill & Finish Material and Contract Manu-
facturing for Amgen

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 190 Executive interview: Ron Schnur, Vice President of Strategic
Sourcing, Coors Brewing Company

203 Executive interview: Mark McDaniel, Vice President, Procurement

and Logistics for Supply Chain Management, Halliburton’s Energy
Services Group

Chapter 4: Perspectives on global logistics

213 Introduction
By Colin Taylor

216 Why global logistics is rising from the basement to the boardroom
and five steps for transforming logistics
By Colin Taylor

229 Building value in logistics outsourcing: The future of the logistics

provider industry
By Karen Butner and Derek Moore

252 EPC: A shared vision for transforming business processes

By Sean Campbell and Sachin Shah

286 Transforming the military through sense and respond

By Grace Y. Lin and Robert E. Luby, Jr.

294 Executive interview: Alan Estevez, Assistant Deputy Undersecre-

tary of Defense for Supply Chain Integration, U.S. Department of
Defense

307 Further reading

311 Author biographies

321 Endnotes

329 Index

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Pearson Custom Publishing
 Preface

Anyone looking for a comfortable career with little change would do

well to avoid supply chain management. By its very nature of devel-
oping, acquiring, converting, delivering and servicing the products and
solutions that customers desire, the supply chain is a truly dynamic envi-
ronment. For well-run integrated supply chains, the pace of change can
be even greater as changes in one aspect or function have a ripple effect
up and down the supply chain. In addition, continuous improvement
requires a never-rest mindset.
As seen in the IBM Global CEO Study 2006: Expanding the Innova-
tion Horizon,1 today’s business leaders continue to rely on supply chain
performance improvement to fund investment in top-line growth and
even to be the source of operating model innovation that creates market
differentiation. This may seem like a tall order, and it is. However, the
best-run supply chains have been able to deliver on this expectation.
For example, IBM’s own Integrated Supply Chain (ISC) transformation
has saved more than US$26 billion for the company since 2002 through
concentrated efforts to:2
• Drive operational excellence in each supply chain function
• Create innovation in the supply chain operating model through collab-
oration
• Build a truly integrated, end-to-end supply chain capability and
mentality.

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  RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

These three priorities enabled IBM’s ISC to increase value for the
company, and these same three priorities form the basis for this collec-
tion of articles, research, and interviews assembled for integrated supply
chain executives and managers to consider in moving forward. Our
articles, case examples and interviews address strategy, process design,
collaboration, governance and organization, performance management
and enabling technologies that can be used to help build, rebuild and
continuously improve each supply chain function. Beyond that, you
will see why we believe that functional excellence is necessary but
not sufficient. End-to-end supply chain integration and optimization
are hallmarks of the most well-run supply chains and will increasingly
differentiate supply chain performance in the years to come.
This book is presented in four main chapters:
Chapter 1: Executing differentiated supply chain strategies
Chapter 2: Innovation, the perfect product launch and lifecycle
management
Chapter 3: The global sourcing phenomenon
Chapter 4: Perspectives on global logistics.

The chapters include articles written by the IBM Global Business

Services Supply Chain management team, as well as interviews with and
perspectives from industry executives. A list of further recommended
reading from the IBM Institute for Business Value appears near the end
of the book.

Tig Gilliam
Global Supply Chain Management Leader
IBM Global Business Services

Pearson Custom Publishing

 Acknowledgements
Thanks to the many people who contributed their time and ideas to this
volume. Chiefly, of course, we owe a debt of gratitude to the authors
of the articles that make up the bulk of the pages. Also deserving of
special thanks are the executives who generously agreed to be inter-
viewed about the concepts discussed in those articles:
• Christine Breves, Chief Procurement Officer, Alcoa Inc.
• Farryn Melton, Vice President and Chief Procurement Officer of
Amgen; Tyson Popp, Associate Director of Manufacturing Materials
for Amgen; and Steven DeClercq, Associate Director of Fill & Finish
Material and Contract Manufacturing for Amgen
• Dan Kochpatcharin, Director, eBusiness for Chartered Semicon-
ductor Manufacturing
• Ron Schnur, Vice President of Strategic Sourcing, Coors Brewing
Company
• Alan Estevez, Assistant Deputy Undersecretary of Defense for
Supply Chain Integration, U.S. Department of Defense
• Mark McDaniel, Vice President, Procurement and Logistics for
Supply Chain Management, Halliburton’s Energy Services Group
• Linda Cantwell, Vice President, Supply Chain Management Opera-
tions, IBM Integrated Operations
• Ramin Eivaz, Vice President Strategic Planning and Demand Chain
Management, Kimberly-Clark Corporation.
A special thank you to Julia McManus, IBM Senior Marketing Manager,
who facilitated the project from inception to publication.

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Pearson Custom Publishing
 Authors

Marc Bourdé Robert Luby, Jr.

Karen Butner Robert McCarthy, Jr.

Sean Campbell Derek Moore

Frank Crnic George Pohle

Dietmar Geuder Shanker Ramamurthy

Tig Gilliam Christian Seider

Harris Goldstein Stavros Stefanis

Charlie Hawker Colin Taylor

James Kalina Simon Terry

Udo Kleemann Theo Theocharides

Peter J. Korsten Mark Wilterding

Grace Lin

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Pearson Custom Publishing
 1
C H A P T E R

Executing differentiated supply

chain strategies
Introduction
By Karen Butner
Today’s business environment – from globalization and increased price
competitiveness to more demanding operational and financial perfor-
mance – has increased pressures on supply chain management. The
stakes are high, the challenges enormous. To remain competitive in this
environment, supply chain executives must execute and deliver differ-
entiating supply chain strategies.
Chapter 1, “Executing differentiated supply chain strategies,” discusses
how today’s leading supply chain executives are achieving differen-
tiation, responsiveness and efficiency. They are accomplishing this
through:
• Developing a specialized supply chain strategy focused on a distinct
set of core competencies, innovative products and services, and
strategic value chain partnerships
• Transforming existing supply chains into customer-driven supply
chain networks that are specialized, componentized and integrated
• Shifting toward sense-and-respond supply chain strategies to monitor,
manage and optimize supply chain performance, event-by-event.

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  RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

We look at how companies are “Scoring high on the supply chain

maturity model” through employing leading practices and performance
criteria. We also look at trends in performance measurements such as
logistics costs, on-time delivery and cash-to-cash cycle time. We draw
a parallel between multi-industry benchmarked results and supply chain
maturity in four key areas:
• Product introduction and lifecycle management
• Synchronizing supply, conditioning demand
• Global buying power through strategic sourcing
• Logistics excellence for superior customer fulfillment.
Finally, we discuss developing a well-thought-out plan for how to get
there – linking the business strategy goals and objectives to supply chain
performance results.

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 CHAPTER 1: EXECUTING DIFFERENTIATED SUPPLY CHAIN STRATEGIES 

Developing a specialized supply chain strategy

By George Pohle, Peter Korsten and Shanker Ramamurthy
The pressing issues facing today’s supply chain business executives
are well known: from globalization and pricing pressures to a more
demanding marketplace and the proliferation of technology. So what are
the keys to success in today’s complex environment?
According to a recent global study conducted by the IBM Institute of
Business Value,3 when asked to identify the most critical imperatives
of success, many executives named differentiation, responsiveness and
efficiency. These imperatives mean that:
• Strong, differentiated value propositions are critical for growth and
profitability.
• Organizations must be able to sense and respond rapidly to customer
and marketplace changes.
• Cost structures and business processes must be adapted in a flexible
manner to maintain productivity and reduce risk.

In today’s environment, business models must be geared to achieve

all three of these imperatives for success simultaneously. In the past,
practical limitations forced companies to gear their business models to
achieve only one of these attributes, with significant achievement of
the others a strong desire but one that was impractical to implement.
Competing on price, for example, tended to rule out highly differen-
tiated products or top-notch customer service. Until recently, such
tradeoffs were an undisputed reality of doing business. The barriers of
time and distance limited the ability of companies to integrate internal
and external capabilities.

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 10 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

Traditional versus progressive business model

Strategically, many companies do not yet feel a sense of urgency to
change their business and supply chain designs. Instead, they maintain
their traditional assumptions about the nature of the firm and what it
means to be a successful player in the marketplace. However, these busi-
nesses underestimate just how radically the changes of the past few years
are impacting the prevailing competitive dynamics in their industries.
On the other hand, more progressive companies view the tools and capa-
bilities that have emerged over the past decade as fundamental to their
strategies and operations. These companies are making it an imperative
for their organizations to use these tools and capabilities for competitive
advantage and, ultimately, to redefine the competitive dynamics in their
industries.
Understandably, years of reliance on the same “hard-wired” business
functions and technology infrastructures have made it expensive and
time-consuming to change a company’s business model. Increasing
organizational complexity makes efficiency gains difficult to achieve,
and attempts to establish best-in-class capabilities across virtually all
parts of the business have left many companies with a lack of focus.
In addition, persistent business unit silos saddle others with redundant
activities across the enterprise.
The organizations that have gone beyond these challenges are redefining
their business models by assembling the best capabilities available in the
market. For capabilities that confer the greatest competitive position and
profit, these organizations are creating pools of specialized capabilities
within the structure of their own enterprises. For capabilities that do not
provide competitive superiority or critical levers to profitability, they
are establishing relationships with external parties, each of which is a
specialist in its own right.

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 CHAPTER 1: EXECUTING DIFFERENTIATED SUPPLY CHAIN STRATEGIES 11

We refer to the business model that is developed based on these internal

and external specialists as the specialized enterprise. By eliminating
the tradeoffs that executives have traditionally been forced to make
between differentiation, responsiveness and efficiency, we believe that
the specialized enterprise will fundamentally reshape firms and indus-
tries for the 21st century.

Specialization in action: Differentiation, responsiveness and

efficiency
By driving the organization toward internal and external specialization,
firms can deliver simultaneous, step-change improvements in differentia-
tion, responsiveness and efficiency. These improvements can go beyond
the scope of traditional business designs. Differentiation through compo-
nentization offers a variety of benefits. Differentiated firms command
higher revenues through premium product pricing and new markets.
Partnering with specialists improves margins and allows companies to
exit non-profitable markets. Maintaining few assets in-house enables the
reallocation of resources for investment in more strategic components.
The focus and expertise required for differentiation and the ability to
control performance offered by a component structure serve as powerful
risk mitigators. The key is to analyze the firm’s positioning within the
overall industry environment and only invest in components that are
truly differentiating, driving innovation in these key strategic compo-
nents while pursing the right partnerships to fill out the rest.
Responsiveness is a second advantage of specialized enterprises. Histor-
ically, companies have operated a deliberate business model based on
forecasted opportunities and perceived threats while forcing customers
to accept the predicted value proposition. In effect, these companies are
laden with fixed processes and relationships. This inflexibility boosts the
lead time required to introduce new business and hampers the ability to

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 12 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

partner effectively. In contrast, specialized enterprises are able to sense

and respond rapidly to otherwise unpredictable changes in the market
environment and the needs of their stakeholders. These specialized
enterprises achieve responsiveness through modularization, eliminating
nonessential components and leveraging existing specialists.
Specialized enterprises are also far more efficient than companies with tradi-
tional business models. Traditional models solidify operations and organi-
zations in silos. These enterprises invest in assets, seek to build scale across
the business and pursue in-house development of capabilities.
The specialized enterprise differs in that it is able to adapt cost structures
and business processes flexibly to reduce risk and conduct business at
higher levels of productivity, cost control, capital efficiency and financial
predictability. This is accomplished by investing primarily in strategic
components, while external specialists are selected on an optimal price-
performance basis.
This focus on differentiation, responsiveness and efficiency helps
specialized enterprises provide much greater value to their customers,
employees and shareholders. Customers can benefit through increased
choice, greater channel options and personalization of services. They also
can receive greater value with faster time-to-gratification. Employees
can benefit due to clear promotion paths, opportunities for advancement
and training and non-commodity skills. In addition, shareholders can
reap benefits from greater revenue growth, premium price-to-earning
multiples, long-term investment strength and greater predictability.
Clearly, using a specialized enterprise business model allows companies
the flexibility needed to help achieve the success imperatives critical
to navigating today’s complex, competitive and ever-changing environ-
ment.

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 CHAPTER 1: EXECUTING DIFFERENTIATED SUPPLY CHAIN STRATEGIES 13

Transformation to consumer-driven supply chain

networks
By John Nelson, Simon Terry and Charlie Hawker
The growth and financial strength of consumer products companies
over the last century have been based on a single principle: Branded
goods are the consumer’s first choice across virtually all product catego-
ries. However, that tenet doesn’t hold true any more in today’s rapidly
changing environment in which consumers often are more concerned
with price and product quality than with brand. This is greatly impacting
how consumer products companies do business.
Vigorous expansion has produced a new breed of mega-retailer that
is asserting ownership of the consumer relationship as well as placing
increased demands on suppliers to deliver higher levels of service.
More stringent growth objectives and regulatory requirements are
compounding the pressures felt by the industry.
Consumer products companies must take bold steps across their value
networks to address these challenges. In particular, the supply chain has
a key role to play in fueling consumer product companies’ growth and
profitability. Yet, in many cases, the supply chain has not adequately
evolved to meet the demands placed on it by retailers and consumers.
As a result, traditional “one-size-fits-all” supply chains can no longer
provide an adequate response to the challenges facing consumer products
companies today.

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 14 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

Pressure from all sides

Consumer products companies are increasingly being squeezed by
changing consumer buying patterns, increased retailer demands, more
stringent growth objectives and new regulatory pressures. The supply
chain plays an essential role in addressing these demands on the business
– yet most companies’ supply chains are not structured to do so. Without
a transformational roadmap that enables consumer products companies
to both restructure their supply chain and generate short-term returns,
they will struggle for growth in the future.

Consumers polarize toward both low-cost and premium products

Pronounced shifts in demographics and attitudes are changing consumer
buying patterns and increasing their complexity. One change in particular
has a substantial impact on the way supply chains should be designed:
Where consumers were once content to buy a “pretty good product at a
decent price”, they are now much more selective and their purchasing
patterns have polarized. As consumers seek to optimize their own
personal value, they are paying premiums for “meaningful” products
that respond to their emotional needs while aggressively looking for
“good enough” quality at rock-bottom prices for commodity items. So
we have shoppers polarized toward both low-cost products on one end
of the spectrum and premium products at the other. Unfortunately, tradi-
tional supply chains are ill-equipped to deal with either extreme.
Low-cost products require a company to manage massive volume,
whereas premium products necessitate flexibility in planning methods
and the physical supply network to anticipate unique market demand
characteristics. Traditional supply chains are either too complex and
cost-laden to distribute low-cost products effectively or too asset-
intensive and inflexible to quickly harness and deploy innovation.

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 CHAPTER 1: EXECUTING DIFFERENTIATED SUPPLY CHAIN STRATEGIES 15

Retailer power and expectations grow

Not surprisingly, retailers are demanding more supply chain prowess
from consumer products companies. Their objectives are to synchro-
nize inventory flow to the store shelf in anticipation of shifts in shopper
demand and, increasingly, to reduce in-store labor and overall retailer
supply costs.
Retailer needs may be as simple as how a pallet will be configured,
shrink-wrapped and marked or as complex as how that pallet is loaded
on a truck, radio frequency identification (RFID)-tagged and date-
sequenced. They also may extend to how product and demand data will
be shared and used for analysis and planning. Account-specific require-
ments often mean that standardization and automation are difficult.
Meeting these demands can be complicated and time-consuming, and
consumer products companies have less and less ability to resist them.
Consolidation, geographic expansion and an increase in goods sold on
promotion are strengthening the relationship that retailers have with
consumers and reducing the influence and importance of consumer
products companies. When out-of-stock levels on retail shelves are
high, particularly when a product is on promotion, consumers often
choose other brands. This points to a need for improved service levels or
consumers will choose other brands at other stores.

Growth requires handling more volume at even lower cost

As consumer products companies respond to stakeholder demand for
growth, they must address two key pressure points. First, companies
need to determine how to provide more service and volume in their
supply chains at a lower cost. Second, they must address the organi-
zational issues that stem from lack of sufficient resources to support
virtually all growth initiatives in the supply chain. Companies need to
make choices on where to focus and where to partner.

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 16 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

Over the last few years, consumer products companies have reduced
supply chain costs as a percentage of revenue to improve profits in a
flat-growth market. Now, to maintain margins while driving growth
in demand, companies must reduce supply chain costs further to free
funds for new sales and marketing efforts. The pressure on supply chains
to “do more with less” becomes even more intense as the traditional
approaches to cost-cutting are exhausted.

Regulatory pressures mount

In addition to the general competitive and consumer changes outlined
above, compliance (and, in particular, traceability) is becoming more
important. There is now tremendous momentum in the industry to react
to a wide range of regulatory and political pressures:
• New regulations such as Sarbanes-Oxley create a greater onus to
make accurate public disclosures.
• Corporate ethics are becoming increasingly scrutinized by consumers.
• Tariffs and import restrictions are more stringent than ever.
• Restrictions on the use of genetically modified organisms (GMOs)
have been tightened.
• The threat of bio-terrorism may lead to new product safety regula-
tions.
• Traceability of raw materials is being demanded by government regu-
latory bodies in response to public health issues.
• Consumer privacy safeguards are increasingly required by govern-
ments and consumers themselves.

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 CHAPTER 1: EXECUTING DIFFERENTIATED SUPPLY CHAIN STRATEGIES 17

The consequences of noncompliance can be significant. Noncompliant

consumer products companies could see brands damaged by negative
publicity or a major product recall. Retailers could “delist” products, and
banks or analysts might view some companies as too high of an invest-
ment risk. Finally, noncompliant companies might be hit with significant
regulatory penalties, which could lead to increased legal costs and higher
insurance premiums. In virtually all of these cases, the key challenge is
not simply to comply but to make the required changes in supply chain
operations at the lowest possible cost to the organization.

Building consumer-driven supply chain networks

With product development and marketing costs rising constantly, the
supply chain must become more dynamic, flexible and cost-efficient.
Companies need to tailor their supply networks to increase responsive-
ness to changing consumer tastes and buying patterns and to deliver
greater efficiency and value for commodity products. To accomplish this,
companies need to transform traditional supply chains into consumer-
driven supply chain networks.
While most consumer products companies have pursued piecemeal
initiatives to take costs out of the supply chain, the potential of these
ad-hoc initiatives has largely been exhausted. It is critical now to make
radical changes to the supply chain to deliver step changes in perfor-
mance.
The traditional supply chain exists within the “four walls” of an enter-
prise, where material and information flow linearly along fixed routes
starting with the receipt of raw material through to shipment of the
customer order. Some supply chains have been extended to share infor-
mation with trading partners, although these relationships are generally
limited to long-established, trusted customers and suppliers.

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 18 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

The consumer-driven supply chain network is best thought of as a

dynamic construct of organizations and supply chains that come together,
at a given point in time, to provide a seamless pipeline for products and
information from source suppliers through to end consumers. This union
may be temporary – perhaps for a single transaction – or an enduring
alliance. It will consist of multiple partners, each with a role to play:
from brand owners, product designers and contract manufacturers to co-
packers and other service providers, all of whom, when combined, act
as a single entity to deliver the overall business value sought by retail
customers and consumers.

Key capabilities of a world-class, consumer-driven supply chain

network:
• Close and deep collaboration with customers, suppliers and service
providers
• A single consistent set of information (for example, inventories, committed
orders and forward production schedules) visible across the whole “supply
network”
• Realtime information, blurring the distinction between planning and
execution systems
• The ability to make future commitments, not only “available to promise” but
also “capable to promise”, with online availability, configuration and pricing
that take into account all parties within the network
• Elimination of the traditional gaps among supply chain management,
customer relationship management and supplier relationship manage-
ment
• Web-enabled applications to facilitate speed and ease of connectivity
• Automated and intelligent exception-based decision-making and process
management
• Focus on profit optimization while maintaining continuity of supply.

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 CHAPTER 1: EXECUTING DIFFERENTIATED SUPPLY CHAIN STRATEGIES 19

To respond to polarizing consumer tastes, companies need to differen-

tiate and focus. To remain relevant and attractive to retailers, companies
need to offer higher service levels in a greater range of areas. The leading
companies will operate comfortably in a more fluid and complex envi-
ronment where the line between raw materials supplier, manufacturer
and retailer is blurred. To better reach consumers, they will increase
the number of channels to market and work efficiently with fragmented
distribution volumes. To respond to the incessant drive for innovation,
they will shorten product lifecycles and cope effectively with many more
product launches. New processes, partnerships and technologies will be
instrumental to enabling greater focus, responsiveness and flexibility in
the supply chain of the future.
Leaders will rely on data to build insights and drive efficiency, and
they will develop a governance structure where the traditional barriers
among geographies, divisions and functions are eliminated. And (as if
that weren’t enough) they will do virtually all of this at lower costs than
ever before to maintain margins while investing in growth initiatives or
reducing prices. Tackling these challenges is not an option – it is essential
for success in the hyper-competitive, increasingly complex and globally
integrated marketplace that will emerge over the next few years.
To position themselves effectively, consumer products companies must
have a clear view of what to prioritize and where to partner. Therefore,
to build a consumer-driven supply chain network, we recommend that
companies concentrate on six key areas.
1. Build “fit-for-purpose” supply chain networks, which means config-
uring supply networks in a tailored fashion to deliver innovation and
responsiveness for premium brands and high efficiency for mass value
products.

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 20 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

2. Accelerate innovation processes so new products and promotions can

be introduced into stores more cheaply and quickly.
3. Reinvent the value chain business model by reconfiguring operations
to radically cut costs and proactively meet consumer demands.
4. Comply with new regulatory requirements to increase product perfor-
mance and quality (or face the consequences).
5. Innovate and achieve more effective collaboration with retail partners
across various process areas.
6. Exploit technology in innovative ways to unlock performance
improvements across the supply chain.

Transformation to a consumer-driven supply chain network does not

happen overnight. It may take years to transform a static, inflexible
supply chain into a dynamic consumer-driven supply chain network.
But to drive profitability well into the future, this process of change
must begin now.

Build “fit-for-purpose” supply chain networks

In a market where consumer shopping patterns polarize into low-cost
and premium extremes, consumer products companies need to more
precisely align their supply chain capabilities with the specific char-
acteristics of each part of their business, which may vary by product,
channel and geography.
A few companies may have it comparatively easy: those with a single
brand, a few customers in a few countries, or a very focused portfolio
with a homogeneous customer base and the same market position across
a number of countries. For such competitors, a single focused supply
chain may be all that is needed.

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 CHAPTER 1: EXECUTING DIFFERENTIATED SUPPLY CHAIN STRATEGIES 21

But for the vast majority of consumer products companies – those with
multiple brands, customers and markets – the challenge is more difficult.
Today’s “one-size-fits-all” supply chain cannot accommodate the varied
needs both cost-effectively and efficiently. At the same time, operating
and managing many different supply chains tailored to each product-
customer-market combination is not a viable option since a separate
supply chain for each product would clearly be cost-prohibitive and
unmanageable.
Consumer products companies need to find a middle ground that leverages
common supply chain elements as much as possible while distinguishing
those few elements where differentiation is needed. Such an approach
allows companies to innovate and helps ensure the quality of premium
products while providing the lowest cost operations for price-driven lines.
For virtually any given business unit, companies can thus establish a fit-
for-purpose, differentiated supply chain that offers the right combination
of flexibility, efficiency and cost-effectiveness.

Assess the relevant capabilities

Companies must first assess which capabilities are most relevant to their
target market segments. Broadly, supply chain requirements fall into
two categories (see Figure 1):
• The “mass value” supply chain caters to the value-driven segment and
operates on a low-cost basis. It is designed for low-priced commodity
products that are predominantly sold at high volume through major
retailers. These products typically do not enjoy strong consumer
loyalty, with shoppers purchasing alternative brands if a particular
brand is not available on the shelf, thus placing the risk of supply
chain problems predominantly on the consumer products company.
The primary concern is to provide greater levels of service to the
retail customer to support consistent availability of the product on the
shelf.

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• In contrast, a “sense-and-respond” supply chain is needed to support

high-margin, premium brands. It optimizes value, innovation and
responsiveness for consumer brands and provides a high level of
service for a premium. Production and distribution are tuned to
satisfy fluctuating consumer demand levels, and products are often
sold through a wide range of channels. Supply chain risk is borne by
both retailers and suppliers. Consumers specifically seek out these
products and will delay purchases or shop elsewhere if the product
is not available, thus requiring consumer products companies and
retailers to work together closely.
Figure 1. The consumer marketplace is polarized to opposite ends of the spectrum.
Growth

Predictable, Highly variable,

Consumer demand
value-driven diversity of drivers

“Mass value” “One size fits all” “Sense and respond”

• Meet the core needs supply chains will • Maximize flexibility
of the retailer and the not adequately serve and responsiveness to
consumer the needs of different variable demand
• Provide consistency product categories • Provide a high level of
and resiliency at the and retail customers service and innovation,
lowest possible cost earning a premium

Source: IBM Global Business Services analysis, 2006.

Componentize the supply chain

Next, companies should reassess their existing supply chain capabilities.
Because traditional process-oriented analytical techniques reinforce the
rigid, linear nature of existing supply chains, a new approach is needed.

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Component business modeling (CBM) is a new tool for analyzing a

company in terms of its basic activities. A “business component” is a
discrete set of business activities that has the potential to operate as
a distinct entity. It has a unique purpose and includes the resources,
people, technology and know-how necessary to accomplish that purpose.
By breaking down current supply chains into business components,
consumer products companies will be better able to identify which parts
effectively meet market needs and which need to change. To find the best
tradeoff between differentiated product availability, economies of scale
and manageability, consumer products companies will need to identify
those components that need to be differentiated and those that can be
common across geographies, product groups and channels.
After determining what supply chain capabilities are required for a
given business unit and which components are common or differenti-
ated, the last step is to evaluate the best way to manage each component
to optimize operational efficiency and flexibility. The decision on how
to best manage a business component is a critical one. Companies have
four options when deciding what to do with each component:
• Achieve superiority – Invest to gain competitive advantage in areas
that are strategic differentiators for the business and where it is
essential for the company to become best-in-class.
• Consolidate – For activities that are not differentiating to the business
but are specialized in the way they are performed at a company level,
consolidate these activities within the business to optimize efficiency
and consistency.
• Outsource – For activities that are generic to the industry and provide
little competitive advantage to the business, seek explicit service-level
and variable pricing agreements with service providers to benefit from
the economies of scale they offer.

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• Leverage specialists – Where internal capabilities are not unique and

best-in-class service providers exist, seek tightly integrated, exclusive
relationships with partners.

Accelerate innovation processes

A key facet of consumer-driven supply chain networks is the ability to
accelerate innovation and drive greater responsiveness to new market
needs. As historical evidence demonstrates, highly innovative companies
that have larger proportions of turnover from new products and services
tend to grow revenues faster. Given the difficulty of improving the hit
rate for new products, to increase the possibility of success, consumer
products companies need to drive a higher volume of new introductions.
The key is to innovate and renovate more often (see Figure 2).

Figure 2. Accelerating the innovation process.

$ $ Time to
market
Existing
revenue 30-50% increase
through accelerated
and more sustained
revenue
Time Time
Existing
development 10-40% less through
costs time compression and
greater efficiencies

Source: IBM Global Business Services analysis, 2006.

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The supply chain is critical to successful and speedy innovation and

can help deliver substantial benefits to a company. To help achieve this,
supply chain improvements should focus on four key elements:
• Time to market – Consumer products companies need a supply chain
that enables them to get new products to the store shelves faster than
their competitors. The goals should be earlier revenue generation and
first-to-market advantage, in terms of both time to “first market” and
time to “full market.” Leading innovators are using project portals,
stage gate processes and technology to enable high-speed develop-
ment at reduced cost.
• Internal integration – Integrated planning and execution among the
disparate divisions of a consumer products company can help cut
through the red tape that inhibits creativity and innovation. Early
involvement of procurement, manufacturing, logistics, customer
service and planning from the start will reduce inefficiencies and
optimize revenues. Whether it is innovation or renovation, the ability
to capture, distribute and reuse knowledge, information and content
enterprisewide will prove invaluable. Greater levels of integration –
including consistent cross-business metrics – will help deliver project-
wide visibility and synchronization across functions and divisions.
• Collaboration – Wider collaboration with suppliers, distributors and
retailers will be key to achieving new levels of cost and service effi-
ciency. Retailers, in particular, need to be involved early in the new
product development process; their cooperation and advice on timing
can help determine the success of a new product introduction. It is
about more than just virtual teamwork. Companies must consider new
ways of working together across functions. They can achieve this by
drawing on expertise from suppliers, creative partners and trading
alliances and pursuing joint ventures for both idea generation and the
execution of innovative strategies.

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• IT enablement – New technologies enable companies to involve

suppliers and partners in idea generation and to execute innovation
across the new product development and introduction process. Collab-
orative applications and business integration middleware are reaching
sufficient levels of maturity; however, there is no single solution that
meets all requirements. Competitors who seek to build competitive
advantage will need to adopt best-of-breed solutions to fill selected
gaps, integrating them with legacy systems to enable end-to-end
processes and provide global visibility of the innovation “pipeline”.

Companies that focus on these four elements can use their supply chain
to accelerate innovation to help improve market responsiveness.

Reinvent the value chain business model

Traditional value chains hamper the development of consumer-driven
supply chain networks, limiting enterprise flexibility and responsiveness
in the face of specific retailer and consumer demands. Thus, companies
must redefine the end-to-end value chain and identify more efficient
ways of managing the supply chain both to cut costs and to achieve
substantial service improvements.

Cost reduction
With traditional cost reduction methods largely exhausted, consumer
products companies need to think and act more radically. They need
to consider a broader range of activities for cost-cutting opportunities,
including those that take place beyond the organization’s four walls.
There are still sources of untapped potential if companies examine the
end-to-end supply chain, exploit new technologies such as RFID, and
include suppliers, retailers and the outsourcing of business processes in
their assessment.

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Service improvement
Even when taking into account all the work that has been done over
the last 20 years to synchronize the supply chain, massive amounts
of out-of-stocks still occur in the market, representing multibillion
dollar opportunities for improvement. While beneficial, the Efficient
Consumer Response (ECR) and Quick Response movements, followed
by the creation of trade exchanges and the development of Collaborative
Planning, Forecasting and Replenishment (CPFR), have not come close
to solving the problem.
This issue encompasses out-of-stocks for both newly introduced
products and existing products. Predicting new product sales is more art
than science, but, at the least, improvement can be made by receiving
demand signals early in the product launch and finding ways to quickly
integrate those signals into demand planning. For existing products, even
more improvement is possible by revamping forecasting and demand
planning into a common, new framework.
Opportunities remain for consumer products companies to improve
sales by lowering out-of-stocks. The consumer-driven supply chain
network enables even better synchronization of supply to improve on-
shelf position.

Comply with new regulatory requirements

Consumer-driven supply chain networks must be able to respond quickly
to the compliance demands and regulatory pressures generated by
consumers, retailers and government. A common and key capability that
companies need to develop to meet various compliance requirements
is traceability – the ability to identify the location of a finished product
after it has entered the distribution network, trace backward to identify
the source of its constituent raw materials and track the route of raw
materials through the conversion process. Companies may also need to
identify other finished products that may have shared a raw material or
conversion process.

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Most consumer products companies today have some capability to

manage traceability issues, although the systems they rely upon generally
are manual and paper-based. But while companies can answer some
traceability questions, they do not capture enough detail to be able to
answer them all, and they certainly cannot answer them quickly.
This issue must be addressed on several fronts. Companies need both
the applications to capture the information and an IT infrastructure that
can store, cross-link and make the information easily accessible. New
capabilities that companies should consider include:
• Manufacturing execution systems to provide improved tracking and
lot traceability
• Laboratory information management systems to streamline the capture
of lab and R&D data
• RFID-enabled systems to help trace both inbound material and
outbound product flow.

The substantial amounts of data that a comprehensive compliance

system generates need to be managed effectively. The success of
virtually any compliance program will rest on its ability to deliver the
necessary requirements at the lowest possible cost. Companies will need
to standardize business processes and equipment to reduce deployment
time and simplify their rollout. Applying a common approach across the
whole organization, with a preference for low-cost, scalable and repeat-
able application integration, also will help reduce the cost of compli-
ance.

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Innovate
A fundamental success factor for the development of consumer-
driven supply chain networks is finding new ways of driving innova-
tion, managing the end-to-end value chain and complying with market
demands. To help accomplish this, consumer products companies need to
develop stronger relationships with trading partners to improve process
management and responsiveness to the end consumer.
Many consumer products companies have not wholeheartedly embraced
collaborative initiatives and processes. But now it is time for industry
executives to think “outside the box” to prepare their organizations to
work with retail customers in new ways. By exploiting new capabilities,
they can deliver higher value to trading partners and, thus, greater sales
and profits for themselves.

Seven steps to effective collaboration:

1. Develop alliance management as a core capability, including development
of a mechanism to share savings and opportunities between partners.
2. Interact easily and efficiently with partners via broad adoption of industry-
wide data standards and data synchronization.
3. Present “one version of the truth” across multiple systems through appli-
cation and process integration and coordination.
4. Develop end-to-end visibility through realtime, event-driven processing
and RFID.
5. Design easy-to-use, scalable solutions (such as workflow, process chore-
ography and portals).
6. Implement internal processes (such as alerts and contingency planning)
that can respond to unforeseen events.
7. Create an adaptive organizational structure that can align with individual
customers’ needs.

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Exploit technology
Technology is the underpinning of virtually all the other elements of
a consumer-driven supply chain network. However, resources for new
technology investment are scarce in consumer products companies
today since most IT departments are busy stabilizing current projects
and operations. Therefore, they may have little capacity for new devel-
opment. Nevertheless, it is important that companies find creative ways
of reallocating resources to invest in the supply chain technology infra-
structure necessary to compete effectively in the future. Specifically,
consumer products companies need to address the following three key
areas:

• Fix the current IT architecture – Consumer product companies’ tech-

nology architectures are often characterized by disparate business
operating models resulting from merger and acquisition activity,
complex application and information architectures, large multifaceted
projects to support business change and short-term activities that do
not lead to benefits realization. Consumer products companies need
to clean up their information systems and consider new technology
investments such as service-oriented architecture to help facilitate the
process.
• Integrate applications internally and externally – Consumer products
companies need to exploit technologies that give them full visibility
across their extended supply chain networks. They must seamlessly
integrate internal applications and link to external partners’ applica-
tions. Doing so will enable them to better respond to both consumer
and customer demands as well as provide them with visibility to
anticipate changes in market conditions.
• Link the digital and physical worlds – Consumer products companies’
online planning and execution systems must link to the physical world
to sense what is happening to the companies’ products. For dynamic

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response to real-world issues, companies need technologies such as

satellite tracking and RFID as well as analytical systems to identify
critical problems in service to be able to resolve them rapidly, if possible,
or prioritize and escalate them if not.

In the next five to ten years, the consumer marketplace is likely to undergo
rapid and extensive change, driven by shifts in consumer patterns, retailer
demands and regulatory requirements. Consumer products companies
need to radically re-engineer their supply chain into “consumer-driven
supply chain networks” just to keep up with these developments and
maintain competitiveness. Furthermore, they need to start now, as these
changes will take time to implement, and the future will not wait.

Conclusion
To be able to achieve their business objectives in today’s complex envi-
ronment, consumer products companies need to accelerate innovation,
restructure their end-to-end value chain business model and develop
collaborative capabilities to be able to comply with mounting global
pressures. Essential foundational elements include developing collab-
orative trade relationships and investing in a flexible, integrated tech-
nology infrastructure. Consumer products companies must prioritize
these efforts according to their unique business needs to be able to
achieve significant cost reductions, provide optimal customer service
and optimize return on investment (ROI).
Each step that consumer products companies take must move them closer
to the overall objective of having the capability to respond quickly and
efficiently to increasing and rapidly changing demands from both retailers
and consumers. By building consumer-driven supply chain networks, they
will be well-positioned to respond to today’s marketplace challenges and
those that are sure to arise in the future.

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Sense-and-respond supply chains for optimized

performance
By Karen Butner
Successful companies are responsive. They adapt to market changes
quickly, remaining nimble in the face of continual economic evolution.
Supply chains, too, must be responsive. Yet supply chains – once rela-
tively simple product and information pipelines – are becoming more
global and complex. The result is executives face ever-increasing chal-
lenges in managing supply and demand as customer needs continually
shift.
These challenges span the entire supply or value chain process. In
the planning stage, fragmented information hinders synchronization
of supply and demand. Ever-shifting global sourcing patterns make
it difficult to find low-cost goods. Companies may be forced to build
inventory at virtually every stage of the supply chain process due to
poor or nonexistent integration with suppliers and contract manufac-
turers. There is also a lack of global visibility into products in transit
and in the pipeline, which interferes with the ability to meet customer
service levels. Finally, there’s no ability to effectively up-sell or cross-
sell across business units and actually condition market demand.

CEOs seek innovation to sustain growth

When IBM conducted the IBM Global CEO Study 2006 to discover
the greatest concerns of CEOs across various industries, top-line growth
and profitability topped the list. The study also revealed that CEOs are
looking to innovation to drive fundamental change that enables sustain-
able growth (see Figure 1).4

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Figure 1. Most common operations innovations.

Improved operations
62
responsiveness to customers
Applied new science or 54
technology to core processes
Applied new IT to
51
automate processes

Optimized core processes 45

Reduced cycle 44
time/complexity
Integrated functional
business processes 42

0 10 20 30 40 50 60
Percent of respondents
Note: This question was asked of operations innovators only.
Source: IBM Global CEO Study, 2006.

However, few CEOs believe that their organizations are able to react with
sufficient speed and agility to changing market conditions and supply
chain events. Many rated their organizations as being “less than capable”
of responding adequately. CEOs recognize that their organizations need to
sense, analyze and respond much more effectively and quickly to market
fluctuations if their companies are to remain competitive.
Executives recognize the need to establish effective and proactive real-
time responses to evolving market conditions and daily supply-and-
demand shifts. To do so and to achieve their business objectives, they’re
focusing on supply chain responsiveness initiatives. Specifically, they
are adopting advanced practices in four focus areas:
1. Responsive end-to-end supply chains – The ability to sense and
respond with flexibility and speed to virtually any customer demand,
market opportunity or external threat.

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2. Variable cost aligned with revenues – A variable cost structure

designed to execute high levels of productivity, cost control, capital
efficiency and predictability.
3. Realtime information – Gaining realtime access to transactional infor-
mation to be able to quickly identify exceptions and alert supply chain
constituents.
4. Shared risk – Orchestrating a network of partners and sharing risks
across the network.

Sense-and-respond supply chains for improved responsiveness

Some companies are shifting toward sense-and-respond supply chain
strategies because sense-and-respond supply chains can monitor,
manage and optimize business exceptions – anomalous events that
occur within supply chains – with a limited need for human intervention.
They can provide event assessment and optimize supply chain perfor-
mance between planning and execution, based on realtime information.
Ultimately, they allow businesses to remain nimble and responsive to
shifting demand. And in a proactive business environment, sense-and-
respond supply chains can be used to influence market demand.
Sense-and-respond supply chains align strategies and imperatives with
ongoing daily activities and decisions. They proactively monitor and
observe ongoing supply chain issues, enabling companies to respond
quickly to market shifts and proactively pursue potential market oppor-
tunities.
A feature of sense-and-respond supply chains is realtime visibility
into virtually all transactional event information, allowing companies
to quickly identify the root causes of issues. They can sense potential
problems and respond with flexibility and speed to infrequent or sudden
demands. Sense-and-respond supply chains can dynamically adapt
to supply chain shocks through end-to-end visibility and proactive

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exception management. They can detect company-defined exceptions

and alert those affected, which leads to faster resolution. By identifying
situations that are designated as out of tolerance, they can determine and
execute the appropriate action.
These types of supply chains are characterized by optimized performance
and metrics, supply chain visibility, collaborative decision processes,
exception management, a variable business structure and knowledge
retention. These features are discussed below.

Optimized performance and metrics

The end-to-end supply chain consistently and continuously measures
performance. Dashboards report across the entire chain, and those
measurements are shared with all the partners and service providers.
Daily report cards and alerts provide information regarding exception
events. These measurements are then used to gauge supply chain perfor-
mance on a regular basis with all constituents. Supply chain partners
can also use them to monitor key events or groups of events that may
miss business expectations. They can proactively measure on-time
delivery performance to customers. Sense-and-respond capabilities can
also monitor discrete events, make decisions based on business rules
and recommend responses; some of those responses can be automated
transactional changes.

Supply chain visibility

Sense-and-respond supply chains allow constituents to see virtually
all transactional event and performance information. Both executive
and operational dashboards aggregate and synchronize information
and support collaboration. Integrated workflows model where critical
decision points reside and help determine targets and thresholds for
event notification. The information available as a result of end-to-
end visibility supports exception management decisions and adaptive
planning and execution.

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Collaborative decision processes

Collaborative decision processes help resolve problems and execute
processes when cross-functional supply chain teams – such as suppliers
and service providers – are involved. Events are mapped to key decision
points within the supply chain processes, and user profiles define who
receives action items. The escalation process helps ensure that the
appropriate parties are notified to take collaborative corrective action.
Dynamic, cross-functional teams monitor performance and analyze
event exceptions and trends to determine which changes to make to
improve planning and execution.

Exception management
Sense-and-respond supply chains drive problem resolution by proac-
tively detecting exceptions and alerting affected parties. Alert messaging
warns decision-makers when an action should be taken in response to
an event or if a trend is emerging. When an exception is detected, the
system analyzes the event to determine its implications on other parts of
the supply chain, such as inventory or service levels. After assessing the
implications, the system uses detailed analytics and optimization logic
to determine the most effective way to remedy that exception.

Variable business structure

A variable business structure is an organizational construct that focuses
on core competencies and supports an open and integrated operating
environment. This supports and promotes collaboration with suppliers,
service providers and customers by providing virtually all supply chain
constituents with current data. Performance and event information is
shared on a timely basis so mutual or collaborative decisions can be
made quickly. Business processes are low latency – keeping products
moving expediently through the supply chain – and are dynamically
aligned with core process components and capabilities. Management
governance is adaptive; it can change as needs evolve. Those account-
able for outcomes perform governance on the basis of context.

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Knowledge retention
Cross-enterprise knowledge sharing and knowledge bases support
decision-making and identify performance trends and recurring issues.
Collaborative knowledge bases provide the foundation for analyzing
performance trends and identifying root causes – and how often problems
occur – to assist teams in determining corrective action.

Conditioning market demand with sense-and-respond supply

chains
When companies can move away from reacting to market conditions
and take a more proactive stance, they can gain competitive edge. Sense-
and-respond supply chains can enable market conditioning through trend
analysis and supply-and-demand information. For example, a major high
technology firm uses order trends and actual demand to provide early
warnings of constraints and excesses. These early warnings result in the
company’s ability to position itself to condition demand for existing and
planned supply.
The sense-and-respond system identifies forecasting events and order
events. This provides early warning for demand conditioning. It can
correlate and analyze the information and detect early insight into
supply constraints and excesses. It will then alert the appropriate parties
of exceptions and recommend actions. Based on this information, sales
teams adjust selling tactics and supply teams rebalance supplies. The
core team is collaborative, composed of members from marketing, oper-
ations, procurement, finance and development. They identify supply
imbalances, create a conditioning plan in partnership with the geography
sales organizations and manage the plan’s execution.

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Gaining visibility and managing events for advertised

campaigns
Many retail companies find it challenging to proactively manage adver-
tised campaigns. To help ensure product availability, they must closely
monitor:
• Rejected purchase orders or those not confirmed by suppliers
• Products shipped beyond the time frame necessary for store allocation
or delivery
• Products shipped to the wrong store
• Advanced shipping notice (ASN) quantities that do not match ordered
quantities
• When suppliers cannot meet purchased quantity commitments
• When suppliers indicate a shipment date beyond the required date.

The supplier sends purchase order acknowledgements, inventory

status and capacity plans to the retailer. The sense-and-respond system
validates the supplier information against business rules and thresh-
olds to determine if the event is critical for the upcoming campaign. If
virtually any situation is out of tolerance, the system sends a proactive
notification to the merchandise planner. In some cases, the system
generates an automatic transaction and sends it to the appropriate supply
chain constituent. For example, a late shipment may initiate a shipping
request to another logistics service provider, or a purchase order quantity
discrepancy may automatically generate a reorder of merchandise from
another supplier.

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An open and services-based technology architecture incorporates

realtime information, data integration, business rules and analytics to
optimize supply chain performance (see Figure 2). Intelligent agents
detect signals and send responsive transactions, often without manual
intervention. The intelligent agents assist in analyzing event exceptions
and, through dashboards, allow employees to view exceptions. In some
cases, the agents anticipate an event and notify the appropriate party
when the event has not occurred; for example, if delivery notification
is not received. They support the ability to make either automated or
better-informed decisions based on what the exceptions are.

Figure 2. Supply chain sense-and-respond components.

Management dashboards
Command portal
Portal view to display supply chain performance
Dashboard measurements and alert notifications. Provides
access to “drill-down” views of supporting infor-
mation

User profiles Event engine

Tool which provides the foundation for supply
chain visibility. Constantly monitors supply chain
transaction data. Contains rules required to identify
and build event notifications, profiles of notifica-
Sense Interpret Decide Act tions and user interaction rules, and thresholds for
Event engine performance alerts

Active data warehouse

Active Primary data repository of supply chain integrated
data information for event engine processing. Updated
warehouse in realtime as events occur

Product tracking
RFID Technologies, such as RFID, to provide realtime
data collection and detection of product in the
pipeline. Sends automated messages to the event
engine

Tag Antenna Reader

Source: IBM Global Business Services analysis, 2006.

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Analytics detect business trends and support root cause analysis. Optimi-
zation components support the planning of actions in reaction to trends
and situations. These may include:
• Notification to key business managers
• Changes to operational parameters or business rules
• Reallocation of resources
• Invocation of exception processes or transactions.

These elements serve to optimize supply chain performance.

Conclusion
Sense-and-respond strategies and capabilities offer many benefits that
can generate both quantitative and qualitative value. For example,
constituents can see integrated information and processes, allowing for
rapid decision-making and corrective action before problems escalate.
This end-to-end visibility also provides the opportunity to proactively
identify and resolve problems like inventory gaps and possible out-of-
stock issues. Bottlenecks and interruptions – such as a supplier’s inability
to fill an order prior to a cancellation date – can also be identified and
resolved. In addition, because it’s easy to see current stock positions,
in-transit stock and on-order status, the inventory in the pipeline can be
reduced.
Sense-and-respond supply chains can provide continuous performance
improvement through measurement, accountability and event notifica-
tion of pending problems. When performance measures and targets are
standardized and aligned, performance excellence confined to isolated
silos can be eliminated, and overarching supply chain objectives of
synchronous excellence can be met. But the ultimate value of the sense-
and-respond approach is supply chain responsiveness – the ability to
quickly and effectively adapt to impending threats and opportunities,
making companies more nimble and better able to meet the demands of
an ever-evolving marketplace.

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Scoring high on the supply chain maturity model:

Leading practices and benchmarks
By Karen Butner and Dietmar Geuder
Top-performing supply chains have a common trait: the ability to respond
quickly to shifts in demand with innovative products and services. To do
this, they employ a variety of business strategies and models coupled
with leading management practices. They also consistently measure
their performance based on such key indicators as:
• Perfect order attainment
• Demand management accuracy
• Time to value
• Cash-to-cash cycle time
• Supply chain cost.

These indicators of supply chain performance are the gauges used to

monitor the efficiency of the business.
Leading companies have evolved and transformed their supply chains.
They have moved from seeking operational excellence in static and
isolated silos to seeking operational excellence across the value chain
network to achieving horizontal integration within the company to
external collaboration with partners and, eventually, to on demand
performance.
According to IBM’s 2006 Value Chain Study,5 supply chain executives’
top three objectives remain:
1. Increased profitability
2. Reduced costs
3. Improved responsiveness.

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To meet these objectives, the leaders understand that supply chain effec-
tiveness is about more than efficiency and low cost. They understand
that revenue growth and profitability are best achieved by creating an
integrated value chain with the ability to condition demand and respond
to supply chain shifts with innovative products and services.
Many companies are progressing toward the vision of an on demand,
customer-driven supply chain – one that is integrated end-to-end across
the business and with key customers, partners, suppliers and service
providers. The top-performing supply chains are actively transforming
their strategies and adopting leading management practices including:
• Coordinating business functions across the supply chain
• Developing mutually beneficial ways to strengthen supply chain rela-
tionships
• Synchronizing supply and demand through planning and forecasting
• Managing supply chain cycles
• Developing variable cost structures
• Sharing risks with partners
• Using realtime information to create responsive, customer-driven
processes.

Snapshot of the four key areas of supply chain maturity and

top-performing supply chain practices
Let’s look now at multi-industry benchmarked results and supply chain
maturity in the following four key areas:
• Product introduction and lifecycle management
• Synchronizing supply and conditioning demand
• Global buying power through strategic sourcing
• Logistics excellence for superior customer fulfillment.

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 CHAPTER 1: EXECUTING DIFFERENTIATED SUPPLY CHAIN STRATEGIES 43

We will present survey findings, discuss what leaders are doing to

achieve success and include success tips for each of these key areas.

Product introduction and lifecycle management

A key driver of revenue growth is innovation and being able to bring
innovative products to the marketplace quickly. This requires a coordi-
nated product launch by multiple functional areas (e.g., product design,
procurement, planning and manufacturing/process, sales and marketing)
within a company working together. Furthermore, as companies expand
their supply, manufacturing and logistics capabilities globally, this
requires them to work together in a collaborative manner to deliver these
innovative products through virtual networks. Therefore, organizations
need to integrate internally as well as externally with suppliers and
customers. Thus they can create end-to-end supply chain processes and
capabilities with responses better mapped to customer requirements.

Key survey findings

Bringing innovative products and services that meet customer wants and
needs to market is the top goal for new product development. The primary
strategy for new product development is collaboration with customers to
understand their requirements, followed by customer product configura-
tion and specifications for design. Most supply chain executives in the
study (97 percent and 90 percent, respectively) consider these practices
within their company to be extremely effective.6
Identifying and meeting customer requirements is the primary challenge
for remaining competitive. Over 56 percent of respondents indicated
that the correct identification of customer needs is their most signifi-
cant management challenge in new product development.7 To design for
customer requirements while maintaining cost control objectives, many
manufacturers are incorporating product commonality and reuse tech-
niques with standardization of components. Reusing existing designs
and other knowledge assets can help streamline the product development

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 44 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

process and, at the same time, significantly improve product quality by

standardizing and reusing proven components and assemblies. A formal
program of commonality and reuse can also help reduce direct materials
procurement costs, speed time to market and improve product quality.
There has been little change in the past three years in developing new
products/service innovations (see Figure 1). Growth has primarily been in
new customer markets and extensions to existing products. IBM’s study
shows that new product variations increased 16 percent from 2003, plus
average time to market is decreasing for new product variations.8

Figure 1. Average time to market for new product variations versus three years ago.

50

40 38
Percent respondents

31 30
30 28
25
22
20
14 2003 2006
13
10

0
0-100 101-200 201-300 >300
days days days days

Source: IBM Institute for Business Value 2006 Value Chain Study.

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 CHAPTER 1: EXECUTING DIFFERENTIATED SUPPLY CHAIN STRATEGIES 45

Historically, new product development efforts have concentrated on

achieving on-time and on-budget targets. However, IBM’s study reveals
that a significant proportion of respondents miss their product devel-
opment schedule targets, and it’s getting worse. Likewise, a signifi-
cant proportion of respondents miss their product development budget
targets, and, here as well, performance is falling.

What the leaders are doing to achieve product launch success

As companies evolve up the supply chain maturity model toward an on
demand supply chain, they realize that business performance is directly
related to their ability to bring superior products and services to market
in a cost effective manner. Many of the leaders are implementing the
following practices:
• Collaborating with customers to explicitly define requirements
• Including logistics and "get-to-market" requirements in product/
service design
• Integrating with suppliers and supply chain service providers during
design, development, production and service
• Using componentization and standards to develop variations on
products at lower costs
• Outsourcing design and development activities for non-core products
and/or components.

Success tip:
Achieve product launch success through the integration of product/
service lifecycle management activities with customers, suppliers and
service providers, superior products/services innovation and effective cost
management.

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 46 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

Synchronizing supply and conditioning demand

When companies move away from reacting to market conditions toward
a more proactive stance, they create a sharp competitive edge. Respon-
sive supply chains can help enable market conditioning through trend
analysis and supply-and-demand information. They can achieve this
by using order trends and actual demand to provide early warnings of
constraints and excesses, identifying key forecasting events and order
events. This activity provides advanced insight for demand condi-
tioning. The processes and systems can correlate and analyze the infor-
mation and detect likely supply constraints and excesses, then alert the
appropriate parties of exceptions and recommend actions. These early
warnings allow the company to position itself to condition demand for
existing and planned supply.
Demand-driven synchronization of supply chain planning and execution
activities, in collaboration with suppliers and partners, enables companies
to balance demand and supply and to optimize customer service and
inventory levels by continuously planning, in real time, across organiza-
tional boundaries. The result is a feasible, synchronized plan.

Key survey findings

Political/economic uncertainty is affecting costs and lead times (see
Figure 2). Trending indicates that these influences are affecting sales
less, but they are continuing to impact supply chain effectiveness.

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 CHAPTER 1: EXECUTING DIFFERENTIATED SUPPLY CHAIN STRATEGIES 47

Figure 2. Impacts of political/economic uncertainty on supply chain efforts over the

past three years.

52
Increased costs
62

28
Increased lead times
38

Decreased sales 57
22
14 2003
No impact
17
2006
7
Increased sales
10
7
Other
6

0 10 20 30 40 50 60 70
Percent of respondents

Source: IBM Institute for Business Value 2006 Value Chain Study.

Companies are employing customer-focused practices to synchronize

customer demands for product delivery (e.g., the “perfect order”) while
balancing the costs associated with excessive inventory in the pipeline.
Many companies are using continuous replenishment programs to
maintain customer-specified levels of products on the shelf and direct
material inventories in supply. As shown in Figure 3, they are finding
these programs to be extremely effective.
Inventory planning and deployment are primarily based on customer
sales (78 percent) and volume, followed by product grouping, region or
geography and, lastly, margin or market share. Few respondents (only
15 percent) use customer profitability as a determinant for inventory
deployment even though profitability is the number one objective.9

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 48 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

Figure 3. Effectiveness of customer practices implemented.

Effectiveness

Continuous 21 48 31 91.8%
replenishment
Returns management/
reverse logistics 19 41 40 83.6%

Shared, realtime
electronic demand/ 16 41 43 85.7%
inventory data
Inventory management 16 29 55 82.7%
at customer location
Customer interactions
3 39 58 82.9%
with production

0 10 20 30 40 50 60 70 80 90 100
Percent of respondents
Extensive Some None
Source: IBM Institute for Business Value 2006 Value Chain Study.

A majority of the respondents are effectively using realtime, shared

electronic demand and inventory data to gain visibility into customer
demand and to collaborate on forecasts. In a totally integrated supply
chain, customer point-of-sale or demand information is used within the
organization to better plan and adapt production and other schedules in
accordance with demand requirements. To further synchronize supply
with demand, the customer forecast information is fed back to key
suppliers. When demand spikes, the company can then shift production
back and forth between suppliers.
Most respondents said that they are “rapidly” responsive to changing
market conditions (70 percent) and have realtime visibility inside and
outside the enterprise (60 percent). Yet when asked about collaborative
planning initiatives, only 31 percent said they are implementing collab-
orative approaches with suppliers and only 25 percent with customers.
Likewise, few (31 percent) said they are sharing visibility into inventory
and demand with suppliers.10

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As organizations seek to get closer to their customers and “pull”

demand through their supply chains, an accurate reflection of product
demand is critical to increasing sales revenue and customer satisfac-
tion while reducing inventories and order cycle times. Demand planning
and inventory planning and replenishment applications are being used
more extensively than they were three years ago. Since 2003, the use of
these applications has grown by 9 percent. Most respondents are using
vendor packages, and some (an average of 29 percent) are using inter-
nally developed software.11 Demand/supply planning is becoming much
more organizationally integrated, with sales and marketing, finance,
supply chain operations, information technology and even key partners
involved in the sales and operations planning processes.
Effective demand management can significantly impact not only new
product introductions but the decision to retire an existing product as
well. Key issues that businesses must consider every day when attempting
to forecast demand include pricing, product mix, promotions and other
factors that impact the delivery of products and services.
Respondents indicated that they measure forecast accuracy primarily by
stock keeping unit (SKU), product family or grouping, and customer
segmentation. Thirty-three percent said they measure forecast accuracy
at the market level.12
As shown in Figure 4, demand/supply planning and synchroniza-
tion result in quantifiable supply chain performance improvement.
Companies employing advanced demand planning techniques typically
carry less inventory, are more likely to meet customer requirements for
perfect order attainment and generally are more profitable. Our study
shows that customer lead-time improved significantly from 2003, with
over 60 percent delivering products in 7 days or less. Inventory turn
rates for finished goods are higher, and the cost of quality has improved
from 2003. Cash-to-cash cycle time has made a leap, with 71 percent

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 50 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

achieving less than 60 days and 41 percent with cash-to-cash cycles of

less than 30 days. In addition, on-time delivery has improved, with over
54 percent of the respondents achieving levels of 95 percent and above
versus only 48 percent in 2003.13
Figure 4. Key supply chain performance indicators.

For primary products, what is your What is your annual total finished
standard customer lead-time? goods inventory turn rate?

100 100
8 14
15 16
10
80 80 8
Percent of respondents

Percent of respondents

30 17 > 30 days > 26

60 8-30 days 60 46 13-26
46
3-7 days 5-12
33
40 29 0-2 days 40 0-4

20 34 20 36 32
26

0 0
2003 2006 2003 2006

What is your on-time delivery rate? What is your site’s annual cost of quality?

100 100

25 23
80 39 44 80
Percent of respondents

Percent of respondents

>97% >10%
17
60 96-97% 60 27 6-10%
9
10 91-95% 3-5%
40 19 0-90% 40 37 0-2%
17 22

20 33 20
29 26 23
0 0
2003 2006 2003 2006

Source: IBM Institute for Business Value 2006 Value Chain Study.

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What the leaders are doing to achieve supply and demand synchronization
As companies evolve up the supply chain maturity model toward an
on demand supply chain, they are developing demand-driven extended
supply chain networks. Many of the leaders are implementing the
following practices:
• Collaborative demand planning and forecasting with customers and
suppliers
• Customer inventory planning and deployment programs including
continuous replenishment and shared management of inventory
• Integrated sales and operations planning among functions within the
organization and the extended supply chain network
• Bundled pricing of products and services.

Success tip:
Achieve profitability objectives by synchronizing demand and supply.
Implement collaborative planning processes integrated organizationally (for
example, across sales and marketing, supply chain operations, finance, IT)
with key customers, suppliers and service providers. Use real demand to
replace forecasts.

Global buying power through strategic sourcing

Global sourcing patterns continue to shift dynamically in search of lower
cost sources. In addition, companies continue to rationalize and harmonize
their own global value chain resources in search of more efficient and
effective means of meeting global customer demands. Fast, flexible,
efficient and transparent response to changing end-customer demands and
supply shocks remains a strategic mission for supply chain management
and will be essential to remaining competitive.

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To effectively analyze and manage total procurement spend, companies

need basic as well as comprehensive information and visibility into
purchasing spend and consumer patterns. Enterprises need opera-
tional and supplier performance measurements to effectively manage
supplier relationships. Shifting to customer-driven supply networks can
be accomplished by integrating sourcing, procurement, operations and
logistics with partners to better manage global strategic sourcing and
spending and to achieve reduced procurement costs, enhanced profit-
ability and cash flow.

Key survey findings

Profitability (77 percent) and cost containment (65 percent) continue
to be the major objectives for procurement and supplier management
functions, followed by improved quality and increased customer respon-
siveness.14 Collaboration with suppliers and global sourcing of direct
material are viewed as the key factors to achieving profitability and
reduced costs (see Figure 5).
Collaborative design and development, where companies engage
suppliers and exchange knowledge during the entire product lifecycle,
can help reduce costs and time to market and, at the same time, maintain
quality standards. Working in isolation and making assumptions about
supplier capabilities may undermine sourcing strategies because of
higher costs and may fail to leverage supplier knowledge for componen-
tization and reuse.

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 CHAPTER 1: EXECUTING DIFFERENTIATED SUPPLY CHAIN STRATEGIES 53

Figure 5. Key initiatives underway to achieve company objectives.

Supplier collaboration 63

Global sourcing direct materials 51

Total cost of ownership 46

Spend analysis 34

Contract compliance 22

e-Procurement/e-sourcing 10

Global sourcing indirect materials 9

Other 13

0 10 20 30 40 50 60 70
Percent of respondents
Source: IBM Institute for Business Value 2006 Value Chain Study.

Global sourcing of direct materials is definitely on the rise. Sourcing

within North America has remained relatively stagnant since 2003;
however, direct material sourced from Europe, South America and
China/India is increasing (see Figure 6). Global sourcing is posing some
difficult performance challenges for many industries – longer lead times,
slower inventory turns and unpredictable delivery – often compounded
by cultural issues.

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 54 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

Figure 6. Global sourcing by region.

What percentage of your site’s direct materials What percentage of your site’s direct materials are
are sourced from North America? sourced from China and India?

100 100
17
21 24 22
80 80
Percent of respondents

Percent of respondents
>97% 31 >15%
28 21 25
60 90-97% 60 5-15%
75-90% 1-5%
10
19 28 <75% 40 28 <1%
40

20 20 42
32 25
27

0 0
2003 2006 2003 2006

What percentage of your site’s direct materials What percentage of your site’s direct materials are
are sourced from Europe? sourced from South America?

100 100
10 13 18
33
80 80
Percent of respondents

Percent of respondents

38 >10%
60 2-10% 60
25
1-2% >1%
21 None 87 82
40 40 None

42
20 20
31

0 0
2003 2006 2003 2006

Source: IBM Institute for Business Value 2006 Value Chain Study.

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 CHAPTER 1: EXECUTING DIFFERENTIATED SUPPLY CHAIN STRATEGIES 55

As companies continue to seek qualified global sources to fulfill supply,

many are beginning initiatives where the total cost of ownership (TCO)
is a key driver of strategic sourcing. TCO involves the analysis and
inclusion of virtually all process costs, actual procurement costs, and
even operations and maintenance costs, if applicable. Fifty-nine percent
of the survey respondents use total cost as the key performance criteria
in evaluating suppliers, followed by price, quality and delivery.
Many companies struggle to capture accurate, timely data that could give
them insight into enterprisewide spend patterns, such as maverick spend
rates, contract compliance and price optimization opportunities. Most
respondents do not plan to invest in procurement applications, but the
demand for supply chain integration technology and electronic payment
systems appears solid. Respondents are making supplier management
and procurement technology investments in the following areas:
• Electronic payment: 67 percent
• Internal supply chain integration: 60 percent
• Web-enabled e-Procurement and e-Sourcing: 59 percent
• Spend analysis: 54 percent.15

Establishing global buying power through strategic sourcing involves

creating supply relationships that help optimize potential value contri-
bution by accurately matching demand requirements with supply market
capabilities. There is continued emphasis on overall supply chain perfor-
mance and profitability, as evidenced by the results of the key sourcing
and procurement measurements shown in Figure 7 and described
below.
Supplier lead times have improved, with 74 percent reporting stable or
decreasing lead times over the past three years. Study results from 2005
show a significant improvement in supplier on-time delivery, with 63
percent reporting delivery of at least 85 percent of supplier orders by the

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date originally requested. There has been a slight improvement

in purchase order processing cycle time, but inventory turn rates
have remained relatively stagnant.16

Figure 7. Supplier management and procurement performance.

What is your site’s average supplier lead-time on What percentage of supplier orders is
purchased materials? delivered by the original request date?

50 80
46
70
40
40 59
60
Percent of respondents
Percent of respondents

50
30
26
23 40 37
20 18
17 16 30
14 23
20 20 20
16 17
10
10 8

0 0
0-10 days 10.1-20 20.1-30 >30 days 0-85% 85.1-90% 90.1-95% >95%
days days
2003 2006
2003 2006

Using standard costs, what is your business site’s What is the average cycle time, in hours,
annual raw material inventory turn rate? to place a purchase order at your site?
40
50 40 38
46
43 35
40
30
Percent of respondents
Percent of respondents

27
25
30
26 26 20 20 20
24 20
17 18
20 19
15

10 10
10
7
5

0 0
0-4 4.1-12 12.1-26 >26 turns 0-0.5 0.6-1 1.1-4 >4
turns turns per turns per per year hours hours hours hours
per year year year 2003 2006
2003 2006
Source: IBM Institute for Business Value 2006 Value Chain Study.

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 CHAPTER 1: EXECUTING DIFFERENTIATED SUPPLY CHAIN STRATEGIES 57

What the leaders are doing to achieve global buying power

As companies evolve up the supply chain maturity model toward an on
demand supply chain, they are increasing their buying power through
strategic global sourcing while creating virtual supplier networks. Many
of the leaders are implementing the following practices:
• Global sources of supply for direct and indirect materials
• Collaborative supplier relationship management programs with
mutual objectives and performance criteria
• Increased attention and information on spend analysis and total cost
of ownership
• Outsourced basic procurement, payment and audit functions
• Consolidation of supplier management and sourcing organizations.

Success tip:
Achieve profitability objectives by increasing your global buying power through
an integrated high-performance network of suppliers and service providers.

Logistics excellence for superior customer fulfillment

Today’s decentralized supply chain models and tighter trading partner
collaborations demand expanded logistics capabilities – more stocking
locations, more frequent ordering, smaller order sizes, more costly modes
of transportation, multichannel distribution, configure-to-order capa-
bilities, personalization and distributed responsibility. With improved
visibility and fulfillment tools, the logistics function has become a key
component of supply chain operations, helping to combat inefficiencies
in warehouse labor, transportation and space utilization, and inaccura-
cies in inventories and customer shipments. Implementing expanded yet
cost-effective strategies for supply chain logistics has become a mission-
critical objective.

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Key survey findings

As virtually any shipper of products knows, transportation costs are out
of control. Transportation cost increases, driven primarily by fuel prices
in the past several years, combined with a capacity shortfall have led to
a significant rise in logistics costs (see Figure 8).
Figure 8. Site total logistics cost as a percentage of sales.
Up from 20%
60 in 2003
51
50
Percent of respondents

40

30
24
Down from
20 34% in 2003
12 12
10

0
0-2% 2.1-5% 5.1-10% >10%

Source: IBM Institute for Business Value 2006 Value Chain Study.

Formal distribution strategies are being implemented as companies look

for ways to balance the global sourcing of material with increasing trans-
portation and distribution costs and, as usual, rising customer service
requirements (see Figure 9). Many are considering the placement and
deployment of inventories in their networks to counter-balance the
recent sky-rocketing increases in transportation costs. Some companies
are even reestablishing distribution facilities closer to the customer
to combat transportation capacity and costs issues. Another tactic is
implementing differentiated logistics services for particular customer
segments and markets, which over 73 percent of the respondents are
embracing.17

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As companies strive to develop an integrated and informed logistics

network, many are implementing collaborative processes, including
supply chain visibility and exception management, with logistics service
providers. Many are seeking improvements in collaborative order
fulfillment and visibility – designing and implementing processes and
Internet-based technologies to provide visibility and realtime manage-
ment of distributed order fulfillment across today’s complex, highly
outsourced supply chains. Companies are finding that these practices
are effective (80 percent and above) in meeting their objectives for
increased profitability, cost containment and increased customer respon-
siveness/service.18

Figure 9. Implementation of logistics practices at companies.

Effectiveness
Formal distribution strategy
24 60 16 91%
(location, number, mission, mix)
Collaborative carrier
management 27 46 27 89%

Differentiated logistics services

for discrete customer segments 28 45 27 88%

Collaboration and integration

among service providers 22 45 33 86%

Supply chain visibility for

22 40 38 80%
managing exceptions

Cross-docking, flow-through 26 34 40 79%

Formal returns management 18 41 41 65%

0 10 20 30 40 50 60 70 80 90 100
Percent of respondents
Extensive implementation Some implementation No implementation

Source: IBM Institute for Business Value 2006 Value Chain Study.

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More and more companies are developing a variable global logistics

network of service providers to better manage end-to-end logistics costs
while providing greater levels of on-time delivery, fill rate and other
customer performance expectations. They are accomplishing this by
outsourcing components of their overall logistics capabilities to trans-
portation and distribution service providers. Transportation (inbound and
outbound) continues to be the highest ranking outsourced function (57
percent), with customs/export, warehousing and/or distribution centers
and transportation management services (TMS) following. Overwhelm-
ingly, the respondents indicated that those outsourced functions are
effective in meeting their desired objectives (transportation 93 percent,
customs/export 87 percent, warehousing/distribution centers 88 percent
and TMS 75 percent).19
Superior customer fulfillment requires keeping a careful eye on logistics
performance and key indicators. For the last three years, customer order
cycle times have been improving (see Figure 10). For more than 75
percent of the respondents, cycle times are below 10 days. Seventy-five
percent are achieving order fill rates above 90 percent, which is rela-
tively consistent with the 2003 data. On-time delivery (OTD) remains
the major indicator of customer satisfaction and logistics performance
excellence, along with other perfect order components (e.g., complete, in
the right place, undamaged). Eighty percent of the respondents achieve
OTD rates of 90 percent and greater.20 In this survey, OTD was defined
as scheduled delivery time versus the customer’s original request date.

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Figure 10. Customer fulfillment performance measurements.

For primary products, what is the average What percentage of sales orders is delivered on
customer order cycle time in days? time, as scheduled?
60 55 40

48 33
Percent of respondents

Percent of respondents
50
29
30
40
20
30 20 18
22 21
20 17
14 14
10 10
10

0 0
0-5 6-10 11-20 >20 0-90% 90.1-97% 97.1-99% >99%
days days days days

What is your site’s order fill rate?

50
45

40 39
Percent of respondents

30
25
23
20 20
20
15
13
10

0
0-90% 90.1-97% 97.1-99% >99%
2003 2006
Source: IBM Institute for Business Value 2006 Value Chain Study.

What the leaders are doing to achieve logistics excellence

Companies continue to strive to improve their logistics execution and
performance to meet profitability and cost containment objectives and,
much more importantly, to deliver “the perfect order” and meet customer
requirements for the right product at the right time for the right price.

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As companies evolve up the supply chain maturity model toward an

on demand supply chain, they develop robust, global logistics capabili-
ties that are variable in structure and cost – logistics networks that are
highly integrated and can fluctuate to accommodate varying customer
demand.
Many of the leaders are implementing the following practices:
• Outsourcing non-core logistical functions to leading third-party
logistics providers
• Integrating end-to-end processes with key service providers and other
supply chain partners
• Keeping a watchful eye on key events and performance criteria
• Managing the logistics network by monitoring events and exceptions.

Success tip:
Achieve superior customer fulfillment (e.g., the perfect order) by restruc-
turing logistics processes from end-to-end to develop a variable network of
partners and cost structure that are responsive to customer service require-
ments.

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Conclusion
The role of the supply chain is changing as it moves from a static, cost-
centric approach to an evolving, integrated model. Organizations are
focusing on the supply chain to help transform their businesses by:
• Altering the way they think, organize and execute
• Looking at business processes horizontally rather than vertically
• Integrating processes within and beyond the enterprise.

Companies are moving toward a dynamic, realtime supply chain model.

This type of on demand supply chain is supported by applica­tions
that enable realtime information visibility both inside and outside the
enterprise. It can respond to changes in market conditions faster than
traditional supply chains can, and it uses information to sense shifts
and redirect resources. An on demand supply chain is adaptable and
can help companies respond rapidly to market opportunities based on
actual demand and market conditions. And responsiveness is the name
of staying in the game.

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Building a roadmap to the innovative supply chain

strategic vision
By Karen Butner
Transformation to an innovative supply chain is a journey and requires
a roadmap, or structured approach, on how to get there. The journey
should begin with a diagnostic assessment of your company’s current
supply chain performance in regard to the various attributes and charac-
teristics of the desired vision, or end state.
The assessment should also determine how your company is positioned
according to the maturity model of leading practices. As a company
matures through the various stages – functional optimization, horizontal
process integration, external collaboration, on demand supply chain
– certain characteristics are evident. A diagnostic assessment will help
you determine where you are on the supply chain maturity model and
help you prioritize initiatives that will have the greatest impact on share-
holder value and return on investment (ROI). Your diagnostic assess-
ment might include the questions shown in Figure 1.
Figure 1. Questions to ask for a diagnostic assessment of your supply chain performance.
Stages and questions to address
Analyze Define Develop Define solution Transform
situation capability gaps vision and roadmap performance
• What are our strategic • What are our supply • What are the trends • Which initiatives • What is the final
goals and objectives? chain capability in our industry? contribute the most solution?
• What is the gaps? • What are our value? • How can we best
performance • Is our organization competitors doing? • What is the business implement to reduce
baseline? structured to best • How should we case for change? risk while optimizing
• How satisfied are our practices? integrate demand and • How ready is the value?
major customers? • Do we collaborate supply management organization for • How will we manage
• What drives our total effectively? in the future? change? the change program?
delivered cost and • What are the • What vision will • How long will it take • How do we
margin? expected benefits? guide all of our and how will we avoid operational
• What are the supply • Do we have the right activities? measure progress? disruption?
chain challenges and infrastructure to • Where should we • What requirements • How do we help
opportunities? deliver expected or focus our activity? will determine fit of ensure business
desired results? • What initiatives may potential solutions? ownership?
we need to invest in? • How do we integrate
our partners?
Analysis Capability gaps Vision Roadmap Transformation
complete defined complete developed executed

Source: IBM Global Business Services analysis, 2006.

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Based on this assessment of your supply chain maturity in regard to

processes, organizational aptitude and enabling technologies, you can
begin to formulate a supply chain vision and strategy. This strategy
should include the following key steps:
• Identify the company’s core supply chain differentiators and capabili-
ties, and assess current performance.
• Determine which functions could be better performed by a partner,
and begin to identify these partners.
• Define the supply chain process components and the needs for orga-
nizational reconstruction.
• Define the measurement framework, which is aligned with business
objectives and goals. Set targets and thresholds for the key supply
chain performance indicators.
• Evaluate the financial and operational value to be achieved in terms
of financial performance and operational performance character-
istics such as cycle time, quality and service level attainment. Use
modeling tools to simulate end-state financial statements and opera-
tional performance criteria.
• Define the realtime information and connectivity vision, including an
open and services-based technology architecture, required to support
the strategic vision.
• Prioritize which initiatives will have the greatest impact on growth,
operational excellence, ROI and shareholder value.

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Figure 2. Steps to formulating a supply chain vision and strategy.

Business Capability Vision Roadmap

Transform
review analysis development definition
• Strategy review • Process mapping • Scenario • Business case Activities vary by initiative
• Business model and analysis development development but likely include:
review • Best practice maturity • Vision development • Change readiness • Program management
• Process framework assessment • Target setting assessment • Change management
development • Application and data • Option analysis • Benefits realization • Benefits realization
• Stakeholder mapping and analysis planning
• Functional • Business design
interviews • Supply chain requirements • Program
• Application blueprint
• Industry trend mapping and analysis definition development
• Application build or
analysis • Synchronization • Solution architecture • Application
configuration
• Customer/channel analysis development and
• Benefits analysis • Testing
analysis • Cost and retirement planning
• Initiative development • Final preparation
• Supplier analysis performance analysis • Project definition
and prioritization
(benchmarks) • Resource planning • Cutover and support
• Competitor analysis
Business Capability Vision and value • PMO establishment
requirements gaps proposition Roadmap Transformation

Source: IBM Global Business Services analysis, 2006.

Transformation requires a roadmap that establishes the steps required to

achieve the vision. Each supply chain component has associated perfor-
mance criteria – both financial (i.e., costs, revenue influence) and opera-
tional (i.e., cycle time, quality, service level attainment). The initiatives
with the greatest business impact, both financially and operationally, can
be prioritized and implemented with speed to bring value to the organi-
zation. A transformation portfolio should be created which focuses on
the prioritized initiatives that will have the greatest business impact the
fastest.
In addition, a new mindset is required for implementing the strategy.
The old model of fixed strategy and long implementation timescales
is dead. In its place, companies are demanding either rapid ROI or
ROI that is self-funding, with a modular approach to implementation,

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often involving pilots followed by scale-up. More scrutiny is also being

placed on benefits delivery and tracking, helping to ensure that benefits
flow through to the bottom line and that multiple supply chain initia-
tives do not double (or worse) account for benefits and overstate the
business case, especially in inventory and process cost reductions. On
demand implementation approaches (e.g., gain sharing, pay-as-you-use)
can provide the impetus to kick-start major transformation programs and
generate the change momentum required to build a longer term vision.
Meeting the challenge of today’s tough market conditions requires
companies to treat their supply chains as a competitive weapon. In doing
so, breakthrough business models must be designed and implemented.
Supply chains must become connected and integrated end-to-end with
suppliers, partners and customers – realtime in constant collaboration.
The supply chain must be able to respond rapidly in a variable and
resilient manner to virtually any opportunities or threats.
Such a supply chain cannot be built overnight but can be developed as the
industry and technology evolve. The transformation has already begun
in several distinct process areas (e.g., leveraged procurement, demand-
supply synchronization) for many companies, and early adopters are
already realizing the benefits.

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How IBM transformed its supply chain into a competitive weapon21

A few months after he took office as IBM’s CEO in 1993, Lou Gerstner set about
transforming IBM’s supply chain. At the time, IBM had 30 different supply chains
and spent nearly US$45 billion on them yearly. Instead of maintaining the traditional
view of the supply chain as just a cost of doing business – the unglamorous work
of negotiating contracts, procuring parts, getting them to the people who make the
products, then shipping the products to clients – he wanted to turn the supply chain
into a front-line competitive weapon that would be better able to respond to market
fluctuations and add value to the company.
To accomplish this, IBM had to not only dramatically improve operations but also
make its supply chain accountable to the business by applying a fundamentally
different set of expectations of the benefits it can deliver. The goal was to revolu-
tionize the very concept of a supply chain.
While parts of the transformation began in procurement in 1994, it wasn’t until
January 2002 that IBM officially launched its Integrated Supply Chain division with
19,000 employees in 56 countries. This division combined the 30 supply chains into
one globally integrated function that continues to evolve.
IBM’s supply chain transformation required a radical re-engineering of our processes
and systems across the company. The first step required us to create a common
framework for configuring solutions and to enforce it through a governance model.
The idea was to have the Integrated Supply Chain touch every part of IBM and play
an active role in aligning and integrating the company horizontally.
IBM formed three diverse teams to manage issues cross-functionally in the areas of
operations, strategy and talent development. Our management approach is helping
us make better decisions faster and fostering collaboration across the supply chain.
And we’re reinforcing it with changes we have made to our performance measure-
ment system, adding new metrics that tie the entire supply chain together with
common goals and objectives, such as improvements in customer service or cash
generated. Thanks to the adjustments we have made to both our management and
measurement systems, we are gaining more visibility into exactly how the supply
chain is operating and how IBM is responding to client needs.

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By now, there is no doubt that a supply chain like the one we are building is, and will
continue to be, a driving force in the business, and we have the proof:
• IBM’s Integrated Supply Chain has improved productivity by US$3-$5 billion a
year every year for the last five years.
• At the end of 2004, the Integrated Supply Chain reduced IBM's inventory to its
lowest levels in 30 years (in 2003 it reached the lowest level in 20 years).
• The 4Q2005 was the best quarterly turns performance in over five years.
• By speeding inventory turns and improving client collections and supplier
payment terms, IBM’s supply chain efforts generated millions in cash to the
bottom line in 2005.
• IBM's supply chain transformation efforts have reduced the amount of time the
sales force spends on activities like checking order status, proposal generation
and contracts by 25 percent. As a result, they are spending 38 percent more
time with clients.
• We have cut the time to process a purchase order from a month to less than a
day, which has resulted in significant savings. And thanks to ongoing automation,
99 percent of purchase orders are now processed electronically.
• In 2005, IBM’s Integrated Supply Chain improved overall client satisfaction by 1
percent on delivery satisfaction, which potentially equates to millions of dollars
of revenue in future sales.
Our supply chain transformation is not complete yet, but we have laid a solid founda-
tion that is continuing to evolve as IBM moves from a hardware-based business to a
services-based business. We also decided to share our supply chain transformation
experience externally, so in June 2005 we formed the world’s first Supply Chain
Business Transformation Outsourcing Services business, with 8,000 consultants
and 15,000 Integrated Supply Chain employees. Initial offerings focus on procure-
ment, logistics outsourcing and supply chain optimization. Today, IBM is successfully
managing outsourcing and/or logistics for several large companies and government
organizations.

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Executive interview
Ramin Eivaz, Vice President of Strategic Planning and
Demand Chain Management, Kimberly-Clark Corporation

Kimberly-Clark and its well-known global brands are an indispensable part

of life for people in more than 150 countries. Every day, 1.3 billion people-
nearly a quarter of the world’s population-trust Kimberly-Clark brands and
the solutions they provide to enhance their health, hygiene and well-being.
With brands such as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend,
Kimberly-Clark holds the No. 1 or No. 2 share position in more than 80
countries. 1
This interview with Ramin Eivaz, Vice President of Strategic Planning and
Demand Chain Management, Kimberly-Clark Corporation spotlights the
company’s supply chain strategy and how they are addressing challenges
such as integration and globalization.

IBM: What has been the biggest challenge in crafting Kimberly-Clark’s

supply chain strategy?
Ramin Eivaz: I think for us it was changing our mindset from a “push”
supply chain model to one that is truly demand based and very customer
responsive. Historically, everything from our manufacturing footprint
and equipment design to our key performance indicators and score-
cards was designed with a cost/capacity utilization mentality. We made
the most out of manufacturing and manufacturing efficiency and then
optimized our distribution network. We are now making a 180-degree
turn to create a supply network that is customer focused and demand
responsive.

1
http://www.kimberly-clark.com.

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“Now we feel there is an even bigger opportunity

for us to differentiate ourselves by delivering better
customer services and value-added capabilities
through our supply network.”

IBM: What specifically prompted this shift in thinking?

Ramin Eivaz: We realized that although we were cost-competitive and
deemed a strong supplier, we were not being viewed by our customers as
an indispensable partner. Although, our customers viewed us as a good
supplier, it was clear that there was an opportunity to be more innovative
and flexible. Consequently, we took a hard look at ourselves, talked with
our customers, internal teams and suppliers and conducted a lot of external
benchmarking in order to identify strategic areas of opportunity.
As we developed our broader strategies to drive our company forward,
we concluded that our supply chain was critical to supporting our vision
while creating and sustaining an advantaged status. We believe our
supply chain has historically given us an advantage in collaborating and
engaging with customers in certain areas but not in all the fundamental
areas. When the fundamentals of supply chains are not working, it’s hard
to have any meaningful engagement with customers.
Now we feel there is an even bigger opportunity for us to differentiate
ourselves by delivering better customer services and value-added capa-
bilities through our supply network. If we start from the shelf and work
our way back to our suppliers, I believe that not only can we improve
our current level of efficiency but also enhance current service levels
well beyond anything we have achieved to date.

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IBM: So for you, supply chain is about more than just efficiency.
Ramin Eivaz: Absolutely. Efficiency is simply the entrance fee. So
you are efficient, so what? Many organizations out there are efficient.
Efficiency is not what will differentiate us from our competition – it is
everything else about our supply chain that will distinguish us.
Our senior management remains focused on efficiency but is placing
greater attention on making sure we deliver against our customer’s expec-
tations. We truly appreciate and value supply chain’s role in enabling
growth and enhancing our relationship with our retail customers. If the
basics are in place, we can move on to more productive discussions on
key growth opportunities.
A lot of our work with customers requires supply chain innovation
even if it’s just to change the configuration of the delivery, pallet or
package. Instead of leaving supply chain out of the equation, we are
taking advantage of it heavily with our customers – and as our customers
recognize our abilities in supply chain, it creates a halo effect for us.
Supply chain is clearly a component of our differentiation strategy.
IBM: Can you give us an example of how you’re using supply chain as
a differentiator?
Ramin Eivaz: We’re seeing our customers becoming increasingly
sensitive to the level of capital investments and inventory. We have
customers whose business model is designed around maintaining
inventory and service levels and others that are focused on managing
high velocity flow. We’re looking at ways we can adapt our supply chain
so that we generate better flow through our manufacturing process and
to our customers’ shelves and reduce working capital.
At the same time, we’re able to be much more responsive to changing
needs or unique customer demands. We recognize that our customers
have different expectations of our supply chain that invalidate a “one-
size-fits-all” supply chain strategy. We must be different things to

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“We’re looking at ways we can adapt our supply

chain so that we generate better flow through
our manufacturing process and to our customers’
shelves and reduce working capital.“

different customers, and our supply chain plays a critical role in achieving
this differentiation. Additionally, diversity of product portfolio is also
increasing the need to develop a hybrid supply chain network.
IBM: Can you tell us more about your vision of a hybrid supply chain
network?
Ramin Eivaz: Everything that happens at the consumer and customer
level has a ripple effect throughout the supply chain. As consumers and
customers are changing and fragmenting in their needs and preferences,
we must also be changing our product portfolio and offerings to meet
those needs.
While we’ve been innovating and streamlining our current supply
chain model, we’ve also been expanding our portfolio to include
products and channels with different characteristics (e.g., smaller form
factors, broader product portfolio) which might require a different type
of supply chain to handle them. Having products with very different
manufacturing and handling characteristics amplifies the need for
a hybrid approach to a supply network as opposed to a traditional,
single-dimensional model. And if you’re trying to maintain a leader-
ship position or to get your supply chain to the next level, a hybrid
strategy and approach will be key.

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IBM: What are the greatest challenges you see in developing hybrid
supply network?
Ramin Eivaz: If you’re going to use your supply chain as a differen-
tiator, you need to create and share information and performance metrics
to a much higher degree. This means your systems and infrastructure
must be able to accommodate that. Not everybody will want to have the
same set of metrics or targets.
In order to do this effectively you need to collaborate with your retail
partners to understand their unique needs and be able to integrate and/or
harmonize your network and systems with theirs. Making sure systems
are integrated and capable of managing a diverse set of capabilities and
metrics is one of the key challenges that must be addressed. Additionally,
your footprint, equipment capability, suppliers and distribution network
need to be able to respond to that information in a way that creates value
and not only meets but anticipates customer and consumer needs.
IBM: So synchronization of information is a critical factor?
Ramin Eivaz: Yes, it is a very critical factor, although I call it “trans-
parency of information” across the supply chain. It includes both the
accuracy of basic data through data synchronization and visibility of the
activities that are taking place.
We’ve learned that it is critical for the transparency of information to
extend beyond our four walls all the way down to the shelf. We have
done a lot of work on data synchronization and data integration with
retailers over the last five years and are one of the leaders in this area.
When you start thinking about all of this data, whether it’s POS (Point
of Sale) data or RFID (Radio Frequency Identification), it plays a major
role in developing our supply chain network. Good data is critical if we
are going to make sure our systems are transparent and synchronized
and don’t have artificial barriers or time lag.

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“We’ve learned that it is critical for the trans-

parency of information to extend beyond our
four walls all the way down to the shelf.“

IBM: And how is this integration progressing?

Ramin Eivaz: Our industry is still a ways away from true integra-
tion of trading partners. Right now, you still have handoffs; at best you
have linkages and connections but not true integration. Whether you’re
talking about demand planning, inventory management or any other
area, you still have multiple systems with point-to-point connections
making multiple handoffs.
This raises a series of challenges around data standards and systems
standards. While a lot of the manufacturers have integrated their enter-
prise systems on SAP platforms, they have customized them to such a
degree that the data architecture isn’t the same. From a retail standpoint,
it is still a very fragmented environment.
IBM: Any thoughts on what can be done to accelerate the efforts?
Ramin Eivaz: Part of the challenge is that while supply chain can be a
differentiator, many key components of it do not need to be customized.
Standardization from a data exchange standpoint is far more important
and advantageous than having proprietary data or a proprietary system
architecture. In many cases, the benefits of standardization outweigh the
benefits of differentiation.
With data in particular, the structure becomes complex very quickly if
standards are not followed. As an industry, we just are not there yet.
As for accelerating the integration efforts, unfortunately, the exchanges
have been slow in delivering against the vision that was set forth.

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IBM: Finally, what are your thoughts on globalization and how it affects
Kimberly-Clark from a supplier and retailer point of view?
Ramin Eivaz: I see globalization as much more of a factor on the
sourcing and manufacturing side of the supply chain today. As you look
at how the supply chain is evolving, it’s fascinating to see it transform
on one end to become so globalized, while on the other end it is getting
more localized. This reflects the world of extremes that we are operating
in. As retailers become truly global and expect the same service and
services throughout the world, we recognize that Kimberly-Clark must
have consistent supply chain capabilities in each region we do business
in to meet those expectations.

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Executive interview
Linda Cantwell, Vice President, Supply Chain Manage-
ment Operations, IBM Integrated Operations

The IBM Integrated Supply Chain (ISC) comprises 19,000 employees in 56

countries. These employees are responsible for building a very advanced
and cost-effective on demand supply chain to enable IBM to gain market
share, grow revenue and profit, improve cash flow, and enhance customer
satisfaction. In 2005, the ISC generated US$580 million in cash for the
IBM Corporation, while it reduced costs by US$6 billion and improved sales
productivity by 25 percent.B
Linda Cantwell, Vice President, Supply Chain Management Operations, IBM
Integrated Operations, talks about the strategic direction and challenges
facing the ISC.

IBM: Have you witnessed any increase in boardroom involvement with

respect to supply chain issues?
Linda Cantwell: Yes. When we formed the integrated supply chain back
in 2002, one of the first real proof points that we were coming together
as an organization more than in name only was specifically “having a
seat at the table.” It was truly the first time from an IBM perspective that
supply chain was elevated to discussion at the chairman’s level.
Initially, what we did was to join the organization together and centralize
it; but it truly became real when we had to bring forward our business
results as a consolidated, integrated supply chain organization. Having
to report metrics that were meaningful and relevant to the overall
company’s operations was a new way of thinking for us.

1
IBM Global Business Services analysis, 2006.

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Making these measurements visible had two effects. Number one was
that it forced us to come together as a team, because we were bringing our
metrics forward into one integrated report card. The second impact was
more of a corporate cultural one. IBM Chairman & CEO Sam Palmisano
was now talking about how supply chain management affected the prior
quarter’s results. He also started making comments publicly about
how supply chain was helping our company’s performance, which is
something that we as supply chain professionals had never heard stated
at that level nor in that way before.
IBM: Who is really involved in developing the supply chain strategy?
Linda Cantwell: When we first started we had an innovative twist on
supply chain strategy because, while the initial development was done
at the senior leadership level, the deployment was done quite differ-
ently. The strategy initially was defined by Bob Moffat, IBM Senior
Vice President, and his direct reports along with a few other leaders who
pulled it all together and packaged it as a comprehensive report. But Bob
realized that he somehow had to make it real – make it resonate with our
employees at all levels. We didn’t need another “white paper.” What we
needed was 19,000 people operating as one team.
So we embarked on an ISC strategy “champions” project. We received
nominations from the worldwide leadership team of key employees from
around the world who were considered top talent and future leaders. We
joined them together as a team of champions and brought them in to
review, challenge and influence the strategy document. We motivated
them to understand it fully by telling them that they would be the leaders
driving the deployment and education. They then led a global rollout,
setting up and leading education sessions that were very well received
because the strategy was real – not a document, not a Webcast, but truly
a set of principles supported by strategic initiatives. Our people under-
stood the strategic direction and their place in our future. Since that

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“We continually ask ourselves, ‘What’s the next

improvement leap now that we’ve got this supply
chain running very effectively as an integrated on
demand operation?’”

time there is a disciplined strategic planning process driven by a senior

leader with cross-functional participation that updates the strategy and
supporting initiatives annually.
IBM: Do you look to any other companies or organizations for best
practices in supply chain?
Linda Cantwell: We’re constantly monitoring other companies’
practices. In earlier years, each functional unit determined whether to
benchmark others formally and to what extent. Recently, we became
more serious about benchmarking more consistently across all of our
functional areas.
IBM: What would you say is the company’s biggest success with regard
to improving the supply chain?
Linda Cantwell: I would say it has been our ability to drive to the on
demand supply chain – to really put ourselves in the position where
the supply chain responds in a more cohesive and consistent way to
market conditions. In our early days of being an integrated organiza-
tion, we saw improvements in collaboration and partnering across the
supply chain functions when reacting to some type of pressure, such as
unplanned orders or extreme weather conditions. There are great stories
about our “quarter-end heroics” – brute force and lots of manual inter-
vention. As we became more sophisticated and really put the on demand
agenda in play, we positioned ourselves to be much more predictive in
our responses to late information or natural events.We communicate
through technology and manage complex situations more seamlessly.

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Each advance brings the challenge of how we take our supply chain to
the next level. We continually ask ourselves, “What’s the next improve-
ment leap now that we’ve got this supply chain running very effectively
as an integrated, on demand operation?”
IBM: Would you say cost control is still the primary supply chain
concern, or do you think other issues like profitability or customer
responsiveness may be more dominant?
Linda Cantwell: The latter. I think that cost control is the price of
entry and is fundamental for the supply chain. But in our business now,
our supply chain priorities are focused on driving sustained business
improvement in the areas that are most important, such as client satisfac-
tion and shareholder value.
IBM: How has collaboration of your supply chain with your suppliers,
partners and customers impacted your business?
Linda Cantwell: We’ve had to become nearly totally reliant on the
collaborative side of the supply chain relationship model, as we have
chosen to drive a variable supply chain. In moving ourselves to the on
demand model, we had to lessen our dependency on the physical asset-
based infrastructure that we had worldwide. So, by definition, we put
ourselves in the position where we had a huge dependency on partners.
For example, once we decided it no longer made any sense to have
our own warehouses, distribution facilities and our own local ways of
moving products around, we had to go out and secure the best global
partners we could find and then put high trust and reliance on them.
While you wouldn’t want to place total control in your partners’ hands,
you do need to figure out where that balance point is. The supplier
consolidation activities we performed were part of making a deliberate
choice to have a set of trusted partners. We did experience some initial
missteps, as we sometimes gave away too much control or didn’t set up

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“We have to operate as a globally integrated

company since we have supply chain relationships
in virtually every country in the world.”

the right kind of metrics. At this point in our on demand journey, I would
say that we have the supplier collaboration model right, and we depend
on it every day.
We decided a long time ago to be very open with our suppliers and to
share critical supply chain information. We are honest with each other
and know what our common goals are. It may sound simple, but there’s
a lot of corporate culture change that’s required to make that happen.
We find that our suppliers are looking to prove that they have the capa-
bilities to step up and do even more to bring value to IBM. It’s a very
good lesson – what we have learned from our suppliers makes us a better
supplier ourselves.
IBM: To what extent has globalization affected your supply chain? For
example, are you sourcing materials globally in particular regions, or
are you doing any manufacturing in low-cost jurisdictions?
Linda Cantwell: We’ve embraced IBM’s global footprint in a big way.
We approach the world as our global market, and it’s not just about low-
cost labor. Where many people look at globalization and offshoring as
the same thing, we see them as entirely different business models. We
have to operate as a globally integrated company since we have supply
chain relationships in virtually every country in the world.
For example, where in the world is the best talent? Where in the world
are the most effective manufacturing capabilities? As a global company
and a sophisticated supply chain operation, we study the marketplace and
decide for IBM where we’re going to operate for optimum effectiveness.

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We very much try to factor in the implications of, say, moving manu-
facturing operations to another region and look at all of the complexi-
ties, such as what it does to your cycle times, customs operations and
logistics model. We must be able to evaluate the different factors and
assess the total cost of available alternatives.
In fact, we are now applying these supply chain lessons to other parts
of the IBM organization – thinking about things like shared services
models and centrally operated global business centers. We are choosing
to invest in countries with emerging economies and big appetites for the
solutions that IBM has to offer. Gaining market access in parts of the
world that have been traditionally out of our reach is part of the decision
criteria of choosing where we operate.
IBM: What supply chain issues and challenges do you foresee either
coming on board or continuing over the next three to five years?
Linda Cantwell: One issue, unfortunately, is the continued focus on
unplanned global events, such as terrorism or natural disasters, and what
those have done to change the dynamic of the supply chain. Supply
chain security is something that we as an industry paid little attention
to not too long ago, and it is now core and central for the business.
We have had to step up and build more sophistication into what we’re
doing about issues like pandemic planning, where our company is trying
to approach the challenge in one organized multifaceted way so we’re
ready to address those types of crises should they come upon us.
There are also issues like port congestion and insufficient infrastruc-
ture, realities of the global marketplace. It’s interesting to me that in
some cases, we’re basically contributing to new problems as we’re
addressing others.

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“...our supply chain success has largely been driven

by a corporate cultural transformation.”

Another ongoing challenge is talent. The traditional supply chain talent

that served us well for a long, long time was built around manufacturing
– professionals doing a great job, from development through reverse
logistics. However, it’s not just the product supply chain that we’re
operating anymore – we are now a solutions and services supply chain.
One of the biggest components of our supply chain is labor. How are
we positioning our supply chain professionals of the future with more
training and skills and enabling them with new technology that the tradi-
tional supply chain professional of the past didn’t have to worry about?
This problem statement leads us to the partnerships that we’ve struck
with universities worldwide in trying to get that win/win – our getting
their best supply chain talent and influencing their curriculum develop-
ment on new supply chain challenges.
If we’re still teaching students that supply chain is about factories and
parts, warehouses and trailers, then we’re short-changing them and
only telling them half the story. The supply chain that they’re going to
enter post-graduation looks a little bit like that but a whole lot more like
something else – a complicated global business enabled by sophisticated
technologies.

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IBM: Do you feel there is a company that you think is doing something
really innovative in their supply chain?
Linda Cantwell: Cisco stands out to me. At IBM, we have a multifac-
eted relationship with Cisco – as an alliance partner, a supplier and a
customer. In terms of looking at where we might help them in supply
chain challenges, we’ve found them very sophisticated in their own
right, and they have some lessons to teach us about aspects of their
supply chain that they’re operating particularly well.
IBM: Any closing comments?
Linda Cantwell: The main message I’d like to drive home is that our
supply chain success has largely been driven by a corporate cultural trans-
formation. Without corporate culture change, the rest of it doesn’t really
matter – it won’t be sustainable. We are focused on making our people
truly proud to be supply chain professionals. We’re trying to drive a strong
supply chain community which is, of course, an ongoing journey.

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 2
C H A P T E R

Innovation, the perfect product

launch and lifecycle management
Introduction
By Mark Wilterding

“Innovation is the application of invention and fusion of

new developments and new approaches.”
– Nick Donofrio, IBM Senior Vice President of Innovation

Chapter 2, “Innovation, the perfect product launch and lifecycle manage-

ment,” explores the emerging trends, key components and case studies
of the perfect product launch and lifecycle management. Each article
and case study in this chapter illustrate why the era of innovation is
expanding the definition of the perfect product launch and some of
its key process components like design commonality and component
reuse. We hope that these topics become the impetus for publishing and
sharing new examples and insights to help everyone who is engaged in
the business of innovation, to innovate more effectively.
As a leading global high technology engineering and manufacturing
company, IBM has concluded that corporate activities associated with
product innovation are the sum total of the work performed by an ever-
changing and virtual collaborative network. This network includes
companies, research institutions and individuals who work together to
produce and launch virtually any line of business product and offering,
ranging from servers to software to services.

85

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Put in the context of the era of innovation, the perfect product launch and
lifecycle management are becoming viewed in a different and expanded
way. Traditionally, determination of a successful product launch
revolved around proving whether the best integrated product design
(IPD) or the integrated supply chain management (ISCM) should take
credit. Michael Burket t of AMR Research wrote in his article, “Perfect
Product Launch”: “Supply chain professional and design engineers have
clashed for years over the challenge of delivering innovative products
in sufficient volumes – and at a price and lead time that the market will
accept.”22 Furthermore, success of these product launches was based
on traditional measurements such as return on investment (ROI), Key
Performance Indicators (KPI) yield, time to market and market share.
With the advent of the era of innovation, the definition and measurements
of success are changing from the chicken-egg argument of the relative
contribution of the engineering (Engineering Bill of Materials) or supply
chain (Manufacturing Bill of Materials) domains. Up until 2005, only a
very small number of companies had begun to integrate IPD with ISCM.
Even a smaller number of companies, such as IBM, have experienced
and measured the results of launching an integrated product plan and
supply chain management product plan through an innovative collab-
orative network of partners. What is emerging is that the new redefined
measures of success must take into account three primary component
drivers of the era of innovation:
1. Leadership and culture
2. Collaboration and partnering
3. Integration of business and technology.

This chapter provides examples and proof points of the perfect product
launch. In the coming years, as integrated efforts through collaborative
networks become more common, we expect there will be hundreds upon
hundreds of examples of perfect product launches from virtually every
industry and geography.

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The perfect product launch: Innovation drives growth

in the consumer products industry
By Karen Butner and Mark Wilterding
You know the story: Consumer products manufacturers are under
increased pressure to grow revenues and improve operating efficiency.
Challenges in meeting growth targets include changes in consumer
demographics, increased competition in a mature market, increased
spending on services, the rise of private labels and the low success rate
of new brands.

The era of innovation

Enter the era of innovation. It is pervasive. It is influencing the way
companies think about virtually every aspect of research, marketing
product development, supplier and materials management, manufac-
turing, distribution, warranty and defect management, maintenance
repair and overhaul, and product end-of-life and disposal.
Innovation is global. Innovation knows no boundaries. Its growth is
being nurtured by active investments, grants and tax incentive policies of
both established, industrialized nations and emerging economies. Placed
in the context of the era of innovation, the “perfect product launch” and
lifecycle management are now viewed in a different and expanded way.
Innovation in products, services and markets commands top attention
from CEOs, who recognize that sustainable growth requires several
different types of innovation. According to the IBM Global CEO Study
2006: Expanding the Innovation Horizon, CEOs are allocating their
innovation emphasis accordingly:
• Products/services/markets: 42 percent
• Operations: 30 percent
• Business models: 28 percent.23

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One of the greatest opportunities for revenue growth is through new

products and services, new markets and customer intimacy. According
to the CEO study, products/services/markets innovators maintain a 1.2
percent higher operating margin than their competitors. Outperforming
products/services/markets innovators exploit current offerings and use
electronic channels to improve reach and penetrate new markets.24
The perfect product launch involves managing the development and
support of complex products and services throughout the entire lifecycle
from product design to product build to post-sale service. It includes the
integration of traditional new product introduction (product innovation,
design and collaboration) with sourcing and procurement, supply chain
planning and execution, and service.

Benefits of being first to market

The importance of being first to market is discussed extensively in
various sources. In addition to the instinctive idea that it is best to be
first, other measurable benefits are possible for those who get to the
market sooner with innovative products and services (see Figure 1).
These benefits include:
• Increased sales through longer sales life – The earlier the product
reaches the market relative to the competition, the longer its life can be.
• Increased margins – The more innovative the product (that is, the
longer it remains on the market with little or no competition), the
longer consumers will pay a premium purchase price.
• Increased product loyalty – Getting the first opportunity to attract
customers, especially early adopters, offers an advantage in terms of
customer loyalty; customers will most likely upgrade, customize or
purchase companion products.
• More resale opportunities – For components, commodities or products
that other companies can private-label, being first to market can often
help ensure sales in other channels.

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• Greater market responsiveness – The faster that companies can bring

products that satisfy new or changing customer needs to market, the
greater the opportunity to capitalize on those products for margin lift
and to increase brand recognition.
• A sustained leadership position – Unlike best-selling, fastest or other
superlative market positions, first is the only market position a compet-
itor cannot claim – only one company can be first. And repeated firsts
establish companies as innovators and leaders in the market.

Figure 1. The value of time-to-market.

Increased
services
revenues
Increased $
profitability
$
$
Faster time
to market Larger market share
Profit
$

Loss Time

Cost reduction

Source: IBM Global Business Services analysis, 2006.

Clearly, quick product introduction is a competitive differentiator.

Accelerating time to market supports achievement of almost every
primary design, sales and marketing goal a company has (or should
have) in today’s increasingly competitive, increasingly global market-
place. The challenge facing virtually every manufacturing organiza-
tion today is to continually accelerate time to market while reducing
development costs.

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Product introduction is the only source of long-term competitive

advantage. Companies with fast and efficient product introduction
processes who provide customers with the products and services they
demand will win over competitors who are slow to react to market
changes and advances in product and process technology.
High-performing companies – those that generated annual total share-
holder return in excess of 37 percent and have also experienced consis-
tent revenue growth over the last 5 years – averaged 61 percent of their
sales from successful launches of new products and services. Further-
more, companies that generated 80 percent of their revenue growth from
new products typically doubled their market capitalization in a 5-year
period.25 We believe these positive results will continue to be realized
when traditional leadership and cultural styles are replaced by new
leaders who foster a culture of networked professionals who share the
objective of realizing the combined and individual positive return on
their participation in the product launch.

New product innovation success rates down

Ironically, as companies rely increasingly on new products and services
to meet growth targets, new product innovation success rates have been
historically low. A significant proportion of companies miss product
launch schedules; according to IBM’s 2006 Value Chain Study, on-time
rates are down 8 percent from 2003, and on-budget rates are down 7
percent over the same time period.26
One of the primary reasons for product launch failure is poorly defined
customer needs. Another is the lack of a clear business strategy linked to
supply chain objectives and initiatives for go-to-market product launch
and customer service. Insufficient resources – both human and monetary
– and lack of executive-level support are additional reasons for product
launch failures.

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The IBM Global CEO Study 2006 exposed several myths about the
pursuit of innovation:
Myth: Innovation is the responsibility of brand and product managers.
Reality: Innovation must be orchestrated from the top.
Myth: Innovation happens from within – most often generated by product
developers and research groups.
Reality: External collaboration is indispensable.
Myth: Innovation means coming up with new or better products and
services.
Reality: Business model and operations innovation matter.

Revenue growth not necessarily flowing to bottom line

Consumer products companies are facing another challenge: variability
in business growth. One of the reasons for this has been the variation
in consumer per-capita spending. The economic downturn of the late
1990s slowed growth in consumer spending, although there are now
signs of a more healthy turn, with retail trade sales up 6.7 percent above
last year.27
Another reason for variable business growth is the change in consumer
spending patterns. On one hand, consumers are demanding lower prices
for basic goods, and, on the other hand, they are willing to pay premium
prices for products that hold individual value for them. This results in
mega-retailers and premium luxury brands enjoying growth on both
sides of the competitive spectrum while companies in the middle of the
spectrum are facing growth challenges.
The rise in mega-retailer private labels has also contributed to slower
growth for some consumer products companies. Private labels have been
growing twice as fast as consumer products brands, with some variation
across categories, and they currently represent the leading brand in most
product categories.28 As a result, private labels often offer cheaper prices
to consumers and greater margins to retailers, leading to an increase in
their market share.29

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The revenue index for consumer products manufacturers is up 4.4

percent compared to the previous quarter, and it’s even higher (up 7.9
percent) compared to the same period in 2004 (see Figure 2).30 Growth
can be attributed to product innovations, improved product mix,
strategic pricing, customer segmentation and increased sales in emerging
markets.
Figure 2. Consumer products manufacturing industry revenue index.
140

120

100

80
Index

60

40

20

0
4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06

Index Estimates
Source: Witty, Michael, Jay Holman and Jason Spaulding. “CPG Manufacturing Industry Update, 1Q06.” Manufacturing
Insights, an IDC company. Document #M1201026. March 2006.

Consumer products manufacturers are increasingly being pressured

to increase revenues and improve operating efficiency and margins.
Average net profit margins were 8.2 percent – nearly flat compared
with the previous quarter and same period in 2004.31 Meeting revenue
growth and profitability targets has become more difficult due to higher
commodity and energy prices, increased competition in mature markets,
the rise of private labels and the low success rate of new brands.

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Successful innovation: The perfect product launch

Successful innovation has become a key driver for revenue growth,
competitive margins and, in some cases, even survival. The ability to
bring this innovation to market quickly, efficiently and ahead of the
competition is becoming increasingly important.
An efficient product launch requires integration and coordination
among multiple functional areas, including product design, procure-
ment, planning, manufacturing/process, and sales and marketing. In
addition, as organizations increasingly leverage core capabilities of other
companies, this innovation has to be delivered through virtual networks,
working with partners in a collaborative environment to bring product
and services to market faster, smarter and cheaper. Consequently, orga-
nizations now need to integrate not only internally but externally as
well with suppliers and customers. This creates end-to-end supply chain
processes and capabilities that differentiate on product and customer
requirements.

Strategies for success

Launching products and services that best fit customer requirements is
clearly the top strategy for new product development. Lower introduc-
tion costs and first-to-market strategies pale in comparison to bringing
to market innovative products that meet customer wants and needs (see
Figure 3).

Figure 3. What is the primary strategy for your site’s new product development efforts?

Best fit to customer requirements 58

Innovative products 22
Low product/service cost 15
First to market 5
Other 0

0 10 20 30 40 50 60 70
Percent of respondents
Source: IBM Institute for Business Value 2006 Value Chain Study.

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In accordance with the primary strategy, over half of the consumer products
company respondents reported “Correct identification of customer needs”
to be the most significant challenge for new product development efforts,
followed by “Remaining competitive” (see Figure 4).
Figure 4. Most significant management challenges for new product development efforts.

Correct identification of customer needs 58

Remaining competitive 55
Reducing time to market 25
Increasing product innovation 23
Managing project costs 18
Proper allocation of resources 15

0 10 20 30 40 50 60 70
Percent of respondents
Source: IBM Institute for Business Value 2006 Value Chain Study.

It’s all about collaboration

The participants in a new product launch can be members of centralized
or decentralized organizations. They can be employees of multinational
corporations; tier one, two or three suppliers; university departments; or
independent contract engineers. An innovative work product is the result
of the successful design and integration of ever-changing and evolving
professional and technical disciplines. The concepts, specifications,
designs, materials, components, software and processes are sourced
from a variety of interdepartmental, intracompany, interregional, inter-
dependent and collaborative networked relationships.
And it all begins, as it should, with the customer. Study respondents
reported that their most widely implemented practice is “Collaboration
with customers to achieve customer requirements for product specifi-
cations” (99 percent), followed by “Customer product configuration
and specifications for design” (94 percent), as shown in Figure 5. Most
respondents consider these practices effective (100 percent and 91
percent, respectively), and 43 percent even claim collaboration to be
extremely effective.32

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Figure 5. To what extent have the following customer practices been implemented?
Effectiveness
Collaboration with
54 45 1 100%
customers
Customer product
configuration and 44 50 6 91%
specifications
Standardization of 23 58 18 94%
components
Integrated design with 21 50 29 83%
partners
Product commonality 20 49 30 96%
and reuse
Recyclable materials for
11 32 58 76%
components
Lifecycle cost
7 31 62 46%
management

0 10 20 30 40 50 60 70 80 90 100
Percent of respondents

Extensive implementation Some implementation No implementation

Source: IBM Institute for Business Value 2006 Value Chain Study.

Collaboration with customers, suppliers, and other value chain partners

is viewed as having the most significant impact on time-to-market perfor-
mance (see Figure 6). Also related to performance, CEOs who partici-
pated in the IBM Global CEO Study 2006 described a broad spectrum
of benefits from collaboration and partnering to achieve innovation.
Collaboration and partnering reduces costs, increases customer satisfac-
tion, increases revenue and provides access to skills and products (see
Figure 7).

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Figure 6. Most significant impact on reducing product development time-to-market.

5% Other
3% Shift towards
platform products/
services 40% Collaboration
with customers/
24% Reallocation suppliers
of resources to
key products 29% Formal product/
service development
process

Source: IBM Institute for Business Value 2006 Value Chain Study.

Figure 7. Collaboration and partnering benefits cited by CEOs.

Reduced costs
Higher quality/customer satisfaction
Access to skills/products
Increased revenue
Access to markets/customers
Overall speed, strategic flexibility
Reduced risk/capital investment
Faster time to market
Focus and specialization
Fixed to variable costs

0 10 20 30 40 50
Percent of respondents
Source: “Expanding the Innovation Horizon: The Global CEO Study 2006.”
IBM Corporation. March 2006.

Balancing the three success factors: time, cost, lifecycle

Managing costs in product design, development, launch and service is
always top-of-mind with executives. First-to-market strategies are also
critical and often become the competitive differentiator in generating
growth and profit.

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Eighty-five percent of the consumer products participants in the IBM

2006 Value Chain Study identified “Sales or profit contribution” as the
primary measure of success for new product development projects.
An increasing reliance on new products for growth means that more
products are needed in the pipeline, and new products need to be
launched more frequently. As a result, the new product development
process is becoming critical to business success. The IBM 2006 Value
Chain Study also supports this argument by showing that nearly a third
of consumer products companies had more than 20 percent of their
annual sales generated by new products launched within the previous
year (see Figure 8).33
Figure 8. Percentage of sales generated from products launched in the past year.

50 47
Percent of respondents

40

30
22
20 17
14
10

0
0-10% 10.1-20% 20.1-30% >30%
Source: IBM Institute for Business Value 2006 Value Chain Study.

However, delivery adherence-to-plan measures, such as on-time launch

and on-budget launch, indicate room for improvement as a significant
proportion of respondents miss their product development schedule
targets. Similarly, a significant proportion of respondents miss their
product development budget targets (see Figure 9). In both cases, the
trend, based on a comparison to studies in prior years, is toward even
more misses.

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Figure 9. What percentage of new products is launched to market on time/on budget?

What percentage of new products is launched What percentage of new products is launched
to market on time? to market on budget?

40 39 40

Percent of respondents
Percent of respondents

30 30 28 28
25
23
20 19 19 20 19
14
10 10

0 0
0-40% 41-60% 61-80% >80% 0-40% 41-60% 61-80% >90%

Source: IBM Institute for Business Value 2006 Value Chain Study.

For new product variations, there has been a significant improvement

in time-to-market performance. In the past 3 years, consumer products
companies have improved time-to-market by 7 to 8 percent, with 41
percent of new product variations reaching the shelf within 100 days.34
Time to market and the total cost of the product including design,
development and execution, and launch into the market are certainly
two important criteria. But there’s a third, frequently overlooked,
success factor for the perfect product launch: lifecycle management
(see Figure 10).

Figure 10. The three success factors for a perfect product launch.

Time-to-market Total product

cost

Lifecycle
management

Source: IBM Institute for Business Value analysis, 2006.

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It is important to take a holistic view of product/service lifecycle manage-

ment, which includes:
• Quality programs
• Customer service requirements
• Global supply readiness
• Scalability into new markets
• Returns programs and spare parts planning for repairs
• Designs and plans for product variations for subsequent launches.

All of these elements must be integrated within the context of the overall
supply chain processes, from planning to reverse logistics, and among
all significant constituents.
Consumer products companies must reinvent their business models and
processes based on innovation, integration and collaboration to bring
profitable products and services to market on time and on budget. As one
CEO in the IBM Global CEO Study 2006 remarked, “A good business
model, good products and market, and superior operations supplement
each other to form a continuous cycle.” 35

“A good business model, good products and market,

and superior operations supplement each other to
form a continuous cycle.”
– Consumer products company CEO, IBM Global CEO Study 2006

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CONCLUSION
Consumer products executives realize that business performance and
growth are directly related to their ability to bring superior products and
services to market in a cost-effective manner. In this discussion, we have
shown that:
1. High levels of competition, shorter product lifecycles and changing
market conditions intensify pressures on consumer products
companies’ growth.
2. To meet their business targets, consumer products companies need
new ways to deliver value to their customers.
3. Innovation depends on introducing new products and services to
existing markets while expanding into new market channels and
geographies.
4. Reducing time to market is a key success factor.
5. Consumer products companies have not yet significantly improved
their time-to-market and on-budget performance.
6. To help shorten time to market while reducing development costs,
companies should adopt a holistic view of the development process
and involve stakeholders from outside the immediate scope of the
process, such as contract manufacturers, suppliers and other service
providers.
7. Implementation of point solutions aimed at reducing time to market
may achieve only local improvements and may not provide wide-
spread business benefits. New product development objectives and
initiatives must be tied to corporate strategies.
8. One of the most critical strategic initiatives in new product introduc-
tion is acquiring an explicit definition of customers’ requirements in
collaboration and communication with customers – not in an R&D
vacuum.

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9. Use of componentization and standards to develop variations on

products can help companies achieve “faster-to-market” objectives at
lower costs.

The message is clear. The perfect product launch can support business
growth initiatives. It can support innovation for superior products and
services. It can support effective cost management through the integra-
tion of product/service lifecycle management activities with customers,
suppliers and service providers. And, for any organization in any industry
that wants to achieve sustainable growth, the time to achieve the perfect
product launch is now.

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Cost-effective supply chains: Optimizing product devel-

opment through integrated design and sourcing
By Robert McCarthy, Jr.
In today’s global economy, industrial manufacturers face complex
challenges such as fluctuating market conditions, aggressive competi-
tion, pricing pressures and rising costs for raw materials. Against this
backdrop, they must continue to bring new, highly differentiated products
to market – cost-effectively and within compressed timeframes. What
can manufacturers do to optimize the product development process?

Collaboration, reuse and standardization

To solve these challenges, leading manufacturing companies are
deploying next-generation digital design initiatives to reduce product
development costs, improve product quality and speed time to market.
Indeed, digital design technologies and techniques can help design
engineers fully exploit existing investments in knowledge assets and
integrate key suppliers into the product development process – essential
in today’s hyper-competitive marketplace. Best-in-class industrial firms
are embracing core design principles that focus on collaboration, reuse
and standardization to reduce costs and improve performance.

Platform commonality, standardization and design reuse
Reusing existing designs and other knowledge assets can help stream-
line the product development process and, at the same time, significantly
improve product quality by standardizing and reusing proven compo-
nents and assemblies. A formal program of commonality and reuse
can also help reduce direct materials procurement costs, speed time to
market and improve product quality.

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To achieve the full benefits of commonality,

an integrated tools environment must support
business processes.
To further accelerate product development and improve product quality,
it is critical that industrial firms access and leverage the specialized skills
and knowledge available through their strategic suppliers. Managing this
process effectively requires a tight integration between the manufacturer
and the supplier through a collaborative design process and tight linkage
between the design and sourcing processes. This gives manufacturers
the capability to manage product cost and target profitability over the
product design lifecycle.

Integrated design tools environment

Today’s mechanical design, electronic design and supply chain processes
typically operate independently, with their own isolated silos of infor-
mation. To achieve the full benefits of commonality, an integrated tools
environment must support business processes. By extending access to
the product data management environment, firms can share design and
cost information across business units and collaborate with strategic
suppliers to accelerate design and sourcing processes across and beyond
the enterprise.

Design commonality and component standardiza-

tion begin at the product platform architecture
level.

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Defining commonality and reuse initiatives through the

product platform architecture
Design commonality and component standardization begin at the product
platform architecture level. The product platform architecture should
specify the hierarchy of functional components, defining an allowable
set of product options and facilitating innovation and change within a
particular product feature while protecting the integrity of the platform
design. An architecture defined as a hierarchy of building blocks can
help manufacturers simplify creation of the engineering bill of materials
(BOM) and facilitate component standardization and reuse.
Cost information can be integrated into the product hierarchy, giving
design engineers early lifecycle visibility into the total designed cost and
letting them determine whether the product can be built within market-
place cost and time constraints. Indeed, design engineers can evaluate
the impact of design changes on direct materials costs, engineering
design costs and manufacturing costs by allocating target costs to major
building block components. This knowledge provides the incentive
to implement standardization and reuse, which can have a significant
impact on improving product cost and quality.

Standardizing steel grades and thickness has

significantly reduced costs for steel.

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JOHN DEERE: THE BUSINESS impact of standardizing steel

In 2003, John Deere and Company launched an initiative to standardize the

steel used in its product lines. Standardization of steel grades and thickness
has significantly reduced costs for steel. Standardization also helped Deere
avoid production shutdowns in the face of dramatic demand increases for
specialty steel in 2004.
To achieve the benefits of design standardization and reuse, consider the
following principles when defining the product architecture:
• Create a product structure that anticipates change and localizes the
impact of change.
• Leverage product data management tools and decision support tools
to identify standardization and reuse opportunities across component
designs, design processes, tooling and supplier expertise in the design of
purchased components.
• Align engineers according to functional product areas to create centers of
excellence in a specific design discipline.
• Leverage common tools and design processes to improve engineering
efficiency and effectiveness.
• Create governance processes and metrics and deploy tools to identify and
measure the downstream impacts of asset reuse, component standard-
ization and commonality on cost, quality and time to market.

The most efficient way to launch a comprehensive

program of commonality and reuse is to start with
commodity components.

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Executing a comprehensive program of commonality and reuse

Once commonality and reuse initiatives have been defined from the top
down – at the architectural level – industrial firms must implement this
strategy from the bottom up. The most efficient way to launch a compre-
hensive program of commonality and reuse is to start with commodity
components.
Standardizing the design specifications for common components such as
sheet metal, fasteners and electrical and electronic parts can help firms
capture substantial cost savings and set the stage to standardize and
reuse more complex components. Standardization also spurs successive,
associated benefits such as:
• Standardization and reuse create opportunities to aggregate spend
with a smaller number of suppliers
• Increased spend volume provides greater leverage with suppliers
• Higher purchase volumes allow buyers to negotiate lower prices and
achieve greater assurance that critical components will be available in
the quantities required.

Similar benefits can be achieved for design compo-

nents, purchased assemblies, and tooling, plant
and equipment.

Similar benefits can be achieved for designed components, purchased

assemblies, and tooling, plant and equipment. A consistent product archi-
tecture – supported by common design processes and metrics – provides
the foundation for “design anywhere, build anywhere” capabilities and
facilitates global sourcing. By creating better visibility into component
design requirements, the product platform architecture and current
business needs, industrial firms can optimize aggregated component
and equipment purchasing requirements and negotiate cost reduc-
tions for strategic components and assemblies, and other asset classes.

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These assets can include:

• Production assets such as plant automation, machine tools, jigs and
fixtures, material handling equipment and test equipment as well as
intangible assets such as manufacturing processes, training materials
and quality programs
• Purchased components including assemblies, engineered components,
electronics and embedded software, raw materials and commodity
components
• Processes spanning product development, product verification and
testing, and after-sale service and support processes
• Knowledge assets including computer-aided design (CAD) informa-
tion about products and components as well as the core knowledge of
how to design, manufacture and sell products and how to manage the
supplier population.

IBM has developed deep expertise in planning and

deploying commonality and reuse initiatives.

Key enablers: Strategy and process

Although most executives have an intuitive understanding that common-
ality and reuse strategies are critical to business effectiveness, creating a
comprehensive program to drive product commonality, standardization
and asset reuse can be a daunting task. Our experience with large indus-
trial customers and our own internal computer design practice has led
IBM to develop deep expertise in planning and deploying commonality
and reuse initiatives. Indeed, we have identified a set of key business
processes that must be deployed to create a comprehensive program
for platform commonality and reuse. These processes include portfolio
planning, design for commonality and reuse, integrated design and
sourcing tools, closed loop product design and sourcing, and total cost
management.

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Portfolio planning
Through portfolio planning, a company can acquire a detailed under-
standing of its customers’ wants and needs. It can then translate this
understanding into a set of high-level design requirements for product
platforms and for the development of product models from the product
platform. As part of the portfolio planning process, it is important to
define and organize the product architecture into a hierarchy of “common
building blocks” (see Figure 1). This enables simplified “as designed”
and “as built” BOM structures and creates downstream opportunities for
component standardization and asset reuse. The output from the portfolio
planning process should be a precise definition of the target market and
customer requirements, the platform architecture and product model
specifications, the product financial targets and a product development
roadmap.

Figure 1. The portfolio planning process.

Portfolio planning process

Product management data

Market information Segment performance data
Develop Manage
Customer input Align and
Understand Perform Perform market market
optimize
the market portfolio segment segment
Competitive input business
marketplace segmentation analysis strategy and and assess
plans
plan performance
Cost information

Source: IBM Global Business Services analysis, 2006.

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The portfolio planning process defines the product

architecture and creates design parameters and
targets for the product set.

Design for commonality and reuse

The portfolio planning process defines the product architecture and
creates design parameters and targets for the product set. The design
process translates these requirements into an engineering BOM and
product design specifications. The engineering BOM is then converted
into a set of manufacturing BOMs that specify how the product will
be built at each individual manufacturing site. By leveraging design
and sourcing tools and motivating design engineers to reuse assets, the
business can significantly improve the efficiency and effectiveness of
the product development process and achieve structural product cost
reductions. While it takes time to deploy tools and processes that enable
commonality and reuse and to stimulate design engineers to reuse
existing assets, the anticipated net result is a leaner and more effective
product development process that enables manufacturers to “design
anywhere, build anywhere” within the enterprise.

Integrated design and sourcing tools

An effective program of commonality and reuse cannot be achieved
without an integrated design tools environment that links design, procure-
ment and manufacturing. IBM is working closely with IBM Business
Partners to create the data standards and functional requirements that
will result in a flexible, interoperable design tools environment. IBM
has created a Product Development Component Reference Model that
leverages IBM middleware and the Websphere® Integration Framework

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to enable the integration of software tools from multiple vendors in the

following areas:
• Mechanical CAD tools
• Electronic CAD tools
• Software design tools
• Computer aided manufacturing design tools
• Knowledge management tools
• Configuration management tools
• Design analytics
• Cost management tools.

It is critical that design tools portfolio and

supplier management tools become more tightly
integrated.

Closed loop product design and sourcing

The newest generation of design tools makes it possible to design
products and identify opportunities for component standardization and
reuse. However, while design tools are becoming more effective at iden-
tifying components that could be reused, they have not yet evolved to
provide decision support capabilities that will empower design engineers
to determine if component designs should be reused. This decision
depends on an understanding of component costs, an assessment of
whether performance must be enhanced to meet customer requirements
and a determination as to whether the component can properly address
safety, quality or regulatory requirements.
It is critical, then, that design tools portfolio and supplier management
tools become more tightly integrated. Integrating design information
and product cost information into a wholly aligned design collabora-
tion and sourcing environment creates a closed loop product design and
sourcing environment. This allows design engineers to evaluate the cost
and feasibility of alternate design strategies and makes it possible to
monitor the product’s actual cost versus target cost so program managers

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can modify component design specifications to achieve cost, quality and

customer value targets set during the portfolio planning process.

A closed loop design and sourcing environment

can serve as the foundation for managing the
product development lifecycle against target costs.

Total cost management

A closed loop design and sourcing environment can serve as the foun-
dation for managing the product development lifecycle against target
costs. On a more granular level, a system of total cost management
allows design engineers and executives to extract product costs from
the product selling price and required gross margins in order to calculate
the financial impact of design alternatives (see Figure 2). Indeed, cost
modeling can help manufacturers accurately predict total landed product
costs, design costs and manufacturing-related costs. Then they can set
appropriate cost targets and optimize product content at each stage of the
product design cycle.

The common building block process: Inside IBM

In response to a highly dynamic IT marketplace, IBM has defined a reference
architecture for each of its product lines, categorized by major market
segments. At the highest level, this architecture defines the target market,
the competition, and the life span of the product platform as well as the
value of price versus computing capacity. On a more granular level, the plan
defines functional capabilities of the models within the product line and traces
the upgrade path. At the design stage, engineers carefully isolate product
functionality and define standard interfaces among subsystems – demon-
strating the ability to enhance performance and capacity without compre-
hensive component replacement. IBM maintains a library of reusable product
design templates and a searchable catalog of components designed within
the guidelines of the common reference architecture. IBM also supports an
up-to-date catalog of available components from approved vendors.

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Figure 2. Sample hierarchical product structure.

F5E Platform
Manufacturer selling price: $18,000 base model
$27,000 high end model
Target gross profit 12%
Target platform cost: $16,000

Model A Model B F5E3 Platform

Manufacturer selling price: $25,000 base model
Target gross profit 18%
Target platform cost: $20,700
Engineering cost: $2,100
Manufacturing cost: $6,500
Tooling cost: $3,600
Component cost: $8,500

Assembled chassis Welded unibody Engine Assembled interior

Target cost: $2,100 Target cost: $640 Target cost: $1,400 Target cost: $4,250

Front suspension Rear suspension Frame Dashboard Seating

Target cost: $640 Target cost: $550 Target cost: $360 subassembly subassembly
Quoted cost: $1,080 Quoted cost: $350
LF brake assembly Engine mount
Quoted cost: $32.50 Quoted cost:
$1.85
Source: IBM Global Business Services analysis, 2006.
Note: Figures are in U.S. dollars.

To be successful in the global economy, products

must be tailored to meet local customer prefer-
ences, but it is often too costly to create unique
products for each marketplace.

The next wave: Design for reuse in a global economy

The newest generation of design tools integrates sourcing with design
to create a closed loop design and sourcing environment and enables
alignment of the participants in the product development lifecycle into
a seamless, extended enterprise development team. Tools, common
processes, and governance and metrics strategies give design engineers
the information and motivation to leverage existing designs and reusable
assets to create better products more efficiently and effectively.

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This capability has become the new imperative for industrial companies
focusing aggressively on global marketplaces. To be successful in the
global economy, products must be tailored to meet local customer pref-
erences, but it is often too costly to create unique products for each
marketplace. To meet this challenge, design engineers must understand
local preferences and then leverage existing product platforms and
available resources to design products that will be profitable within each
geography. By providing visibility into local customer requirements at
each stage of the product design process – from portfolio planning to
manufacturing design and build – engineers can create local variants
with a cost structure and product features that are designed to allow the
products to be successful in each target market.

The anticipated net result is greater flexibility in

facing new markets – a quality that can provide a
distinct competitive advantage.
The same strategies for commonality, standardization and reuse that
can be used to improve the efficiency and effectiveness of the design
and manufacturing process can provide an even greater competitive
advantage in foreign markets. Closed loop product design and sourcing,
total cost management tools, and integrated design and sourcing are
designed to make it much easier to understand the impact of changes
mandated by local content rules. They also are designed to make it easier
to integrate local suppliers into the design and manufacturing processes
and to assess the impact of local preferences and requirements on the
product architecture. The anticipated net result is greater flexibility in
facing new markets – a quality that can provide a distinct competitive
advantage.

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Product commonality and reuse

By Stavros Stefanis
Digital technology and embedded computing have become more
pervasive, leading product design requirements to become more complex.
Thus, managing the new product development process has become more
complex than ever before.
It is not enough for industrial products companies to create reliable
mechanical designs for new products. Digital design technology is
now a critical element of virtually every complex industrial product.
Embedded computing is a prerequisite for achieving optimal product
performance across the range of operating conditions that the product
will encounter over its service lifetime. At the same time, product design
constraints imposed by external factors such as product safety require-
ments and emission control standards make the design challenges even
more difficult. Product designers and suppliers must meet all of these
challenges and design constraints – while at the same time completing
the new product development process at lower cost and in shorter time-
frames.

Best practices, new design tools, governance strategies and

performance metrics
In this perspective, we present an integrated approach to product devel-
opment that leading companies have utilized to reduce the overall cost
of new product development and direct materials sourcing and procure-
ment. We describe how processes, tools, organization and management
strategies can be applied to optimize cost, quality and cycle time across
the product development lifecycle and how to partition design respon-
sibilities so a design team comprised of design engineers in multiple
geographies can collaborate on the product design.

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We also examine the key features of a new generation of design tools that
go beyond the design discipline-specific focus of the current generation
of CAD design tools. This next generation of design tools creates a closed
loop design and sourcing environment that can seamlessly integrate
all participants in the product development lifecycle into an extended
enterprise development team. In addition, we describe the governance
strategies and performance metrics that are required to motivate design
engineers to leverage the processes, tools and organization strategies to
create better products at lower cost and in shorter timeframes.

Benefits of product commonality and reuse

Conceptually, the impact of product commonality and component and
design reuse on product cost is easy to understand. By standardizing
the design of key components within a product family, those compo-
nents can be reused in future designs. This reduces complexity and
takes cost out of the product development process by reducing design
work and creating opportunities to obtain improved component pricing
from suppliers based on increased purchasing volumes for existing
components.
A commonality and reuse strategy creates other downstream benefits.
The greater use of proven designs and components with a known reli-
ability history will improve overall product quality and reduce the likeli-
hood of component failures due to design issues that are more likely to
go unrecognized in new component designs. Greater consistency in the
design process and greater reuse of standardized components and subas-
semblies reduce the number of hours required to design the product and
provide time to consider issues such as design for manufacturing and for
design collaboration with suppliers.

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When supported by knowledge management tools that can capture the

impact of design decisions on cost, quality and manufacturing effi-
ciency, design engineers can create product and component designs that
create opportunities to reuse existing plant and equipment. This leads
to improvements in manufacturing efficiency and product quality and
ultimately results in lower capital expenses, increased flexibility in the
manufacturing process, and reduced cost and time required for model
changeover.
Although it is easy to understand how benefits can be achieved through
commonality and reuse, it is not nearly as simple to create the process
and tools environment that makes it easier to recognize opportunities
for component and design reuse and then to provide design engineers
with the ability to predict the impact of individual design decisions on
product cost, quality and time to market. This requires processes, tools
and governance strategies that create an environment where replica-
bility in the product design process becomes a required best practice and
mandates a tight integration between the design and sourcing processes
and those of the tier one and tier two supplier population.

Defining a standard architecture

Product commonality is typically described in the context of a product
“platform.” A product platform defines a standard architecture for a
product family and specifies the core components that will be shared
across all of the models defined for the product family.
The basic product platform is extended to appeal to additional customer
market segments by adding additional features and functions that improve
perceived value to the customer. These enhanced features and functions
are grouped together to form models within the product family. The
cost of new model development is reduced because the core functional

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components of the product remain unchanged. By designing a product

architecture that allows for evolution of the product design in response
to consumer preferences and technology changes, new models can be
developed more quickly and at lower total cost since styling changes
and performance improvements can be made without impacting other
areas of the product.
Best-in-class firms, such as Toyota and Airbus, have made product
commonality and reuse a core design strategy that extends across the
entire product line and across all of the business processes in the product
development lifecycle. Toyota has the lowest vehicle assembly costs in
the industry because all Toyota vehicles are designed so they can be
assembled on the same assembly lines with significantly reduced setup
time between models. Greater flexibility in manufacturing means that
Toyota can easily adjust production capacity to build more hot-selling
models and reduce the production volumes for slower-selling models
without constraints in the production and assembly processes.
Airbus uses the same cockpit, avionics and flight controls across all of
its aircraft models. The commonality in the aircraft flight systems makes
it possible for pilots trained on one Airbus model to be flight certified on
all of the other Airbus models. This saves millions of dollars annually in
training costs for airlines and makes it much easier for airlines to change
equipment on routes as traffic patterns change without being constrained
by a lack of pilots qualified to fly the new equipment.
The experiences of Toyota and Airbus are typical of the kinds of compel-
ling results that can be achieved through product commonality and
asset reuse. However, many firms have found it difficult to drive reuse
below the level of the major subassemblies within a product family, and
few firms have been able to extend the concept of commonality and
asset reuse to other asset categories used in the design and production
processes of the enterprise.

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As Figure 1 illustrates, there are other asset classes in addition to

components that can be reused during the product development process.
Intangible assets such as manufacturing “know-how,” knowledge of the
customer and expert knowledge of the product development process are
all assets that are critical to bringing new products to market quickly
and at low cost. A characteristic found in best-in-class companies is the
ability to reuse knowledge assets such as common processes, common
tools and knowledge capital across the product lifecycle to achieve
greater efficiency and shorter cycle times across the enterprise. This is
important as considering reuse and commonality from a more global
perspective is key to achieving sustained performance improvements for
the business.

Figure 1. Reusable assets classes.

Portfolio planning
Marketplace knowledge
Corporate governance
Customer knowledge
Requirements management
Supplier knowledge
Information Processes Product design
Product road map
Supplier management
Product requirements
Manufacturing
Quality information
Marketing and sales
Service and support
Product development
environment
Plant and equipment
Common planning tools
Knowledge Reusable Production Test equipment
Integrated sourcing
management assets assets Ergonomics design
environment
tools Tooling
ERP tools environment
Production management NC programming
Customer relationship Methods
management
Portfolio strategy
Organizational structure Design specifications
Product development Complex subassemblies
Procurement Resources Products/platforms Assemblies
Manufacturing Components
Marketing and sales Embedded software
Raw materials
Value added services

Source: IBM Global Business Services analysis, 2006.

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Products and platforms

Most of the commonality and reuse initiatives for large manufacturing
companies have focused on the physical assets associated with products
and platforms. It is standard business practice to mandate reuse of
major subassemblies such as engines, power transmission components
and frame components for all models in an automotive product line.
At a discrete component level, many firms have also deployed tools
and processes that mandate reuse of standard commodity components
such as fasteners, connectors and electronics parts. Reuse of commodity
components is relatively easy to achieve because commodity compo-
nents conform to existing industry standards, are easy to describe and
catalog, and produce quick-hit savings. Managing commonality and
reuse for complex components is more difficult and requires process,
tools and governance strategies that create an environment that reduces
complexity and establishes commonality and reuse as a key objective
for the product design process.

Production assets
Production assets are assets that are used to support the production
processes of the enterprise. These assets include physical assets such
as assembly lines, tooling, manufacturing cells and test equipment as
well as intangible assets used to support the production processes such
as node control programming, production control processes and quality
control processes. A disciplined program of product commonality and
design reuse will help create flexible manufacturing environments that
can accommodate a range of products and product models using existing
plants and equipment.

Processes
Processes are enablers of commonality rather than an outcome of product
commonality. Common processes and process discipline provide the
foundation for achieving quality improvements and cost savings. Gover-

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nance, performance metrics and product portfolio planning processes

form the foundation for programs that enable product commonality and
design reuse.

Knowledge management tools

Knowledge management tools are required to organize and manage
asset information used by the firm’s commonality and reuse initiatives.
Information technology tools play a vital role in synchronizing product
lifecycle development processes and making reusable assets visible
to the participants in the product development processes. Knowledge
management tools need accurate and timely information about the state
of the assets used in the product development processes. A comprehen-
sive program of commonality and reuse needs accurate information
about product design requirements, design constraints, asset cost and
the status of the reusable assets in order to assist design engineers and
sourcing specialists in making optimal decisions about what assets can
and should be reused.

Organization
Organization goals and skills need to be aligned and the participants
in the product development lifecycle must be motivated to identify
opportunities for reuse and then design new products and components
to leverage reuse. A comprehensive program of commonality and reuse
requires a high level of process discipline and tight synchronization
between business processes and organizational entities that are involved
in each stage of the product development lifecycle.

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Portfolio planning provides the foundation for commonality

and reuse
The capacity to reuse parts needs to be addressed early in the product
design – it cannot be added on later. The framework for product common-
ality is created at the product portfolio planning phase of the product
development lifecycle.
Portfolio planning requirements are translated into a series of design
decisions about the product’s functional capabilities and a definition of
the product’s high level architecture. This architecture defines the major
subassemblies within the product structure and then refines the architec-
ture down to the performance criteria for components that will be used
across all of the models in the product family. A second iteration defines
what feature set variations will be applied to the product platform to
define the models in the product family.
Inputs to the portfolio planning process include information about: the
competitive environment, customer needs and wants, the market oppor-
tunity and the current product and component costs, all of which serve
as the basis for estimating product development costs. These inputs are
used to understand the needs of the marketplace and each of the market
segments within the marketplace. This understanding of the marketplace
is used to analyze the current product portfolio. Then a determination
can be made as to how the product portfolio needs to be enhanced to
meet future customer needs.
The portfolio planning process interacts with the concept phase of the
product development lifecycle process to translate these requirements
into a conceptual design for the product family and the definition of the
feature set for the models within the product family.

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The portfolio planning process provides the definition of the product and
includes:
• Target pricing
• Gross profit
• Target cost
• Required product features and functions
• Channel strategies
• Service lifetime
• Reliability and serviceability requirements
• Product support strategy.

On an ongoing basis, the portfolio planning process includes monitoring

the performance against plan for the individual product lines and contin-
uously adjusting the product roadmap for the business to help ensure
that the product mix continues to meet the demands of the marketplace.
This also will help ensure that new products are developed at the right
price, at the right time and with features that can continue to capture
market share and grow profitability.

Product commonality in the design process

Portfolio planning defines features and functions of the product set and
sets the financial and quality targets that must be achieved to meet prof-
itability and market share goals. Portfolio planning is performed by a
cross-organizational team drawn from the senior leadership team, Sales
and Marketing, Design, and Manufacturing in order to capture the voice
of the customer and then translate this understanding of customer wants
and needs into a product that will achieve its financial and market share
objectives.

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Figure 2 illustrates the linkage between the portfolio planning and

product development process. The later stages of the portfolio planning
process are executed in parallel with the initial Concept phase of the
product development lifecycle. During the Concept phase, the product
functional requirements developed during the portfolio planning process
are translated by the Product Engineering group into a set of high-level
design specifications, first for the product platform and then for each of
the models within the product family. The proposed product architecture
is reviewed by management to validate the design assumptions and to
verify that the product can be designed and built within the cost, quality
and time-to-market parameters defined at the outset during the portfolio
planning process

Figure 2. Portfolio planning and product development process linkage.

Portfolio planning process

Product management data

Market Product
Segment performance data portfolio
information
Develop Align and Manage management
Customer process
input Understand Perform Perform market optimize market
the market portfolio segment business segment
Competitive marketplace segmentation analysis strategy and plans and assess
input plan performance
Cost Resource
information allocation
Product Performance
requirements data Product
Technology development
roadmap process
Target cost Concept Plan Develop Validate Deliver/
support
Historical cost
information Target cost modeling
Target cost management

Control Design Sourcing and

procurement
process

Purchase Source
Source: IBM Global Business Services analysis, 2006.

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During the Plan phase, the engineering design team creates a hierarchical
product structure map that defines the major functional components and
systems for the product family and maps the product technical features
and performance requirements against the proposed product structure.
Using decision support tools, the product designers map the portfolio
of existing components and subassemblies from current products to the
proposed product structure. Then they execute an iterative process of
evaluating the performance, cost and quality history of these compo-
nents against the required performance characteristics for the new
product set.
Where performance gaps exist, the design team identifies what improve-
ments will be required. Then they start the design collaboration process
with the key suppliers to determine the cost and time required to develop
the components and to determine whether the requested enhancements
are technically feasible.
At this stage, the product design is continuously reviewed and reevalu-
ated against not only the primary dimensions of cost, quality and time
to market but also against the dimensions of manufacturability, service-
ability, reliability and the need to create a platform that can support a
clear upgrade path for customers. System boundaries and interfaces need
to be carefully structured to localize areas in the product structure likely
to experience a high level of technology-driven change. For example,
environmental concerns may require lower emissions or a reduction in
the use of hazardous materials, so competition would accelerate the need
for improved product performance and value.
At the product and model design level, the process becomes one of trans-
lating the functional requirements and conceptual design for the product
into detailed designs for each of the models within the product family.

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This must be done within the constraints imposed by the reference archi-
tecture; within the cost, quality and time-to-market constraints defined
by the portfolio planning process; and within the goals for manufactur-
ability, serviceability, reliability and other goals and constraints defined
for the product line. Component and design reuse is a key enabler of
this process because it provides a starting set of designs and compo-
nents that have already met these criteria and for which both the OEM
and its suppliers have experience in designing and manufacturing these
components.
In the Develop phase of the product development lifecycle, the proposed
design has been validated, and management is confident that the product
can be taken to market within the constraints defined during the portfolio
planning process and the Concept and Plan phases. In the Develop phase,
design engineers create the detailed designs for the major subassemblies
and product design features and collaborate with suppliers to design and
build key product components. This involves an iterative cycle of design
and cost quotes to converge on the design and manufacturing cost of key
components.
The concept of total cost management is a key success factor. It allows
product design teams to target cost and maintain control over product
costs since participants in the design process have the greatest degree of
control over design decisions that have the greatest impact on product
cost and profitability.
This top-down approach to product design utilizing a formally defined
reference architecture for the product simplifies the design process,
reduces the impact of future design changes on the overall product,
and makes commonality and reuse the foundation of the entire product
development process. Design engineers use existing proven designs
as the starting point and then work within the reference architecture to
design new products that meet the customer requirements captured and
validated during the portfolio planning process.

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This creates a compelling need for accurate and timely information

about the cost, quality and reliability of the components that could be
reused in the design process. It requires tools to organize the data and
make it available to the design engineers during product development.
It also requires processes, governance and metrics to motivate design
engineers to use the available information to design new products more
efficiently.
While it is relatively easy to create a library of components and designs
that could be reused, it does not answer the question as to whether they
should be reused. To answer this question, the design engineer needs to
understand whether it is less expensive to modify an existing component
or subassembly design, or whether an entirely new component design
should be created. This requires an ability to analyze the cost tradeoffs
involved in the design versus reuse decision.
The next section focuses on how management can leverage product
commonality and asset reuse to transform the enterprise to create product
development and manufacturing efficiencies. These efficiencies can, in
turn, help achieve significant reductions in cost and cycle time while
improving product quality and reliability.

Design Considerations
Many industrial firms address new product development on a project-
by-project basis. When a decision is made to develop a new product,
a project team made up of design engineers and other staff within the
organization is formed and headed by a chief engineer. Their task is to
create a new model with specific features using an existing platform.
The chief engineer and his or her team are assigned responsibility for the
way the project is planned and executed. Typically the team is motivated
to hit specific targets via performance bonuses tied to completing the
product design at or ahead of schedule and at or under target cost.

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However, if the design team only exists for the duration of the product,
there will be little opportunity to detect product quality problems. And
if the team is strongly motivated to reduce costs and cycle time, then the
team may place undue pressure on suppliers to reduce costs and shorten
design cycles.
Since few firms have implemented technology tools that incorporate
the capability to leverage existing designs with a known quality history,
the logical outcome would be a higher than expected level of quality
problems after product launch. If the design team does not have long-
term responsibility for product quality, manufacturability or service-
ability, there are no personal disincentives to designing in poor product
quality.
In industries with low product volumes and high unit costs, such as the
aerospace and heavy equipment industries, there is no consistent defini-
tion of a product platform. Each iteration of the design cycle results in a
host of design changes to accommodate specific customer requests and
to correct design defects. Design modifications proliferate across the
product design due to the number of interrelated systems. This increases
the product cost and impacts the reliability and maintainability of the
product because of the number of components that are unique to the
product. Under these circumstances, the reference platform is effec-
tively the last version built. This leads to part proliferation issues and
manufacturing, quality and maintenance problems because all of the
products are essentially unique.
Unfortunately, design engineers are accustomed to this method of
designing products, and there are no disincentives in place to discourage
them from continuing to design products in this fashion. Management
has typically been very hesitant to make changes to the product devel-
opment processes because they are critical to the future success of the
firm. In addition, there typically is strong resistance from the product
development community to changing the basic process.

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Lacking strong incentives to change and a strategy and proven design

methodology that are clearly superior to the existing ad hoc approach to
product design, management has left the product development process
unchanged. Other than push for the adoption of technology tools to
create greater efficiency in the design process, management has largely
maintained the status quo.
A convergence of independent events are now creating a reason for
change in most industries. These events, which will combine to push
companies toward greater replicability in the product development
process and a more disciplined approach to knowledge reuse, include
the following:
1. The marketplace has changed in most industries. Customers have
more choice and are buying products from firms that can deliver high
quality products, provide more features at the same or comparable
prices, and have a lower total cost of ownership. Firms that cannot
meet these expectations quickly lose market share and find their
product margins under extreme pressure.
2. Leading edge companies in each industry have found that increased
discipline in the product development process and greater leverage of
existing knowledge assets lead to higher quality products and faster
cycle times. Firms have also discovered that a strong reputation for
quality allows them to charge higher prices for their product and
achieve greater profitability. It also provides a buffer during economic
downturns. Reinforcing this cycle creates competitive advantages that
persist over a long period of time.
3. Greater discipline and replicability in the design process make it
possible to move design work to low-cost countries and to address
new emerging markets in Asia and Eastern Europe. The ability to
leverage existing design assets and knowledge capital is essential
to quickly establish a market presence and to design products that
meet the unique requirements and supplier capabilities in emerging
markets.

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The best-in-class firms in each industry have discovered the power of

commonality and asset reuse in establishing design processes that can
reduce cost and cycle time and improve product quality. Because the
design process utilizes knowledge assets, common design processes and
reusable assets, it becomes much easier to divide design tasks between
onshore and offshore resources. It also makes it much easier to design
products that are tailored to the buying preferences of consumers in other
countries and that can be built locally with components that are within
the capabilities of suppliers in these global markets.

Component Councils and Design Review Boards

In most organizations, the reporting lines for product development,
manufacturing, procurement and information technology typically come
together only at the highest levels of the business. Often, these groups
have different performance metrics that can lead to the sub-optimization
of one organization’s metrics to the detriment of other aspects of the
product performance.
For example, procurement often has cost reduction targets to achieve in
its negotiations with suppliers. If component cost is the only metric on
which procurement is measured, to the exclusion of product quality and
performance metrics, procurement may attempt to negotiate the lowest
possible cost for virtually all components to optimize performance
against its target metric. This can lead to downstream product quality
problems that can result in increased warranty claims and support costs
and manufacturing and assembly problems. It can also lead to expensive
product recalls and redesign efforts to correct product defects. These
effects can easily exceed any cost savings achieved by forcing suppliers
to design and manufacture low-quality components that satisfy cost
constraints imposed by procurement.

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To address these problems, all of the internal groups that participate in

the product development process as well as the firm’s key suppliers need
to participate in the definition of balanced metrics and have a stake in
execution of the total cost management and commonality initiatives.
An important tool for achieving this objective is to create Component
Councils and Design Review Boards.
The role of Component Councils and Design Review Boards is to
represent the needs of the different constituencies within the business
so the product design meets the needs of the customer, and the final
delivered product achieves a balance between cost, quality and cycle
time. These groups are tasked with setting the strategic direction for
the business area and reviewing the work products at each stage of the
product development lifecycle. They are also tasked with controlling
critical processes that affect commonality and reuse.
The Component Council is a group that is responsible for establishing
and managing strategic relationships with the key partners in the firm’s
supplier community. The Component Council fulfills five key roles:
• Works with suppliers to understand the direction and evolution of new
technology and product functionality for each major class of compo-
nents for which the council is responsible
• Sets supplier qualification guidelines and defines supplier perfor-
mance metrics
• Defines and documents the sourcing and design roadmap for the
component classes for which the council is responsible
• Manages the accuracy and quality of the content of the component
catalog used by the business
• Controls the new part introduction process by approving or denying
requests to introduce new part numbers.

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Component Councils do not replace the commodity teams within the

procurement organization of the firm. Component Councils set strategy,
define performance metrics and define the sourcing guidelines for the
procurement teams to follow in negotiating with the firm’s suppliers.
They are tasked to help ensure that design groups share knowledge
across the business, help ensure that best practices are applied, and
help ensure that the business achieves the lowest total product cost and
highest quality for the firm’s product lines.
The Design Review Board plays a similar role in the product lifecycle
development process. The Design Review Board plays a central role in
defining product development strategy and sets guidelines for design
reuse and product commonality. The Design Review Board defines
performance metrics and governance strategies for the product design
groups and defines the strategic direction for the product platform
strategy of the firm. Finally, the Design Review Board plays a role in
the stage gate review process by reviewing the work products against
the existing criteria and making decisions about whether to cancel new
product development projects that do not seem capable of achieving the
profitability and revenue targets.
The Design Review Board has five key roles:
• Reviews the results of the portfolio planning process and determines
when to initiate the development cycle for new products
• Sets commonality and reuse guidelines, publishes best practices
guidelines, and helps ensure that the product development organiza-
tion follows the design guidelines during the product development
lifecycle stages
• Sets performance metrics and monitors and publishes performance
results across all of the firm’s development projects
• Reviews and approves the work products produced at each stage of
the product development stage gate design process and authorizes the
project teams to advance to the next stage in the development cycle

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• Controls the product development tools environment and helps ensure

that the accuracy and quality of the content in the reusable design
catalog are sufficient to meet the needs of the business.

To help ensure that the organizations that are most directly impacted by
the design of new products are adequately represented on the Design
Review Board and the Component Councils, participants on the councils
are drawn from across the business areas in the enterprise. There are
representatives from the sales organization, the product development
organization, the procurement organization, manufacturing, and the
sales and distribution organization. The goal is to create an organization
that will be able to balance cost, quality and time to market to create an
entire portfolio of products that optimize overall profitability and market
share.

Supplier collaboration
To reduce costs and improve flexibility, most large industrial OEMs
are moving responsibility for much of the design and manufacturing
processes to their tier one suppliers. While this has substantial benefits, it
also increases complexity and introduces additional risk into the product
development process.
The way the partnering strategy should be structured depends on the
past relationship with the supplier, the role of the supplier in the product
development process, and the nature of the component to be designed
and sourced. For simple commodity components such as fasteners and
steel, the type of relationship that an OEM will need to establish with
suppliers depends on market supply versus demand. At times when
supply is expected to exceed demand, commodity prices would be
expected to fall, and the OEM can buy commodity components on the
spot market at market prices. At times when demand is expected to
exceed supply, the OEM will negotiate pricing and supply agreements

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with a fixed price agreement with a single supplier or a small group

of suppliers to obtain delivery commitments on larger quantities of
commodities at the lowest price.
For make-to-order components, such as castings or instrument clusters,
where there are multiple qualified suppliers, the OEM can provide
drawings and design specifications and then initiate a competitive
bid process to obtain pricing and supply commitments from the key
suppliers. These types of components are typically procured through an
open or closed RFI/RFQ process or through a multi-round bid process.
Complex sub-assemblies and highly engineered products that have
a high level of engineering design content, such as automobile trans-
missions or jet engine fan blades, are best managed through a collab-
orative design and sourcing cycle between the OEM and the supplier.
Typically, a limited number of suppliers have the specialized design
skills and manufacturing expertise to qualify as approved suppliers for
these types of components. Therefore, design specifications and the
logical and physical design of the product are developed and refined
through a collaborative design effort between the design engineers for
the OEM and the design engineers from the supplier. A best estimate of
the component cost is developed at the outset of the design process and
then updated through a change order process.
Costing for complex sub-assemblies and engineered components can
be very complex with suppliers quoting separate line item costs for
design services, testing and verification, tooling and production start-up
costs. Product costing quotes also tend to be very complex. Suppliers
typically quote pricing for complex components at different tiered prices
depending on the production volumes within a specific time period.
OEMs often add to the complexity of the pricing process for compo-
nents by requesting that the supplier buy sub-components sourced by the
supplier at lower cost than the supplier could obtain independently or by
supplying OEM-manufactured parts.

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At the other extreme is a sourcing and design scenario where the supplier
is given primary responsibility for the design and manufacturing of
complete products or major subassemblies. In this scenario, the supplier
will be provided with design requirements and product specifications, and
the supplier will design the product or will use designs from a third party
contract design shop. This approach is commonly used for low margin,
commodity products such as low-end inkjet printers and PCs in the elec-
tronics marketplace or branded garments made for large retail dry-goods
chains. It is typical for OEMs who outsource full responsibility for the
design and manufacturing of products to take on full responsibility for
component sourcing. The OEM typically integrates the supplier into the
design, supply chain planning and firm’s financial systems to provide
visibility into sales planning and production requirements.

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CONCLUSION
The ability to introduce new products quickly and efficiently is critical
to the health of virtually any business. Industrial products companies
design in an environment where the products themselves are becoming
more complex, where responsibility for design is moving outbound
to key suppliers and offshore design centers, and where externally
mandated design constraints are making the design process much more
complex. Therefore, in summary, it is increasingly important for indus-
trial products companies to:
• Apply key design strategies such as common building-block design,
commonality and reuse, and total cost management to improve the
efficiency and effectiveness of the product lifecycle development
process.
• Create a set of end-to-end integrated product development and supplier
management processes that can significantly reduce the cost and cycle
time required to develop new products.
• Apply the tools and techniques of total cost management to monitor
and control the product development process across the extended
enterprise.
• Leverage technology to reduce costs and improve time to market
through product commonality and reuse strategies.

Leading companies have taken this integrated approach to product

development and are reaping the benefits.

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Executive Interview
Dan Kochpatcharin, Director, eBusiness for Chartered
Semiconductor Manufacturing

Chartered Semiconductor Manufacturing, one of the world’s top dedicated

semiconductor foundries, offers leading-edge technologies down to 90
nanometers (nm), enabling today’s system-on-chip designs. The company
further serves the needs of customers through its collaborative, joint develop-
ment approach on a technology roadmap that extends to 45 nm. Chartered’s
strategy is based on open and comprehensive design enablement solutions,
manufacturing enhancement methodologies and a commitment to flexible
sourcing. In Singapore, the company operates a 300 mm fabrication facility
and four 200 mm facilities.1
In 2003, IBM and Chartered established a collaborative partnership which
helped change market perceptions of Chartered as just another semicon-
ductor foundry into a provider of leading-edge systems-on-chip technology.
The partnership offered both IBM and Chartered customers flexibility in
manufacturing locations, as well as cost and time-to-market advantages.
Dan Kochpatcharin, Director, eBusiness for Chartered Semiconductor Manu-
facturing shares his perspectives on product lifecycle management and the
perfect product launch.

1
http://www.charteredsemi.com

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“Perfect product launch means a complete product

package, customers who are excited about the product
and the readiness for production.”

IBM: What are the biggest challenges your company is experiencing

with product lifecycle management?
Dan Kochpatcharin: The biggest challenge, for any company, I believe,
is often business process re-engineering. Moving to a more uniform
way of tracking and managing product lifecycles requires the company
to adapt quickly and allow for the product to be managed by product
lifecycle management tools. Also determining the level of product
granularity to track using product lifecycle management tools is a chal-
lenging task.
At Chartered, the management and staff keep abreast of the market and
are always ready to adapt to the changes required of us by the customers
and the environment, thereby ensuring that our products meet both the
needs and high-quality demanded by the market.
IBM: How does your organization approach portfolio planning?
Dan Kochpatcharin: We actively and constantly seek feedback from
the market, our partners and customers. This allows us to enhance areas
we do well in and perfect areas we can improve on.
IBM: In the product development process, do you collaborate with
suppliers and partners?
Dan Kochpatcharin: We certainly do. By collaborating with both
suppliers and partners and maintaining constant communications with
them, we ensure that we understand the market’s and our customers’
needs and demands.

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IBM: Are customers involved in the design of new products or services?

Dan Kochpatcharin: Definitely! Involving our customers in every
stage of product development enables us to constantly meet their needs
and exceed their expectations.
IBM: To what level has your organization been able to implement
commonality, standardization and design reuse for its product develop-
ment?
Dan Kochpatcharin: With our commitment to constantly engage our
customers and collaborate with our partners, we have implemented the
use of shared community space and knowledge databases which facili-
tate commonality, standardization and design reuse.
IBM: What does the term “perfect product launch” mean to you?
Dan Kochpatcharin: Perfect product launch means a complete product
package, customers who are excited about the product and the readiness
for production.
Basically as we maintain close communications with our suppliers,
partners and customers, we understand what they need and customize
our products to suit them. In doing so, we are always prepared to manu-
facture according to their demands, creating a win-win situation for all.

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 3
C H A P T E R

The global sourcing phenomenon

Introduction
By Harris Goldstein and James Kalina

Procurement performance is in the spotlight. Increasingly, CEOs and

boards are counting on procurement initiatives to keep their companies
favorably positioned in today’s intensely competitive marketplace. To
better understand what is separating the leaders from the laggards, IBM
Global Business Services conducted the IBM Chief Procurement Officer
Study.36 This study highlighted several strategic imperatives that, taken
collectively, are fundamentally altering the role of procurement – not
only what is expected in terms of outcomes and performance but also the
type of organization and individuals that excel in this new procurement
environment.
One very topical imperative is sourcing from low-cost jurisdictions.
As companies shift more production to locations where manufacturing
is cheaper, global sourcing, procurement and logistics have become a
growing challenge. An integrated, global approach to sourcing is now
critical to the success and optimized performance of most global busi-
nesses. Supplier networks and relationships have grown exponentially
to support new global sourcing and other growth initiatives.

139

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Multinational sourcing decisions have become more significant to

business performance but are more and more difficult to make due to
volume growth, fragmented information, process complexities and the
need to integrate along the entire supply chain.
In this chapter we discuss how:
 CPOs (Chief Procurement Officers) are dealing with globalization
and other supplier management and sourcing decisions.
 Sourcing in low-cost countries helps companies improve their compet-
itiveness.
 Procurement savings can significantly influence bottom-line results.
 Sourcing in low-cost countries becomes the starting point for a
company to achieve market growth in emerging regions.
 Risks associated with low-cost country sourcing can be addressed and
managed in a comprehensive way.

As these concepts converge, it should become apparent that sourcing and

procurement decisions and capabilities can influence the performance of
the entire supply chain.

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Procurement takes center stage: The IBM Chief

Procurement Officer Study
By Charlie Hawker, Theo Theocharides, and Marc Bourdé
Ready or not, procurement is moving to center stage, with top billing
on the corporate agenda. At companies around the world, CEOs and
boards are counting on procurement initiatives to keep their businesses
favorably positioned in today’s intensely competitive marketplace.
To better understand current procurement performance and future
expectations, IBM Global Business Services conducted the IBM Chief
Procurement Officer Study. IBM consultants spoke at length with 45
Chief Procurement Officers (CPOs) from 14 different industries about
current performance and their views on critical procurement topics.
IBM also conducted an online survey that encompassed 64 different
countries and a wide variety of industries. The 50 CPOs and 250 other
C-level executives that responded electronically voiced similar perspec-
tives in almost every instance.37 We will look at significant findings from
the survey and discuss five key areas of change that CPOs should focus
on to help boost their company’s competitive edge.

Spotlight on procurement performance

For businesses worldwide, the steady beat of market pressures continues.
Budget cuts are common. Deregulation and globalization are upsetting
the competitive equilibrium. Companies are feeling the squeeze from
rising materials costs and yet find it difficult to raise prices in a “zero
inflation” world.
Meanwhile, the fundamental structure of the corporation is changing.
Companies are spending more with third parties and, at the same time,
are outsourcing many more functions that historically were performed
in-house. Across the enterprise, the increased contribution of suppliers
is adding more value – and more risk.

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Collectively, these factors have elevated the importance of procurement.

Today, perhaps more than ever, procurement has a broad and direct
impact on corporate performance. Consequently, procurement perfor-
mance is prominently positioned on boardroom agendas worldwide.
Our survey results suggest that CPOs are beginning to feel the heat of the
spotlight. The majority of those surveyed reported procurement savings
to be much more important in the near term (see Figure 1). And many
of the respondents who reported procurement savings to be only equally
or slightly more important in the near term reasoned that procurement
savings were already extremely important to their organizations.

Figure 1. Importance of procurement savings over the next three years.

64% Much more

14% Slightly more

17% Equally

5% Slightly less

Source: IBM Institute for Business Value Chief Procurement Officer Study.

But cost savings are only part of what procurement contributes to the
bottom line. CPOs are beginning to wrestle with bigger, more strategic
questions: How can procurement become a stronger competitive weapon?
How can procurement contribute to increased shareholder value?

“We’ve gone as far as we can in leveraging price. Now

we have to find other ways of meeting our targets.”
– Industrial products CPO

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Five focal areas for CPOs who want to boost their company’s
competitive edge
According to the CPOs surveyed, basic strategic sourcing competen-
cies are relatively mature (see Figure 2). As business strategies evolve,
procurement organizations are looking for ways to create additional
value.

Figure 2. CPOs rank procurement effectiveness higher in historical focus areas.

Global sourcing of direct materials 3.5

Leveraging volume 3.5

Internal compliance to policy 3.3
Collaboration with suppliers 3.0
Efficiency of payment processes 2.8
Management of supplier performance 2.8
Global sourcing of indirect materials 2.5
e-Procurement 2.5
e-Sourcing 2.4

0 1 2 3 4 5
Least effective More effective

Source: IBM Institute for Business Value Chief Procurement Officer Study.

“Having a customer service mindset and being able to

manage change are essential parts of the new role.”
– Technology industry CPO

Based on our analysis of the study results, we identified ways that CPOs
can potentially increase their company’s competitive edge and add value
to the bottom line. Specifically, we recommend that CPOs focus on the
following five key areas of change:

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• Become business partners, not just buyers – CPOs must overcome a

pervasive buyer mentality and position procurement to identify and
respond proactively to broader business goals.
• Explore new value frontiers: It’s not just about price – CPOs need to
reorient organizations that are historically biased toward buying raw
materials and supplies and convert their thinking and actions to fit the
very different demands of capability sourcing.
• Make suppliers part of your team: The best value chain wins – Procure-
ment organizations need to champion the full contribution potential of
strategic suppliers, taking proactive steps to seek out value beyond the
supply chain.
• Pursue low-cost sources: A world worth exploring – Procurement
organizations have to be prepared to leap hurdles imposed by borders
and geographic differences and tap into more cost-effective sources
around the globe.
• Conduct the ultimate talent search – CPOs must equip their teams
with the necessary skills and expertise to address all of these chal-
lenges – and, perhaps more importantly, they must do so in record
time.

As procurement influence grows, performance in these key areas will

dictate the position of industry leaders and laggards. Too often, procure-
ment organizations focus on one aspect of their role while ignoring
others. For instance, it is common for procurement organizations to
concentrate so intently on supplier management that they neglect stake-
holder management. As a result, companies frequently end up with
tremendous supply-side value that rarely gets realized because their
internal customers decide not to leverage it.
To make the most of the limelight, procurement organizations need to
address each of these five key areas in a synchronized manner – and
use their superior procurement performance to distance their companies
from the competition. Now let’s take a closer look at each of the five
focus areas.

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Become business partners, not just buyers

To break out of the buyer mindset, procurement organizations have to
focus on a bigger picture: the overall objectives of the business and how
they can help their internal customers meet these objectives. Procure-
ment strategies need to be shaped by business strategies and need to be
flexible to be able to adapt as those business strategies change.
Stakeholder engagement remains a constant challenge for procurement.
The value that procurement provides to the corporation is contingent
upon the degree of buy-in from its internal customers throughout the
organization. Misalignment between sourcing strategies and business
needs leads to maverick buying, causing companies to forfeit the value
that procurement worked so hard to deliver.
Becoming a business partner involves a mindset shift for procurement
– from price to value, products to solutions, inputs to outcomes. To make
this transition, CPOs need to invert their traditional models, focusing
more on relationship and category management, where the opportunity
for strategic impact is high (see Figure 3). Procurement organizations
must serve as the conduit for converting supply-side potential into broad,
business value contributions. Shifting to such a model is not simple;
procurement organizations will need deeper relationship management
and customer service expertise – attributes that are not necessarily
intuitive among existing procurement staff.

Figure 3. Model better suited to future procurement demands.

Traditional model New procurement model

Relationship management
Strategic
sourcing Category management
Tactical/operational
Operational buying
buying
Trans-
Transactional
actional

Source: IBM Global Business Services analysis, 2006.

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To stay focused on what matters, procurement organizations also need

the right measurements. However, among the companies surveyed,
comprehensive, balanced scorecards were the exception, not the rule.
Performance measures were heavily skewed toward traditional external
results – the price and quality that buyers could negotiate – largely
ignoring how the procurement organization itself was performing or
how well it was serving internal customers. To produce superior results,
procurement organizations have to balance both, identifying effective-
ness and efficiency measures that are critical to their constituency and
putting practices in place to track results.

“It is a real challenge to have sourcing skills

related to services.”
– Industrial products CPO

Explore new value frontiers: It’s not just about price

Capability sourcing is totally different from traditional procurement,
and it is a game that CPOs feel inadequately equipped to play. Instead
of simply negotiating the price of a particular transaction, procurement
personnel must understand the nuances of the capability in question and
have the ability to assess a broader variety of factors. With capability
sourcing, the focus turns to overall business outcomes, total cost of
ownership (TCO) and the potential for long-term value creation.

“We have no real history of managing outsourcing.”

– Financial services CPO
Since capability outsourcing is new territory for many procurement
organizations, the CPOs we surveyed reported difficulty in developing
the skills and experience required for this sort of sourcing. Because of
its long-term implications, capability sourcing involves a more holistic
business perspective when evaluating and selecting vendors. With
outsourcing, for example, procurement must carefully assess a potential
partner’s overall business health and marketplace longevity before
entering what are typically multiyear agreements.

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As capability sourcing expands, procurement organizations must become

more adept at forecasting the future – weighing a supplier’s future capa-
bility, not simply what it offers today. Procurement needs to understand
and compare strategies, discovering new areas where a strategic supplier
can add value and become more integral to the company’s operations.
Equally important, it becomes procurement’s responsibility to foresee
conflicts of interest that might push the parties in different directions and
derail long-term agreements.

CPO perspectives on procurement outsourcing

With their most familiar capability being procurement, CPO attitudes toward
outsourcing vary by process area (see Figure 4). To date, indirect materials,
procurement technology and accounts payable have been the most common
outsourcing candidates. However, many companies continue to view direct
materials sourcing as core to their businesses and, consequently, choose to
retain that function in-house.

Figure 4. Status of procurement outsourcing.

Indirect materials sourcing

Procurement technology

Payment processes 29

Procurement administration

Direct materials sourcing

0 10 20 30 40 50 60
Percent

Significant outsourcing Have done pilots Have plans

Source: IBM Institute for Business Value Chief Procurement Officer Study.

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Make suppliers part of your team: The best value chain wins
During our interviews, CPOs spoke of continued supply-base consoli-
dation, leading to fewer, deeper supplier relationships focused on long-
term value creation. The emphasis on value creation is key. In today’s
business environment, suppliers do not just “supply” – they are partici-
pating in the full product lifecycle, moving upstream into product devel-
opment and downstream all the way to disposal. Suppliers are becoming
tightly integrated into the company’s value chain.

“Our strategy for complex, high-tech items is

clear: long-term relationships and partnerships
with a small number of suppliers.”
– Industrial products CPO

The expanding influence of suppliers makes strategic supplier manage-

ment even more critical. The CPOs interviewed agree – TCO and
management of preferred suppliers were considered to be the top two
drivers for supplier value creation (see Figure 5). Acknowledging the
upstream progression, CPOs viewed product development collaboration
with suppliers to be nearly as important to value creation as supply chain
collaboration.
Figure 5. Key drivers for value creation with suppliers.

TCO approaches 4.2

Management of preferred suppliers 3.9

Demand aggregation/volume leverage 3.8

Supply chain collaboration with suppliers 3.5

Reduction of the number of suppliers 3.4
Product development collaboration
3.3
with suppliers
Usage of e-sourcing solutions 3.2

Management of non-preferred suppliers 2.4

0 1 2 3 4 5
Least important Critical

Source: IBM Institute for Business Value Chief Procurement Officer Study.

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Despite the perceived importance of strategic supplier management,

41 percent of those surveyed were actively managing less than half of
their direct materials supplier base; management reporting associated
with indirect materials suppliers was even less common (see Figure 6).
Faced with complex relationships and sophisticated contracts, procure-
ment organizations often find that they lack the skills needed to manage
supplier performance.

“Purchasing is not strong on supplier management

and contract performance; we tend to be reactive
not proactive.”
– Financial services CPO

Figure 6. Percentage of supply base covered by regular performance reporting.

Direct Indirect

14%
38% Over 75%
66%
41% Between 50% and 75%
20%
Under 50%

21%

Source: IBM Institute for Business Value Chief Procurement Officer Study.

Pursue low-cost sourcing: A world worth exploring

With technology bridging borders and enabling global commerce, the
choice of suppliers today truly is worldwide. CPOs are taking advantage,
seeking out viable suppliers in low-cost jurisdictions that can offer
comparable quality and better price points. According to our survey
results, finding better-value suppliers globally was the number three
strategic goal for CPOs (just behind the mainstays of cost and quality).
And China was their top destination (see Figure 7).

itical

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Figure 7. Percentage planning to increase procurement volumes and upgrade sourcing

capabilities in specific regions.
59
60

50 44
Percent of respondents

40

30 26
23
20 18
12
10

0
China Eastern South Asia Russia Southeast Latin
Europe (India...) Asia America

Source: IBM Institute for Business Value Chief Procurement Officer Study.

With its financial potential, procuring globally also brings challenges

and risk. Even if a company can overcome the language and cultural
obstacles, the average procurement organization typically lacks the
expertise required to establish and manage contracts in different countries
– particularly in emerging markets. CPOs recognize these shortcomings;
while just over half believe their organizations have the right knowledge
and skills to address sourcing in Eastern Europe, their shaky confidence
dwindles even further when considering Southeast Asia or Russia (see
Figure 8).

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Figure 8. Percentage currently equipped with the right knowledge and skills for
procurement regions.

58
60

50 46
43 43
Percent of respondents

40
34
30
20
20

10

0
Eastern Latin South Asia China Southeast Russia
Europe America (India...) Asia

Source: IBM Institute for Business Value Chief Procurement Officer Study.

Although CPOs’ concern with skills is justified, based on our experience

with clients, a general, paralyzing fear of global sourcing is unfounded. In
most geographies, pioneers have already tackled many of the anticipated
issues, and effective risk mitigation and management approaches exist.
For instance, because of their small size and relative obscurity in Asia,
many Western companies are adjusting their procurement approaches.
Without the purchasing volume or reputation to command deep discounts
individually, they are pooling their leverage and sourcing jointly. With
such great potential for cost savings, CPOs owe it to their businesses to
evaluate sourcing options outside of their traditional purview.

“We need to find and integrate new personnel with

fresh views and different backgrounds…rotation
of our procurement staff into other departments is
also in our plan.”
– Consumer goods CPO

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Conduct the ultimate talent search

While conducting interviews for this study, a persistent theme came
across in almost every discussion: a fundamental need for new skills
and expertise. Virtually all avenues that CPOs are counting on to boost
procurement performance – greater use of outsourcing, more strategic
supplier relationships and expanded sourcing in emerging markets – are
pushing their personnel into unfamiliar territory.
With the corporate role of procurement changing so radically and so
quickly, CPOs are scrambling to build enhanced skills and change habits
across their organizations. In fact, the top three performance improve-
ment strategies among the CPOs surveyed were people-related (see
Figure 9).

Figure 9. Top strategies for procurement performance improvement over the next
three years.
Management and retention of talent 4.1

Upgrading of people capabilities and skills 4.0

Training of staff to improve core procurement skills 3.9

Introduction of best practice sourcing processes 3.8

Reengineering of purchase-to-pay process 3.7

Transformation of the procurement organization 3.7

0 1 2 3 4 5
Least important Critical

Source: IBM Institute for Business Value Chief Procurement Officer Study.

In the end, transforming procurement into a competitive advantage

depends on winning the battle for talent. With the marketplace’s shallow
talent pool and internal financial constraints, companies cannot depend
on hiring to fill all of the gaps; businesses have to develop expertise

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among their existing staff. In addition, with today’s economic and

competitive pressures, companies do not have time for traditional staff
development approaches. The transformation of procurement personnel
must happen in months, not years.

BP: Building capabilities for complexity

As part of BP’s transition from inorganic to organic growth, procurement was
identified as a key value lever in delivering the business strategies. To capture
this value, BP has focused on taking procurement from a somewhat reactive,
internally facing service function to a proactive, market-facing business
capability. As the organization and accountabilities have progressively moved
toward market-facing lines, attention has shifted toward building the capa-
bilities necessary to capture and deliver the increasingly complex sources of
value.
The first priority was to build category strategies in support of the business
strategies. These were developed in 2004 in consultation with stakeholders
using a common framework. Performance management within the function
is progressively shifting toward category lines as these strategies become
operational.
The next priority was to build both the skills (e.g., leadership, strategic,
financial, program management, technical and communication) and the
knowledge (e.g., business strategies and supply markets) within the orga-
nization necessary to capture complex sources of value. BP is using recruit-
ment and coaching to achieve this objective.
Recruitment covers sourcing commercial talent from within BP, expanding
its graduate programs and finding experienced professionals from outside
BP who can fill key gaps (e.g., market knowledge/experience or strategic
process expertise). Coaching helps develop the key talent already existing
within the organization.

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BP has taken an innovative, programmatic approach to capability develop-

ment that it calls the “Capability Accelerator.” The approach is designed to
compress three years of development into six months through expert on-the-
job coaching. Individuals are independently assessed against “role model”
job profiles and receive a tailored, blended learning plan that covers the full
set of skills required – not just technical ones.
The program is being delivered in waves to key members of BP’s global
procurement community. Program management is being driven internally by
BP, with expert coaches coming from both internal (such as BP finance) and
external sources (such as IBM), depending on the module. The program’s
impact has been encouraging so far, and many of its features, including
blended learning and expert coaches, are likely to form part of BP’s ongoing
learning program beyond this “Accelerator” phase.

As they reflect on current capabilities and the challenges ahead, CPOs

have to ask themselves whether their procurement organization will bask
– or bake – in the spotlight of increased corporate attention. Undoubtedly,
procurement performance can have a significant impact on a company’s
bottom line and strategic positioning in the marketplace. Therefore, as
an organization, procurement must master each of the dimensions of
change we have discussed here – not just excel in one or two areas.

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Key changes ahead – Speed is critical

• Become business partners, not just buyers. Focus on business value
contribution by enhancing customer service capabilities and category
management skills and establishing measurements that track procure-
ment efficiency and effectiveness.
• Explore new value frontiers: It’s not just about price. Explore addi-
tional capability sourcing options and develop the expertise to evaluate
suppliers in a broader, future-state context.
• Make suppliers part of your team: The best value chain wins.
Nurture supplier relationships to more actively manage supplier perfor-
mance, and seek broader value contributions from key suppliers.
• Pursue low-cost sources: A world worth exploring. Gain the
expertise required to evaluate sourcing options, establish agreements
and manage contracts in different geographies, and use co-sourcing
(using multiple suppliers for the same product) or similar arrangements
to reduce risk and increase buying power.
• Conduct the ultimate talent search. Equip the procurement organi-
zation with the new capabilities needed to achieve all of the above.
• Accelerate the development of more sophisticated procurement
capabilities. This is the final and most important step:
- Establish an education program. Develop a formal program to
provide tailored education, training, coaching and knowledge transfer
activities to staff and drive projects through a structured schedule.
- Leverage specialized external expertise. Draw on the strengths
and experience of external partners to help the organization reach the
desired level of performance more quickly.
- Integrate the portfolio of capabilities. Combine in-house and
external capabilities to establish a procurement organization that
differentiates your company in the market.
- Capture value from the strategy. Realize business value from
procurement strategy, strategic sourcing and supplier management
through the introduction of processes, tools, techniques and best
practices that translate performance into financial results.

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Conclusion
In companies where procurement offers a true competitive edge,
we expect to find CPOs who have won the talent contest, who have
turned buyers into business partners, who consider capability sourcing
to be routine, who take suppliers deep inside their operations and who
constantly explore low-cost sourcing options wherever they emerge.
And those CPOs in the spotlight deserve to take a bow.

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Low-cost sourcing in emerging markets can benefit a

company’s bottom line
By Frank Crnic, Udo Kleemann, Christian Seider
Revenue growth is the number one priority for four out of five CEOs
according to the IBM Global CEO Study 2006.38 CEOs seeking revenue
growth often must reduce costs to maintain or expand profit margins.
Both tasks are made more challenging when customer demand changes
on a whim, supply chains are interrupted, costs for materials increase
unexpectedly and the competitive landscape morphs apparently inexpli-
cably. So what can companies do?

Low-cost country sourcing helps grow revenue

Companies should consider sourcing materials or products to low-cost
countries as a reduced-cost alternative. Companies can realize significant
direct material savings – up to 40 percent in purchase price39 – for their
global factory network when they successfully use low-cost sources in
emerging regions (see Figure 1).

Figure 1. Range of potential savings for selected spend categories when using low-cost
sources in emerging regions.

Cable and harness

Electronics and
assembly

Mechanics

Tooling
Minimum savings
Maximum savings
Plastics

0 10 20 30 40 50
Percent

Source: IBM Integrated Supply Chain analysis, 2006.

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Implementing sourcing programs in economically emerging regions like

Asia-Pacific, Eastern Europe and Latin America can help a company
compete more effectively. The following countries are typically consid-
ered to be emerging markets that offer a low-cost environment:
• China
• Thailand
• Vietnam
• India
• Ukraine
• Romania
• Bulgaria
• Mexico
• Brazil.

Savings generally result from low labor and infrastructure costs in these
regions. These savings present compelling reasons for companies to
migrate manufacturing operations to low-cost areas. Figure 2 illustrates
the dramatic differences in labor costs between regions. The hourly costs
for labor in China and Mexico, for example, are substantially lower than
in North America and Western Europe.

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Figure 2. Sample average hourly compensation costs of manufacturing workers in

selected economies and regions.40
100
100 94
88
80

60
Percent

40 33

20
12 12 8
3
0
United EU(15)A Japan Asian Brazil Mexico Romania China
States NIE’sB

A
EU(15) are the European Union member countries prior to the expansion to 25 countries on May 1, 2004.
B
Asian NIE’s are the newly industrialized economies of Hong Kong, Korea, Singapore, and Taiwan.
Source: Bureau of Labor Statistics, “International comparisons of hourly compensation costs for production workers in manu-
facturing, 1975–2003,” Nov. 18, 2004; on the Internet at http://www.bls.gov/fls/home.htm. For China, data are from this article
and not from the BLS series. The data for China refers to all employees rather than just production workers. Hourly compensa-
tion for Romania in 2002 as per Eurostat Web site: http://epp.eurostat.cec.eu.int.

Labor is only one element in the total cost of a component’s price, of

course. To determine the total cost, a company must include the compo-
nent’s manufactured price plus shipping costs, customs charges and other
expenses involved with moving a component from the manufacturer to
the point where it is incorporated into the final product.
If, for example, the cost basis is 100 points for a component manufac-
tured in Germany and 70 points for the same component manufactured
in China, the gross savings is 30 points. Shipping the component to
Germany and customs charges may add another 10 points, bringing the
component’s total cost to 80 points. The net savings of 20 points may
still be enough to warrant sourcing that component in China.
Procurement savings can make a direct contribution to a company’s
bottom line compared to other methods for improvement. As can
be seen in Figure 3, for a company in the electronics industry, for

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example, virtually every procurement dollar saved may go directly to

the company’s bottom line. To otherwise achieve the same impact, the
company must increase revenue 29 percent.

Figure 3. Spend and net profits as percent of revenue for selected industries.

100 100 100 100 100 100

100
Revenue
Spend as 80
a % of
revenue 60 59
53
Percent

Net profit 51
48
margin 41
40

23
20
10.5 9.9
3.4 5.1 4.9 3.4
0
Aerospace Chemicals Computer Electronics Petroleum Semi-
and defense hardware conductor

Bottom-line increase 1% pt 1% pt 1% pt 1% pt 1% pt 1% pt
Incremental revenue 29.4% 19.6% 20.4% 29.4% 9.5% 10.1%

Source: IBM Global Business Services analysis, 2006. Reprinted with permission from the publisher, the Institute for Supply
Management(tm) and W.B. Carey School of Business at Arizona State University.

Other benefits from low-cost country sourcing

Turning to sources in low-cost regions offers other benefits in addition to
cost. A significant example is the competitive advantage gained against
companies that don’t effectively incorporate low-cost sourcing in their
procurement processes. Companies can boost revenue by reinvesting
procurement savings in new products. They also can establish substan-
tial markets for themselves by extending highly competitive pricing to
buyers. Companies that tap manufacturing sources in low-cost countries
can further expand their business by offering goods they produce for
local consumption.

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Some forward-looking companies are radically restructuring their cost

bases as they shift to globally integrated manufacturing and supply chains
that include low-cost sourcing. Freed from managing multiple sets of
supply chains, other parts of these companies are able to concentrate on
customer relationships and value-added engineering. One approach to
accomplishing this is moving to a shared-services model for back-office
activities, often using an outsourcing provider. The shared-services
model provides those companies with far greater ability to integrate
acquisitions and realize value from them.

Low-cost country sourcing is increasing

The competitive and bottom-line benefits of low-cost country sourcing
are attractive to many companies. That is why, according to the Aberdeen
Group,41 60 percent of manufacturers now source from China as part
of their low-cost sourcing strategies, and almost half of their low-cost
country sourcing spending is for direct materials – chips, circuit boards,
cables and other parts used in end products (see Figure 4). In fact,
the average total spending for direct materials with low-cost country
suppliers is projected to almost double – from 21 percent to 39 percent
– through 2008 (see Figure 5).

Figure 4. Average percent of spending by category in low-cost countries.

50 45
40

30
Percent

21 21
20 16
10

0
Direct Production Business Indirect
materials services services materials

Copyright © 2005, Aberdeen Group, Inc. Reprinted with permission.

Source: Aberdeen Group, Inc. “Low-Cost Country Sourcing Success Strategies – Maximizing and Sustaining the Next Big
Supply Savings Opportunity,” June 2005.

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An average of 45 percent of surveyed companies’

spend in low-cost countries is for direct materials.
Figure 5. Average percent of total spending for direct materials with low-cost country suppliers.
40 39

30
21
Percent

20

10

0
Today Next 3 years

Copyright © 2005, Aberdeen Group, Inc. Reprinted with permission.

Source: Aberdeen Group, Inc. “Low-Cost Country Sourcing Success Strategies – Maximizing and Sustaining the Next Big
Supply Savings Opportunity,” June 2005.

Surveyed companies plan to almost double their

spend in low-cost regions.

Sourcing in low-cost countries extends beyond just individual companies.

Entire industries are gaining footholds. It is not unusual for tier one and
tier two manufacturers to build plants on the same property or very near
to the manufacturer of the end product. Why? Low labor and land costs,
increasing tax benefits, maturing manufacturing and services, improving
infrastructures and stabilizing political environments all play a role.

Potential risks of low-cost country sourcing

While sourcing in low-cost countries offers enticing benefits, it also
presents potential pitfalls and difficulties to achieving benefits. The
obvious issues are cultural and political differences. Another issue is
finding capable suppliers in unfamiliar places. Then, when you find

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them, you must ask whether the suppliers can provide the consistent
quality that you need and your customers expect. Companies seeking
low-cost country sources for the first time may find that establishing and
qualifying those sources and making the transition to them may take
longer than expected.
Companies new to sourcing in low-cost countries should also be
concerned about other issues. These issues include staff quality and
technical capabilities in the region, government interference, intellec-
tual property protection and the potential for fraud. Let’s take a closer
look at the specific risks, then we will discuss how to address the risks
of sourcing in low-cost countries.

Operational risks
Working in a low-cost country often adds complexity to a company’s
operations. Operational risks include:
• Inflexible customs practices
• Intellectual property protection
• Foreign exchange controls
• Business licensing limitations
• Political or joint-venture partner interference
• Project management challenges associated with migrating manufac-
turing operations effectively.

Technical risks
Technical issues related to manufacturing and shipping the product can
arise. Technical risks include:
• Poor product quality
• Low-tech and labor-intensive production
• Infrastructure weakness
• Distant client markets.

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Staffing risks
Good staff can be difficult to find and retain, and other related issues can
also arise. Staffing risks include:
• Poor-quality staff
• High turnover or even poaching of effective employees
• Lack of experience
• Fraud
• Ineffective use of expatriate staff.

Supply chain risks

Establishing a new manufacturing source brings change, which affects
the supply chain – especially early in the process. Supply chain risks
include:
• Difficulties in communicating with staff and vendors
• Availability of accurate baseline data
• Underestimating the time required to complete transitions to low-cost
country sources
• Sustaining savings after the initial benefit.
Now let’s look at ways to address and overcome these risks.

Overcoming risks of low-cost country sourcing

Companies can overcome the risks involved in sourcing in low-cost
countries. As for overcoming operational risks, forming deep, key rela-
tionships at critical points along the supply chain’s inflection points helps
reduce potentially rigid customs practices or foreign exchange restric-
tions. A considered approach and developing deep, lasting relation-
ships with vendors help ensure intellectual property. Because business
license and value-added tax fraud can be commonplace, companies
should perform comprehensive documentation checks to help ensure

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that licenses are proper and taxes have been paid. More and more, as
countries derive the economic benefits from companies relying on low-
cost manufacturing sources, political or joint-venture partner interfer-
ence is diminishing. Finally, as with virtually any change in manufac-
turing operations, good project management is critical.
Overcoming the technical risks involved in sourcing in low-cost
countries is also possible. Suppliers with the latest high-tech equipment
and the ability to solve problems onsite rapidly can help achieve the
product quality that companies have come to expect from mature market
suppliers. And suppliers with shorter tooling development cycles tend
to offset increased shipping distances. If necessary, companies must
monitor constrained air freight capacity to support timely shipping of
products. In the end, technical issues are often no worse than in virtually
any other supply market, and high quality local resources can be deployed
to manage them.
Actively recruiting and developing quality staff are the most effective
ways to overcome staffing risks. This includes concentrating on training
and developing staff, and hiring good local managers to help retain
good employees. At the same time, companies should provide appro-
priate performance-related compensation and incentives. Also, to
prevent procurement fraud, it is important to develop strategic missions
locally. That activity includes implementing tight process controls and
executive-level vendor relationships. Building a capable local organiza-
tion that uses mature processes is a prerequisite for success in a low-cost
region.
To reduce or eliminate supply chain risks, companies should establish a
rigorous product development process, making a significant initial effort
to expose the full, comparable costs of sourcing. Also, the procure-
ment department and suppliers must be involved early in the product

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development process. Developing and acting on a detailed project plan

– including risk management – throughout the enterprise and with
contract manufacturers is essential to move manufacturing successfully
to a low-cost country.

Questions CPOs considering low-cost sourcing in emerging

countries must ask
Despite the risks that companies face when doing business in an emerging
region, they are driven to do so by competitive pressures and the desire
to expand to new markets. Hence, CPOs must do their homework first
to help smooth the way.
Say that all of the direct materials that Acme Company uses in the manu-
facturing process come from high-cost regions, and the company is
losing competitive ground. To reduce costs across the company, Acme’s
CPO decides to move 30 percent of the company’s current spending for
direct materials to low-cost country sources. As the CPO ponders the
necessary steps to meet the CEO’s requirement, many questions come
to mind.
First, the CPO must determine which components should be sourced in
low-cost regions. Components with low complexity and high labor costs
usually present the best opportunity for savings in low-cost countries.
After identifying which components to manufacture in low-cost
countries, the CPO must determine where the best suppliers are. To
find the best supplier or suppliers for the company, the CPO must ask
questions such as:
• Who are the right suppliers?
• What are the strengths and weaknesses in commodity coverage in a
supplier’s country or region?
• How can I help ensure savings considering total cost of ownership?

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• How can I build a business case?

• How can I maintain product quality?
• How can I most effectively manage the extended supply chain?
• How can I help ensure competitive lead times?
• How are contracts set up?
• What are the legal requirements?
• What are the benefits or pitfalls regarding local taxation?
• How can I manage the local language and cultural challenges?

Answers to these questions will help the CPO narrow the list of potential
suppliers. Then the CPO must be assured that the company’s intellectual
property is protected. Questions to ask include:
• Does the supplier work for the competition?
• Does the supplier demonstrate business ethics that are in line with
expectations?
• Is the supplier’s country known for corruption?
• Has the supplier indicated a reticence to sign a nondisclosure
agreement?
• Does the supplier have a proven track record of treating intellectual
property confidentially?
• Have there been any negative news or rumors about the supplier not
acting in an appropriate manner?
• Does the contract include significant penalties for intellectual property
violations?
• Is the supplier willing to provide customer references?

These questions are unlikely to reveal complete answers. However,

the answers will provide initial direction for the CPO and the CPO’s
company to take in building valuable, viable manufacturing sources in
low-cost regions.

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Low-cost country sourcing can deliver tangible results to the

bottom line
Companies can potentially realize significant direct material savings
using low-cost sources in emerging regions. But companies must have
strategic sourcing experience and skills to attain those savings at a
manageable level of risk.
To help with what can be a daunting task, companies and CPOs should
consider working with a third party with relevant experience as a consul-
tant. Working with a third party may help reduce up-front capital invest-
ment, help reduce risk and, combined with a holistic approach to procure-
ment transformation, can help expedite achieving the desired savings.

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Executive interview
Christine Breves, Chief Procurement Officer, Alcoa Inc.

Alcoa Inc., with 00 sales of over US$6 billion, is the world’s largest
producer of primary and fabricated aluminum. The company also serves the
aerospace, automotive, packaging, construction and industrial markets as
well as making and marketing a number of consumer brands. 1
Christine Breves is the Chief Procurement Officer for Alcoa where she is
responsible for Alcoa’s purchases of goods and services globally which
includes primary raw materials, resins, non-smelter energy, transportation,
commercial metals and indirect materials and services. During this interview,
Christine discusses how Alcoa is addressing global sourcing and their
ongoing procurement transformation.

IBM: Sourcing from low-cost jurisdictions certainly offers attrac-

tive savings in purchase price but with attendant issues, both real and
perceived, that must be addressed. Are you currently taking advantage
of low-cost jurisdictions for sourcing?
Christine Breves: Yes, we are. We currently have an IPO (International
Procurement Organization) in Asia. That’s our biggest group and the
biggest area where we’re sourcing from low-cost regions to supply
higher cost regions. But we also have a smaller team in Eastern Europe
and small teams in Mexico and Brazil.
So we definitely think that this is important for the future, because in
our commodities, it’s important to have some competition to the tradi-
tional suppliers from these lower cost sources. But you have to be really
careful to make sure that you end up with a landed cost that is actually
lower.

1
http://www.alcoa.com

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IBM: That’s a very good point, especially when you consider all the risk
factors and logistics. In addition to that landed cost, what are the key
issues that you see? And how is Alcoa addressing those issues?
Christine Breves: With non-traditional suppliers, you’re taking a lot
more risk. So you have to have a lot more contingency planning in place.
You’ve got to really work with the supplier to help ensure consistent
quality. You’ve got to work with the supplier to know that you can count
on them when they get another, better offer – that they’ll honor their
contract.
For example, when you have an extended supply chain, you have to
think about if you’re going to carry more inventory. If you’re going to
keep your inventory level the same, then obviously there’s more risk if
the supply chain is longer and from a place farther away and also where
the infrastructure can’t be counted on as much. So there are a lot of
things that you have to think about in your contingency planning to help
ensure that you’re going to have continuity of supply.
IBM: Are these formalized contingency plans that you create? And how
often do you create or update those plans?
Christine Breves: We do it on a case-by-case basis. It’s a commodity
manager’s responsibility to constantly assess the situation. At this point
in time, they would probably look at it on a yearly basis, but we haven’t
really formalized that it has to be updated on a certain frequency.
IBM: So for example, if there were political issues in a geographic
area – that might cause you to update the plans or at least review those
plans?
Christine Breves: Yes, the whole idea about contingency planning is
that you’ve tried to think through all the possible scenarios, issues like
political risks or undependable transportation systems in the country.

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“If you’re going to keep your inventory level the same,

then obviously there’s more risk if the supply chain is
longer and from a place farther away and also where
the infrastructure can’t be counted on as much.”

All those kinds of issues are built into the plan – you’re trying to antici-
pate all the possible things that could happen and line up plans while you
have time to think about it and develop alternatives.
IBM: Are there risks that you addressed that might not be intuitively
obvious to a lot of our readers?
Christine Breves: I think a lot of people understand the risks with non-
traditional suppliers. Because I think a lot of people have heard all the
stories about issues with low-cost suppliers. You hear stories of incon-
sistent quality, of people not honoring the contracts when the price goes
up. You hear stories of intellectual property that ends up in the hands of
suppliers other than just the supplier you’re working with – out in the
market. So I think a lot of the risks are pretty well known.
IBM: Procurement has taken on greater responsibility in the last 5 to
10 years. And there’s been more emphasis on sourcing and compara-
tively less emphasis on the actual transaction processing. How has this
changed the mix of skills and capabilities Alcoa needs in your procure-
ment organization, and how are you acquiring and developing those
skills?
Christine Breves: I think the skill mix for procurement professionals is
definitely changing. We have a very deliberate focus to shift the resource
focus in our organization to a higher percentage of strategic value-added
activities and away from transactional processing. We think in order to
do that you have to have a transaction strategy so that you can reduce the
number of resources tied up in transactions.

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We have a lot of emphasis on both sides right now, because we want to

spend more of our resources on the strategic side. In the past we’ve had
far too high a percentage of our resources tied up on the transactional
support side.
That’s one of the reasons why we’re undergoing the current transforma-
tion that is underway – because we believe that we can have a much
higher value organization at a lower cost by reorganizing into a global
best practice model and making sure that we’re putting technology in
place. We are consolidating into transaction centers, we’re doing a lot
more hands-free transactions – all of those things – so that we can free
up the resource costs in the transaction area to invest in people that have
the new strategic sourcing and commodity management skill sets that
can really drive more bottom-line and top-line impact.
IBM: Could you elaborate for a minute on your global center and the
best practices?
Christine Breves: We’re in the process of developing the transaction
centers. We have two low-cost centers right now. One is insourced and
is located in Hungary, and the other one is outsourced and is located in
India. We are shifting a lot of our transactional work to those centers.
Currently we have accounts payable there, but also we’re pulling a lot
of the procurement transactions, purchase order processing for example,
into the transaction centers. We also have a North America center
right now, but, long-term, at least parts of that will move to a low-cost
region.
IBM: Do you both insource and outsource as a way of managing your
risk, or is that a transitional position?
Christine Breves: We actually do both. We have found that it’s more
effective in Hungary to insource, and in India it’s more effective to
outsource. One center can be the backup for the other center is also part
of the thought. We’re just starting to form a center in Brazil because
we have a major facility there. That will probably be a combination of
insourcing and outsourcing.

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“That’s one of the reasons why we’re undergoing

the current transformation that is underway –
because we believe that we can have a much higher
value organization at a lower cost by reorganizing
into a global best practice model and making sure
that we’re putting technology in place.”

But the real story is about the value side. We have the transaction strategy
so that we can free up resources – not necessarily all of the same people
because a lot of times it is a different skill mix. We want to take the
cost of procurement and make sure that the majority of the resource
cost is invested in strategic activities. Specifically, we’re putting a lot
of new emphasis on commodity management and also what we call the
“Procurement Center of Excellence,” which is a group that supports
people, processes and technology for the procurement organization.
IBM: And your Procurement Center of Excellence does that globally?
Christine Breves: Yes. We are driving global processes, and the
commodity management organization is global as well. We support our
local plants with the part of the organization that we call “Procurement
Operations.” We felt that Procurement Operations needed to be regional
so that we would really understand the needs of the specific region.
IBM: So from a tactical perspective, it’s more of a regional focus but
retaining the global strategic focus overall.
Christine Breves: Right. Procurement Operations keeps the plants
supplied. They are the customer interface, making sure that the commodity
management organization and the whole procurement organization
is delivering what the business needs from Procurement. The sourcing
activity sits in the commodity management organization.

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IBM: That leads us to our next question. As commodity management

and sourcing has become a key element of strategic procurement focus,
how are you coordinating and orchestrating those processes and tech-
nologies globally?
Christine Breves: Commodity management is about both technology
and process and having the right people and the right skill sets. We are
organized into commodity councils in Alcoa. All of our spend has been
broken into nine councils, based on the nature of the spend. We have an
executive-level sponsor – a business sponsor. Usually they are the key
consumer of what’s being bought by that council or at least one of the
major consumers of what’s being bought in that council.
An important part of the council structure is to have the executive
sponsorship to make sure that you really can reduce the total cost of
ownership. The councils take a long-term approach, making sure we are
making the right strategic decisions. And if investment is required, that
executive sponsorship is essential as well as support for rationalizing
specifications and making other changes. That kind of business support
and alignment is critical. You need to have that level of support within
the business.
The commodity management structure is made up of the councils, and
the council acts as the steering group for the commodities in the council.
In the council structure, you have specific commodity teams. The specific
strategic sourcing initiatives are executed in the specific teams.
IBM: And those are done, as we talked about, on a global perspective
– with the execution of the procurement transactions a responsibility of
the specific regions.
Christine Breves: Exactly. The commodity management structure is
global. It’s a global leveraging of the buy under a global strategy. We
have regional representation so that we’ll really understand the regions’
specific needs. But after specific agreements are in place, the execution
and implementation of those agreements are done by the Procurement
Operations organization.

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“An important part of the council structure is to

have the executive sponsorship to make sure that
you really can reduce the total cost of ownership.”

IBM: So if I could paraphrase, you’re flowing requirements up to your

councils. Then the sourcing is done, and then the execution is back at
that regional level.
Christine Breves: Right, we have a total global view of the spend. That
allows global spend management of each category.
IBM: Now, as we’ve talked, I’ve heard two key metrics described: One
is the degree to which your team is focusing on strategic activities as
opposed to tactical and, also, the total cost of ownership. Are those the
primary metrics that you use, or are there others?
Christine Breves: We use a lot of different measurements to track our
progress. We track leveraged agreement compliance. We track working
capital contribution. We also track process metrics to identify improve-
ment opportunities.
IBM: As we conclude the interview, I’d like to ask you to share with
our readers any advice or lessons learned that you feel are important
– particularly in light of the fact that we can often learn from what other
industries are doing.
Christine Breves: We’re in the process of making a change – a restruc-
turing of our global procurement organization. We are starting to see the
power of the new model. It’s always difficult to change and restructure
an organization as large and complex as ours. But I think our businesses
are starting to see the benefit of having people with focused expertise
in each of the categories – deep knowledge, good financial acumen and
collaboration skills. We also are going out and targeting very specific
skill sets for some categories that we didn’t have in-house. We are
expecting great things out of the new organization.

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As far as lessons learned, we are at the beginning of seeing the value of

the new model. In particular, total cost of ownership will be a lot easier
to go after in the new model than under our previous structure. That’s
because, before, the structure almost forced us to be very price focused,
whereas now we can look at the whole supply chain and how to bring
value at all different parts of the chain.

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Executive interview
Farryn Melton, Vice President and Chief Procurement
Officer of Amgen; Tyson Popp, Associate Director
of Manufacturing Materials for Amgen; and Steven
DeClercq, Associate Director of Fill & Finish Material
and Contract Manufacturing for Amgen

Amgen is a leading human therapeutics company in the biotechnology

industry with over US$12.4 billion in annual revenues. Over the last 25
years, Amgen has tapped the power of scientific discovery and innovation to
dramatically improve the lives of various people. They employ over 16,500
full-time staff. The wide variety of goods and services required to support
Amgen creates some interesting supply chain challenges that Farryn and her
team are working to optimize.1
Farryn Melton is the Vice President and Chief Procurement Officer, Amgen,
where she’s responsible for Amgen’s purchases of goods and services globally.
Joining Farryn during this interview are Tyson Popp, Associate Director of Manu-
facturing Materials for Amgen and Steven DeClercq, Associate Director of Fill
& Finish Material and Contract Manufacturing. These three executives provide
thought-provoking perspectives on sourcing and procurement strategies.

1
http://www.amgen.com

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IBM: Sourcing from low-cost jurisdictions certainly offers attractive

savings in purchase price, but with the attendant issues – both real and
perceived – that must be addressed. Are you taking advantage of low-
cost jurisdictions for sourcing?
Farryn Melton: Today, we don’t have a strategy that includes low-cost
country sourcing per se. It is not a primary driver for us right now nor
is it necessarily aligned with what our business requires. Our primary
concerns are effectiveness, assurance of supply and scaling for growth
– these are things that will not necessarily in and of themselves drive
toward low-cost countries.
However, we are looking at low-cost countries for some of our catego-
ries. For instance, in our clinical area for data analysis, if we want to
have a presence in places like India, we may go into those countries
from a supply base standpoint or a captured standpoint to do work.
We would hope to achieve lower costs as a result, but it wouldn’t be a
primary driver.
IBM: That’s a good point. As you look to move into India and other
areas for the items you just mentioned, what key issues do you see, and
how do you intend to address those?
Farryn Melton: It really comes back to the strategy. So in the business
areas where we want to have a presence, it will be the typical things that
other firms have dealt with such as, intellectual property and the overall
capability of that region.
Obviously, India is growing in its capabilities, and our concern is less
around capabilities for services like data analysis. We want to be careful
in how we select what work we place where. It’s primarily going to be
driven by the capability of that supply base versus cost for us. These
really are the same challenges that other companies have, but they may
take a little bit of extra risk for low-cost reasons, whereas we wouldn’t
do that.

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“But truly, assurance of supply is our biggest

challenge as we’ve grown so quickly – not necessarily
the cost of our raw materials.”

The other point in Tyson and Steven’s area is the cost of goods and
materials in chemicals, where naturally that’s where some of the supply
base is going.
Tyson Popp: I think in the case of the direct materials, we will find
ourselves with chemicals and commodities in low-cost countries;
however, we’re not going to be driven there by our own nature. We will
be driven by happenings in the world market around us – things like oil
price as well as regulatory concerns that influence where capacity will
be built.
So if we go there directly, we’ll go there with a proven supplier and
make certain that we’re driving to effectiveness and the right capabili-
ties. But truly, assurance of supply is our biggest challenge as we’ve
grown so quickly – not necessarily the cost of our raw materials.
IBM: So you’re looking more to where the capabilities reside to be
the most effective than necessarily trying to generate savings from the
materials that you’re purchasing.
Tyson Popp: That’s correct. And on a capabilities side, it’s more than just
people’s skills. It’s also the experience that suppliers have with Western
regulatory agencies, specifically FDA and European regulators.

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IBM: Aside from India, are there any other countries that jump out at
you or is it too broad of a question based on everything that you buy?
Tyson Popp: Certainly China and others. In the area of contract manufac-
turing, we know that South Korea is becoming a player, as is Singapore.
If you really think about the direct materials with aspects of manufac-
turing, you start to raise the question of where are the right places to do
business from a tax perspective, which is more of a corporate strategy
issue.
IBM: Interesting. When IBM was heavily into PC manufacturing, our
tax strategies leveraging Singapore were a big part of our supply chain
success.
Farryn Melton: As we answer these questions, keep in mind the
business that we are in is different than pharma. It’s about biotech and
pioneering in this area. We’re really growing a new business. Therefore
we have different business drivers than a lot of companies might.
IBM: Procurement has taken on greater responsibilities in the last 5
to 10 years, with more emphasis on sourcing and comparatively less
emphasis on the actual transaction processing. How has this changed
the mix of skills and capabilities that you need within your procurement
organization, and how are you acquiring and developing those skills?
Farryn Melton: Our mix is changing in concert with any organization
that’s going through a transformation to strategic sourcing. So one of
the things that Amgen, as well as other companies, is doing is leveraging
systems to allow us to automate and eliminate non-value added process
and make the remaining processes more effective and more efficient.
One of the things that we’re doing is implementing an ERP system.

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“We have sourcing people in research

all the way through to manufacturing
and distribution – all along the line.”

The way to eliminate those non-value-added activities and change

the mix of skill sets has everything to do with not spending time and
energy on the transactional activity but finding ways to streamline and
automate. What we have been doing is implementing strategic sourcing
skill sets over the last year or so with an emphasis during the last six to
nine months on bringing in “category management” capability. That is
the backbone of our strategic sourcing and our vision and strategy. It has
to do with thinking about sourcing in a different way, not as a transaction
and not as a deal but managing the category spend and coming up with
a strategy at the material or service category level.
If you think about the sourcing group, and the value that it can bring,
transaction is really not the top value proposition. It’s a means to an
end, as is the contract itself. So we’re trying to emphasize building the
strategy that gets you there and also managing that marketplace and
supply base on a continual basis. Sourcing is one of the most unique
organizations that has touch points throughout the value chains. We have
sourcing people in research all the way through to manufacturing and
distribution – all along the line.
If we can find a way to harness that value and tap into it and leverage it,
it’s just that much more powerful. Our skill set mix is changing dramati-
cally in that regard, where our focus is more on category management
and category managers and leaders like Steven and Tyson. These people
are helping drive strategies for the business. Therefore that is where our
focus is and where our future lies.

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IBM: That’s a great point. And we mentioned in the last question how
different the biotech supply chain is. What would be the top one or two
categories that you’re faced with and challenged with when you look for
the expertise that we just talked about in category management?
Tyson Popp: I think the key differences are that although we look like
pharma, and we have a common supply base with pharma, our leverage
comes in different places. So the key categories are those that support
cell culture – how we make our biotech products. The key challenge is
that our growth has been dramatic and, in some cases, has been tough to
forecast. The same growth stress is placed upon our suppliers and they
must try to keep pace with us. And more importantly, the suppliers must
anticipate how our growth is going to occur over time.
It’s a real challenge. We’ve gone from US$3 billion to north of US$12
billion in sales in a few short years – this has had a real impact on the
unique supply base that’s supporting biotechnology. That’s the key
challenge and probably the most significant one.
Farryn Melton: One of the things that comes to mind is one of the
strategies and one of the areas that Steven is focused on: contract manu-
facturing.
Steven DeClercq: This refers back to the primary question, where the
skill sets and innovations typically found in the supply base aren’t that
prevalent in the area of biologics manufacturing services. Therefore, we
are trying to extract the most value from our top-tier suppliers and really
leverage their knowledge as opposed to just optimizing the tactical
supply of goods and services, if you will.
Another area that we are focusing on is closely collaborating with our
suppliers to spur more innovation. This takes a different set of skills
than the traditional category management has required. This means that
we need to bring in people that have dealt with some of these develop-
ment areas so we can extract that value from our supply chain going
forward.

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“...we are trying to extract the most value from

our top-tier suppliers and really leverage their
knowledge as opposed to just optimizing the tactical
supply of goods and services, if you will.”

IBM: Great point. It amazes me how many people think that the bigger
you are, the heavier your hammer is, the easier it is to do supply chain
management. And the challenges you just articulated make for some
creative strategies.
Farryn Melton: Our leaders and teams understand the business, and
they need to understand the impact of what we’re doing in order to be
effective. You can walk into a contract manufacturing negotiation with
a real strategy on how to deliver the most value. That’s worth a lot more
than just saving a dollar or two per hour on a rate.
There are a couple more things we all collectively want to say about
that point. One is that category management is a process that provides a
strategic way of looking at your supply base and your supply. Currently,
Amgen is driving approximately US$13 billion in revenue with almost
US$4 billion in spend. So if you think about how much we spend to create
US$13 billion in revenue, there needs to be nearly as much strategy in
the supply side as there is in generating that revenue.
That’s where we think category management is powerful and we’ve
taken a lot of time and effort to train our people in category manage-
ment strategies. Everyone who has anything to do with sourcing has
been trained for four full days and also receives coaching and on-the-job
training. During this training they are learning about strategic category
management, how to develop a category strategy and how to execute
against it. In addition to training staff, we are bringing on talent that has
the category management skill set. We have a good mix of functional
expertise as well as process expertise which is how we’ve been devel-
oping the organization.

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IBM: That point actually ties right into the next question about how
you leverage technology to help sustain those benefits and realize them.
Aside from the ERP project that you mentioned, are there any other
pieces of technology that you’re leveraging to, again, help you realize
and sustain those savings that the category teams are coming up with?
Farryn Melton: In order to spend more time on doing strategic work,
we need to spend less time on transactional and tactical work. One way
to accomplish this goal is to minimize non-value-added activities which
we accomplish by eliminating them, automating them or streamlining
them. Consequently, everybody’s objectives are to analyze their area of
responsibility, evaluate their non-value-added activities and develop a
plan to eliminate, automate, outsource or a combination thereof.
We’re bringing all that together and starting to evaluate our roles and
responsibilities. We are now looking at the things we do from a new
perspective, i.e. what can we do to bring more value? One area we are
examining is how we currently automate our operations. Our technology
is the ERP program and implementing an end-to-end integrated system
which will provide better data in real-time allows us to do our category
management in a more effective way than manually pulling data.
We did an opportunity analysis a few months ago. It took us weeks to
pull the data because we had to do it from multiple systems and manually
had to create Excel spreadsheets. What we want from the ERP system is
to help us do data gathering through a central “business warehouse” with
effective reporting tools.
But we also want improved compliance tools. Once the strategic sourcing
is done, how do we know we’re actually utilizing those leveraged strate-
gies? Steven or Tyson, is there anything that you want to add?

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“What we want from the ERP system is to help

us do data gathering through a central ‘business
warehouse’ with effective reporting tools.”

Steven DeClercq: The other variable is, when you implement these
systems, to ensure that you are adopting new and improved processes as
well. So to ensure that you actually gain sustainable savings, one way,
like you said, is measuring or ensuring compliance.
The other way is ensuring that your system reflects the true sourcing
processes that you want to instill throughout the organization versus an
implementation of processes that focus on one-time savings or that don’t
reflect the desired outcome, which would drive people to revert back to
their old habits and implement the systems inconsistently. So I think
that’s an element to consider as well when implementing systems.
IBM: With this change in focus to category management and leveraging
the systems to take out a lot of the transactional day-to-day tasks, how
have you dealt with the changes in skill sets within your organization,
and how have you brought people along? Or have you found that you’ve
needed to reshuffle the deck and move people on?
Farryn Melton: We have taken action in both ways and it goes back
to category management training. It’s establishing a new vision and a
new way of working and clearly articulating that message over and over
again to the whole organization. We’re a fairly large organization and
we’re spread out around the world. To address our depth and breadth,
we developed a vision and a mission focused on business partnering and
category management which drives everything we do.

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Any change effort takes time to implement, and when you first change
your way of doing business dramatically, you need on-the-job training.
You don’t just go through four days of Six Sigma training and then call
yourself a “black belt”. You can’t just go do category management. So
we’ve enlisted external support. The individuals who have helped us do
the training are now sitting with people on these projects doing on-the-
job training and working with them so that they’re really embedding the
process into our actions.
IBM: That’s a good point. It should be one of the more rewarding
scenarios – getting people to go from the day-to-day firefighting to
actually appreciating what it’s like to add that value.
Farryn Melton: Absolutely. And the people can begin to see it and
feel it. One of the bigger challenges is how do we flip the paradigm
so that we can be more strategic because we’re so day-to-day focused.
That’s the challenge that we’re facing, that everybody faces. That’s why
we’re getting rid of the non-value-added activities and becoming laser
focused.
Tyson Popp: The key question that we keep coming back to answer, is
this activity really helping Amgen to succeed? Is this furthering Amgen’s
business strategy? And to the extent that it’s not, we try to step back and
think about how SS&P (strategic sourcing & procurement) should be
engaged. Like many firms, we have more to do than we have people to
do it. We resultantly have to make some tough choices and make certain
that we don’t leave the high-value opportunities on the table.
IBM: As organizations rely even more on extended supply chains, there
becomes an increasing emphasis on complete, accurate and timely
information.
Tyson Popp: We understand that more extended supply chains will be a
focus for our business and that we’ll be maturing many of our supplier
relationships in the next few years in order to get and stay ahead in this

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“Supplier relationship management is increasingly

critical for us and the success in how we’re going to
grow in this area of extended supply chain.”

area. Supplier relationship management is increasingly critical for us

and the success in how we’re going to grow in this area of extended
supply chain. We do not have nearly the integration with our supply base
that we could have.
IBM: As supply chains become longer and more complex, the enter-
prise encounters new risks, including hazardous materials, geopolitics,
even weather. Even more traditional risks such as buyer versus supplier
power, the ability of substitutes and barriers to market entry take on new
dimensions. To manage these risks, how do you evaluate your business
environment, learn from industry innovators and share that information
across your extended enterprise?
Tyson Popp: I think the first thing is that we’re at a point in our growth
where the “traditional risks” should be factored into our strategic
plans. We evaluate traditional risks of supplier versus buyer power and
question if we are properly positioned with our supply base. This is part
of category management. We need to look out to the market and make
certain that we’re properly positioned to really have the developmental
opportunity that Amgen requires. We have to be careful not to be taken
advantage of, exploited or treated like a small company coming along
into pharma.
If you step beyond the traditional, we have some interesting regulatory
concerns in biotech, things like animal-derived materials, things that
could be disruptive to to the biologics market overall.

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The third aspect of risk is vulnerabilities from environmental concerns.

It’s not the environmental risk of Hurricane Katrina or those things hitting
our business – and certainly, we have that risk. The risk that concerns me
is with our tier two suppliers where we have unique materials and where
we may not have as much visibility. We have had some experiences with
this risk and we deal with that every day.
IBM: What supply chain lessons, both positive and negative, have you
learned from other industries that you’ve been successful at applying
here?
Steven DeClercq: One of the aspects we talked about before was
vertical integration and really looking at how can we strike value. And
one of the areas we’re trying to get at is what extra value or additional
value of services can these providers bring to the table that we’re not
extracting today.
The second element is business development. A lot of the suppliers in
our base are developing along with us. So what role can we play as
a developed and established biotech company to develop the suppliers
out there? And I think all of the automotive or some of the engineering
firms have vertically integrated to the extent of even parts or component
suppliers developing their skills sets and capabilities – we need to extract
some of that value as well. So not only extracting it but also educating
and developing our suppliers is a two-way street that we could learn
more about from the other industries.
IBM: As we conclude the interview, I’d like to ask each of you to share
with our readers any advice or lessons learned that you think would be
particularly appropriate for your peer group.
Farryn Melton: My mantra is always about making sure that what
you’re doing is aligned with the business strategy and that it is adding
real value. You need to constantly look at yourself objectively and criti-
cally to make sure you’re doing the right things, and that you’re focused
on the right things. And not just staying relevant, but really being ahead
of the curve. That’s my best advice to anybody.

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“We have a role to bring back some of the innova-

tions or lessons learned from others and to collabo-
rate with our internal stakeholders to bring these
opportunities to the forefront and really derive
value out of these relationships.”

Tyson Popp: I think the key aspect for me is recognizing that as you do
more and more strategic sourcing, the aspects of value become clearer.
Clearly, it’s more than price, and it really comes back to truly driving
the business strategies. We need to stop and almost forget what we know
about what procurement is and transition to approach our work from a
different perspective, asking: How do I help the business strategy? And
finally, drive at what’s going to make the firm successful and what’s in
the best interests of our patients.
Steven DeClercq: I think the nature of this job is such that you interact
with many third parties, suppliers and industry peers, that we are a
conduit to the outside world. We have a role to bring back some of the
innovations or lessons learned from others and to collaborate with our
internal stakeholders to bring these opportunities to the forefront and
really derive value out of these relationships. I think we forget this at
times and we should take advantage of this unique vantage point as a lot
of other business functions tend to be really internally focused.

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Executive interview
Ron Schnur, Vice President of Strategic Sourcing,
Coors Brewing Company

With annual sales exceeding 32 million barrels, Coors Brewing Company

remains at the forefront of the brewing industry. Its heritage is exemplified by
the commitment made by Adolph Coors in 1873: to brew the finest-quality
beers using the highest-quality ingredients available.1
Ron Schnur, Vice President of Strategic Sourcing for the Coors Brewing
Company, shares his insights on procurement from a wide range of topics
including low-cost sourcing and the procurement profession itself.

IBM: The first question is around sourcing from low-cost jurisdictions.

Certainly, it offers potentially attractive savings in purchase price, but
there are a lot of attendant issues – either real or perceived – such as
time zone, intellectual property, logistics, etc. that must be addressed. Are
you currently taking advantage of low-cost jurisdictions for sourcing?
Do you plan to in the future, and, if so, what are the key issues you see?
How do you intend to address them?
Ron Schnur: The answer is yes we are today buying some products from
what we would all probably refer to as low-cost countries, emerging
countries. Not a great extent to compare what we buy to heavy manufac-
turing or diversified manufacturers or automotive; we’re nowhere near
on the glide path of moving significant portions of our spend to lower-
cost developing countries because, quite frankly, a lot of our spend
doesn’t lend itself to take advantage of one of the key benefits, which is
the lower-cost labor. And many of our products don’t lend themselves to
efficiencies around transportation or logistics costs.

1
http://www.coors.com

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“Purchase price or product piece prices is just one

element of what it is we need to be about in terms of
managing our spend and managing the dollars as
though they were our own.”

But to the extent that we are continually looking to evaluate low-cost

suppliers in low-cost countries, the one thing that I try to reinforce with
my team here is a total cost look at the picture. Purchase price or product
piece prices is just one element of what it is we need to be about in terms
of managing our spend and managing the dollars as though they were
our own.
I’ll give you a case in point. We buy cooler bags from China. We started
to buy cooler bags from China in the last couple years. Let’s say that the
total cost of the cooler bag is US$3 a bag, and over 50 percent of that cost
is transportation and the requisite logistics costs, duties, taxes, freight
forwarding – all the easily recognizable costs that go into the movement
of the product. So when you’re looking to source cooler bags if you
only get zeroed in on the product cost, you are missing a significant cost
element of what it would take to bring that stuff in from China.
I will say the other thing that we’ve seen in the recent past is that, as an
example, as China has continued to grow and become more capitalistic
in the way that they are approaching business and the marketplace, we’ve
seen a significant increase in their labor costs. Five years ago when I was
spending a lot more time over in China, we were seeing manufacturing
rates at about US$100 per month for an FTE (Full-time Equivalent) labor
cost. Today that cost in many cases is US$250 a month. Now it isn’t that
much, and it isn’t that significant a cost compared to what we would pay
for similar labor over here in the U.S., but it’s an increase nonetheless.

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And then when you start looking at the cost of professional talent, the
support talent, once again, five years ago I could hire a supplier quality
specialist with multiple degrees, great experience, and they were costing
me US$10,000 or US$12,000 a year. Today those people in significant
demand, surprisingly, might be pushing US$100,000 a year.
So we’ve actually seen from a lean perspective that Mexico, as an
example, is becoming more and more attractive as a low-cost provider
of goods and services. That’s because of what we’ve seen inflation in
China, and we’ve seen the inflation in logistics and transportation costs
with everything that’s going on with freight and capacity constraints
in the ocean shipping and/or truckload or less than truckload or inter-
modal type of moves coming from the ports in, let’s say, Long Beach,
for instance.
So while we continue to look at low-cost country suppliers and we have
some suppliers in Eastern Europe and China specifically, it’s not to the
greatest extent that you might see in other heavy industrial manufac-
turing companies. But, quite frankly, as we continue to evaluate total
cost, we’re actually seeing things turn somewhat more favorable back
into Mexico and Latin American types of markets.
IBM: That’s a great point. And your experience five years ago, was that
with another company?
Ron Schnur: Yes it was. That was with Eaton Corporation, which is
where I was prior to coming to Coors.
IBM: Great, thank you. Next question, procurement’s taken on greater
responsibility in the last 5 to 10 years with a lot more emphasis on
sourcing and, it would seem, comparatively less emphasis on the actual
transaction processing. How has this changed the mix of skills and
capabilities you need in your procurement organization, and how are
you acquiring and developing those skills? Additionally, how are you
eliminating or minimizing those non-value-added tasks to allow time for
the more strategic activities?

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“So while we continue to look at low-cost country

suppliers and we have some suppliers in Eastern
Europe and China specifically, it’s not to the
greatest extent that you might see in other heavy
industrial manufacturing companies.”

Ron Schnur: More and more, even today, it’s surprising if you ask some
people if procurement and supply management is a profession, you still
get a variety of responses. While we’ve made a lot of progress in the
professional field, it’s still an emerging field I think.
I’m still shocked today when I ask that question to people, how many
blank stares I get back. You know, surprisingly, no one will question
that sales is a profession, or engineering is a profession, or finance is
a profession, but there is still some gap, at least in my experience in
the consumer packaged goods industry, of viewing procurement and
supply management as a profession that people such as myself go and
get advanced degrees in and get certifications in. Manufacturing again,
and automotive, and probably even technology companies – I don’t see
that much of a gap in those industries as I do in my travels in the last
three years.
But even in consumer packaged goods companies, that is becoming less
and less of an issue. You know we’ve spent a lot of time during my time
here at Coors at trying to develop and capture what we call leadership
and technical success factors for professional procurement and strategic
sourcing organizations. And they’re not dissimilar to what you see in
other professional activities.
For instance, to come into Coors as a strategic sourcing or supply
management professional, our evaluation and our interviewing process
is much more rigorous around these types of skills: getting results,

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strategic thinking, talent management, interpersonal effectiveness, lead-

ership maturity, and then what we’ll call stakeholder and/or customer
focus. When you think about those types of skill sets and competencies,
more and more it’s about being good business people. It’s about being
deep and broad in your understanding of what drives businesses, how
businesses make money, how we grow and develop and nurture talent.
I think 10 years ago in Coors Brewing Company, we wouldn’t even be
talking about that kind of stuff. We’d be talking about the ability to write
purchase orders and the ability to expedite parts and the ability to maybe
manage people but not so much lead and grow people.
One thing that I’m a real stickler on here as a measure internally for
strategic sourcing – a measure of are we making progress – is what I
call the exporting and importing of talent. I want strategic sourcing to
be a place where people want to come into, recognize it as being a fertile
ground for skill development and business growth and impact on the
business. And then for some people who don’t want to be professional
supply chain people, they go on to other things in other departments
– finance, marketing, program management, what have you.
The bottom line in the second half of your question, around transaction
processing to the extent that we can outsource and download that type
of activity to third parties, to incorporate technology that manages that
at the source – we are absolutely on a glide path doing more and more of
that, be it managing our storerooms, be it managing our temporary labor,
be it managing our procurement of some promotional items. We’re abso-
lutely doing that to a significant extent.
And once again, five years ago we would never have made an investment
in an e-procurement tool to facilitate and enable transaction processing,
contract management, spend analytics. And we’re 30 to 40 days away
from going live with our e-procurement technology solution.

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“I want strategic sourcing to be a place where

people want to come into, recognize it as being a
fertile ground for skill development and business
growth and impact on the business.”

IBM: The import/export of people throughout the Coors organization

definitely speaks well of what you’ve been able to do in the company for
the last few years.
Ron Schnur: Yes, I think that’s a tremendous win. I want more of that
to happen, for people to see this as a place that you can come and add
value, grow your own skills and get great coaching and mentoring. And
if you so desire to stay in the organization – great, if not, then we have
built a credible organization that other departments want to come in and,
quite frankly, poach our people.
IBM: The next question we have is around commodity management and
sourcing and how they really are key elements of the strategic procure-
ment focus. Effective commodity management requires the orchestration
of process and technology. How are you leveraging the capabilities of
your enterprise both within and outside procurement to achieve those
objectives? You touched a little bit on the technology play a minute ago.
Do you want to elaborate or expand on that?
Ron Schnur: Well let me start with the process piece because I think
the process piece is very important. You know you don’t want to digitize
or implement a technology solution on top of bad process. I came here
three years ago, and we’ve spent the first two years really working on,
as I talked earlier, laying out success factors, laying out revised job
descriptions and role responsibilities and what those critical success
factors look like.

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We spent some time really getting our arms around what does a good
strategic sourcing process look like and what are those inputs and what
are those outputs and what are those deliverables? And there’s – call it
what you will – the 5-step process, 7-step process, 15-step process, it’s
all the same. But we really spent a lot of time around introducing what
that good process looks like, what good spend analytics look like, what
good supply market analysis looks like, what a good deliverable looks
like and then educating our people around those key process steps and
key process deliverables.
And then right on top of that, as I said earlier, we’re going to launch our
e-procurement tool that is going to address the workflow, the content,
the catalog pieces of some of our high-volume, low-spend, perhaps low-
impact spending areas. So some of these people that we have brought
into the organization and that we have educated and that we have really
attracted with great strategic sourcing or supply management experi-
ence, we unchain them from the desk of pushing paper to really now do
leading practice or good practice strategic sourcing.
This is an exciting time for us because people see the roadmap, and they
now see it starting to really take hold. Up until the last six months or so,
doing strategic sourcing here, it was hard to get at the spend analytics,
it was hard to understand by category what we’re spending our money
on. It’s been very frustrating for some of our folks, and I can understand
that. So now with the launching of the technology on top of a lot of good
work that’s gone on in the process side, there’s a lot of excitement here.
That’s then on top of the profile of the person that we’ve been hiring
that can help us still manage the change and help us collectively with
the transformation. I’ve posed a question of my peers at times: People
first or process first? You need both, but what have you done at other
companies?

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“So we really have focused on people and the

skill development, the process, and now we’re
going to start applying some leading or at
least current technology tools that will only
enhance our strategic sourcing activity.”

Surprisingly, and not so surprisingly, great people can work around

bad process and help you create the “to be” process that you aspire to
execute. So we really have focused on people and the skill develop-
ment, the process, and now we’re going to start applying some leading
or at least current technology tools that will only enhance our strategic
sourcing activity.
IBM: That’s a good point, especially when you’re trying to sustain the
savings that your teams have been able to identify through the sourcing
efforts. Next question: As organizations rely even more on their extended
supply chain, there is increasing emphasis on complete, accurate and
timely information. Transparency is necessary for meeting not only
manufacturing and logistics requirements but also regulatory require-
ments and effective sourcing. How are you optimizing your organization,
systems and tools to enable this transparency? I think we’ve touched on
a couple of those points with your process standardization earlier.
Ron Schnur: Yes. The one thing I have found in coming to Coors
compared to my heavy manufacturing-automotive background is there’s
much more dedicated effort and focus on the limited resources and the
limited capital dollars that we have to spend on tools and technology.
Clearly, that’s going to the customer-facing activities first and foremost.
So, in some regards, we will never be at the leading edge of what I
would call back office, downstream supply chain tools and technology
just because with every extra free dollar that we have, we’re going to

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probably put that on our customer-facing roadmap – how we interact

with point-of-sale data with our retailers or our distributors, or how
our distributors order their materials, and how we’re able to track that
throughout the manufacturing, distribution, customer service piece of
the supply chain.
It’s changing a little bit. I think of the incoming supply piece – suppliers
self-scheduling, suppliers self-releasing, and suppliers self-policing their
ASNs (advanced shipping notices), quite frankly going into our portal
and any portal and being able to see their up-to-date, time-sensitive
performance for on-time delivery or quality or defects. We’re several
years and probably several generations of technology behind automo-
tive and some of those other industries.
So what our e-procurement platform is going to provide us, at least at
a very basic level, will be a supplier portal for some insight into our
release schedule and our production schedule that we don’t have today.
It will help us take our supplier rating system and our capturing of the
incoming delivery and incoming quality defect rates and will be an
incremental improvement over what we have today. It’s still three or
four generations, probably, behind automotive and some of the other
companies but an improvement nonetheless.
So are we where best-in-class is? No. Will we ever be? Probably we
can be best-in-class in some procurement activities but most likely not
in technology. But I think we’ve gotten to a place internally where we
all agree now that there’s a baseline level of capability and capacity and
competency that we need to be at in order to adequately support and
sustain this extended supply chain of plan, source, make and deliver.
A key input into that is, obviously, incoming material, quality and
delivery, and cost. Up to this point we’ve been doing a lot of things by
Excel spreadsheets, e-mails and faxes, and to a significant extent that’s
going to go by the way of the horse and buggy whip here in the next 3,
6, 12 months.

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“...I think we’ve gotten to a place internally where we

all agree now that there’s a baseline level of capability
and capacity and competency that we need to be at in
order to adequately support and sustain this extended
supply chain of plan, source, make and deliver.”

IBM: What supply chain lessons, both positive and negative, have you
learned from other industries, and are there things that you’re going to
avoid trying to implement where you’re at and things that you’re going
to try to emphasize in an industry that may not have embraced those
previously?
Ron Schnur: I think the one of the more significant philosophical
thoughts that I’ve tried to bring to Coors and that I’ve been continuously
pushing and advocating is that we clearly are not as big as our primary
competitors in the North America market, SABMiller, Interbrew and
Anheuser-Busch. But we can be as good as, if not better than, them in
how we add value in procurement and supplier management.
As I told our CEO when I interviewed here three years ago, we don’t
outspend those companies, we don’t out-asset those companies, we don’t
out-capitalize those companies, we don’t out-resource those companies,
so we have to do things differently. We have to be focused on finding
and identifying those key categories and those key business relation-
ships that we need to nurture and harvest and grow and, at the same time,
demand and expect great performance.
So that’s quite a shock to a traditional purchasing person who may be
all about hammering the supplier or threatening the supplier or using the
power of the buyer over the supplier. And so we have to be really smart
and innovative and creative and, quite frankly, perhaps more interested

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in listening and finding ways to create win-wins for our key suppliers
because we can’t do it the more traditional way of just flowing more and
more volume through their business.
We do have some suppliers here that have been suppliers for a long time.
Some perhaps less on merit than others and, in those cases, we’ve been
very direct and transparent with those suppliers on what we need them
to be doing. As I frequently say, if we ship bad beer to distributors and
consumers at a 90 percent quality level or on-time level, they don’t pay
me for that. Why would I accept anything less from the supplier base?
And what and how do we need to connect our two teams to make sure
we both win?
I’m a firm believer that if you can’t find ways for suppliers to make fair
and reasonable margins that they can, in turn, reinvest into their business
and reinvest into innovation that they want to bring to you, you have an
unsustainable supply chain. So while we want a fair price and we want
a market-competitive price, we clearly are about understanding cost for
what it is, what goods or service it is we buy. We also want our suppliers
to make some money so that they are here next year and the year after and
the year after that. And more importantly, they want to do business with
us, and they want to bring innovative ideas to us, and they know that we
won’t violate intellectual property or shop their designs haphazardly.
So I think I’m touching on the back half of that question, around positive
and negative lessons learned. I don’t want to give you any sense that
we’re naïve, or soft, or Pollyanna-ish in our approach, but we clearly
recognize that we’re an 11 percent player in the U.S. market, not a 25
or 48 percent player. So we have to do things a little bit more creatively
and engage our internal people as well as our external supplier base in a
different way and in a more collaborative way than perhaps they might
see elsewhere.

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“...we have to be really smart and innovative and

creative and, quite frankly, perhaps more interested
in listening and finding ways to create win-wins for
our key suppliers because we can’t do it the more
traditional way of just flowing more and more volume
through their business.”

IBM: That actually makes for a more interesting environment for you
and your team. I mean, there’s only one 800-pound gorilla in every
industry. There are a lot of supply chain professionals out there who
are facing, in various industries, the same challenges you are. As we
wrap up this interview, are there one or two nuggets you can give them
from an advice standpoint of things to look out for when you’re not able
to use just a leverage play – either lessons learned or key things to
help them become successful when they are the underdog in the supplier
scenario?
Ron Schnur: Yes. Integrity and authenticity are something that a lot
of people talk about these days, and I think the authentic leader makes
social and corporate responsibility part of the company’s plan. I believe
that there are still some integrity issues around, and there are a lot of
challenges in working with suppliers across the supply chain.
When we have a supplier that’s having a problem with throughput or
whatever, and I say let’s parachute in a black belt to help them uncover
and eradicate some waste, I’m always shocked to hear someone be
against it.

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But I sit there and say waste is waste. Somewhere, somehow we’re all
paying a part of that waste. Isn’t it better for us to come in, maybe show
them or help them or teach them how to identify and correct issues
within their plant that they can, either with our ongoing help or of their
own volition, transfer across their organization so we can benefit on an
ongoing basis for a better, more robust, healthier, more efficient and
effective supplier?
I’m a firm believer that, in the long haul, we’ll get our fair share of
that supplier’s cost structure, of their intellectual capacity, and of their
support and their creativity. We may not scoop it up this week, or this
month, or next month, but building a healthier supply chain, making a
bad supplier better, even though it might look like it’s directly impacting
a competitor’s line or what have you, I think the benefits are there.
I continue to always harp on my folks, waste is waste, and we need to
be better tomorrow than we were today. There’s a great quote that I keep
near and dear to my heart talking about six months from now, you will
not be in the same place – you will either be better or you’ll be worse
than you are today, but you will not stay the same.
If you internalize that and really believe that and really predicate every-
thing that you do around that hypothesis, then I think in the long run
you’ll have a sustainable, healthy, productive business.

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Executive interview
Mark McDaniel, Vice President, Procurement and
Logistics for Supply Chain Management, Halliburton’s
Energy Services Group

Halliburton, with 2005 revenue of approximately US$21 billion, is one of the

world’s largest providers of products and services to the oil and gas indus-
tries. Revenues are almost evenly split between the Energy Services Group
and KBR. Over 70 percent of Halliburton’s 2005 revenue was generated
internationally. Halliburton employs more than 100,000 people in over 100
countries. Mark’s organization itself is responsible for approximately US$5
billion of spend with 1,100 employees.1
Mark McDaniel is the Vice President of Procurement and Logistics for Supply
Chain Management for Halliburton’s Energy Services Group, where he’s
responsible for purchases of goods and services globally, including both
direct and indirect goods and services. During this interview, Mark provides
his insights on several key topics, such as procurement strategy, supplier
collaboration and risk mitigation.

IBM: Sourcing from low cost jurisdictions certainly offers attractive

savings in purchase price, but there are attendant issues, both real and
perceived, that must be addressed. Are you currently taking advantage
of low cost jurisdictions for sourcing?
Mark McDaniel: We are. When we launched into the effort more
actively, we analyzed our spend and found we were actually buying and
purchasing more from the low cost countries than we initially thought.

1
http://www.haliburton.com

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But it’s obvious it’s not enough in the current environment to help us
generate the extra capacity that we need. We also realized that we need to
do more to make us more cost advantaged and to position us for growth
in the eastern hemisphere.
So we are aggressively doing that. First, we are getting our spend data
together, which we now have a better handle on. We now understand the
strategies of our product service lines so that we can deliver the products
that they need. And finally, we’re focusing on building, what we call,
local “boots on the ground” resources in both India and China.
IBM: What are the key issues you see, both in your last 18 months of
more aggressive efforts and in your previous experience? And how do
you intend to address them?
Mark McDaniel: You must understand the business volume and the
business needs in other markets. We’ve learned it is very critical to
understand that we’re in a technology business with some complex
products; procurement cannot just go out and start buying things differ-
ently from a different place. You have to build a concerted and coordi-
nated effort with engineering, technology, and quality programs. The
learning curve that we’re on now is to make sure that we have alignment,
we get resources identified and we establish processes to make this more
of a core competency.
IBM: It sounds like that integration and alignment is really perhaps
more of a key factor than the transactional sourcing itself.
Mark McDaniel: If we wanted to dramatically increase the volumes
that we were purchasing in low cost sources, then we had to get our
processes aligned. We’re also finding that we’re developing the culture
of how you manage new supplier development, how you must support
them in their first article builds and you must devote the quality and
technology resources to support them as they start. And we know that
you have to do that locally. The resources that we’re placing in country
have been valuable in the communication and exchange of information
as well as reducing the time it takes to generate first articles.

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We’ve learned it is very critical to understand that

we’re in a technology business with some complex
products; procurement cannot just go out and start
buying things differently from a different place. You
have to build a concerted and coordinated effort
with engineering, technology, and quality programs.

IBM: And how are these resources coordinated? With activities in

100 countries worldwide, Halliburton has a presence in many of the
countries that you’re sourcing from.
Mark McDaniel: At this point, our focus has been on India and China.
So that’s where we’re focusing our hiring at this point. It doesn’t mean
that we won’t focus on other regions at a later time. Our business needs
will dictate where we add local resources.
IBM: Procurement has taken on greater responsibility in the last five
to 10 years. And as you’ve just pointed out, with increasing emphasis
on sourcing and, I would suggest, comparatively less emphasis on the
actual transaction processing. How has this changed the mix of skills
and capabilities Halliburton needs in its procurement organization?
And how are you acquiring and developing those skills?
Mark McDaniel: You can’t neglect the transactional part of the business.
We have taken a balanced approach on that philosophy. We have focused
on trying to eliminate the low value added processes that procurement
has been encumbered with over the course of time. The field is reacting
to very high workloads with processes that can be more efficient.
Last year we made multiple process changes to eliminate low value
added work for our field employees that are in the transactional part of
the business. We’re trying to give field employees the tools and processes
to streamline their work.

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We’ve learned that handling the transactional part of the business really
gets you to the table with the operations piece of the business and it
makes you a valuable partner in the battlefield as you’re handling trans-
actions and helping them execute their daily business.
It’s very important to do the tactical well and do it right. But now we have
added a strategic component to our procurement organization through
category management, strategic sourcing, the development of Supplier
Relationship Management (SRM) tools, and process improvements. We
brought in employees from the outside that had the strategic sourcing
and analytical skills needed to move the organization forward.
IBM: And are there specific initiatives that you have completed or are
in the process of completing that allow you to focus on the responsive
execution of those transactions, but – at the same time – minimize some
of the less important or non-value added tasks?
Mark McDaniel: Yes, we’ve just implemented a contract management
solution as part of our SRM overall delivery. We’ve created an electronic
repository system and are currently loading contracts into that system.
We’ve trained hundreds of our field people to utilize that system. So it’s
very exciting for our field employees who manage contracts on a daily
basis to have the capability to manage them more efficiently.
We’ve also implemented a logistics platform that ties into our manu-
facturing facilities and can improve the shipping and the optimization
of our packaging and consolidation. The platform has added some visi-
bility into our logistics shipments.
We’ve also increased our bidding limits to try to get away from the three
bids and a buy and the amount of low value activity. These two things
will impact the field as much as anything at this point.

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But now we have added a strategic component to

our procurement organization through category
management, strategic sourcing, the development
of Supplier Relationship Management (SRM) tools,
and process improvements.

IBM: Commodity management and sourcing is a key element of a

strategic procurement focus. You’ve pointed out some of what’s been
done from a commodity management perspective and it certainly requires
your orchestration of processes and technologies. Can you expand a bit
on how you are leveraging the capabilities of your enterprise, both with
in and outside procurement, to achieve those sourcing objectives?
Mark McDaniel: First of all, we’ve identified the key commodities
and created category areas within the company. We have 13 category
managers that are managing the critical spend – which is not necessarily
just the highest spend categories. We’re supporting our manufacturing
group’s most critical categories with category managers organized
around their key raw materials, machining and freight and logistics.
We’ve created and matured ‘category councils’ within the key busi-
nesses to ensure that our strategies are aligned and that we’re meeting
their customer needs for maintaining continuity of supply. We’re also
monitoring the leading indicators around the supply chain markets.
Within the Halliburton organization, we are applying Design for Lean
Six Sigma into our processes and the product design technology to bring
a complete supply chain view to product design.

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IBM: Is there a structured process for commodity managers to interact

with other organizations, for example manufacturing? Or is that done
within their day to day activity?
Mark McDaniel: It’s done within their day to day business activity.
In Energy Services though, procurement and manufacturing all report
into a Senior VP of Supply Chain. So we don’t consider ourselves
procurement and manufacturing, we consider ourselves all part of the
Halliburton Supply Chain. It makes it very easy for us to work together
and support each other. Our category managers typically come from
an operating business background so they have established internal
networks and product knowledge. We teach them best practices and
category management skills.
IBM: Mark, as organizations rely even more on their extended supply
chain, there is increasing emphasis on complete, accurate and timely
information. Transparency is necessary for meeting not only manu-
facturing logistics requirements, but also regulatory requirements and
effective sourcing. How are you optimizing your organization systems
and tools to enable this transparency?
Mark McDaniel: One benefit is that we utilize SAP throughout all of
Halliburton’s Energy Services Group. So the data, the spend analysis,
is much simpler to extract – although it requires what I call scrubbing
of the initial data out of SAP. But the single SAP system allows us to
achieve more transparency and faster analysis of the spend. We probably
spend less time at Halliburton scrubbing data than I have in other organi-
zations where spend data comes from several different systems.
Logistics is one area where we really needed to improve the transparency
of our data. Because of this need, we launched a logistics platform last
year to create visibility. We’ve discovered that on the logistics side, for
example, our internal customers don’t necessarily require exact supply
chain event management, just the basic visibility of data that allows them
to manage their business more effectively. The platform can provide 80
percent of what they need.

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“So we don’t consider ourselves procurement and

manufacturing, we consider ourselves all part of the
Halliburton Supply Chain. It makes it very easy for
us to work together and support each other.

Now on the regulatory side, we’re working to revalidate all of our classi-
fications and ensure country of origin issues are avoided. We are leading
the initiative to improve material master data as well.
We also have one of the best collaborative relationships between our IT
organization and supply chain organization that I’ve seen or observed.
It’s a very supportive environment and the IT employees know our
business very well. We get a great deal of support from them.
IBM: That type of collaborative relationship is one that, frankly, a lot
of organizations would be envious of. Have there been specific activities
or initiatives that led to that collaboration? Or is that a function of the
culture at Halliburton? Or a combination of the two?
Mark McDaniel: I don’t have a long history at Halliburton, so I don’t
know for sure. The relationships were established when I came into the
organization. We have an IT director in place that had worked in supply
chain and had been in an IT organization within supply chain. Having
that individual in place has made the collaboration possible. It is a
function of the people that we employ along with the corporate culture.
IBM: That will certainly help. Because what we’re finding is that as
supply chains become longer and more complex, the enterprise encoun-
ters new risks. These may include hazardous materials, geopolitics,
which you certainly must be familiar, and even weather. Even the more
traditional risks such as buyer versus supplier power and availability of
substitutes and barriers to market entry are taking on new dimensions.

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To manage these risks, how does Halliburton evaluate the business envi-
ronment from the supply chain perspective, learn from industry innova-
tors, both with in and outside the enterprise, and share that information
across the enterprise?
Mark McDaniel: Those issues are certainly real, particularly in today’s
market with tight commodities and services. There’s an element of risk
in the countries in which we operate. We understand and are used to the
geopolitical risk, so it doesn’t frighten us. Weather, we can’t control, but
we learned so much from the hurricanes in 2005. For example, when
the hurricanes damaged the chemical capacity in the Gulf Coast, our
category managers quickly reacted. They worked with suppliers and
restored our supply of critical chemicals and found alternate supplies,
as well.
So in tight markets, we’ve encouraged product substitutions, identified
new suppliers, tapped into additional capacity of sole suppliers, and
added additional capacity as needed. So I think for the most part, our
category managers have played a key role in mitigating those risks.
IBM: That’s an impressive organization response to a difficult situation.
As we conclude the interview, I’d like to ask you to share with our
readers any advice or lessons learned that you think would be particu-
larly appropriate for your peers.
Mark McDaniel: When implementing a strategic component to the
organization, it is critical to include everyone in the process. Many
times the field employees will feel left out of the transformation and
won’t understand it. I’ve spent a great deal of time communicating our
vision to the field and showing them what we’re building and how it will
benefit them and their daily work.
In general, transformations tend to bypass the tactical procurement
organizations so they may feel like it was done because they weren’t
performing. While that may or may not be true, all employees need to
buy in to the change and understand why it is occurring.

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“So in tight markets, we’ve encouraged product substi-

tutions, identified new suppliers, tapped into addi-
tional capacity of sole suppliers, and added additional
capacity as needed.”

Be realistic about the timing and impact of the change; particularly in

a global organization. Leadership will always start with the highest
impact locations and spend. Therefore, it is critical to let the other 20
percent know how long it will take before they feel the change. You
must communicate early and often to each and every stakeholder in the
process.
We learned that if you focus just on communicating monetary savings,
that’s what the organization is going to use to measure your progress. If
you do things correctly, then you’re not only saving dollars, but you’re
also delivering value beyond savings. Organizations need to move
quickly from a cost reduction style of communication to a value delivery
communication for the stakeholders.
IBM: Communications has been a central theme. Are there particular
techniques that you use for communicating? What techniques did you
use that might be above and beyond the ordinary?
Mark McDaniel: I’m not a communication or change management
expert, by any means and admit we could have done things better.
However, I spent a great deal of my time traveling to our international
locations to address the product line leaders and our procurement orga-
nization to explain our vision, the changes we were making and the
role they would have in that change, then I focused on the rest of our
procurement managers that run the global organization. I brought them
to headquarters and trained them on the transformation and the role they
would play in the process. The face to face interaction and the open
feedback seemed to be very effective.

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But you get the most effective communication when category managers
travel to meet with the stakeholders and demonstrate how they are
specifically helping that region or country and providing value to the
product service lines. When you achieve buy in at that level, you really
see things take off.
We also learned to communicate in sound bites. Communications don’t
have to be long, formal, and written by experts. Blackberry friendly
emails easily communicate the value we provide to the rest of the
organization and are time and cost effective. One thing that I have not
witnessed is an effective change management program. I’ve never seen
anyone who has cornered the market on that; I certainly didn’t see it
here, but I don’t think we’re that unusual.
IBM: It appears that the key is execution – and steady process in commu-
nication. And perhaps a lot of listening, as well.
Mark McDaniel: Yes, listening is key. But you have to have the
executive level support; which we had. The support has actually strength-
ened over the last year at the executive level now that they’ve seen the
value delivery. We aligned ourselves with the financial organization in
the early savings delivery and we won’t quote numbers if the financial
organization or the stakeholders won’t buy into those numbers. So that
was one of the enablers.
Another enabler in the change has been the high quality of skills and
talent we have hired into this organization. These strategic analysts go
into a business and start tearing down the spend analysis and building
cost models. That quickly drove credibility and an understanding of,
“Wow, this is different.” It also helped with the change management
when our stakeholders saw a differentiating skill set and a talent base.

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 4
C H A P T E R

Perspectives on global logistics

Introduction
By Colin Taylor
Fifty years ago the imagination and foresight of Malcolm McClean led
to the historic sailing of a converted tanker named Ideal X from Port
Newark. Bound for Houston, Texas, the Ideal X had 58 metal boxes –
very similar to the ubiquitous 40-foot containers we have today – lashed
to the deck. Thus started the container shipping industry. McClean’s
innovative solution to loading and unloading ocean cargo caught on,
and the industry and ships grew quickly. By 1980, the largest container
ships carried over 2,700 twenty-foot equivalent unit (TEU) containers;
today’s ships carry over 8,500 TEUs. The largest ships currently in
construction will carry 10,000 TEUs and, like most things today, they
are being made in Asia.
So has global logistics become bigger, faster and cheaper?
It’s true that vessel sizes keep growing. Increases in shipping capacity
track the soaring demand driven by the global sourcing strategies of
retailers and manufacturers as well as federal government initiatives that
utilize commercial shipping capacity to reduce costs and extend reach.
Also, transit times have been reduced, with some of the fastest ocean
services between Hong Kong and the West Coast taking only around 11
days. But whether or not global logistics is cheaper depends on when
and what you measure.

213

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With deregulation in the ocean industry, competition has helped control

rates but rates still fluctuate with the season, fuel prices, labor shortages,
and congestion charges and other additional fees. While the industry
remains fragmented, recent acquisitions and mergers have some shippers
wondering if the emerging “mega-carriers” will take advantage of their
size to pass on the cost reductions or whether they will hold onto the
extra profit. Or perhaps they will use their newly combined weights to
transform the industry with new services such as near-realtime visibility
and tracking.
Many retailers and manufacturers of goods with shorter or fashion-
sensitive shelf-life depend on more expensive air freight to be first to
market. But just as many shippers use air freight to expedite a shipment
because their product development, sourcing, and logistics processes and
systems do not integrate or synchronize, resulting in less than predict-
able delivery schedules.
One thing is certain: Whether you are moving manufacturing offshore
or looking to suppliers in Asia, South America and Eastern Europe
for lower cost goods, the global logistics cost components of landed
costs are increasing. Never before has it been so critical to have import
logistics information integrated with other supply chain functions to
form a seamless, flexible, predictable and responsive inbound supply
chain. And never before has that been such a complex feat to achieve.
Traditionally, supply chain and logistics executives have been unanimous
in voicing the difficulties they have encountered trying to elevate their
logistics initiatives to the executive suite. Despite Chief Executive
Officer (CEO) directives to “Go global” or “Increase global sourcing by
50 percent next year”, there was not as much inertia behind transforming
logistics operations. However, the tides are turning as the real impact of
global sourcing strategies is starting to put a visible strain on corporate
performance.

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CEOs and Chief Financial Officers (CFOs) are getting wake-up calls
due to increased inventory, higher levels of working capital, increased
out-of-stock positions and glitches in manufacturing performance.
Forward-thinking companies are now realizing that logistics holds a key
to competitive advantage and is a key enabler in today’s global, end-to-
end, demand-driven supply chain. As a result, logistics is moving from
the “basement to the boardroom” and – with focused efforts in improve-
ment – delivering tangible, differentiated results to corporations.
Chapter 4 looks at global logistics from both a shipper’s perspective
and that of a logistics service provider. We explore why global logistics
is on the agenda of CEOs in retail and manufacturing and the subject
of massive investment by logistics service providers. We also look at
RFID as an enabler to visibility; RFID has become one of the key capa-
bilities that industry and government agencies pursue to reduce surplus
inventory and optimize the rapid availability of required goods. Finally,
we look at logistics as a vital component within the broader “sense-and-
respond” value net of the military.
We hope the perspectives in this section not only stimulate thought
among logistics managers but raise awareness among business leaders
as well. With products being sourced around the globe, logistics is no
longer a back-burner issue but a key strategy for a company’s survival
and competitive advantage.

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Why global logistics is rising from the basement to the

boardroom and five steps for transforming logistics
By Colin Taylor
Traditionally, global logistics has been almost an afterthought when it
comes to corporate strategic planning. Because it is an unavoidable cost,
logistics has been seen as a complex detail that can be attended to in the
margins of the business. But this is no longer the case.
We will explore why global logistics has become so strategically
important and recommend steps a company can take to transform
logistics operations to meet global challenges. IBM’s own experience
in transforming its logistics operations serves as a case study to offer
insight into the performance benefits gained from a strategic focus on
logistics.

Reasons global logistics is rising from the basement to the

boardroom
With the rising strategic importance of global sourcing, logistics
planning is becoming the focal point for supply chain managers. You
source globally to keep costs down, and it doesn’t make sense to let
the rising costs, longer transit times and complexities associated with
global logistics erode those savings. It’s no longer possible to make a
decision about where to obtain parts, locate a manufacturing facility
or open a retail outlet without first understanding the impact on global
logistics. Chief Executive Officers (CEOs) and Chief Financial Officers
(CFOs) are increasingly alarmed by rising inventory, higher levels of
working capital, missed deliveries and glitches in the lean manufac-
turing performance, all of which can result from poor global sourcing
strategies. So, as the strategic dimension of logistics planning becomes
more apparent, senior management is looking for ways to get the most
value and competitive advantage out of this business function.

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Managing rising logistics costs

The biggest reason global logistics is now getting C-level attention can
be summed up in one word: cost. Logistics costs now consume more
than ten percent of sales revenues for most companies.42 Consequently,
logistics costs are beginning to erode or at least counter-balance many
of the economic advantages of global sourcing.
These costs are driven by both internal and external factors. Internally,
the increasing tendency toward global sourcing has resulted in a great
deal of network complexity. The extremely rapid nature of this transi-
tion has forced logistics networks and distribution centers to assimilate
loads and variables that they were not designed to manage. Additionally,
most global companies are dealing with a legacy of fragmented internal
logistics structures that are siloed by brand or department, which makes it
difficult to apply consistent management processes and tools. This frag-
mentation also makes it hard to leverage cost savings across divisions
and brands – and leads to suboptimal container-utilization levels.
External costs are also continuing to rise. Inputs such as fuel, labor and
real estate show no signs of falling in price. Supply and demand curves,
tight schedules and capacity levels for ocean shipping place upward
pressure on costs – especially in trans-Pacific trade lanes. Addition-
ally, some recent merger and acquisition activity in the carrier market
is creating the potential for greater price control for the tier one carriers.
Finally, there are the costs and complexities related to compliance with
government global trade regulations.
Managing customs declarations and other documentation, not to mention
the varying fees and tariffs involved, has driven up logistics costs. Given
the impact of these internal and external factors, an overall strategic
approach is needed to leverage economies of scale, improve import
decision support and increase lane densities.

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Lean manufacturing
The advent of lean manufacturing and lean supply chain initiatives has
meant that logistics must also support these goals. The lean approach
helps companies move toward demand-based product flow from the
point of origin to the consumer or end-customer. It has inspired global
businesses to focus on reducing waste and lowering inventory.
However, while lean initiatives have reduced inventories in warehouses,
the greater distances and transit times involved in global sourcing have
led to longer inbound supply cycles. These longer cycles create pressure
to build up stock against potential shortages, undercutting the goals of
lean manufacturing. Meanwhile, shortening the supply cycle means
integrating inbound and outbound sides of the supply chain. Therefore,
logistics planning and execution now need to be integrated with sourcing
and materials procurement – yet another reason why C-level executives
are turning their attention toward enterprisewide logistics management
and organizational integration.

Operating as an on demand business

In line with the move toward lean manufacturing, many companies are
transforming in order to support on demand business operations. This
often requires a makeover of the company’s logistics operations, too.
IBM defines an on demand business as an enterprise whose business
processes – integrated end-to-end across the company and with key
partners, suppliers and customers – can respond with speed to virtually
any customer demand, market opportunity or external threat. To stay
competitive in the era of on demand business, companies need to be
responsive to changing market conditions, aware of variables in their
cost structures, focused on core competencies and resilient in the face of
disruptions or setbacks.

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For example, logistics costs need to fluctuate in relation to business

revenue, as illustrated in Figure 1. Companies also need to examine
how the ownership of assets, such as warehouses, truck fleets and the
resources to operate them, affects their ability to respond quickly to new
market pressures. To create a global logistics infrastructure that supports
the goals of on demand business requires top-down planning and coor-
dination. The good news: A business that is flexible enough to vary its
logistics costs in line with revenue is well-positioned to react to unex-
pected changes that are geopolitical in nature and beyond the control of
the enterprise.

Figure 1. IBM global logistics costs for hardware business – varying with IBM hardware revenue.

Hardware global logistics cost Hardware Revenue

Hardware global logistics cost

Hardware revenue

1Q 01 3Q 01 1Q 02 3Q 02 1Q 03 3Q 03 1Q 04 3Q 04
2Q 01 4Q 01 2Q 02 4Q 02 2Q 03 4Q 03 2Q 04 4Q 04

Source: IBM Global Business Services analysis, 2006.

Cross-functional sourcing decisions

The dramatic increase in global sourcing has changed the process for
strategic decision-making in areas like offshore manufacturing locations,
private label growth and vendor selection. To make these decisions in
today’s world, operations specialists from all functions within the supply
chain need access to detailed logistics information.

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If you want to change a vendor or manufacturing location, you need to

understand how that move will affect your logistics costs. In addition,
new opportunities need to be taken into account. For example, you may
want to change your distribution patterns by setting up manufacturing
closer to your markets to offset logistics costs. You will want to know
where your liabilities and your opportunities lie, so you’ll need to assess
which sourcing locations best balance factors related to cost, customer
service, working capital and risk. Cross-function processes must now
provide what-if analyses of sourcing information based on robust infor-
mation about direct and indirect logistics costs. Again, that means direct
involvement of C-level executives to enable the organizational transfor-
mation and the waterfall of business objectives required to set goals and
constraints.

Supply chain management

Because logistics has such an enormous impact on supply chain manage-
ment, global logistics information is now essential for supporting enter-
prise decision-making, including forecasting and demand planning. To
make good decisions, line-of-business managers and executives need
to understand optimized logistics costs by both origin and destination.
They also need predictable delivery dates, clear visibility into import
logistics events and automated alerts when plans change or a shipment
is off schedule. Automated transactions and analytics are important to
help manage the growing volumes of imports – for example, to enable
the automatic optimizing of carrier allocations according to predefined
business rules, carrier performance and contract commitments.
Companies should closely examine their shipping options. Air freight, in
particular, may harbor hidden costs, even though it is commonly perceived
as the better option for moving goods overseas quickly. Companies may
assume that faster shipping times justify the higher prices they pay
compared to ocean shipping. However, delays in customs or other areas

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can wreak havoc with your inventory, negating many of the benefits of
faster transit times. It is important to use a model that accounts for all
aspects of the journey so you can make appropriate decisions regarding
which forms of transportation to use. A framework that enables better
forecasting and supports collaboration with suppliers – while managing
carriers – can help you align your shipping mode with your profit goals
(see Figure 2).

Figure 2. Supply chain management decision support.

Enterprise decisions... require... robust logistics information.

Sourcing / Landed cost and profit

Access to optimized logistics costs
Forecasting / Demand planning by origin and destination

LEAN manufacturing / Scheduling Predictable delivery dates

Delivery dates / Customer service Visibility and advance warning of

exceptions to plan
Inventory / Distribution optimization
Quantitative carrier performance
Managing risk / Business continuity
Reliable event visibility
Improving process productivity
Automated standard data transaction
Managing financial performance and analytics

Source: IBM Global Business Services analysis, 2006.

Clearly, global logistics is now a critical-path operation. Regardless of

your objective – to protect the economic value of global sourcing, adhere
to lean manufacturing or on demand business objectives, or make better
decisions regarding sourcing or the enterprise as a whole – you need to
be able to track your materials and manufactured goods at all times and
know what it is costing you to get them to where they need to go. Opti-
mizing costs and business decisions usually means transforming your
logistic operations to support your overall business goals. Luckily, the
transformation path has been well-mapped for global companies. Let’s
take a look at that path.

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Five steps to global logistics transformation

Take a phased approach
A comprehensive transformation of your entire global logistics operation
can’t be accomplished in a single project. It is a phased process,
comprising multiple projects that need to be prioritized according to
your most pressing business needs. And to be successful, the entire
process needs to fully leverage existing investments in your logistics
infrastructure.
A global logistics transformation has two main phases, although indi-
vidual companies may want to create additional stages within each phase
based on their needs. The stages within Phase 1 involve identifying your
transformation strategy, designing your new infrastructure and beginning
to deploy it. This phase is based on a number of strategic imperatives,
such as organizational strength, leadership and execution, compliance,
convergence and simplification, performance measurement, outsourcing
and network optimization. In other words, activities in logistics should
be directly related to delivering improvements in one or more of these
areas. Virtually any other activities need to be redirected or eliminated
during the transformation period.
In Phase 1, the lines-of-business (LOBs) must buy into the transforma-
tion. Clear business metrics need to be established so the LOBs can
understand what they will gain by participating. The more buy-in you
get from the LOBs, the further you can progress in your network optimi-
zation, and, in turn, the better the results you can deliver. Virtually all of
the LOBs should see better reliability and responsiveness in shipping as
a result of their participation in the transformation process.
During Phase 1, you create the overall roadmap of your transformation
by analyzing all your business and IT processes related to logistics in
terms of their components and identifying the gaps between where you
are today and where you want to go. Once you understand the dependen-
cies among the various projects that will take you there, you can create
a timeline and map your projects against it.

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In Phase 2, you deploy and optimize your new systems. Many companies
move toward more outsourcing of logistics operations to establish a
system where global logistics costs can vary on a transactional basis. This
adds a great deal more flexibility to the company’s business operations.
Ongoing centralization – consolidation and simplification – of logistics
operations and management can move your organization from an asset-
based, fixed-cost organization to one that is more fully leveraged with a
flexible and variable cost structure. Automated processes and reporting
can help you improve efficiency and support ongoing monitoring and
performance management.

Establish partner connectivity

As import volumes increase, a strategic approach to connectivity becomes
essential to allow for automated event management and the ability to use
other planning, optimization and execution systems. The sheer number
of parties and documents involved in a single ocean shipment exposes
you to a multitude of risks and liabilities in terms of regulatory compli-
ance, delivery schedules, errors and, ultimately, customer satisfaction.
For example, for one container shipment, data transactions can touch an
average of 27 parties and require 40 original documents and 360 copies
– for each container.43
A data services gateway can serve as an information broker between
you and your supply chain partners by linking partners, applications,
carriers, customs agencies and banks. Standardized interfaces can allow
partners and customers to interact at virtually any time from virtually
any point on the globe. Such a gateway can lower entry and exit costs,
decrease interface setup times, reduce transaction time and decrease
business risk. It replaces the multiple systems you would otherwise need
to use to link multiple divisions with multiple partners.

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As an add-on to a connectivity gateway, companies can develop an e-

customs infrastructure that can serve as a convergence point for brokers
and supply sources. A centralized global product database can help
organize the classification function and the usage of preferential trade
programs to align the entire enterprise with a standard product structure
and additional capabilities that allow for paperless processing, transac-
tion testing and easy access to shipping procedural instructions. Benefits
include reduced and more variable costs, increased reliability, the ability
to change suppliers as business needs change, adherence to global
standards without losing local flexibility and enhanced compliance.

Know your industry

Many companies opt to bring in what Forrester Research has called a
“global trade orchestrator”44 to help them redesign and manage their
logistics systems. Such a partner would need a detailed understanding
of the systems, processes, data and constraints affecting all the service
providers involved in moving a container from one point to another. But
whether you are outsourcing this orchestration capacity or establishing
it in-house, experience with integrating logistics and business functions
is critical. The ideal skill-set base would include direct knowledge of
import scope, sourcing, procurement, global logistics planning and
execution, trade and customs regulations, and financial invoicing and
credit checks.

Build an integrated import processes and systems framework

Creating an import framework that helps you view import logistics
across all of your business functions is another essential step (see Figure
3). The single view that results from such a framework enables you
to make more informed business decisions and support rapid volume
growth. In this view, logistics is considered to be a horizontal business
function alongside other key areas of your business, such as product
development, global sourcing, procurement and finance. These functions

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are supported by integrated processes that include product data manage-

ment, vendor selection and management, quality control, import trans-
portation and compliance. Virtually all of the integrated data can then
be viewed through a planning and operations dashboard, which has the
ability to generate management reports. The whole thing links to your
enterprise resource planning (ERP) software for comprehensive integra-
tion of your business.

Figure 3. An integrated framework for import logistics can support your overall business goals.

Product Global Merchandising /

Functions Logistics Finance
Development Sourcing Procurement

Product Data Management

Vendor Selection
Integrated PO and Vendor Management, QA
Processes
Import and Transportation
ERP
Settlement, Claims, Compliance, Reporting

PDM/PLM E-Sourcing PO Mgt TMS GTM Audit Data Services

Integrated Gateway (Vendors,
Existing Systems, Custom Interfaces and
Toolset LSPs, Banks)
Data Integration Layer
Import
Planning and Operations Dashboard Database
Decision
Support Management Records

Source: IBM Global Business Services analysis, 2006.

Implement an international transportation resource planning framework

To integrate the fragmented, manual and siloed processes of global
logistics, organizations are increasingly thinking in terms of parallels
to ERP frameworks. An international transportation resource planning
(TRP) framework can help make container shipments more predictable,
visible across the organization – as well as across partnerships – and
easier to manage. A TRP framework has four main components:

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• Strategic processes – Forecasting and planning

• Tactical processes – Mapping forecasts and purchase orders to
container utilization plan, selecting and booking carriers, managing
compliance
• Process control – Conducting data analysis, assessing carrier contract
compliance, rating performance, managing carrier relationships
• Integration – Integrating these processes with enterprise applications
and supply chain management.

Used to continuously improve decision-making and service levels, TRP

data can deliver shareholder value by helping reduce the contingency
charges of inventory that typically get added to account for the vari-
ability of ocean shipping. By lowering inventory, a TRP framework can
help reduce costs and promote better alignment with lean manufacturing
and on demand business goals.

Reducing logistics costs at IBM45

In response to the changing global marketplace, IBM transformed its own
global logistics operations. Our phased approach had three main segments
and took ten years to complete – a timeframe that could now be condensed
due to the experience gained.
In Phase 1, which began in 1995, our goal was to improve efficiencies at
the organizational and tactical levels. At that time, our product lines were
autonomous in virtually every sense, with each line operating its own
logistics system. By focusing on project management discipline, working to
build a global team ethos, understanding our client requirements, leveraging
volumes and creating a logistics-focused line of business, we were able to
save millions in the first phase.

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In Phase 2, which began in 1996, we developed an overarching strategy for

our logistics transformation process based on the seven strategic impera-
tives of organizational strength: leadership, execution, compliance, conver-
gence and simplification, performance measurement, outsourcing and
network optimization. We wanted to leverage the promise of our brand – that
is, we set out to make sure that we achieved ideal shipping rates across our
entire brand so we could access economies of scale rather than taking a
piecemeal approach, with each product line trying to drive its own bargain.
We optimized our internal networks, built a performance-based culture
supported by metrics and ultimately saved millions in this phase, as well.
In 1997, we launched Phase 3, which is still in effect today. We now outsource
over 90 percent of our logistics operations to significantly decrease the
complexity of those operations. We also reduced the number of suppliers
we worked with, the number of contracts involved, our logistics cycle times,
the number of legacy systems we had to integrate and the number of field
locations. In the end, this convergence and consolidation accounts for savings
in excess of US$1 billion. Our logistics cost-to-revenue ratio has dropped by
25 percent. We trimmed our legacy applications from 350 to 60, and our
client satisfaction rates have risen continuously since 1999.
As a result of our transformation, we’ve moved from a fragmented, asset-
based fixed-cost system with limited ability to respond to market pressures
to a standardized, fully leveraged and outsourced model with a variable cost
structure. Our logistics operations fully support our ability to operate in the
marketplace as an on demand business.

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Realizing competitive advantage from logistics transformation

An enterprise-wide transformation of your logistics operations can yield
significant business benefits for your organization. By helping you attain
better landed-cost calculations and make better sourcing decisions, it
can help you increase overall profitability. Such a transformation can
also help you bring your products to market faster by smoothing both
sourcing and import operations and helping to ensure that product infor-
mation is easily accessible across the enterprise. You can reduce your
need for working capital by increasing the opportunity for collaboration
with carriers and by improving your shipment forecasts. Some of the
benefits IBM clients have experienced include:
• A 40 percent savings from improvements in lane density and container
utilization46
• A 14 percent savings in total international transportation costs by
mixing ocean and air shipping47
• Reduction in transit times by about five days
• Cost recovery of 2-10 percent, due to comprehensive invoice
auditing48
• Increased productivity due to automated processes and tools.

By leveraging the expertise already available in the marketplace, you can

follow a well-mapped path to your logistics transformation, reducing the
costs and time involved in the journey. Ultimately, you will be acting
to protect the economic benefits you gain from global sourcing against
erosion caused by the rising costs and complexities associated with
global logistics management. The benefits of such a strategy can include
a significant increase in shareholder value.

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Building value in logistics outsourcing: The future of

the logistics provider industry
By Karen Butner and Derek Moore
Customers of logistics services – whether they are across the globe or on
one subcontinent – are seeking greater reliability at lower total cost. But
as higher performance due to greater end-to-end integration and better
visibility tools becomes more attainable, logistics services providers’
approaches are diverging.
More customers are recognizing that to realize the full value of the
potential tradeoffs from outsourcing, they need to broaden their span.
They need to move from purchasing many piecemeal transportation and
warehousing services to purchasing fewer and bigger contracts with
much wider scope. In response, the logistics provider industry has been
evolving to offer greater scope and more complex solutions. However,
for the more demanding customer segments – those seeking greater inte-
gration and higher degrees of process conformance – there often is a gap
between buyer needs and provider capabilities.
Often, providers market and represent capabilities that they have not
yet implemented, so they over-promise and under-deliver. Unfortu-
nately, the business model of most providers traps them because of their
inability to scale offerings. Thus, they fail to meet the expectations of
high process conformance buyers. High process conformance, in this
context, is the ability to deliver end-to-end supply chain integration and
synchronization repeatedly for many customers, establishing de facto
process & technology standards.

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We will discuss how to build value in logistics outsourcing and the

future of the logistics provider industry in greater detail. Specifically,
we will look at:
• Why the needs of buyers are diverging
• What is shaping the future industry structure
• The journey to value and how to facilitate value creation.

Evolving customer needs

As higher performance of more complex logistics services is being
achieved, the needs of customers of logistics service providers are
growing. We can map these needs to four diverging customer segments
(see Figure 1).
Figure 1. Future customer segments.

Customer Service Key features Commercials

segments requirements and pricing

• High process • Want economies of • Shared risk and

Wider service conformance scale and scope in reward
outsourcers addition to all the other
• Planning and control
features
Planning and to reduce complexity Incremental requirements and features sought
control, execution and optimize better
Increasing scope and integration required

and technology
• “One throat to
squeeze”

• High process • Want services requiring • Fixed and variable

conformance additional capabilities with gain share
• Remove data (e.g., retail preparation, measures to
complexity of using reverse logistics) and reward continuous
High process efficiency improvements improvement
multiple providers
conformance each year
• Extended range of • Fixed and variable
outsourcers
services • Execution focus
• Continuous • Some specify the
improvement operating model, types
of people (skills) and
systems

• Good level of • Tactical outsourcing • Transactional

Commodity
operational efficiency of basic services:
outsourcers
and process transport, warehouse
conformance and freight forwarding

Insourcers • Established internally

Source: IBM Global Business Services analysis, 2006.

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In order of their increasing demands, the four logistics customer

segments are:
1. Insourcers – These customers manage and operate most of their own
logistics activities in-house. Some companies operate in-house either
by accident or design. That is, some of them insource because they
think of these activities as “back-office” functions without recog-
nizing that there is high leverage potential through a more strategic,
corporate focus.
2. Commodity outsourcers – These customers focus on the tactical
outsourcing of non-core activities: transport, warehousing and freight
forwarding. They expect a good level of operational efficiency. They
call for more innovation but are not prepared to pay for it. They have
a large number of providers serving niche needs primarily based on
cost of service and are willing to switch providers more readily for
lower prices.
3. High process conformance outsourcers – These customers operate in
a framework where processes are clearly defined, and conformance is
tightly measured. They want a demonstrably greater depth of people
with very high process and target conformance and consistency. They
seek a wider range of services, such as special packaging configu-
ration, shelf stacking and reverse logistics. Within this segment are
buyers who dictate the operating model and often require use of
systems that they have selected. There are also buyers who demand
not only a very high level of operational effectiveness but also demon-
strable efficiency improvements virtually every year. This segment
expects the provider to specify much more of operating model and
systems. It tends to be more open to share financial results to reward
continuous improvement.

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4. Wider service outsourcers of process, planning and control, execution

and technology – These buyers have concluded that to realize the full
scope of the potential tradeoffs (among transport, storage, inventory
and service levels), they need to move to fewer, bigger contracts
allowing for more scale economies. This is combined with process
improvement and better process interfaces to reduce complexity (via
fewer providers) and focus on process simplification and standardiza-
tion. These buyers are looking for evidence of effective end-to-end
integration and more tightly engineered synchronization and optimi-
zation as well as the “traditional” qualification of industry specializa-
tion. This segment will outsource complete processes (physical and
technology) embracing planning, control and execution. This implies
moving the boundaries of outsourcing beyond tactical execution into
strategic planning and control. Above all, these buyers want a single
point-of-control. Since these buyers have a good handle on where
their logistics operations fit inside their entire enterprise value chain,
they appreciate the competitive advantage that can be achieved by
carefully selecting a sophisticated partner to drive their integrated
processes.

The logistics provider industry

With customer needs increasing, the logistics provider industry is
evolving to offer greater scope and more complex solutions. Logistics
providers also have a decision to make. They need to choose between
serving a large commodity customer segment or the more demanding,
yet faster growing, high process conformance customer segment. The
payoff for providers that choose the high process conformance customer
segment is tighter integration with customers along the supply chain,
delivering greater value and increased “lock-in.” Increased complexity

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offers more opportunities to sustain higher margins. Success will be

measured by customers in terms of how well providers increase reli-
ability and overall service performance at a reduced total cost.
In keeping with the expanding customer needs, the logistics provider
business model has evolved to offer greater scope and deeper integra-
tion (see Figure 2). Over the past 30 years, the industry has expanded
its scope and grown in stature. It has moved from providing low-
complexity, basic foundational services (such as trucking and ware-
housing) to core services that combine different execution capabilities
to extended services that support a wider range of capabilities. This
tactical, execution-focused outsourcing typically reduces the buyer’s
logistics costs by 10 percent.49

Figure 2. Evolution of logistics provider business model.

Service offerings Outsourcing Relationship Pricing

models

• Synchronized provider • Collaborative more • Shared risk and

• Supply chain than contractual reward
integrator partnership
Synchronized • Lead logistics manager
n
ratio

supply chains • Global trade

orchestrator
integ

• Lead logistics provider • Contractual • Fixed variable with

Lead
e and

(LLP) some risk sharing

logistics
• Big brand(s)
scop

• Inbound centric third- • Contractual • Fixed and variable

Core and
asing

party logistics provider • Contractual • Transactional

extended (3PL)
services • Contractual • Fixed and variable
Incre

• Freight forwarder
• Outbound centric 3PL

• Transport, • Contractual and/ • Transactional

Foundation services warehousing, customs or spot
broking

Source: iBM Global Business Services analysis, 2006.

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As customers seeking wider services have emerged, Lead Logistics

Providers and, more recently, one or two “Big Brands,” have developed
to serve them. Big Brands are defined as very large global logistics
groups (with less than a 10 percent share of the customer segments they
serve) with the capability to execute all of the activities within their own
organization.
Despite the emergence of Lead Logistics Providers and Big Brands,
most organizations today still procure logistics services on a piecemeal
basis. In doing so, they may forego the benefits of reducing inventory
carrying costs, which can be realized by end-to-end management of
the supply and transport chain. These costs are on the order of US$750
billion globally, equivalent to over 25 percent of total freight logistics
costs.50
Financial returns in the logistics provider industry are typically rather
poor and make it relatively hard to attract capital (see Figure 3). Very
few companies in this industry reach returns on capital above approxi-
mately 11 percent and operating margins above 8 percent (see the shaded
box in Figure 3).51

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Figure 3. Financial returns in the logistics provider industry.

Average operating margin: 8.1%

30
Percent return on invested capital

25

20

15
Weighted average cost of capital: 10.9%
10
Average ROIC: 10.7%

0
0 5 10 15 20 25
-5
Percent operating margin (EBITDA/Total revenues)

Notes: ROIC and operating margins are average values calculated for the latest five years, mostly to 2004. ROIC is
defined as net income/total capital. Averages are the simple averages of all players plotted on the graph. Weighted
average cost of capital is based on U.S. industry average.
Source: IBM Global Business Services analysis, Thomson Financial for financial data, WACC data from Ibbotson &
Associates, 2006.

Historically, 50 percent of the valuation of shares is typically associated

with a provider’s growth.52 A credible growth rate backed by attractive
returns (such as twice the weighted average cost of capital) allows leaders
to fund growth and innovation more readily than their competitors.
Margins among providers vary, but the highest rewards for market share
gains tend to lie in activities driven by scale economies. If the economics
of an activity are scale-driven (for example, parcel carrier, shared user
third-party logistics (3PL), full truck load), then relative market share
growth can be rewarded by higher profit margins.

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Example of scale-driven activity

As the density of stops per on road day increases, the inter-drop distance
decreases, allowing a single vehicle to make more stops. This increasing
productivity can help optimize margins.

Conversely, where activities are primarily driven by economies of

scope, growth can generate more revenue and an increase in net profit,
but typically at similar margins. In these cases, such as warehousing and
dedicated user 3PL, there is very limited margin gain from growth in
volumes.

Five drivers of change

The logistics provider industry is evolving quickly. This evolution is
being driven by five drivers of change: customers’ increasing and
diverging demands, growth in global trade, continued outsourcing, tech-
nology and further industry consolidation. The logistics provider industry
is also expanding due to recognition of the supply chain as a driver of
enterprise-wide performance improvements and greater competitive
advantage. Now let’s take a closer look at the five drivers of change.

Customers have more demanding and diverging requirements

What buyers of logistics services expect will vary depending on their
industry, organizational maturity, business model and preferred operating
style. Looking across all buyer types, the key buying criteria are, in order
of greatest importance:
• Greater reliability
• Lower total costs
• End-to-end integration and visibility globally
• Speed through more tightly engineered synchronization
• Flexibility
• Consistent capability globally

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• Industry specialization
• Optimization and data warehousing
• Deep integration with buyers and partners.

Logistics outsourcing key buying criteria

Greater reliability. Buyers want greater reliability of service (delivery to promise),
which allows them to reduce inventories and provide greater service levels to their
customers.
Lower total costs. Customers traditionally focus on individual logistics transac-
tions; as a result, costs become optimized in silos but can end up being higher
holistically.
End-to-end integration and visibility globally. Achieving effective end-to-end
integration is another enabler of greater reliability. Automated visibility, coupled with
work flow, allows exception reporting and alerts management when intervention is
needed on a key-event basis.
Speed through more tightly engineered synchronization. Good data inte-
gration and automated sensing can enable process synchronization and automated
responses. This entails massive orchestration by the logistics service provider to
simultaneously manage volumes of informational and physical logistics transactions
within a diverse global network. The end result can include improved speed and
efficiency of the physical and financial flows, while performance criteria for time,
delivery and cost are met.
Flexibility. Flexibility is needed to respond seamlessly to changes in demand and
changes in sources of supply
Consistent capability globally. This is an enabler of greater reliability. The
growth model of providers has largely been via acquisition. The post acquisition
integration challenges of processes and systems seem minor compared to the orga-
nizational and cultural adjustments. The organizational alignment needs to tolerate
high degrees of freedom and diversity in terms of delivery performance, processes,
business rules and systems. More demanding buyers want process conformance.

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Industry specialization. Customers increasingly put a premium on this knowledge.

Optimization and data warehousing. Even with a good degree of synchroniza-
tion, there typically is room to optimize further. Data warehousing capabilities
can enable regular and ad hoc root cause and performance analyses to drill
down much more effectively.
Deep integration with buyers and partners. To access logistics data and
information, customers want deep, but straightforward, integration with the
service provider and expect that the provider’s transportation partners will be
similarly connected.

Global sourcing is here to stay – but it is more challenging

Public policy is generally encouraging freer trade. The attractions
include differential wage rates, skill availability and favorable taxation.
However, longer transport routes are harder to manage; infrastructure
capacity lags changes in demand, causing bottlenecks; and capabili-
ties and standards are less consistent. These challenges can drive up
inventory costs and dramatically shift the overall sourcing economics.
Global sourcing typically leads to more frequent switching of source
locations. Uninterrupted supply requirements place greater demands
on process standardization to allow seamless switching. This also puts
more pressure on the speed and accuracy of providing landed cost infor-
mation. In turn, this requires access to dynamic rate tables and transit
times from carriers.

The outsourcing envelope is finally widening…slowly

The boundaries of the opportunity space for outsourcing in logistics have
slowly widened in recent years but not as fast as investors have been
promised (see Figure 4). Until recently, manufacturers and retailers have
done limited outsourcing for “non-core” execution processes (transport,
consolidation, warehousing, freight forwarding) on a tactical basis.

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Figure 4. The boundaries of the opportunity space are widening... slowly.

Customer relationship Customer

linkages Distribution Manufacturing Supply
fulfillment

Product Network and asset Network and asset Manufacturing Strategic

development configuration configuration strategy sourcing
Strategy/
Product Logistics oversight Manufacturing Supplier relationship direction
management oversight management

Retail marketing Planning and

Demand planning Logistics Manufacturing
execution Supplier planning control/
and forecasting planning planning
management
In store inventory Customer Primary Inbound Plant inventory
management Line scheduling
fulfillment transport transport management
Customer Distribution Make product/ Execution
account servicing center operations components Manufacturing
procurement
Transport Assemble/pack
Product directory
resources products

Customer Product movement Customer Product MES data Supplier/materials

directory data directory directory directory
Data
Product
Performance measurement
movement

Retained core: Not for outsourcing

Traditionally core: Candidates for outsourcing extend scope of outsourcing to transform?
Either multi-source teams (in and out service) or total outsource
Non-core: Probably already outsourced

Source: IBM Global Business Services analysis, 2006.

Two forces are operating. First, the drive to achieve lower costs is
leading buyers to rethink some of their assumptions. The innate conser-
vatism of many buyers is being challenged. Labor practices made it
easier to consider outsourcing physical execution, but most draw the line
at outsourcing the more managerial planning and coordination activities.
This is beginning to change.
Second, lowest unit costs will not automatically deliver lowest total
costs. The latter requires proactive tradeoffs among transport, ware-
housing and inventory. Piecemeal outsourcing offers less opportunity to

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realize those tradeoffs. Many firms are not truly capable of bringing the
parties together across different internal functional areas to examine the
full potential value of business tradeoffs and to focus beyond price. In
other words, they lack the sophistication needed to make highly complex
integration analyses and “make versus buy” decisions. The challenge is
for providers to grow their capabilities as fast as “the doors open.”

The role of electronics, automotive and apparel in widening the

envelope
The electronics, automotive and apparel industries have been trendset-
ters in widening the envelope. Contract manufacturers in the electronics
segment and procurement specialists in the apparel segment, already used
to working with demand data and balancing supply, may become the new
sources of convergence in the supply chain. The automotive industry has
pioneered extension of the Manufacturing Resource Planning (MRP II) line
of sight beyond tier-one suppliers. These leading global industries are now
more willing to outsource some of the planning and control activities.

The synchronized, demand-driven supply chain requires standardization

and pervasive technology
Three related sets of challenges in supply chain strategy demand seamless
interfaces, fast responses and complex tradeoffs. They are:
• Tight coupling of the major supply chain functions – plan, source,
make, deliver and repair/return.
• The ability to respond faster as companies focus on being driven by
actual demand rather than forecast demand (the plan).
• The pressure to meet service objectives leads customers to operate
multiple supply chains. Cost reduction, however, pushes them to
share assets – implying some tradeoffs among the service objectives.

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Synchronization and visibility challenges

• Planning is challenged with fragmented information, making it difficult to
synchronize supply and demand efficiently.
• Buying is complicated by lack of visibility of a product in the pipeline
globally, all the way to the first line supplier. Often, a lack of integration
with the manufacturer’s systems makes it nearly impossible to receive
in-transit order status information (once a product is moved or shipped).
• Sales teams are hampered from optimizing sales (cross-selling, up-
selling, suggested selling based upon supply) by lack of product avail-
ability information.

Consolidation and convergence will increase… but so will the challenge to

integrate effectively
Publicly quoted providers have to communicate a “growth story” to
drive their share price up. Doing “more of the same,” meaning doing
more globally, meets part of this need. Convergence among inbound and
outbound logistics by combining services such as transportation, consol-
idation, warehousing and freight forwarding is another element – but
still low margin. Adding capabilities up the value chain to planning and
control activities is expected to increase customer lock-in and margins.
In terms of their asset profile and core competency, the four traditional
provider activities are very different (see Figure 5). They require different
management priorities and styles. Hence, managing such a portfolio
for consistent profitability is a challenge, as is agreeing on common
standards for key interfaces of customer solutions.

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Figure 5. Key characteristics of logistics provider segments.

Network Point-to-
3PL/
Provider Freight transport: point and
customized
segments forwarding Packages charter
distribution
and LTL transport

Relative
High Low High Medium
asset profile

Core Customer Yield Capacity

competency intimacy Buying management management

Source: IBM Global Business Services analysis, 2006.

Future trends
In the following we discuss how we believe the market segments will
evolve in the years up to 2015. We also discuss our view of the potential
market share of each of these segments.

Market segments
In the future, we believe that the relative size of the market segments will
change in favor of the more strategic buyers. Specifically, we believe
that a fifth customer segment – “Strategic Outsourcers” – is likely to
evolve in addition to the four segments described earlier (see Figure 6).
Let’s take a closer look at each of these segments.

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Figure 6. Future customer segments.

Indicative
Service Commercials outsourced
Key features
requirements and pricing market share
2015

• Plan and deliver • Strategic relationship • Shared risk and 5-10%

inventory with “shared reward
Emerging

Strategic requirements direction”

outsourcers • Shared formulation
of supply chain
strategy
• End to end scope
• High process • Want economies of • Shared risk and 20-25%
conformance scale and scope in reward
Wider • Planning and addition to all the other
Today’s customer segments

service control, execution features

outsourcers and technology
• Reduced complexity
– “one throat to
squeeze”
• High process • Want services • Fixed and 30%
conformance requiring additional variable with
• Remove data capabilities (e.g., retail some risk
High process
complexity of using preparation, reverse sharing
conformance logistics) and efficiency
multiple providers
outsourcers improvements each • Fixed and
• Wider range or variable
year
services
• Executional focus
• Continuous
improvement • Some specify the
operating model, types
of people (skills) and
systems
• High level of • Tactical outsourcing of 40%
Commodity operational foundation services:
outsourcers efficiency; transport, warehouse • Transactional
adequate process and freight forwarding
conformance
• Established
Insourcers
internally

Source: IBM Institute for Business Value analysis, 2006.

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1. Insourcers – Companies in virtually all industries and sizes will be

outsourcing more and more of their logistics functions.
2. Commodity outsourcers – This segment will broadly behave much
as it does today. The less efficient commodity outsourcers will employ
3PLs and freight forwarders but will be ready to switch for lower prices.
Those with greater competencies, including a good understanding of
pipeline visibility and provider capabilities, are likely to bypass the
3PLs in favor of direct use of foundation service providers. They will
likely implement a control tower solution to manage their providers. In
either case, brands will not matter. We expect this segment to represent
approximately 40 percent of total volume.
3. High process conformance outsourcers – We expect this segment will
continue much as today. Many buyers will adopt more widespread use
of reward mechanisms for continuous improvement. This segment could
represent 30 percent of market volume.
4. Wider service outsourcers: Process, planning and control, execution
and technology – This group of customers is expected to widen. It will
comprise large, often global, enterprises renowned for supply chain
management excellence. For these buyers, the brand matters. They could
represent up to 20 percent of market volume.
5. Strategic outsourcers: Buyers looking for a strategic relationship with
“shared direction” – These buyers are ready to trust the partner to plan
and deliver inventory availability for one or more of their supply chains.
The scope will include shared formulation of the supply chain strategy
with extensive outsourcing of planning, control and execution of their
total supply chain. Execution will include virtually all logistics and
could include specific procurement responsibility and manufacturing.
The scope will be end-to-end and include demand and supply balancing,
embracing the range of physical and technology dimensions of the
supply chain. This segment will be limited to organizations with central-

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ized supply chain management. They will require above average flex-
ibility (“plug and play”) to accommodate the variability in their business
portfolio and demand fluctuations; this flexibility will be accomplished
by an on demand business structure. These buyers typically will be
either large global enterprises whose strategy is to only engage directly
in design and marketing or significant enterprises that are not in the
upper quartile of performers and find it hard to attract the best talent.
This group could represent up to 5 to 10 percent of market volume.

The battle will be for the middle ground: High process conformance
buyers
The business models and organizational values required to address these
market segments are very different. In the period to 2015, the logistics
provider industry will likely consolidate into five provider types:
• Foundation Providers – This large group of operators should continue
to thrive. Traditionally mostly small scale, we expect that very large-
scale enterprises will emerge, especially in transport, as new ways
of achieving scale economies are identified. There will be very little
product differentiation, although highly specialized niche-market
providers will exist. Geographic reach will be mostly, but not exclu-
sively, national.
• Core Service Providers – This group will comprise inbound logistics-
centric 3PLs, freight forwarders and outbound logistics-centric 3PLs
focused on commodity buyers. These providers will focus on and
excel at specific but fewer capabilities.
• Extended Service Providers – This group will comprise inbound
logistics-centric 3PLs, freight forwarders and outbound logistics-
centric 3PLs focused on high process conformance customers. These
providers will seek to provide a wider range of services – such as
special packaging configuration, shelf stacking and reverse logistics –
and will acquire additional capabilities. They will “deliver what they

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advertise,” likely with higher quality execution than Core Service

Providers.
• Lead Logistics Providers and Big Brands – These providers will focus
on the wider service outsourcers – process, planning and control,
execution and technology – segment. But critically, they will need a
significant share of the two largely tactical, high process conformance
buyer segments to attain sufficient scale advantage. They will drive
more industry consolidation and be good at acquiring scale and scope
in emerging parts of the world. They will aspire to provide a globally
integrated offering with seamless physical and information services,
which is hard to replicate. With a “global control tower” in place, they
will provide supply chain performance metrics, key event status and
alerts to customers on a global basis. These providers will need to be
good at continuous improvement. Unless they get much better at inte-
grating with customer processes and systems, they will experience
competition from the foundation and value-added service providers.
They will aim to “mass customize” logistics.
• Synchronized Providers – A small number of Synchronized Providers
who are capable of becoming supply chain managers is likely to
emerge. They will serve buyers looking for a strategic relationship
with shared direction. They will aim to manage inventory avail-
ability, balancing demand and supply end-to-end. The Synchronized
Providers will deliver end-to-end supply chain integration, visibility,
synchronization and broad-based business process capabilities for
global customers. They will do this repeatedly for several customers,
establishing de facto process and technology standards or reinforcing
acceptance of existing ones. Processes could include supplier manage-
ment, procurement, contract manufacturing, logistics services, global
trade financial and tax management, performance management and
customer service. Service offerings will be standardized, provide ease

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of integration and provide flexibility in customization. The solutions

will be scalable with componentized processes, enabling customers to
“plug and play” responses to growth opportunities or changes. This
category of provider will also exhibit an internal culture that seeks
and rewards ongoing innovation, and it will need to have a wealth of
existing intellectual property that it can leverage as part of solutions
for its customers.

Synchronized Provider uncertainties

• How Synchronized Providers will emerge is less certain. The future
Synchronized Providers are likely to emerge from Lead Logistics Providers
or the “Big Brands”, probably as a result of progressive “reinventions” of
a few leading providers. They likely will need to team with banks for trade
and project finance, process improvement firms and global technology
companies to reinforce their capabilities.
• The emergence of Synchronized Providers has been hampered by buyers
and providers each doubting the other. More buyers would migrate toward
centralized supply chains if they believed that providers with matching
capabilities existed. Conversely, providers have been reluctant to invest in
the capabilities due to lack of evidence of a market. The emergence of the
Big Brands is likely to break this log-jam.

Each provider is likely to specialize in one buyer segment. However,

players from virtually all segments are likely to seek high process confor-
mance customers. Their specifications will be consistent with the tactical
elements of the Lead Logistics Providers, Big Brands and Synchronized
Providers, who in turn will need a share of their volume to achieve scale
economies. Core Providers will seek a share, too, for the higher margins
– and become “market spoilers.” The Extended, Lead Logistics, Big
Brand and Synchronized Providers therefore have a vested interest in
clearer marketing messaging and positioning.

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Journey to value
There is more than one way to make money in logistics services. So,
whichever core buyer segment(s) logistics service providers choose to
focus on, how they develop and execute these capabilities will shape
their competitiveness and ultimately determine how much value they
create for shareholders.
The journey toward future success for providers that are focused on more
strategic and high process conformance customers typically involves an
overlapping sequence of activities to develop enhanced capabilities (see
Figure 7). These activities include:
• Driving the standardization and integration of processes and systems
to reduce costs and provide a platform to achieve scale economies
• Componentizing the service portfolio, giving providers the means to
deliver customized solutions at higher margins
• Supplementing country governance with global governance processes,
allowing providers to relate to their large global customers on an equal
footing
• Making an ongoing investment in service innovation, which will be
essential to sustaining leadership
• Developing effective teaming capabilities (applies to the few aspiring
to become Synchronized Providers).

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Figure 7. The journey to value.

Providers may enter this transformation Teaming

capability Scale access
pathway at different points with varying
capabilities and overall vision
Service
Sustaining leadership
Cumulative cash generated

innovation

Global
governance Delivers promises

Componentization Flexibility and higher returns

Standardization
Cost reduction and consistency
and integration

Strategic clarity Rigorous alignment

Time

Source: IBM Global Business Services analysis, 2006.

Journey to value
The journey to value starts with having strategic clarity about the market
segments in which to participate. Then it involves an overlapping sequence of
activities to develop enhanced provider capabilities. These steps include:
• Strategic clarity – Rigorously align target market segments and value
propositions with organizational culture, business model, core compe-
tencies, asset planning and performance measures.
• Standardization and integration – Proactively sell the value of stan-
dardized and integrated global processes and shared user services –
internally and externally. These processes and services will help ensure
commonality of data definitions and service performance indicators.
• Componentization – Provide customized solutions from a set of stan-
dardized – but configurable – process, information, work flow and value-
added components. These solutions will harvest knowledge and make
the data readily accessible across the organization.

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• Global governance – Improve global deal consistency by moving such

contracts to global Profit and Loss statements (P&Ls) and reserving
traditional country P&Ls for narrow scope activities.
• Service innovation – Invest in new capabilities (such as visibility,
supply planning and control; dynamic synchronization and optimiza-
tion of business processes; a virtual supply chain information platform).
They will need to enhance existing capabilities in transport planning and
control and extend into more areas of procurement. This will necessi-
tate deep integration with customers to provide end-to-end supply chain
capabilities and visibility.
• Teaming capability for emerging “Synchronized Providers” – These
providers will need to invest in teaming skills in the new era of “co-
opetition,” where the value and breadth of services offered to customers
will amplify as the service provider’s network of partners grows.

No provider today can complete this transformation as a “single project.”

It is a strategic journey. The journey will need to be broken into manage-
able chunks of initiatives that can be realized in well-defined timelines
and at relatively low risk. Where a provider should begin the journey
will depend on that provider’s own business goals, the market pressures
and the maturity of existing capabilities.
Providers who can draw on the standardization capabilities of sister
package divisions (such as DHL and UPS) should find it easier and
faster to create value if they foster a culture of shared learning. Drawing
on the proof points of the package experience, growth rates and scalable
economics should enable providers to win over any change resistors
more easily.

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In the value journey sequence…

• Strategic goals will lead to different priorities and investments.
• Standardization and integration come before componentization because
the latter economically depends on standardization having been
achieved.
• Componentization comes before global governance because setting up a
global governance structure is a daunting task that includes overcoming
corporate culture issues to achieve cooperative efforts. While global
governance needs to be addressed, we believe that accomplishing
componentization first is likely to free up cash flow faster.
• Service innovation is investing for leadership. The investments are likely
to deliver lower returns if done right away than if a foundation of stan-
dardization, integration and componentization has been laid first.

The future logistics provider industry will be more global, more concen-
trated, more segmented around customer types and better at execution.
Business processes will be standardized, and systems will be integrated.
There will be better visibility of end-to-end supply chain information
and integration with partners and customers. The industry will have
effective, shared metrics to continuously measure performance and
handle exception management more easily through event monitoring
linked to business rules. And, at long last, providers will have a single
view of their larger global customers.

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EPC: A shared vision for transforming business

processes
By Sean Campbell and Sachin Shah
Electronic product code (EPC) adoption is still taking shape. Leading
companies are actively piloting and deploying EPC initiatives, yet EPC
adoption is very much a work-in-progress. While significant advances in
understanding how EPC can be used to drive anticipated benefits have
been made, there is still much to learn. Therefore, Global Commerce
Initiative (GCI) commissioned IBM to share the recent lessons learned
and perspectives of leading EPC adopters with the rest of the industry
and the market at large.
The discussion presented here is based on a joint assessment by GCI
members, including representatives from both the manufacturer and
retailer communities. Our goal is to provide senior industry leaders with
pragmatic insights on how RFID and EPC technology can help drive
major changes in the supply chain that ultimately benefit all partici-
pants.53

A shared EPC vision

Leading retailers and manufacturers share the ultimate vision of an
EPC-enabled supply chain that brings significant service and efficiency
benefits to shoppers, end consumers and businesses. The EPC-enabled
supply chain will enable trading partners to meet shopper and consumer
needs in ways far superior to what is possible today.
EPC is a global standards-based implementation of RFID technology
that is supported by the use of standards-based tags, readers, tag content
and information flows. It can be viewed as a continuation of the journey
that began approximately 25 years ago with the introduction of barcode

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scanning, although EPC makes a significant step forward with the ability
to support mass serialized identification. While barcode implementation
has delivered significant benefits to both the shopping experience and
industry supply chain efficiency, great opportunities remain for further
innovation and improvement in both areas.
Successful implementation of the technical capabilities introduced by
EPC makes it possible for companies to have broad, relevant and realtime
information about product movement across the supply chain, from
upstream suppliers through manufacturers, third-party logistics (3PL)
and distributors, to the retail store. In the near and medium term, case-
and pallet-level tagging has the potential to significantly improve supply
chain visibility, which will lead to increased collaboration and operating
efficiency for supply networks based on both distribution centers and
direct store delivery. These capabilities are expected to deliver signifi-
cant benefits to shoppers, end consumers and industry adopters in the
following areas:
• Store operations and replenishment
• Distribution center operations
• Logistics asset control
• Total inventory management
• Track and trace
• Shelf replenishment/shelf availability
• Goods transfer
• Promotion/event execution
• Shrink management.

Also, when item-level tagging becomes feasible in a given product

category, shoppers will benefit from an enhanced shopping experience
with even better on-shelf availability, fresher products, more efficient
checkout, and improved service and information delivery.

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RFID technology and, in particular, the standardized EPC and its associ-
ated information flow via the EPC global network are poised to enable the
next wave of evolution in the way that manufacturers, retailers and their
business partners share information and work together to satisfy consumer
demand. EPC can be thought of as an extended barcode containing a seri-
alized item key that enables individual products to be uniquely identified.
Unlike existing barcode technology, EPC systems, based on the use of
radio frequencies, do not require line-of-sight scanning. This fundamental
change improves the speed and potential accuracy of data collection and
provides the following new capabilities:
• Faster scanning and product handling with the capability to support
hundreds of tag "reads" per second (versus one-at-a-time as with
barcodes) and to conduct automated scanning with limited manual
intervention
• New opportunities to collect inventory information and “see” the flow
of products, potentially in real time and in locations not previously
feasible across the supply chain and in the store
• Automated “triggering” of appropriate actions (e.g., replenishment
orders, stock alerts) with less manual intervention
• Identification of discrete items – for example, by flagging duplicate or
invalid codes, thus enhancing the execution of promotions, track and
trace, product authentication and other activities.

These new capabilities will become fully realized as EPC technology

matures. Today, however, many pilots have encountered technological
challenges with:
• Tag quality (significant percentage of defects)
• Inconsistent read rates (due to issues with tag placement, the physics
of the product or environment, and the compatibility of tags and
readers)
• Tag application equipment (inability to operate at sufficient speed and
volume with consistent quality).

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Through current testing and initial deployment efforts, technology

vendors and users are working to overcome these challenges and make
effective use of the current level of performance. At this time, for
example, the read rates differ when reading all cases on a pallet compared
to reading individual cases on a conveyor system. While, in some pilots,
100 percent read rates are being achieved, results vary greatly depending
on product characteristics and environmental conditions.
Nonetheless, over time, EPC has the potential to bring fundamental
change to many areas of the marketplace, from the supply chain to store
operations to consumer interactions. The nature of EPC adoption will
evolve as new systems and standards are developed, technology costs
come down and new insights are developed on how it can add value.

Three stages of EPC adoption

The likely evolution of EPC adoption is illustrated in Figure 1. The
three stages of adoption are: supply chain execution and collaboration,
enhanced store experience and transformed consumer experience.

Figure 1. Envisioned evolution of EPC adoption.

Pallet/case- Pervasive
level Item-level RFID
Opportunities and benefits

Transformed
consumer
experience

Enhanced store experience

Supply chain execution and collaboration

Time
Source: IBM Institute for Business Value analysis, 2006.

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Today, most companies are focused on implementing EPC in the supply

chain at a pallet and case level to improve operational efficiency and
trading partner collaboration. The ultimate goal is to provide consumers
with greater value and a better shopping experience through fewer out-
of-stocks, fresher products and better service in the store. Going forward,
we envision that companies will use EPC tags at the item level and the
point of sale to enhance the store experience. Ultimately, consumers
may benefit from EPC-enabled capabilities throughout a transformed
consumer experience. In fact, a few companies are already exploring
stages 2 and 3 today. In addition, for bulk products such as pet food
or electronics, “case-level tagging” could encompass the consumer
saleable unit.
Now let’s take a closer look at the three stages of EPC adoption.

Supply chain execution and collaboration

The focus for most companies and in most product categories today is
on pallet- and case-level tagging. Even at this level, EPC adoption can
lead to a better consumer shopping experience by enabling companies to
improve supply chain execution and collaboration. (Note, however, that
some companies are also actively exploring inner-pack and item-level
tagging of products such as medicines, cosmetics, consumer electronics,
CDs/DVDs and apparel to address category or brand-specific business
needs and because benefits can be delivered quickly.)
To help frame the breadth of potential EPC applications, we have clas-
sified the major EPC opportunity areas within the supply chain into the
following six categories:
1. Store operations
2. Distribution operations
3. Direct store delivery
4. Promotion/Event execution
5. Total inventory management
6. Shrink management.

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Industry leaders have identified further opportunities to enhance supply

chain execution and collaboration through EPC adoption. However, more
work is required to understand the potential applications and benefits in
these areas. For example, EPC holds promise in a range of “track and
trace” activities, such as:
• Anti-counterfeiting
• Product diversion
• Recalls/Reverse logistics54
• Fresh/Code-dated product management
• Temperature/Cold chain monitoring55
• Legal compliance.

In addition, three major areas of EPC supply chain opportunities remain

largely unexplored in the consumer products/retailing industry. They
are:
• Manufacturing operations – While some companies have already
achieved significant improvements in this area through barcode-based
systems, further EPC-enabled benefits may be possible. For example,
manufacturers could use the better demand signal visibility enabled
by EPC to improve capacity planning and production efficiency for
themselves as well as key subcontractors and co-packing partners.
EPC could also help manufacturers improve tracking and manage-
ment of work-in-process inventory; maintenance, repair and operating
(MRO) supplies; and spare parts.
• Upstream supplier management – EPC may also help improve
replenishment and inventory management further up the supply
chain, specifically with raw materials and packaging suppliers. Track
and trace initiatives have the potential to support "recipe manage-
ment" and lot-tracking activities, where inbound materials are tracked
through the manufacturing process and linked to production orders
and finished goods.

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• Transportation and logistics – RFID tagging of shipping units (such

as trucks, containers, railcars) could help improve transportation
management. As one example, the fast-track tagging of "known
trucks" (with contents notified in advance) reduces the need for de-
briefs and gatehouse personnel. Waiting times at the ramp decrease
due to quicker unloading processes and better scheduling of arrivals.
Knowing where shipping units are located at virtually any time
provides for better asset utilization, leading to benefits in 3PL and
indirect benefits throughout the supply chain.

Enhanced store experience56

Looking further out, the broader vision for EPC is to tag individual
products at the item level. While technology costs remain too high to
make this feasible in the near term for most product categories, these
costs will inevitably come down as EPC adoption scales across various
industries including consumer products/retail. As this occurs, consumers
will likely see increased value and noticeable enhancements to the
shopping experience, enabled by new supply chain and store manage-
ment practices. For example:
• Product out-of-stocks would become rare as “intelligent,” EPC-
capable store fixtures provide retailers and manufacturers with stock
visibility all the way to the shelf and enable more dynamic restocking
procedures.
• The assortment and presentation of products would be more aligned
with consumer shopping preferences as EPC data is used to improve
category management, and automated shelf-level monitoring helps
ensure compliance with plan-o-grams.
• Shoppers would only see “fresh” products available for purchase as
item-level stock monitoring helps retail employees quickly and effi-
ciently identify aging or obsolete products that should be removed
from the sales floor.

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• Store employees, with access to item-level product inventory infor-

mation, could quickly help a customer find a specific size, color or
model anywhere in the store or throughout the retail chain.
• Consumers could obtain valuable information that helps them make
better shopping decisions (for example, product features, usage
instructions and promotions on complementary products) through
digital displays or information kiosks that interact with EPC-tagged
products.
• The checkout process would no longer be a primary source of
consumer pain as EPC-tagged products make rapid, automated
tallying of purchases possible.

Transformed consumer experience

EPC might ultimately become pervasive throughout the consumer envi-
ronment as a wide range of consumer devices become capable of inter-
acting with tagged products. Glimpses of potential future applications
can be seen today in other markets, such as RFID-based toll collection
systems for automobiles and identification systems for pets. As succes-
sive generations of EPC technology are developed and deployed, they
will likely become the basis of as-yet unimagined shopping experi-
ences and product/service offerings. While it is difficult to predict with
certainty what new applications and services will emerge, the successful
ones will surely be those that respond best to consumers’ needs.

Learning from the past: The barcode experience

To better understand the long-term context for EPC, the industry can
review lessons learned in the adoption of the barcode. Four key aspects
of this experience can help us understand the likely road ahead for EPC,
as discussed below.

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Standards are critical to drive widespread adoption. By accepting

common standards, such as product code specifications and the graphic
design of the barcode itself, companies were able to invest in the required
new technologies with confidence that their barcoded products and
scanning systems could be used with virtually any trading partner in the
industry. Technology vendors could focus on application and function-
ality innovation knowing they had chosen the right platform on which to
build. While there were some local variations, this was not a major issue
at a time when trade was more “local” than “global.” The EPC initiative
has the opportunity to avoid this shortcoming by moving to one global
set of standards from the start.
Collective industry action is key to achieving critical mass and
speeding realization of benefits. Supply chain technologies inherently
face implementation challenges because they typically involve high
initial costs and long-term, gradual benefits. Companies prefer to have
assurances that a large percentage of their trading partners are going to
adopt compatible systems and business processes before committing to
large-scale deployments.
In an industry environment more fragmented than today, the barcode
initiative faced several daunting challenges. Three things had to occur
simultaneously:
• Persuading manufacturers that enough retailers would adopt scanning
technology to make their investments worthwhile
• Assuring retailers that sufficient numbers of suppliers would source-
mark their products with barcodes
• Convincing technology vendors that adequate industry demand would
materialize to justify their R&D investments.57

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The group of industry executives that advocated barcode adoption

focused heavily on this critical mass problem and personally worked
to build support across the industry. However, it wasn’t until the vast
majority of products were barcoded that a significant number of retailers
adopted scanning systems. In today’s more consolidated competitive
environment, a comparatively smaller number of retailers should be
sufficient to achieve a critical mass of EPC-enabled product flow.
Full realization of benefits requires open information sharing and
sustained change in business practices and processes. Companies
achieve benefits not simply by deploying new technology, be it data
processing, the Internet, or RFID, but by implementing changes across
and within business processes to exploit the new capabilities available.
In many areas, including those targeted by EPC, this requires coordi-
nated change on the part of multiple trading partners and participants in
the industry value chain.
The historical experience related to barcodes illustrates this critical point.
Many of the expected benefits were based on the premise that manu-
facturers and retailers would cooperate and share point-of-sale (POS)
data to better manage cross-company activities like replenishment,
inventory management and shrink control. Some of these opportunities
were partially, but not fully, achieved, and others remain completely
untapped.58
Forecasting benefits and costs is difficult. At an early stage in the
adoption of virtually any technology, quantification of benefits and costs
is subject to many uncertainties. That is the case today with EPC. In
such an environment, companies may be conservative in their estimates.
Focusing on tangible costs and benefits, initial business cases may
underestimate the technology’s full impact.

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The barcode experience provides a clear case in point. Startling results

came from a comparison of the original business case for barcode
adoption in the U.S. grocery industry with estimates of the actual impact
over 20 years later (see Figure 2). Two key conclusions stand out.
First, the originally projected costs of adoption were twice as much
as the actual costs, as technology prices dropped more quickly than
anticipated. As can be seen in the evolution and introduction of many
technology-based goods (think DVDs and mobile phones versus televi-
sions or VCRs), price/performance improvements are accelerating and
adoption cycles compressing.

Figure 2. Estimated barcode scanning benefits, 1975 versus 1997.

Factor
8 0.92 5.65 Net Benefits 6.1x
(Barcode Scanned Volume)

6 Hard Benefits 1.1x

3.45
Percent of Sales

4
3.13 Soft Benefits 11.9x
2 3.44
0.29
0
-1.25 Total Costs 0.5x
-2.50
-2
1975 1997
-4

Note: "Hard benefits" refers to measurable cost reductions in areas such as checkout and price-marking labor,
checkout losses and bookkeeping. "Soft benefits" refers to gains in areas such as inventory reduction, shrink
control, sales lift and improved warehouse operations.
Source: IBM Institute for Business Value analysis, 2006.

Time will tell whether EPC adoption patterns will mimic those of the
barcode, but the lessons learned should be heeded as we tackle the new
opportunities enabled by EPC.
In particular, the industry’s historical experience with barcodes illus-
trates the importance of:
• Developing and adopting truly global standards
• Open sharing of information among trading partners

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• Active collaboration on required business process changes

• Continued monitoring of actual versus forecasted costs and benefits to
update business case projections.

Exploiting EPC’s full potential: Scenarios for transformation

The full impact of EPC will not be achieved simply by deploying tech-
nology in today’s supply chain processes. While some product catego-
ries appear to have characteristics that afford a clear path to economic
returns, the full scope of benefits may not be as obvious or as fast as
in other categories. Therefore, to achieve EPC’s full potential, manu-
facturers and retailers need to understand what it will take to achieve
currently identified benefits and to explore ways of further exploiting
EPC-generated data to expand the benefit potential and improve the
long-term return on investment (ROI).
Leading companies are actively investigating these opportunities across
the industry supply chain, all of which will require companies to “rewire”
their existing processes, systems and business practices. To share and
deepen knowledge across the industry and to focus attention on the
most important opportunities and issues, we will explore six scenarios
for EPC-enabled transformation based on case- and pallet-level tagging
(see Figure 3). We will discuss the following for each:
• Where the pain is – Identification of today’s business practices and
problems
• What’s possible – A detailed description of future EPC-enabled
processes
• What the impacts are – The anticipated economic benefits from EPC
adoption in these areas

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• What needs to change and who needs to take action – The key
implementation requirements across people, processes and tech-
nology systems; areas of responsibility across different participants
in the industry value chain (e.g., manufacturers, retailers, logistics
providers); and the expected timeframe for implementation.

Figure 3. Major EPC supply chain opportunities across the industry value chain.
1. Store Operations
Supply Chain

Upstream
Execution

2. Distribution Operations
Supplier Manufacturing
Management Operations
3. Direct Store Delivery

Distribution
Raw Materials
and Packaging Manufacturer Retailer
Suppliers

Consolidation

Factory Factory Manufacturer Retailer Backroom Sales Floor

DC RDC
Current focus
Transportation Future focus

4. Promotion/Event Execution
Collaboration
Supply Chain

5. Total Inventory Management

6. Shrink Management

Other opportunities (e.g., Track and Trace)

Source: IBM Global Business Services analysis, 2006.

While companies in the industry are also exploring ways of improving

supply chain performance using existing technology (e.g., barcodes or
EDI), EPC brings a new set of capabilities that can enable more effective
approaches to these challenges.
Many of the new business processes described in these scenarios require
the ability to identify all cases on a pallet to enable transformational
changes in accuracy and material handling. It should be noted that 100

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percent read accuracy is not necessarily required to obtain some of

the benefits as process workarounds can help compensate for gaps. In
addition, these scenarios generally assume the following:
• The performance of the RFID technology (e.g., tag yields and read
rates, tag application speed and reliability) is adequate for the applica-
tions described.
• Trading partners are using accurate, synchronized item data and
sharing EPC-generated product movement information.
• The requisite standards are available and being used.

Furthermore, it is important to note that these scenarios depict fully

enabled EPC processes and operations, not interim processes and
solutions that companies may need to deploy to manage duplicate or
hybrid processes for both tagged and non-tagged pallets and cases.
The first set of transformation scenarios focuses on improved execution
of core supply chain activities through EPC enablement. Many of the
capabilities developed and deployed in these areas provide the critical
foundation for future benefits that could be achieved through improved
supply chain collaboration.

Store operations
This scenario covers store receipt of products from retail distribution
centers (“store replenishment”) and the movement of products within
the store itself (“shelf replenishment”).

Current issues
EPC-enabled store and shelf replenishment practices can address many
of the problems retailers and manufacturers face today that cause out-
of-stocks59 and limit the time store employees spend serving customers.
These problems include:

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• Inaccurate receiving into the backroom – “Blind received” deliveries

provide no guarantee of receipts.
• Poor/lengthy check-in routines – The alternative to blind receiving
is to take the time to manually check products. Store employees may
spend excessive time correcting internal IDs for received products.
For example, a product arrives at the store, but the GTIN is not in the
system or is inaccurate (due to faulty data entry at corporate). Store
operations are disrupted as the product cannot be sold until a category
or store manager corrects the error.
• Actual versus book stock inventory discrepancies.
• Excessive time spent on inventory counts and searching for products.
• Distorted and delayed store demand signals – Unable to find a given
product in cluttered backrooms, store employees may incorrectly
“zero out” store stock information, leading to unnecessary orders.
• Inflexible or arbitrary replenishment routines – Employees work
according to a fixed timetable instead of in response to actual customer
demand and shelf conditions (for example, “cheeses at 10 a.m., deter-
gents at 11 a.m.”).

Process view
With EPC enablement, both retailers and manufacturers believe that store
employees will have more capability to improve inventory accuracy,
track product movement from the backroom to the sales floor, find
products in the backroom more readily and, ultimately, better manage
shelf replenishment to improve product availability. Specifically:
• Efficient and accurate store deliveries – When products are received
at the store, an EPC-enabled process can identify case receipts and
update the store inventory system. In addition, with new software
functionality, receipts could be compared to expected deliveries to
validate that the right goods were delivered to the right stores and

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identify any overages or shortages. Discrepancies would automati-

cally generate “alert” messages to inform delivery and receiving
personnel, who would also have an “override” capability to handle
damages and breaches. Improved delivery accuracy is thus obtained
without increasing labor requirements. In fact, turnaround times
should become shorter, and deliveries should consume less driver and
store staff time.
• Segmented stock monitoring (between the backroom and sales floor)
– The store’s book stock system would become significantly more
accurate as inbound deliveries cause this information to be updated
automatically. And with EPC readers located at the doors between the
backroom and the sales floor, stock levels in each part of the store can
be monitored separately. Additional EPC readers at the compactor,
baler or waste area (depending on how the store handles emptied
cases) help verify that cases brought to the sales floor were actually
emptied, and when. It is generally believed that retailers will see
improved store-level inventory accuracy, providing a better founda-
tion for store execution processes and systems.
• Demand driven store replenishment practices and the timing and
quality of orders placed with the distribution center – With improved
accuracy and visibility, store employees would also have greater
confidence when looking for a particular item and be able to locate
products more quickly with the creation of new backroom manage-
ment processes. Retailers could also implement a variety of alert-
based practices to improve shelf replenishment. For example, they
could compare existing electronic POS data with product movement
to the sales floor and proactively generate alerts for employees to
investigate shelves believed to be running low on stock. Emergency
orders could be classified for rapid handling, enabling “fast-track”
movement to the sales floor upon receipt.

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With future reader technology, alerts might be directed to handheld

readers that act more like locator devices to help employees locate
specific EPCs and cases in the backroom. The result is proactive shelf
replenishment that is more in line with consumer demand, helping
to avoid intra-day or peak-hour stock-outs. Employees can then
replenish a greater number of shelves in less time and focus more
effort on items most in danger of being out of stock.
• Improved administrative efficiency – With greater visibility to stock
levels into the backroom and sales floor, store employees would spend
less time performing routine tasks such as product counts and rotation
of fresh or code-dated products (and/or do them less frequently). EPC
numbers could be linked to product expiration information at manu-
facturer tagging points, or even within the retail distribution process
all the way up to the shelf, to help identify soon-to-expire products
more efficiently.
• Improved yard security and inbound management – Receiving doors
could be protected with EPC readers to improve management of and
control over product cases and delivery assets. With future tag tech-
nology (potentially making use of “active” instead of “passive” tags),
transport carriers and trailers may include identification devices that
are linked to the contents of the shipment to help retailers prioritize
trailer unloading.

Economic benefits
In the ways described earlier, EPC enablement can help drive revenue
growth for both manufacturers and retailers and improve retailer
productivity through more efficient labor utilization. The retailer could
choose to refocus store staff on promotional, merchandising and other
more customer-facing, revenue-generating activities. Consumers would
enjoy better service from store employees and, in general, have greater
assurance that the products they want to buy are in stock and “fresh.”

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Distribution operations
This scenario covers core supply chain activities involving the distri-
bution centers of virtually any participant in the industry value chain,
whether a manufacturer, retailer, 3PL, etc. Specifically, it includes:
• Shipment and receipt of products between trading partners (referred
to as “goods transfer” below)
• The movement of goods within distribution centers
• Management of logistics assets (referred to as “asset control”
below).

Current issues
Companies throughout the supply chain can use EPC to address today’s
distribution process bottlenecks and failures that often result from the
complexity of product flow and human error. These include:
• Complex, labor-intensive receiving processes – Typically involve
actions such as manual barcode scanning and label application; some
trading partners utilize EDI ASN/DESADV receipt with SSCC.
• Errors missed due to “single-scan” receiving – Retailers often must
choose between scanning a single case of each inbound shipment
(and accepting errors) or scanning virtually every pallet/case (at high
cost in labor and delays). Discrepancies lead to deductions for trading
partners.
• Labor-intensive cycle counting and physical inventory counts.
• Frequent human errors in marshalling products for delivery (e.g.,
wrong unit, wrong lane) – Distribution centers often engage in manual
checking/audits of outbound shipments to reduce likelihood of claims
and shipping errors. Despite these efforts, errors still occur.
• Assets badly organized, unreturned, misused and stolen – Asset return
schemes have largely failed due to the difficulties and costs of tracking
them. Assets build up on site, disrupting operations and becoming

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vulnerable to theft. As a result, required assets are not available when

needed, and asset utilization is not optimized (for example, expensive
roll cages are used when product warrants only less-expensive
dollies).

Process view
Through EPC enablement, distribution operations could become substan-
tially more efficient, orderly and accurate. Specifically:
• Efficient and accurate receiving process – As with store deliveries, any
shipments received by a distribution center (e.g., from manufacturer
to retailer) would be rapidly and automatically counted into the distri-
bution center inventory system via reads of EPC tags on the shipped
pallets. A “three-way match” process could check that the goods
actually received match the original purchase order and the shipper’s
electronic shipment notification. Distribution center personnel simply
have to visually check the received goods for breaches or damage,
or manually override the check-in process in case of a discrepancy
alert. This is of particular importance where mixed pallets are being
shipped.
• Smooth product handling – Within the distribution center, EPC
readers strategically placed around conveyor belt systems could
achieve close to 100 percent read rates on cases being moved within
the distribution center regardless of how the cases are placed on the
belt (assuming the belts themselves are built from RFID-friendly
materials). This would provide significant improvement over
today’s barcode-based systems, where misreads due to covered or
damaged barcodes result in piles of “rejected” products that must
be dealt with manually. Note, however, that the use of conveyor

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belts is less common in European distribution centers. In this region,

goods are typically received, checked and stored on pallets. EPC-
enabled forklifts or handheld readers will help companies improve
the checking and storage of goods and achieve higher performance
compared to today’s barcode-based procedures. It will, for example,
be possible to identify the location of goods while in transit from the
dock doors to the warehouse storage racks.
• Improved inventory management – Through automated, verified stock
check-ins and EPC readers strategically placed around the distribu-
tion center (e.g., in doors or on forklifts), the accuracy of location
information for cases and pallets would be improved significantly.
Distribution center staff could spend far less time in cycle counting
and/or conducting physical inventories.
• Increased cross-docking accuracy – Similarly, the use of EPC readers
in the cross-docking area would help ensure that the right product is
moved to the right place.
• Efficient and accurate shipping process – Distribution center staff
could use EPC readers to track cases and pallets as they are picked
and packed, enabling “green light” shipping with much less manual
compliance checking and processing time. Distribution center staff
would thus have greater assurance that the right product was sent to
the right door and, ultimately, to the right customer or store.
• Improved RTI/asset control – Tags on returnable transport items
(RTIs) and other logistics assets (such as pallets, totes, trays, roll
cages, etc.) would enable companies to better track their movement
and location, providing several benefits. Asset misuse would be
reduced and the opportunity for actively managing logistics assets
enhanced, helping to ensure that the right assets are available when
needed. Asset theft could be prevented more effectively. In addition,
companies could better encourage and monitor the return of assets
to their proper source.

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Economic benefits
As a result of deploying EPC in their distribution centers and goods
transfer processes, businesses can obtain the following benefits over
time:
• Significantly improve distribution center labor productivity (and
therefore lower operating expenses)
• Reduce the level of claims and deductions for manufacturers
• Reduce the amount of time spent on claims resolution for both retailers
and manufacturers
• Reduce the added capital costs of "cushion" asset inventory and lost
assets.

Direct store delivery

This scenario addresses some of the supply chain execution issues and
opportunities specific to direct store delivery-based supply networks.
(Note that collaborative opportunity areas such as promotion/event
execution, total inventory management, asset control, and track and
trace may also be applicable to direct store delivery.)

Current issues
EPC enablement can help direct store delivery suppliers and their retail
customers address current issues such as:
• Delivery errors – Similar to retailer distribution centers, the direct
store delivery model requires distributors to pick products at their
supply depots for a wide range of customer locations and deliver the
right products to the right stores on “multi-drop” delivery routes. The
inherent complexity of this activity often leads to delivery errors.
• Check-in wait and turnaround times – Today, most retail customers
require direct store delivery suppliers to replenish product during
normal store delivery windows so retail staff can monitor deliveries

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and verify product receipt. As retailers continue to drive efficiencies

by reducing delivery windows, often the receiving process involves
lengthy wait times caused by multiple deliveries arriving at the same
time. These include the retailer’s own delivery vehicles arriving from
their own distribution centers.
• Out-of-stocks and lost sales – The inefficiencies in the direct store
delivery supply chain described previously can lead to missed or
rushed delivery stops, lower performance on shelf replenishment
and merchandise presentation, and, ultimately, out-of-stocks and lost
revenue.
• Invoice discrepancies – Delivery errors help fuel inconsistencies in
delivery receipts and invoices and the need to reconcile financial
records between retailers and direct store delivery suppliers.

Process view
As in traditional distribution center operations, EPC can drive improved
efficiency and accuracy in shipping and receiving activities and asset
control. It can also reduce back-office transaction discrepancies (i.e.,
invoice discrepancies). And with cooperation from retail customers,
direct store delivery suppliers could achieve store-level benefits in terms
of on-shelf availability and labor productivity. Specifically:
• Improved warehouse management – There is the potential for direct
store delivery distributors to improve warehouse operations through
the use of EPC/RFID in the areas of fleet management and pick-and-
pack activities. The level of improvement will depend on the current
degree of automation in the warehouse. Note that because most direct
store delivery distributors have a large number of supply depots, the
cost of EPC enablement may be much greater than that of a warehouse
manufacturer or retailer.
• Efficient store deliveries – In an EPC-enabled model, readers at the
store backroom would automatically capture the movement of direct
store delivery products into the store and enable migration to a more

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automated check-in and delivery process. This change can reduce the
wait times caused by manual check-in and may offer the opportunity
for off-hour deliveries.
• Improved store-level service – This delivery scenario provides quicker
turnaround times to direct store delivery personnel, helping to reduce
the incidence of missed or rushed drops at the end of the day. In addition,
personnel can spend more time at each drop reviewing merchandise
presentation, product quantities and promotion execution. Replenish-
ment and service to the store and end consumers would improve.

Economic benefits
Direct store delivery manufacturers can realize improved on-shelf avail-
ability and sales, higher labor and asset productivity, and reduced invoice
discrepancies. Retail customers can benefit from reduced out-of-stocks
and reduced labor requirements in the receiving process.

Promotion/Event execution
This scenario addresses some of the issues and opportunities specific to
the execution of promotions, events and new product introductions. It
encompasses activities from the manufacturer distribution center to the
retail sales floor.

Current issues
EPC can help trading partners address the issues that arise from lack of
visibility into store-level promotion execution. These issues include:
• Delayed compliance or non-compliance by stores
• Diversion of promoted products to the wrong stores
• Poor coordination with advertising programs, leading to out-of-stocks,
lost sales, reduced consumer satisfaction, and excess markdowns or
returns.

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Process view
To help resolve these issues, trading partners can build on the EPC-
enabled capabilities outlined in the Store Operations scenario discussed
previously to enhance communication and collaboration among trading
partners related to promotional and new product introduction activities.
Specifically:
• Improved store-level visibility – With EPC readers located at store
receiving and sales floor entry doors, realtime data would be available
to help companies verify that on-promotion product and promotional
materials (e.g., displays) are delivered to the store and moved onto the
sales floor to coincide with specific promotional activities.
• Actionable, more efficient compliance monitoring – As this informa-
tion is shared by retailers with their suppliers, manufacturer personnel
would have greater visibility into promotion compliance at the store
and may be able to reduce the number of store visits they have to make
to address non-compliance issues. In addition, trading partners could
proactively work together to coordinate the staging and movement
of products with planned advertising and other events, improving the
effectiveness of promotions in the marketplace.

Economic benefits
These changes, when coupled with EPC-enabled replenishment
processes, can help drive improved on-shelf availability for promoted
products and, therefore, higher consumer satisfaction and sales for both
trading partners. Manufacturers can better monitor the effectiveness of
their promotional spend, reduce wasted investment and decrease labor
costs related to compliance management. In the future, the information
provided by EPC could also be used in promotion planning and trade
funds allocation discussions to better optimize spending in these areas.

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Total inventory management

This scenario outlines how trading partners can exploit the broader, more
granular, realtime stock visibility afforded by EPC to reduce overall
inventory levels across the supply chain.

Current issues
EPC-enabled systems and processes can be harnessed to address one
of the major issues that continue to plague industry supply chains: the
ripple effect of excess inventory and safety stocks that manufacturers
and upstream suppliers must maintain as a result of:
• Poor downstream inventory visibility – Manufacturers, for example,
have little visibility of product flow through the retailer’s supply chain.
Unable to precisely monitor demand levels and forecast when new
orders will be placed, they need to build up safety stocks to maintain
service levels. Retailers themselves have less-than-optimal visibility
into store-level inventory and demand fluctuations.
• Disconnected forecasting and planning activities – Demand planning
throughout the value chain is largely based on historical sales patterns
rather than active, realtime monitoring. Planning accuracy for manu-
facturers is dependent on the frequency of retailer orders and manu-
facturers’ ability to use retail POS data, which can be problematic in
terms of accessibility, reliability and ease of integration with fore-
casting systems. Time lags between orders and updates also help to
drive up safety stock requirements.
• “Corrupted” store demand signals – When store employees “zero out”
inventory in the store book stock system, it can lead to the placement
of premature or unnecessary replenishment orders, causing a buildup
of excess inventory at that store.

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Process view
The EPC-based capabilities detailed in the store operations and distribu-
tion operations scenarios provide the foundation for improved supply
chain collaboration on total inventory management. Specifically:
• Improved store demand signal – As EPC is rolled out in stores to
enhance store and shelf replenishment, one of the second-order effects
of increased stock information accuracy would be improvement in
the demand signal. Store employees should no longer be allowed to
incorrectly zero out inventory in the store book stock system simply
because they cannot find the product. The replenishment orders placed
would thus more accurately reflect the true level of inventory and
demand at the store.
• Improved planning and forecasting – By sharing EPC case and pallet
movement data with their suppliers, retailers would allow manufac-
turers to use this information to improve their planning and fore-
casting activities. Manufacturers would receive more granular and
more frequent updates about inventory levels in the downstream
supply chain, allowing them to more regularly compare actual product
movements with their forecasts and to update them accordingly. Short-
term planning and execution would be done in line with actual store
activity and shipments versus historical sales forecast information.
• Reduced safety stocks across the total supply chain – With improved
visibility and confidence in the stock information at their stores,
retailers could reduce the levels of safety stock held at their distribu-
tion centers. For their part, as manufacturers build greater confidence
in the accuracy and consistency of downstream demand signals, they
could implement more dynamic replenishment processes and poten-
tially change their inventory policies to reduce the safety stocks held
at their own distribution centers.

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• Upstream supply chain benefits – If manufacturers, in turn, shared

their forecasts and production plans with their own suppliers, these
inventory reduction benefits could similarly be shared with raw
materials and packaging suppliers.

In the long run, some companies view EPC as an enabler to help

transform the purchase order process as we know it today. As suppliers
gain more visibility into store-level inventory and product movement
data, they could take a more active role in managing their product
inventories at the store. Suppliers could, for instance, use EPC demand
signals to execute their own replenishment plans. If this process was
linked with financial transactions, EPC reads could automatically trigger
replenishments, transfer of ownership and underlying financial transac-
tions between trading partners. More timely payments could offset the
additional costs of managing inventory at a store level.

Economic benefits
Upstream suppliers, manufacturers and retailers that are able to collabo-
rate with their trading partners in these ways will likely be able to free
up valuable capital currently tied up in excess inventory.

Shrink management
Companies across the industry supply chain could take advantage of
EPC-based product movement data to better identify and control shrink.
As with the preceding scenarios, this vision is built on the EPC capabili-
ties outlined in the store operations and distribution operations scenarios
as well as direct store delivery for those types of supply networks.

Current issues
The sources and causes of shrink have been studied extensively in
various industry studies (see Further reading). In general, though, they
can be classified into four categories:60

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• External theft – Theft from store thieves, grazing and returns fraud
• Internal theft – Theft by employees, contractors and collusion (at POS
and receiving)
• Process failures – Due to incorrect deliveries, counting or pricing;
out-of-date or damaged goods; markdowns
• Inter-company fraud – Willful mis-shipments or pricing discrepancies.

Companies across the supply chain are vulnerable to these forms of

shrink largely due to poorly managed processes or controls. Some of
the issues that inhibit more active and effective management of shrink
include the following:
• Lack of visibility into key links in the supply chain, such as trans-
portation between distribution centers and stores, where theft often
occurs
• Lack of timely information about when and where shrink occurs,
making it more difficult to trace after the fact; reactive tracking with
a significant dependence on employee accuracy and honesty
• Insufficient security deterrents for own or trading partner employees.

Process view
The potential role of EPC in shrink management is straightforward.
Improved shrink management would be achieved by comparing the actual
EPC tag movements being captured by readers installed at receiving/
shipping doors and other key locations with the movements that are
planned or expected. Discrepancies could be automatically logged,
highlighted or sent to relevant managers for their prompt attention.

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Economic benefits
By exploiting EPC’s capabilities as outlined in this section, companies can
reduce the magnitude and impact of shrink, improving their bottom line.

Conclusions
EPC adoption is happening today as leading companies actively pilot
and deploy EPC initiatives addressing many of the areas just discussed.
It is, however, very much a work-in-progress. Significant advances in
understanding how EPC can be used to drive anticipated benefits have
been made, but there is still much to learn. Key conclusions based on the
lessons learned and perspectives of leading EPC adopters are discussed
below and summarized in Figure 4. Recommended actions are also
presented.

Figure 4. Top-level conclusions of this report.

An EPC-enabled industry supply chain...

Requires work process transformation to truly

• Is a shared vision of consumer deliver benefits
products manufacturers and
retailers Will have varying opportunities driven
by category-specific dynamics
• Is happening today

• Will enable the industry to meet Depends on information flows that are free, standards-
consumer needs in ways far based, secure and in context
superior than are possible today
Requires costs to come down and new ways
to create value along the supply chain

Source: IBM Global Business Services analysis based on Global Commerce Initiative data, 2006.

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Work process transformation is required for EPC to truly deliver benefits

Leading adopters generally expect four primary sources of benefit from
EPC adoption in the near to medium term:
• Increased sales from improved on-shelf availability
• Reduction in inventory levels
• Improved labor productivity in stores and distribution centers
• Reduction in post-sale transaction and administrative costs (e.g.,
claims).

However, to fully realize these anticipated benefits from EPC adoption,

trading partners must simultaneously pursue both process and techno-
logical changes. These benefits are dependent on companies making
requisite changes in business practices and work processes, both inter-
nally and in collaboration with trading partners.

Category-specific dynamics drive differences in opportunity

With respect to EPC adoption, different product categories have
different dynamics including cost structures, required infrastructure
support, distribution models, value to the consumer and role in the retail
store. Manufacturers and retailers involved in the production, sale and
merchandising of many categories of consumer products recognize
category dynamics as a key driver of the business opportunity in EPC
adoption. They also recognize the need to “learn by doing” and to
conduct pilots in categories that reflect the greatest opportunities based
on mutual trading partner business cases.

Trading partner collaboration is dependent on information flows that are

free, standards-based, protected and in context
Process change of any kind is difficult and even more so when it requires
coordinated action across trading relationships. To enhance the likeli-
hood of success, trading partners need to operate using the same infor-
mation. Therefore, it is essential that industry participants have a funda-

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mental willingness to collaborate and share supply chain information

with trading partners. Progress must continue in establishing accepted
“best practices” for the sharing of important information among trading
partners for EPC to truly work and for the industry and end-consumers
to benefit.

Costs must come down, and new ways to create value along the supply
chain must be found
In addition to the transformation of specific work processes, a key driver
of EPC’s potential benefits is the value of the pallets and cases being
tagged relative to the cost of the EPC tags and the RFID infrastructure.
Collaboration among early adopters, industry participants, technology
vendors and EPCglobal will be required to continue improving EPC’s
cost of implantation and overall value proposition; the ability to deliver
consumer benefits ultimately depends on the reduction of these costs.
Steps include the following:
• Focus by individual companies on understanding their specific
business case
• Completion of meaningful pilots by trading partners
• Recognition by the industry of the key technology improvements that
are needed.

Learn from the barcode experience

To better understand the long-term context for EPC and help predict its
key success factors and likely challenges, the industry should review
lessons learned in the adoption of the barcode, a process with many
similarities. Time will tell whether EPC adoption patterns will mimic
those of the barcode, but the lessons learned should be heeded as new
opportunities enabled by EPC are tackled. In particular, the industry’s
historical experience with barcodes illustrates the importance of:

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• Developing and adopting truly global standards

• Open sharing of information among trading partners
• Active collaboration on required business process changes
• Continued monitoring of actual versus forecasted costs and benefits to
update business case projections.

Recommended industry actions

Key actions that the GCI recommends for EPC adoption are presented
below. The recommendations are geared toward individual companies,
trading partners and the industry as a whole.

Action steps for individual companies

Actions that individual companies should take in regard to EPC adoption
are:
• Understand and communicate the EPC vision within your own
organization, setting up a cross-functional team and identifying an
executive-level champion.
• Learn by doing. Conduct your own business case analysis, and exper-
iment with and investigate opportunities for using EPC in your own
company.
• Help ensure that your company has clean, accurate product data that
is aligned with trading partners and is being shared automatically with
those trading partners (through Global Data Synchronization, a recog-
nized industry best practice).
• Participate in and support industry groups, especially EPCglobal, at
local, regional or global levels to share lessons learned and engage in
the standards-setting process.
• Understand and proactively address the consumer and public policy
perspectives on EPC.

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Action steps for improved trading partner collaboration

Actions that trading partners should take in regard to EPC adoption
are:
• Embrace the exchange of supply chain information and collabora-
tion via the EPCglobal Network as a source of business improvement
versus viewing them as a threat. Establish clear information-sharing
work practices with your trading partners and support the use of free,
standards-based information exchange.
• Engage in meaningful pilots with trading partners, focusing on oppor-
tunities identified in mutual business cases.
• Leading adopters should share their knowledge, experience and
findings more widely in industry forums, including information on
pilot results and business value.
• Manufacturers and retailers should collaborate to craft a workable
roadmap for EPC deployment focusing on high potential categories
and the most accessible supply chain opportunities.
• Upstream suppliers and 3PL and distribution service providers should
keep pace with industry adoption to avoid creating gaps in the capa-
bilities of the end-to-end supply chain.

Action steps for the industry as a whole to address critical technology

issues
Actions that the industry as a whole should take in regard to EPC
adoption are:
• Industry participants should work with EPCglobal to prioritize the
development of future requisite regulations and standards, such as
tag classes, software interoperability and data sharing, that can be
globally accepted and adopted.
• Industry participants, technology vendors and EPCglobal should work
together to make required capabilities available to drive expected

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benefits. Focus areas should include improved tag read rates and
accuracy, high-speed tag application and embedding technology, a
scalable EPC information network, and a conformance and perfor-
mance certification process.

In summary, EPC implementation is a substantial investment that

requires in-depth, joint planning. Trading partners need to figure out the
best path to an EPC-enabled value chain, working together to determine
how they can deploy EPC in an economically viable way to achieve an
end-state that drives lasting value.

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Transforming the military through sense and respond

By Grace Y. Lin and Robert E. Luby, Jr.
Today’s military and intelligence environment is fast-changing and
unpredictable. Terrorist acts and other threats to the security of our
nation and its citizens require the military and intelligence communities
to address significant challenges. These challenges include:
• Coordinating multi-agency, multinational units so they may more
effectively respond to rapidly changing situations
• Creating a logical fusion of fragmented and uncertain information
gathered from the various theaters in which military or intelligence
branches are engaged
• Configuring value nets intelligently and dynamically to support
common goals between autonomous yet interdependent joint forces.

To face these challenges, the military and intelligence communities are

turning to sense and respond – an innovative managerial approach origi-
nally developed by IBM that is designed to revolutionize organizational
structure and operations.61, 62 The interpretation of sense and respond
by the U.S. Department of Defense (DoD) has resulted in three major
transformational efforts: Network-Centric Operations (NCO), sense-
and-respond logistics and military culture change.63, 64, 65
The sense-and-respond model offers agile, adaptable, scalable and
interoperable response capabilities. We have proven the capabilities and
value of sense and respond to both internal IBM and commercial clients.
Based on this experience, we share DoD’s belief that adapting sense and
respond to the nation’s defense needs will provide the military and intel-
ligence communities with many benefits during their large-scale and
long-term transformation efforts.

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Sense-and-respond managerial framework

The sense-and-respond managerial framework is based on the premise
that changes in the business, security and technology environments
are so swift that they have outstripped our ability to foresee and plan
for them.66 A successful response will come from rapidly sensing and
adapting to change rather than relying on process designs, hierarchies of
authority and industrial-age command-and-control action plans designed
for events that are more predictable.
The sense-and-respond managerial framework is based on five core
competencies: design organizations as adaptive systems, context-giving
leadership, decision clock-speed, know earlier, and dispatch capabilities
from the effect back (see Figure 1). While planning for operations is
still needed, its nature must change dramatically. Specifically, designs
for action must replace courses of action as an expression of military
strategy.
Figure 1. Five key competencies for the sense-and-respond organization.

Design organizations as adaptive systems – Integrate units connected through

common purposes, governing principles and shared risks, collaborating on achieving
common goals.

Context-giving leadership – Train and qualify leaders as provider of the context within
which subordinates can self-synchronize to achieve common goals.

Decision clock-speed – Augment human decisions with smarter and more flexible
technologies and manage execution cycle through collaboration.

Know earlier – Use enhanced sensor networks for better analysis, superior pattern
recognition and more comprehensive context linkage.

Dispatch capabilities from the effect back – Establish a security-enhanced collabora-

tion mechanism for self-synchronization in a technology-enabled adaptive system
based on superior knowledge of events and effects.

Source: IBM Global Business Services analysis, 2006.

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Sense-and-respond value net

The sense-and-respond value net initiated at IBM Research expands the
sense-and-respond managerial framework into an integrated planning,
operations, intelligence and logistics system.67, 68, 69 It uses decision
models and advanced technology first to monitor, detect and predict
events and then to coordinate actions between networked organizations
and value net partners.
Through highly adaptive, self-synchronizing and dynamic physical and
functional processes, sense and respond is designed to drive shorter
decision cycles and faster responses. An array of tools and technolo-
gies support the sense-and-respond value net, including agent-based
distributed decision-making, dashboards, event management, intelligent
analytics and business process integration and automation.
The sense-and-respond value net proactively detects events, aligns oper-
ations with strategy, integrates planning and execution, and supports
sustainment. Value-net partners collaborate in decision-making, and
the entire system constantly adapts to changing conditions. The value
net is dynamically configured by forming and dissolving partnerships
to support objectives. Value-net performance is further improved by
advanced integration technologies, closed-loop feedback control and
learning mechanisms. This optimization involves the sharing of infor-
mation, distribution of decision rights, redistribution of work, support
of sustainment, and better allocation and use of available resources (see
Figure 2).

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Figure 2. Sense-and-respond value net technologies.

Security- Detect and

enhanced interpret

Monitor and Analyze

sense
Control
and learn

Respond and
execute Decide

Value net support Monitor and sense Detect and interpret

• Collaboration support • Sensors and sensor networks • Data cleansing and filtering
• Impact and value analysis • Data integration technologies • Pattern and event recognition
• Distributed decision support • Security-enhanced communica- • Knowledge mining
Analyze tion networks Decision support
• Realtime logistics and effect Dashboard • Agent framework
analytics • Information integrator • Policy-driven decision-
• Simulation and what-if analysis • Situational filter based on roles making system
• Risk and impact analysis • Visualization technologies • Security-enhanced collabora-
• Semantic Web • Portal and information push-and- tion support
• Rulebased systems pull technology • Distributed decision making
Respond and execute Control and learn protocols

• Realtime execution support • Effect measurement and moni-

toring
• Autonomic computing
• Feedback and learning technology
• Realtime infrastructure
support

Source: IBM Global Business Services analysis, 2006.

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Sense and respond in the military

To support deployed forces, the military has traditionally relied on mass-
based logistics systems. This tendency is still true today, even in the era
of just-in-time logistics. While traditional stockpiling was impractical for
responding to sudden, unpredictable threats, just-in-time logistics – the
streamlined alternative – leaves deployed forces and their support units
more at risk to interruptions of their more vulnerable lean supply chains.
In an attempt to fully address these issues, the U.S. DoD Office of Force
Transformation has embraced sense-and-respond logistics, a concept
that has great synergy with IBM’s own sense-and-respond vision. In
November, 2004, DoD defined sense and respond as follows:

Sense and respond (S&R) is a foundational, managerial

and leadership model for joint, networked, effect-back
organizations that specifically address the behavioral
imperatives of Network-Centric Operations (NCO). It
empowers local commanders with information and coordi-
nation mechanisms that allow them to synchronize action
with other units and make informed decisions based on
realtime intelligence. It exploits adaptive technologies and
behaviors to operate effectively in the rapid and unpredict-
able environment of asynchronous warfare.70
Figure 3 shows a sample sense-and-respond system that supports military
operation. The sample scenario in Figure 4 illustrates how sense-and-
respond value nets support logistics and battlefield operations, as well
as sustainment, by observing patterns, detecting issues and performing
root-cause analysis. In the scenario shown, coalition forces are deployed
in support of a peacekeeping mission, and a sense-and-respond system
has already been programmed with data on all rules of engagement
governing coalition forces, available assets and supplies, capabilities of
friendly units and suspected capabilities of the enemy.

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Figure 3. Sense-and-respond value net to support military operations.

Inputs: Operational command Receivables:

Rules Roles: Decision support
Policies Receive mission Communications
Plan Determine resources Data reports
Command intent Determine effects desired Availability of assets
Desired effects Design plan
Adapt plan

Virtual computer
Receivables: Roles:
Information requests Data integration
Commitment management Receivables:
Intelligence command Demand/supply matching Supply requests
Roles: Analysis/pattern recognition Intelligence affecting supply
Determine intelligence need Manage roles, responsibilities
Gather data and accountability Logistics command
Analyze data Middleware Roles:
Weather Modeling and simulation Troop sustainment
Terrain Decision support Inventory management
Enemy capability Reliability management

Inputs: Inputs:
Raw data Supply availability
Filtered data PLM information
Analyzed data

Source: IBM Global Business Services analysis, 2006.

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Figure 4. Sample scenario: Reaction to insurgent attack – the sense-and-respond system

supports a military operation.

Coalition forces are deployed in support of a peacekeeping mission. A sense-and-respond system has already been programmed with data on
all rules of engagement governing coalition forces, available assets and supplies, capabilities of friendly units and suspected capabilities of
the enemy.

Sense-and-respond operations: Current plans call for patrols, Sense-and-respond logistics: While the other activities are taking
backed by quick reaction forces in case of contact. Sense-and- place, and the attention of commanders is focused on the combat
respond uses a version of the Sense, Interpret, Decide, Act Loop. operations, sense and respond continues to analyze all incoming data,
and notices several arising support issues.

Sense: Intelligence assets receive information that several police stations Sense: Patrol units were only carrying minimal food, water and ammuni-
and market areas will be attacked. Patrols observe and report unusually tion loads. Several vehicles that were dispatched, or rerouted in reaction
early shop closings in several market areas. to the attacks, will drop below suggested fuel levels during the operation.
Interpret: Possible coordinated attacks at multiple locations. The on-board prognostics of an unmanned aerial vehicle (UAV), tasked
Decide: Further analysis is required, possible targets are evaluated. as a surveillance platform for this operation, are predicting an impending
Act: Communication initiated with intelligence assets, troop commanders part failure.
are alerted, planning begins, quick reaction troops are dispatched to Interpret: Sense-and-respond determines the amounts of food, fuel, etc.,
possible target areas. needed.

Sense: A patrol is attacked while approaching one of the markets. Two Sense: Sense-and-respond checks [available to promise] fuel (e.g.,
personnel are injured. uncommitted fuel) and finds three sources. Sense-and-respond finds two
Two police stations (one was not originally identified as a possible target) sources of food and water. Sense-and-respond is unable to find available
are attacked by groups of 40-60 insurgents. Ten policemen are killed, ammunition. Sense-and-respond finds a replacement part for the UAV,
22 injured. Coalition teams on the ground report updated statuses of the but it is located at the manufacturer in the U.S. and will take several days
potential targets. to arrive in-theater.
Interpret: Coordinated, simultaneous insurgent attacks are underway. Interpret: Risk calculation: Based on current data, sense-and-respond
Other targets are still at risk. determines that supply vehicles can deliver food, fuel and water. Sense-
Decide: The attacked patrol units require immediate backup. Air support and-respond determines that lack of ammunition will become crucial
and medical assistance are also required. if the engagement is prolonged. Sense-and-respond determines that
Act: Additional troops and medical units are sent to police stations and additional units will have to be committed due to the currently engaged
the market sites. Other forces and logistics units are placed on high alert. units’ supply situation.
Air support is dispatched. The risks at other targets are reassessed and Decide: Presents a recommendation to the Logistics Command (LC)
several teams are moved into strategic positions. showing the preferred sources of supply, delivery vehicles and routes
of travel. The Intelligence Command (IC) is tasked to prepare alternate
surveillance assets in anticipation of a part failure on the UAV currently
on-scene. Makes suggestions to the OC (operation command) on which
additional units may be committed to the engagement.
All of this information is immediately displayed to the OC, LC and IC while
a subset of this information is also uploaded as an input to the Sense,
Interpret, Decide, Act loops of the joint forces commander.

Sense-and-respond sustainment: At the conclusion of this engagement, the sense-and-respond system sends a report regarding the parts.

Sense: This is the second instance of the same part failing well before Sense: Engineers discover that current fluid screens and filtering
the expected mean time to failure (MTF). systems are inadequate for the new operating environment.
Interpret: Additional replacement parts are required, further study is Interpret: New filtering system must be designed; short-term fix is
also required to determine the underlying cause of failure. needed until new system is available. A combination of more frequent
Decide: The need for UAV surveillance is high, therefore a short-term maintenance and improvised filters is suggested.
increase in spare parts levels is suggested; meanwhile, reliability Decide: Manufacturing community should be informed of the problem;
engineers are assigned to study the problem and recommend a long- short-term solution will be implemented.
term solution. Act: Manufacturing community is contacted and agrees to work on a
Act: Parts are expedited from manufacturers. Engineers begin studying new filtering system; improvised filters are constructed (modified from
the problem. helicopter filters) and a revised maintenance schedule is implemented.

Source: IBM Global Business Services analysis, 2006.

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Conclusion
Successfully implementing sense and respond within the military and
intelligence communities will not happen by chance. Rather, it will
result from commitment and collaboration among stakeholders at all
levels supported by changes in decision models, operations and culture.
Rooted in our sense-and-respond value net framework is a paradigm
shift that encompasses planning, operations, intelligence and logistics,
bringing a fundamentally new perspective to our nation’s 21st century
defense needs.
The large-scale effort needed for transforming the military into a sense-
and-respond enterprise will be more than offset by the benefits reaped
from improvements in operations, logistics and intelligence and the ability
to support the operations on which our national security depends.

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Executive interview
Alan Estevez, Assistant Deputy Undersecretary of
Defense for Supply Chain Integration, U.S. Department
of Defense

The Supply Chain Integration office has primary responsibility within the
Department of Defense’s (DoD’s) Logistics and Materiel Readiness secretariat
for several initiatives including: to identify business process changes that
could be enabled or strengthened through the implementation of e-business
capabilities; to lead the development of modern supply chain policies in DoD,
including the integration of acquisition logistics and e-commerce capabili-
ties; and to develop and maintain DoD component implementation of supply
chain management and end-to-end distribution capabilities required to meet
21st century deployment and sustainment requirements.1
Alan Estevez is the Assistant Deputy Undersecretary of Defense for Supply
Chain Integration. Alan is responsible for developing global supply chain
management and distribution policies and processes to support the war
fighters’ operational requirements, wherever they are in the world. This
interview with Alan focuses on the DoD’s use of RFID.

IBM: I understand you assumed your current position in 2002. Can you
please describe more about your role… describe a “day in the life”?
Alan Estevez: Well, essentially, my real role is establishing policies for
the way that the DoD’s supply business processes work. My focus is
mostly on the supply and distribution portion of the supply chain versus,
say, the maintenance and transportation hierarchy.

1
http://www.acq.osd.mil

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“...we are supporting every type of commodity that

you can imagine, from repair parts to keeping our
weapons platforms operating, to food, water to keep
our soldiers operating.”

To give you an idea of what DoD logistics looks like, we have US$77
billion worth of inventory, we process 45,000 plus requisitions each day
(from either our maintenance facilities or from forces in the field) and
about 51,000 vendors that we buy materiel from. And obviously, we’re
supporting about US$700 billion in assets. Those are weapons platforms,
300 ships, 1,500 aircraft, 30,000 combat vehicles, just to give you an
idea of what we have in the inventory. And, of course, our forces are
operating worldwide, and we are at war. So they’re operating, actively
engaged in, combat operations in a number of locations.
The actual hands-on management and execution is done within the
military services and our combatant commands and defense agencies,
particularly Defense Logistics Agency. So we are supporting every
type of commodity that you can imagine, from repair parts to keeping
our weapons platforms operating, to food, water to keep our soldiers
operating. Troop support items like body armor, chem-bio suits, desert
uniforms, combat uniforms, munitions, ammo, etc. Bullets, bombs,
medical devices, medical supplies, barrier equipment, Jersey walls to
keep bases secure. So you think about it in the supply chain, we’re
managing it.
We have about five million SKUs (Stockkeeping Units) in the inventory.
For us, fighting in a place like Afghanistan or Iraq, or a naval vessel
on the move, a stock out can mean a multi-million dollar asset sitting
stagnant because it cannot be used… best case. Worst case is a disaster,
front page of the newspaper, and deaths incorporated into that.

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IBM: Yes, the criticality of it is beyond anything else, I would imagine.

We’ve heard a lot about the military use of RFID within the supply chain.
Could you talk a little bit about the program that you’re responsible for
in general, and how much of that is related to RFID?
Alan Estevez: RFID is a means to an end. The end in our case is an
effective supply chain. It is one of our key programs to achieve visibility
of the supply chain, but you can’t overlook the other facets that we’re
doing to enhance our forecasting capability, enhance our ability to buy
materiel, and from the visibility aspect, the systems integration of our
data tools in order to have actionable information.
But with regard to RFID – RFID is not new to the Department of Defense
for supply chain management for tracking materiel. We started mostly in
the Army playing with active RFID – high-data capacity active RFID,
as a matter of fact – so that we can hold the manifest of a seavan or hold
the manifest of a large air pallet on the tag itself. Started doing that post
the first Gulf War, so about 1991, 1992 timeframe.
The reason we did that is when you started looking at the lessons learned
from the first Gulf War, we moved a vast amount of materiels to support
the 550,000 forces that we had in Saudi Arabia as we prepared to liberate
Kuwait. And we moved about 40,000 seavans to that theater, and about
24,000 of those seavans had to be opened to ascertain their contents
once they got there.
You look at the complexity of what we’re moving and the period of
time in which we’re moving it. You throw in the fact that sometimes our
forces out in the field do not always have the best communications in
the log environment – they’re able to communicate with each other, but
they’re not able to necessarily communicate back to the wholesale base.
We viewed RFID as a tool to help us solve that problem. That is also
why we went to the high-data capacity tag.

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“RFID is a means to an end. The end in our case is

an effective supply chain.”

Now again, that was mostly in the Army, and the Army used that active
RFID on-and-off over the next decade. For instance, shortly after the
Black Hawk Down episode in Somalia, we put in an RFID network in
Somalia. We used it again in Haiti in the mid-1994 intervention, we used
it in Bosnia, we used it in Kosovo.
But what we found is it wasn’t imbedded in doctrine, and it wasn’t
imbedded into the joint services. And every time we moved forward to
go into another operation, it was really re-learn the lessons – re-learn
how to set up that network again.
So as we prepared to go to war in Operation Iraqi Freedom, the folks at
the United States Central Command wanted to have everything moving
into their theater trackable, and asked that an RFID network be estab-
lished to do that. Well, what they found was that the expertise to do that
really resided in the United States European Command. So it was really
find the five, six guys who have done this before and try to learn those
lessons.
Well, coming out of that, on the active side, we decided we’re not going
to keep doing it this way, that’s kind of dumb. So our policy said this is
going to be our way of doing business, and we are going to use active
RFID to help track our moving, large, consolidated shipments.
At the same time, we were looking at how to solidify that policy. A
couple of other things were coming onboard. Obviously the work of the
Auto-ID Center up at MIT, which had been put together by a commer-
cial consortium, was coming to fruition. The DoD had been an early

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member of the Auto-ID Center dating back to 2000, so it’s not like we
just stumbled upon this. We were actually playing in it. And we also,
just like my counterparts in the commercial sector, saw passive RFID
– fairly cheap devices – as a tool in order to not just track our materiel
in motion, but also to get a handle on where our inventory was and to do
receipt processing with those tools.
I mentioned 51,000 suppliers. So we put out a requirement that our
suppliers start tagging (at the) case pallet level, initially to our two
largest supply depots in the Department of Defense system. And we
are growing our processes from there. Simultaneously, we are working
inside the Department of Defense across that global reach of our forces
to start imbedding the use of passive RFID within our processes inside
the DoD.
IBM: It’s certainly been quite a long trail to get where you are today.
Alan Estevez: And it’s a long trail to get to where we want to go,
frankly!
IBM: That was the next question. What are your key milestones around
the program?
Alan Estevez: Well as I said, you know, we have a requirement out now
that suppliers of certain commodities, repair parts, meals ready to eat
and soldier support items – that would be things like body armor and
uniforms, boots, helmets, etc. – tag materiel that’s going to be stored
in our two key defense facilities. We’re going to expand that this year
to some other commodities, including barrier equipment and medical
equipment to the remaining DoD supply depots in the United States.
And certain of our key aerial ports, where we ship materiel moving
overseas using the United States Air Force or United States Air Force-
controlled aircraft.

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“We probably have the most robust open-ended

active RFID network...”

That will be 2006. In 2007, our plan is to expand that to all appropriate
commodities and to all locations in the Department of Defense that are
RFID-enabled.
And we’re working through our budget process, so that we have a
robust program to stand up internal DoD sites over the next five to seven
years.
IBM: A nation at war implies a lot of flexibility and rapid deployment
scenarios. How does your RFID technology hold up in that sort of
scenario with, presumably, the need to not only get the supplies in place,
but also the technology behind the RFID and other technologies that
you use?
Alan Estevez: The reality is the Department is more focused on putting
out a jammer to prevent a roadside bomb from exploding than it is in
experimenting with something like RFID on the battle field.
With that said, we are doing it, in point of fact. We probably have the
most robust open-ended active RFID network with that data passing up
to a server so that it can be seen through some DoD systems, and folks
in the field can track their supplies that are moving through that active
network.
So from that standpoint, we’re ensuring that they’re compliant. There
are issues with that, especially when you start moving to some of the
more austere environments, where things are not always in the control
of the Department of Defense. You put the tag that we use on a seavan

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that’s moving over the Khyber Pass, and a third-party national driver
may look at that device and not be sure what it is, so he removes it. So,
you know, we are dealing with problems like that.
On the passive side, we do have a few small – really small – actions
ongoing in the field. There are people out there who say, “I have a need,”
and frankly our best initial sites are all done by folks in the field who
said, “I have a need to manage either my facility or my incoming supply
chain.” And those have all worked very well.
IBM: Some of the things you’re alluding to are more people and process-
related than they are technology. Having the technology work is one
thing, but it must be quite a change management challenge as well?
Alan Estevez: Absolutely. I’d say the technology works. The tech-
nology not only works, it’s getting better, and it’s going to work even
better as time goes on. So I wouldn’t say the technology is a challenge
at all. It’s the application of the technology and how folks use it and
whether they really get the focus around it is where the real challenge
is. And that applies not only to forces in the field. It applies to starting
up a warehouse in the United States as well. If you do it wrong, we
have a tendency to blame the technology. And in point of fact, it’s a bad
business process, and it’s a bad setup, and it’s a bad application. When
you do those things right, we’re getting some great results.
So let me give you two great examples.
One, we have a cross dock facility in Norfolk, Virginia, which is
operated by the Navy Fleet and Industrial Supply Center. They did an
outstanding stand-up of an EPC application within their warehouse to
the point where they’re using EPC reads to document materiel being
loaded into seavans. Thirty-seven percent reduction in the time it takes
to manage that process. Three percent reduction in mislaid – I hesitate
to use the word “lost” – materiel. But, you know, the materiel eventu-
ally gets found, it just doesn’t get found in time to fulfill the order that

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“Through the use of this visibility network, which RFID

was a key part of, they were able to reduce the amount
of materiel they were holding while at the same time
increasing the supply availability of materiel and signif-
icantly decreasing the backlog of orders that they were
processing from 92,000 orders to 11,000 orders.”

it’s being moved for. So, that’s a great application. What we’re doing
is trying to capture what they did and ensure that we can do that on the
macro scale.
Another application – and this is being done with active tags, but it
could easily have been done with passive tags for part of it – is what our
U.S. Marine forces did on the ground in Iraq. Now, they changed their
business process which they were doing anyway, but while they were
doing it, they figured out how to use the technology at the same time.
They put in a data network so that they had access to the data that they
need to manage this business process, incoming materiel and outgoing
materiel.
Through the use of this visibility network, which RFID was a key part of,
they were able to reduce the amount of materiel they were holding while
at the same time increasing the supply availability of materiel and signif-
icantly decreasing the backlog of orders that they were processing from
92,000 orders to 11,000 orders. And we attribute that to the confidence
that the combat Marines in the field had knowing where their supplies
that were coming to support them were. So the dialogue changed – and
this is a discussion I had with those Marines on the ground in Iraq. The
dialogue changed, the questions coming into them from “Where’s my
stuff?” to “Why isn’t my stuff moving?”

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IBM: Can you give us any idea of the sort of amount of data that you’re
collecting today and what you foresee in the future? And what you see is
the next main objective around the information management?
Alan Estevez: You know, we have a fairly robust tool for processing
orders and tracking orders today. RFID will give us a more realtime
and more accurate feed, and we’re going to feed that data through our
existing network, with some modifications, obviously, to manage that
data. We also have a number of emerging, what I’ll call “front ends”
to those databases that give you the Google effect – pull down the data
from the variety of systems that the Department of Defense has. And I
won’t even try to give you an idea of the complexity of the number of
legacy applications, legacy systems we have out there, something like
2,000-plus logistics systems across the different services of the Depart-
ment of Defense.
RFID, of course, is just going to be another feed. So the trick becomes
then, what RFID data is important at the enterprise level, and what RFID
data is really just important at the activity level.
When you get ready to ship something, when something moves through
a cross-dock operation and the global supply chain, we want to be able
to capture that at the enterprise level. So everyone who is interested
in that order, can see that order moving. We need to be able to pass
that data back to Boeing and Lockheed and Raytheon and Northrop
Grumman and GE Aircraft and General Dynamics and AM General, etc.
across our supply chain, because if you don’t, you’re not going to have
a dynamic, flexible supply chain. I can reduce the lead times it takes to
order components. Those companies can see what’s moving, can see
what their production is. And we can start moving toward that collabora-
tive enterprise that the best supply chains operate under.

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“RFID will give us a more realtime and more

accurate feed, and we’re going to feed that data
through our existing network, with some modifica-
tions, obviously, to manage that data.”

IBM: Are there other tracking technologies that you’re looking at?
Alan Estevez: We today use GPS to track trucks, just like the commer-
cial sector does, and we have different applications of that ranging from
classified to just normal vehicle-tracking applications. And, obviously,
we’re going to continue to use other AIT-type applications like 2D data
matrix scans and the like. In our maintenance area you’ll see more diag-
nostic-prognostic-type devices built into our platforms. The goal there,
of course, is to send the signal that “it is time to change the oil filter.” So
the oil filter is waiting for you when the plane lands or the vehicle drives
up. You can tell I’m not a maintenance guy!
IBM: What is the potential here in terms of savings for the supply
chain?
Alan Estevez: Just from RFID – RFID in use with the network – we did
a very high-level of business case analysis. And we looked at it from two
aspects, very conservative and our most optimistic. We looked at some
commercial projections because, frankly, there’s not a lot of real-world
experience on anyone’s part.
Our business case analysis showed a range from US$70 million savings
(over a five-year period) to US$1.7 billion savings (over a five-year
period) to the Department of Defense. Now what’s critical in that is that
those savings did not, I repeat, did not take into account any kind of
savings in inventory that we could achieve related to the capture of data.
And it did not, more importantly, take into account readiness savings.

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If you take it to its logical end, if I have a supply chain that’s func-
tioning effectively, I can deploy less of those platforms to accom-
plish the same mission that I’m trying to accomplish. And, you know,
there’s a great spiral that goes on with that because every time I deploy
one less weapons platform, not only do I not deploy the crew that
has to operate that weapons platform, I can deploy less maintainers to
maintain that, I’m deploying less inventory to sustain it, I’m deploying
less force protection to take care of those people, and I’m deploying
less food, fuel, water, etc., around that whole thing. So I get a much
more agile footprint on the ground increasing the flexibility of our
military forces. Doing it properly, you really get greater military capa-
bility on a smaller force.
You asked a couple of other things there about the length of time. One
of the things about RFID, it’s an interesting side effect, is that to really
apply this – and we all have the pave-the-cow-path tendency and I hate
to use these clichés – but to really apply RFID you have to look at your
business process. So while you’re looking at your business process to
take advantage of the technology, you should be doing a value stream
mapping. You should be doing a lean Six Sigma-type event around your
business process. And you know what? If RFID doesn’t apply, you’re
still ahead of the game because you’ve done a business process assess-
ment that you should be doing.
So I’ve lumped all of these things under a continuous process improve-
ment area of application. And continuous is obviously continuous. If you
sit, you get stagnant, then you’re not doing continuous process improve-
ment, so this is really lifetime work.
Let me just throw out one other thing about working with the commer-
cial sector. I am the DoD liaison to the EPCglobal Board of Directors.
I can’t overemphasize, obviously, the need for standards, which is why
we’re working with EPCglobal, because for me, it gives me that reach-in

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“But more importantly, we decided early on that

for passive RFID implementation, we were going to
embrace EPC standards. And, frankly, it was a no-
brainer because an EPC process is moving through an
(ISO) process as well.”

to the commercial sector in areas that we normally wouldn’t work and

gets us access to some of the lessons that I was just discussing and the
sharing across the environment.
But more importantly, we decided early on that for passive RFID imple-
mentation, we were going to embrace EPC standards. And, frankly, it
was a no-brainer because an EPC process is moving through an (ISO)
process as well. But when you look at the Fortune 10 companies that
embrace EPC, who are also suppliers to the Department of Defense,
and you look at the aerospace companies who have also embraced EPC,
some of them coming on the heels of us moving in that direction, some
of them are because they were moving that way anyway.
The other thing that we’ve done is we’ve worked across the federal
government, across federal agencies, to ensure that we all know what
each of us is doing to, again, preclude a mix-up in standards, if you
would. I’m using an active RFID device to track materiel. I’m intensely
interested in the direction the Department of Homeland Security may
go in putting out any kind of security guidance. I’m interested in what
FDA is doing with regard to EPC tags on drugs because I buy drugs
from the same companies. So I just thought I’d throw that in, to show
the synchronization that we are working on in order to make this come
out right for both us and the commercial sector.

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IBM: One last question – if there was one thing you’ve learned over the
last four or five years that you would change if you had to go on this – or
start – this journey again, what would it be?
Alan Estevez: Boy… it’s not something I’d say I’d change, but you
really have to find the right change leaders. And the people who are
doing, who are willing to put themselves on the line for a potential
failure because things are out there – you know, you do a beta, you do a
test site – you have to be willing to bump your nose and skin your knee
in doing that because it’s not going to work perfectly. And we come from
an environment...a military culture where people don’t want to fail. So
sometimes they become too conservative and don’t want to try because
it, essentially, can mean failure. So it’s finding those right people and
then building that consensus across the military department, recognizing
the budget issues that you have to manage. So, that’s one. And I think
we’re actually doing OK in that regard.
The second area is, frankly, just the regulatory process across the federal
government. You know, the Department of Defense cannot decide to
insert a contract clause in and of itself. It has to work that through the
interagency process. And in doing so, there’s a lot of – in the RFID world
– erroneous data floating through the Ethernet out there. So getting the
people and getting them to understand what’s real and what’s not is a
difficult challenge, especially when even the RFID trade press shoot for
the “it-didn’t-work” stories, not the “it-did-work.” No one wants to write
that, “Man Walked Dog.” (They want to read) “Dog Bit Man.”
So it’s just getting that message out so that the whole regulatory line-up,
and that goes from the U.S. Congress and other agencies in the executive
branch on down, are inline to support this. And again, it’s something that
we’ve been working hard on and I wouldn’t say we’ve done a bad job of,
but we’ve made some missteps along the way ourselves.

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 Further reading
Recommended IBM Institute for Business Value
reading

You can access IBM Institute for Business Value studies through:
1. The IBM Institute for Business Value external Web site: ibm.com/iibv
2. Subscribing to the IBM Global Business Services thought leadership
e-newsletter IdeaWatch: ibm.com/bcs/subscribe

IBM Institute for Business Value – Supply chain management specific

• Building value in logistics outsourcing
• Follow the leaders: Scoring high on the supply chain maturity
model71
• Energize your supply chain network – A European perspective
• Taking center stage: The IBM Chief Procurement Officer study
• The GMA 2005 Logistics Survey
• A retailer's guide to supply chain management
• Cost-effective supply chains
• Transforming the military through sense and respond
• Supply chain management on demand maturity model
• On demand supply chain transformation II
• Sense-and-respond supply chains: Enabling breakthrough strategy
• Energize your supply chain network
• Transforming your supply chain to on demand

307

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IBM Institute for Business Value – Industry specific

• A prognostic study of on demand business in the electronics industry
• Product lifecycle management – Creating corporate assets or simply
controlling engineering data
• Reinventing the electronics industry through enterprise collaboration

Other reading and specific industry sources

• “17 billion reasons to say thanks: The 25th anniversary of the U.P.C.
and its impact on the grocery industry.” John E. Nelson and Vineet
Garg. PricewaterhouseCoopers. 1999.
• “Automatic product identification & shrinkage: Scoping the potential.”
Adrian Beck, University of Leicester. ECR Europe. July 2002.
• “A balanced perspective: EPC/RFID implementation in the CPG
Industry.” Prepared by IBM and A.T. Kearney for the Grocery Manu-
facturers of America. 2004.
• “ECR – Optimal shelf availability: Increasing shopper satisfaction at
the moment of truth." Roland Berger Strategy Consultants and ECR
Europe. 2003.
• “Full-shelf satisfaction: Reducing out of-stocks in the grocery channel:
An in-depth look at DSD categories." Roland Berger Strategy Consul-
tants and Grocery Manufacturers of America. 2002.
• “Guidelines on EPC for consumer products.” EPCglobal Inc. http: //
www.epcglobalinc.org/public_policy/public_policy_guidelines.html
• “Inventory record inaccuracy: An empirical analysis.” Nicole DeHora-
tius, University of Chicago and Ananth Raman, Harvard Business
School. August 2004.

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• “Measuring the impact of information technology on value and

productivity using a process-based approach: The case for RFID
technologies." Brian Subirana, Chad Eckes, George Herman, Sanjay
Sarma and Michael Barrett. MIT Sloan working paper No. 4450-03.
2003.
• “Retail out-of-stocks: A worldwide examination of extent, causes
and consumer responses.” Thomas W. Gruen, Daniel S. Corsten and
Sundar Bharadwaj. Grocery Manufacturers of America. 2002.
• “Shrinkage in Europe 2004: A survey of stock loss in the fast moving
consumer goods sector.” Adrian Beck, University of Leicester. ECR
Europe. July 2004.

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Pearson Custom Publishing
 Author biographies

Marc Bourdé is an Associate Partner in the Supply Chain Trans-

formation practice within IBM Global Business Services providing
consulting services to global and local clients across a broad range
of industries, including consumer products, oil and gas, pharmaceu-
ticals, automotive, retailing, paper, metal and industrial products.
Marc is delivering value to clients by helping them to transform their
global supply chains and increase their efficiency. Marc has delivered
multiple global supply chain transformations projects that included
strategy, organization, processes and system transformation. Marc is
the former Supply Chain Management (SCM) Lead of the Institute
for Business Value and one of its founding members. Prior to joining
IBM Global Business Services, He was a supply chain director at
PricewaterhouseCoopers in France and the United Kingdom. Marc
Bourdé can be reached at marc.bourde@uk.ibm.com.

Karen Butner is an Associate Partner in the IBM Supply Chain

Management practice, with a focus on Strategy and Transformation
competencies. Karen serves as the Global Supply Chain Manage-
ment Lead for the IBM Institute for Business Value. In this role, she is
responsible for developing and presenting IBM’s thought leadership
and point-of-view strategies, white papers and associated collateral
encompassing global supply chain management. Karen is also respon-
sible for managing the development and deployment of the SCM
Global Solutions Portfolio – a collection of leading, integrated end-
to-end business, technology and organizational solutions to support
IBM’s broad and diversified multi-industry client base. Karen Butner
can be reached at kbutner@us.ibm.com.

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 312 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

Sean Campbell is a Partner in the IBM Consumer Products Strategy

and Change consulting practice. He has over 16 years of experience
working with manufacturers and retailers to formulate new operational
strategies and implement large-scale transformation initiatives. Sean
has delivered a variety of business strategy, operations diagnostic and
process improvement programs related to customer management and
go-to-market activities and has led enterprise resource planning (ERP)
and other large-scale change programs. Sean’s particular areas of supply
chain expertise include demand planning, supply planning, replen-
ishment planning and order fulfillment. He recently led IBM’s Radio
Frequency Identification (RFID) consulting initiatives for the distribu-
tion sector and has delivered many RFID value proposition and imple-
mentation efforts. Sean Campbell can be reached at sean.campbell@
us.ibm.com.

Frank Crnic is a Program Director in the IBM Integrated Supply Chain

(ISC) Business Growth Initiatives Group. In his current role, he is
responsible for identifying marketable capabilities within the ISC and
working with IBM’s go-to-market organizations to develop commer-
cial offerings. He has supply chain operational experience in the areas
of procurement, engineering, and manufacturing, and has focused on
reducing costs, and developing effective relationships with suppliers, as
well as internal clients within IBM’s hardware business units. He played
a key role in developing IBM’s Direct Procurement early involvement
process, and has managed complex projects with global strategic and
operational content, including outsourcing of key hardware develop-
ment and manufacturing projects for IBM. Frank Crnic can be reached
at crnic@us.ibm.com.

Dietmar Geuder is a Senior Consultant for Supply Chain Management

with IBM Global Business Services in Germany and a member of the
IBM Institute for Business Value. He has over ten years of experience,
consulting major industrial clients in procurement, supply chain planning
and logistics in large scale international projects. Dietmar Geuder can be
reached at geuder@de.ibm.com.

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Tig Gilliam is the Global Supply Chain Management Leader for IBM
Global Business Services. The Supply Chain team serves clients in all
industries and focuses on improving and transforming Supply Chain
performance through strategic change, process improvement, enabling
technology and outsourcing of supply chain processes, systems and
infrastructure. From 2002 to 2004, Tig led the Consumer Products
Industry Practice for IBM’s Global Business Services and from 1998
to 2002, he led the Consumer Products and Retail Industry Practice
for PricewaterhouseCoopers Consulting. Tig Gilliam can be reached
at tig.gilliam@us.ibm.com.

Harris Goldstein is an Associate Partner with the IBM Global Business

Services Supply Chain Management consulting practice. He has over
20 years of experience in automotive, electronics, aerospace, consumer
foods, healthcare, government, and insurance. His expertise includes
sourcing, procurement, product lifecycle management, strategic
planning for information systems, and electronic commerce. His has led
strategy, business transformation, process development and technology
implementation projects. Harris Goldstein can be reached at hmgolds@
us.ibm.com.

Charlie Hawker is a Partner in the IBM United Kingdom Supply Chain

Management practice and the Procurement Service Leader. He has 22
years of experience in management consulting, 15 of those years as a
Partner with Coopers & Lybrand, PricewaterhouseCoopers and now with
IBM. He led the European Supply Chain consulting practices of Price-
waterhouseCoopers Consulting and IBM for 6 years from 1998 to 2004
and has also operated in other significant global leadership positions. His
scope of responsibilities has covered all areas of supply chain manage-
ment: supply chain strategy, planning, sourcing and procurement,
logistics, product lifecycle management, physical asset management,
operations improvement and supply chain ERP. Over the past 15 years
he has gained extensive experience working with major clients across
Europe, the United States and Asia Pacific to restructure and radically
improve the performance of their global and domestic supply chains.
Charlie Hawker can be reached at charlie.hawker@uk.ibm.com.

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James Kalina is an Associate Partner with the IBM Global Business

Services, Supply Chain and Operations Solutions consulting practice.
He has over 16 years of experience in the automotive, electronics,
aerospace, entertainment, life sciences, and travel and transporta-
tion industries. His functional expertise includes strategic sourcing,
commodity management, organizational design, eProcurement, and
business process outsourcing. His technical expertise includes project
management, business process transformation, procure to pay optimiza-
tion and business development. James Kalina can be reached at jim.
kalina@us.ibm.com.

Udo Kleemann is a Senior Manager within the ISC Production Procure-

ment team with over 25 years of technical leadership and managerial
experience across IBM’s Integrated Supply Chain (ISC) from produc-
tion procurement, cost engineering, manufacturing engineering to
supply chain management, materials management and logistics. The
Production Procurement organization is responsible for the acquisition
of over US$20 billion of goods in support of IBM’s hardware storage and
technology products such as IBM TotalStorage DS6000 and DS8000.
Notably, Udo developed and patented a supply/demand collaboration
tool, RSC@, which was utilized with 95 percent of the IBM Production
Procurement supplier base from 1998 until 2005. Udo Kleemann can be
reached at udo.kleemann@de.ibm.com

Peter J. Korsten is one of the two Europe, Middle East and Africa
Leaders of the Strategy and Change Services practice with IBM Global
Business Services and also leads the IBM Institute for Business Value
in Europe, Middle East and Africa (the R&D/think tank unit of Global
Business) and is one of the global Executive Directors of the Institute.
He became a member of ‘The IBM Global Business Services Executive
Leadership Team’ in 2001 (the group that heads IBM’s Global Business
Services in EMEA) and is a member of the IBM Global Business
Services Global Senior Leadership Team. In addition to his work for
IBM Global Business Services he spends a substantial part of his time
as global account partner for several of IBM’s global clients in the indus-
trial sector. Peter Korsten can be reached at peter.korsten@nl.ibm.com.

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Grace Lin is a Consultant in the Financial Management practice

within IBM Global Business Services. Grace is certified in transpor-
tation and logistics by the American Society of Transportation and
Logistics. Her knowledge includes inter-functional perspectives in the
areas of end-to-end value-added supply chain management. Elements
include purchasing, strategic sourcing, all modes of transportation in
the selection and management, and inventory management as well as
its policy and techniques. Through obtaining the information systems
degree, she also gained fundamental understanding of the intertwined
relationship between information technology and supply chain manage-
ment and applied both in various case studies throughout her school
years. Grace Lin can be reached at gracelin@us.ibm.com.

Robert Luby, Jr., is a Vice President in IBM Global Business Services.

He leads the Supply Chain Management Services practice for the entire
public sector. He has over 30 years of logistics, supply chain manage-
ment, and project management experience. He is also a key partner on
IBM’s Defense Industry Team. His clients include the Defense Logistics
Agency (DLA), various Defense Supply Centers, several major defense
depots, public and private shipyards, aviation depots, and defense
suppliers. Robert has been in the forefront of the development of supply
chain strategy for many defense clients. He has also been the partner
responsible for leading strategic sourcing efforts both with the Depart-
ment of Defense and its suppliers. Robert Luby, Jr. can be reached at
robert.e.luby@us.ibm.com.

Robert McCarthy, Jr. was an Associate Partner in the Supply Chain

Strategy practice in IBM Global Business Services. He has now joined
the IBM Software Group as the Industrial Sector Alliance Manager
focused on extended enterprise collaboration issues. He provided
consulting services to clients across a broad range of industries, including
retailing, high-tech electronics, aerospace, consumer products, process
and petroleum, and other industries. Robert McCarthy, Jr. can be reached
at remccar@us.ibm.com.

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Derek Moore is an Associate Partner in IBM Global Business Services.

He is currently focused on the Freight Logistics provider industry,
where he is responsible globally for the development of IBM business
solutions. His interests straddle business strategy, change and supply
chain strategy. His clients have included DHL Express, DHL Danzas Air
& Sea, UPS, Federal Express, Parcelforce, Royal Mail, UK Ministry of
Defence, Marks & Spencer and Grundfos. Derek Moore can be reached
at derek.moore@uk.ibm.com.

George Pohle is the Global Leader of the IBM Institute for Business
Value and a Vice President in IBM Global Business Services, with
over 20 years of consulting and line management experience. The IBM
Institute for Business Value is a world-wide group of consultants that
creates practical thought leadership on industry-specific and cross-func-
tional business issues for our clients’ senior executives. Previously,
Mr Pohle led the Communications Sector for IBM Global Business
Services’ Strategy Consulting practice, serving the telecommunications,
media and entertainment and utilities industries. He joined IBM through
its acquisition of Mainspring, a boutique strategy consulting firm. There
he founded and led the Communications and Media Strategy Consulting
practice, creating a vibrant practice that attracted a world-class team
of consultants that rapidly built relationships with numerous Fortune
500 companies. Prior to joining Mainspring, he held key positions in
strategy and business development at Lucent, and led the Americas
Strategy Consulting Practice at Gemini Consulting/The MAC Group.
George Pohle can be reached at pohle@us.ibm.com.

Shanker Ramamurthy is the Global Leader of IBM’s Financial

Services Strategy and Change consulting practice. He also is one of the
lead authors of the Component Business Modelling (CBM) method and
is the global leader for IBM’s CBM initiative. Shanker is a qualified
accountant with an undergraduate degree in mathematics, an MBA in
Finance and a Masters in Information Science. He has over 20 years of
consulting experience and specializes in business strategy, IT strategy

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and business transformation. He has consulted widely to Fortune 100

enterprises in North America, Europe and the Asia Pacific region. He is
a widely quoted speaker and has authored several papers by leveraging
his experience in transforming large enterprises. Shanker Ramamurthy
can be reached at shanker.ramamurthy@us.ibm.com.

Christian Seider is a Business Development Manager for IBM Direct

Procurement Services. He has more than 9 years of consulting experi-
ence covering a wide range of supply chain management topics with a
special focus on sourcing and procurement. Christian has advised clients
from automotive, electronics, aerospace and defense, finance and distri-
bution industry and has delivered tangible benefits with true bottom-line
impact. He has led many projects spanning business strategy through
implementation. Today, he is part of IBM’s leadership team that defines
new service offerings and go-to-market strategies related to Direct
Procurement. Christian Seider can be reached at christian.seider@
de.ibm.com.

Stavros Stefanis is a Partner in the IBM Supply Chain Strategy practice

leading the Automotive Supply Chain Strategy team. Key areas of
expertise are: product development, innovation management, service
parts management, quality management, connected vehicle/embedded
systems, integrated customer experience, incentives management, quality
management, supply chain planning and shop floor control. Stavros has
nearly 15 years of supply chain management and product development
consulting experience including significant time dedicated to design-
manufacture anywhere value chains. Stavros has published over 25 full
length papers in many business and academic magazines and has over
30 conference presentations in large industry and academic events. He
has also published a chapter entitled “Product Lifecycle Management
Methods and Best Practices” on Webster’s encyclopedia of electrical
engineering and is currently authoring a book entitled “Automotive
Transformation from Cradle to Grave.” Stavros Stefanis can be reached
at stefan1@us.ibm.com.

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 318 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

Colin Taylor is an Associate Partner in Supply Chain Management

Services with IBM Global Business Services. He is a member of the senior
leadership team for the Logistics Practice which provides consulting
and solution integration services for logistics strategy, network design,
outsourcing, warehousing, distribution and transportation. With proven
leadership in developing new service model solutions, Colin draws upon
27 years of international management experience that spans import/
export logistics, outsourcing, business development, manufacturing,
military logistics, software development and industrial engineering.
Through senior management roles, Colin has led ocean transportation
programs, information technology services and maintenance/repair
initiatives to generate significant client savings and transform business
performance. Colin Taylor can be reached at colintaylor@us.ibm.com.

Simon Terry is a Partner with IBM Global Business Services. He leads

the Supply Chain Management practice in the United Kingdom’s Distri-
bution Sector. Simon has 17 years in Supply Chain Management working
primarily with consumer products and pharmaceutical companies in
Europe, North America and Asia Pacific. He has extensive experience
working with major multinational companies to redesign, optimize and
implement world-class supply chains. Simon Terry can be reached at
simon.terry@uk.ibm.com.

Theo Theocharides is the Procurement Lead for IBM Global Business

Services in the United Kingdom. Theo has worked in purchasing and
supply chain management and other strategic business roles for 20 years,
the last 12 years of which have been at the Director level. His previous
experience has been in consulting, pharmaceutical sectors, chemical and
building materials. Of particular note are Glaxo Wellcome Plc, Laporte
Plc and Blue Circle Industries Plc. He has worked in a broad spectrum
of strategic areas including, international logistics, global procurement,
business strategy, mergers and acquisitions and total quality manage-
ment. Particular skills and interests are category management, global
sourcing, organizational development, procurement transformation and
e-commerce. Theo is a Fellow of the Chartered Institute of Purchasing
& Supply. Theo Theocharides can be reached at theotheo@uk.ibm.com

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Mark Wilterding is a Partner and Global Product Lifecycle Manage-

ment Leader for IBM Global Business Services. Prior to assuming this
role, Mark was the IBM Global Business Services’ Partner and Asia
Pacific Leader for the Industrial Sector, which comprises the auto-
motive, aerospace and defense, chemicals and petroleum, electronics
industries, and industrial products clients in Japan, China, India,
Southeast Asia, Korea and Australia. He is a member of the steering
committees for the worldwide Industrial Sector practice, the IBM
Institute for Business Value, and the Strategy and Change’s IT Strategy
competency offerings. He is also actively engaged with numerous key
industry focus clients to provide thought leadership and direction to
the industry and client relationship partners for their work with first of
a kind, emerging and leading edge engagements. Mark Wilterding can
be reached at mwilter@us.ibm.com.

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Pearson Custom Publishing
 Endnotes

Endnotes
1
“Expanding the Innovation Horizon: The Global CEO Study 2006.” IBM
Corporation. March 2006. The largest survey ever undertaken based on
in-person CEO interviews, this survey polled more than 750 top CEOs
worldwide, representing all major countries and industries. The survey is
intended to provide a comprehensive view of the CEO planning agenda for
the next two to three years. http://www.ibm.com/BCS/ceostudy
2
IBM Global Business Services analysis, 2006.
3
“The specialized enterprise” study conducted by the IBM Institute for
Business Value, 2004.
4
“Expanding the Innovation Horizon: The Global CEO Study 2006.” IBM
Corporation. March 2006. The largest survey ever undertaken based on
in-person CEO interviews, this survey polled more than 750 top CEOs
worldwide, representing all major countries and industries. The survey is
intended to provide a comprehensive view of the CEO planning agenda for
the next two to three years. http://www.ibm.com/BCS/ceostudy
5
“Follow the leaders: 2006 Value Chain Study.” IBM Institute for Business
Value. 2006.
6
Ibid.
7
Ibid.
8
Ibid.
9
Ibid.
10
Ibid.
11
Ibid.
12
Ibid.
13
Ibid.
14
Ibid.

321

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 322 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

Ibid.
15

Ibid.
16

Ibid.
17

Ibid.
18

Ibid.
19

Ibid.
20

All information in the sidebar is based on an IBM Global Business Services

21

analysis, 2006.
Burket, Michael of AMR. “Perfect Product Launch.” Supply Chain Manage-
22

ment Review. July 1, 2005.

“Expanding the Innovation Horizon: The Global CEO Study 2006.” IBM
23

Corporation. March 2006. The largest survey ever undertaken based on

in-person CEO interviews, this survey polled more than 750 top CEOs
worldwide, representing all major countries and industries. The survey is
intended to provide a comprehensive view of the CEO planning agenda for
the next two to three years. http://www.ibm.com/BCS/ceostudy
Ibid.
24

Davis, Trevor. “Innovation and Growth: A Global Perspective.” IBM Corpo-

25

ration. 2000.
“Follow the leaders: 2006 Value Chain Study.” IBM Institute for Business
26

Value. 2006.
“Advance monthly sales for retail and food services.” U.S. Department of
27

Commerce. March 14, 2006.

Hyde, Linda. “Twenty Trends for 2010: Retailing in an Age of Uncertainty.”
28

Retail Forward. April 2003.

Ibid.
29

Witty, Michael, Jay Holman and Jason Spaulding. “CPG Manufacturing

30

Industry Update, 1Q06.” Manufacturing Insights, an IDC company.

Document #M1201026. March 2006.
Ibid.
31

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 323

32
“Follow the leaders: 2006 Value Chain Study.” IBM Institute for Business
Value. 2006.
33
Ibid.
34
Ibid.
35
Ibid.
36
Taking Center Stage: The 2005 Chief Procurement Officer Study. IBM Global
Business Services. IBM consultants spoke at length with 45 Chief Procure-
ment Officers (CPOs) from 14 different industries about current performance
and their views on critical procurement topics.
37
These interviews are the source for the statistics, graphs and quotations
featured in this paper.
38
“Follow the leaders: 2006 Value Chain Study.” IBM Institute for Business
Value. 2006.
39
“Low-Cost Country Sourcing Success Strategies – Maximizing and
Sustaining the Next Big Supply Savings Opportunity.” Aberdeen Group, Inc.
June 2005.
40
Banister, Judith. “Manufacturing earnings and compensation in China.”
Monthly Labor Review. August 2005.
41
“Insights and Advice, Design-to-Procure.” Aberdeen Group, Inc. Research
Brief. May 2005.
42
“Follow the leaders: 2006 Value Chain Study.” IBM Institute for Business
Value. 2006.
43
IBM Global Business Services analysis, 2006.
44
Tohamy, Noha. Adaptive Trading Networks.” Forrester Research. April 21,
2005
45
All information in the sidebar is based on an IBM Global Business Services
analysis, 2006.
46
IBM Global Business Services analysis, 2006.
47
Ibid.
48
Ibid.

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 324 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

49
Ibid.
50
Ibid.
51
IBM Global Business Services analysis based on financial data from Thomson
Financial and on WACC data from Ibbotson & Associates.
52
IBM Global Business Services estimates this to be typically up to 50
percent.
53
For the full report, see “EPC: A Shared Vision for Transforming Business
Processes.” Global Commerce Initiative and IBM, 2005.
54
Most recycling opportunities rely on item-level tagging of large-ticket items
(e.g., appliances and electronics).
55
This type of application would require the use of tags with additional func-
tionality for which standards have yet to be defined.
56
The enhanced store experience and transformed customer experience sections
are based, in part, on ideas presented in “METRO Group RFID Innova-
tion Center: Key technology put to the test,” METRO AG, October 2004;
and “Item-level RFID technology redefines retail operations with realtime,
collaborative capabilities,” IBM Corporation, March 2004.
57
“17 Billion Reasons to Say Thanks.” Nelson, John E. and Vineet Garg. “The
25th Anniversary of the U.P.C. and Its Impact on the Grocery Industry.”
PricewaterhouseCoopers. 1999.
58
Ibid
59
The root causes and different levels of impact of out-of-stocks for manufac-
turers and retailers have been well documented in several recent industry
studies.
60
“Shrinkage: A Collaborative Approach to Reducing Stock Loss in the Supply
Chain.” ECR Europe. 2003.
61
Haeckel, S. H. and A. J. Slywotsky. “The Adaptive Enterprise: Creating and
Leading Sense and Respond Organizations.” Harvard Business School Press.
1999.

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 325

62
Lin, G. Y., S. Buckley, H. Cao, N. Caswell, M. Ettl, S. Kapoor, L. Koenig, K.
Katircioglu, A. Nigam, B. Ramachandran, and K. Y. Wang. “The Sense and
Respond Enterprise: Value Net Optimization.” ORMS Today. April 2002.
63
“Sense and Respond Logistics: Co-evolution of an Adaptive Capability,”
Office of Force Transformation. http://www.oft.osd.mil/initiatives/srl/srl.
cfm. May 6, 2004.
64
Alberts, D. S., J. J. Garstka, and F. P. Stein. “Network Centric Warfare.”
CCRP. May 1999.
65
Lin, G. Y., R. Luby Jr., and K. Y. Wang. “Sense-and-Respond Military Trans-
formation.” ORMS Today. December 2004.
66
Haeckel, S. H. and A. J. Slywotsky. “The Adaptive Enterprise: Creating and
Leading Sense and Respond Organizations.” Harvard Business School Press.
1999.
67
Lin, G. Y., S. Buckley, H. Cao, N. Caswell, M. Ettl, S. Kapoor, L. Koenig, K.
Katircioglu, A. Nigam, B. Ramachandran, and K. Y. Wang. “The Sense and
Respond Enterprise: Value Net Optimization.” ORMS Today, April 2002.
68
Lin, G. Y., J. J. Jeng, and K. Y. Wang. “Enabling Value Net Collaboration.”
Evaluation of Supply Chain Management, ed. Chang, Y. S., H. C. Makat-
soris, and H. S. Richards, Kluwer Academic Publishers. 417-430. 2004.
69
Buckley, S., M. Ettl, G. Y. Lin, and K. Y. Wang. “Intelligent Business
Performance Management – Sense and Respond Value Net Optimization.”
Advances in Supply Chain Management, ed. Fromm, H., and C. An, (ed.),
Springer. 2005.
70
“Operational Sense and Respond Logistics: Co-Evolution of an Adaptive
Enterprise Capability.” Office of Force. November, 2004.
71
Available for Global, North America, Europe, ANZ, Japan, India and
China.

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 326 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

IBM Institute for Business Value

IBM Global Business Services, through the IBM Institute for Business
Value, develops fact-based strategic insights for senior business execu-
tives around critical industry-specific and cross-industry issues. This
book is based on in-depth studies by the Institute’s research team. It is
part of an ongoing commitment by IBM Global Business Services to
provide analysis and viewpoints that help companies realize business
value. For more information, visit us on the Web at ibm.com/iibv or
send an e-mail to iibv@us.ibm.com.

IBM Global Business Services

With business experts in more than 160 countries, IBM Global Business
Services provides clients with deep business process and industry
expertise across 17 industries, using innovation to identify, create and
deliver value faster – from strategy through implementation. We draw on
the full breadth of IBM capabilities, helping clients implement solutions
designed to deliver business outcomes with far-reaching impact and
sustainable results.

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IBM provides Supply Chain leadership from geographic and compe-

tency perspectives. These individuals are experts in Supply Chain
Management and can offer additional insights on the topics presented
in this publication.

Supply Chain Geographic Leaders

• Global and Americas – Tig Gilliam (tig.gilliam@us.ibm.com)
• Northeast Europe – Andrew Jackson (andrew.d.jackson@uk.ibm.
com)
• Southwest Europe – Philippe Kagy (philippe.kagy@fr.ibm.com)
• Asia Pacific – Yeonho Yoo (yeonho.yoo@kr.ibm.com)

Supply Chain Competency Leaders

• Strategy – Michael LaRoche (mlaroche@us.ibm.com)
• Product Lifecycle Management – Mark Wilterding (mwilter@
us.ibm.com)
• Planning – David Spade (david.spade@us.ibm.com)
• Procurement – Robin Tomlin (robin.tomlin@us.ibm.com)
• Logistics – Maurice Trebuchon (maurice.a.trebuchon@us.ibm.com)
• Operations and Asset Management – Joel McGlynn (jpmcgly@
us.ibm.com)
• Supply Chain Optimization – Gary Cross (cross@us.ibm.com)

For more information about IBM Supply Chain Management Services,

please visit www.ibm.com/bcs/supplychain or send an e-mail to
scmcomm@us.ibm.com.

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Pearson Custom Publishing
 Index

A
Aberdeen 323
AMR Research 86

B
barcode 252, 254, 257, 259-262, 269, 270, 282
BP 153, 154
business model 9, 10-12, 20, 26, 31, 99, 229, 233, 236, 245, 249

C
CAD 107, 110, 115
Capability sourcing 146
CBM 23
China 53, 149, 323, 325
closed loop 107, 110-112, 115
collaboration 18, 20, 25, 29, 35, 36, 41, 43, 46, 88, 91, 94, 95, 99, 100, 102,
110, 115, 124, 148, 221, 228, 253, 255-257, 263, 265, 275, 277, 281,
283, 284, 293
collaborative 29, 31, 35, 36, 37, 43, 48, 51, 59, 85, 86, 93, 94, 103, 272, 302,
324
Collaborative Planning, Forecasting and Replenishment 27
commodity components 105-107, 119
Commodity outsourcers 231, 244
commonality 43, 85, 102-107, 109, 113-122, 125, 126, 249
compliance 16, 27, 28, 55, 217, 222-227, 257, 258, 271, 274, 275
Component business modeling 23
Componentization 249, 251
computer-aided design 107
constraints 37, 46, 104, 114, 117, 120, 125, 152, 220, 224
consumer-driven supply chain networks 13, 17, 24, 26, 29, 31
consumer products 13-17, 19-31, 87, 91, 92, 94, 97-100, 257, 258, 281

329

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 330 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

convergence 222, 224, 227, 240, 241

Core Service Providers 245, 246
CPFR 27
CPO 142, 143, 146-149, 151
customer relationship management 18
customer service 9, 25, 31, 32, 46, 58, 62, 90, 143, 145, 155, 220, 246

D
demand conditioning 37, 46
Demand management 41, 49
Department of Defense 286, 294, 296, 298, 299, 302, 303, 305, 306
deregulation 214
DHL 250
differentiation 7, 9, 11, 12, 21, 245
distribution center 267, 270, 271, 272, 274
DoD 286, 290, 294, 295

E
Eastern Europe 150, 214
ECR 27, 324
Efficient Consumer Response 27
Electronic product code 252
EPC 252-285, 300, 305, 324
EPCglobal 282-284, 304
Extended Service Providers 245

F
forecasting 27, 37, 42, 46, 51, 147, 220, 221, 276, 277, 296
Forrester Research 224
Foundation providers 245

G
GCI 252, 283
Global Commerce Initiative 324
globalization 7, 9, 140, 141
global sourcing 32, 51, 52, 53, 57, 58, 106, 139, 151, 213, 214, 216-219, 221,
238, 224, 228
global trade 217, 224, 236, 246
governance 19, 36, 105, 112, 114, 115, 116, 119, 126, 248, 250, 251

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H
High process conformance outsourcers 231, 244

I
industrial products 114
information technology 49
innovation 11, 14, 19, 20, 22, 24-26, 29, 31, 32, 43, 45, 85-88, 90, 91, 93, 95,
99, 101, 104, 231, 235, 247, 248, 250, 251, 253, 260, 326
innovators 25, 88, 89
Insourcers 231, 244
integrated product design 86
intellectual property 247
intelligent agents 39
inventory management 253, 256, 257, 261, 271, 272, 276, 277
IPD 86

K
Knowledge management 110, 120

L
Lead Logistics Providers 234, 246, 247
lean manufacturing 216
lifecycle management 8, 42, 43, 45, 85, 86, 87, 98, 99, 101
logistics 8, 25, 38, 43, 45, 52, 57-62, 99, 139, 213-238, 241, 244-246, 248,
251, 253, 257, 258, 264, 269, 271, 286, 288, 290, 293, 295, 302
Logistics providers 232
low-cost countries 140, 157
low-cost country sourcing 140
low-cost jurisdictions 139, 149

M
manufacturability 124, 125, 127
manufacturing 25, 43, 85, 87, 89, 93, 102, 104, 107, 109, 110, 111, 113, 115-
119, 125-127, 139, 214-216, 218-221, 226, 244, 246, 257
merger and acquisition 30, 217
military 215, 286, 287, 290, 293, 295, 296, 304, 306

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 332 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

N
network optimization 222, 227
new product development 25, 26, 43, 45, 93, 94, 97, 114, 126

O
OEM 125
operations 10, 12, 17, 20, 21, 30, 37, 49, 51, 52, 55, 57, 91, 99, 147, 156, 214,
216, 218, 219, 221, 223, 225-228, 232, 253, 255-257, 265, 266, 269,
270, 273, 286-288, 290, 293, 295, 324
optimization 18, 36, 40, 55, 223, 232, 238, 250, 288, 325
order fulfillment 59
outsourcing 26, 45, 60, 62, 141, 146, 147, 152, 222-224, 227, 229, 230-233,
236-239, 244

P
Perfect order 41
perfect product launch 85, 101
planning 14, 15, 18, 25, 27, 29, 30, 32, 34-36, 40, 42, 43, 46-49, 51, 88, 93,
99, 107-109, 111, 113, 120-123, 125, 216, 218, 219, 220, 223-226, 232,
239, 240, 241, 244, 246, 249, 250, 257, 275-277, 285, 287, 288, 293,
321, 322
portfolio planning 107, 108, 122, 123
procurement 25, 37, 43, 44, 52, 55, 57, 88, 93, 102, 109, 114, 139, 140-147,
149, 150-156, 218, 224, 240, 244, 246, 250, 323
product development 17, 43, 45, 87, 97, 100, 102, 103, 107-109, 111, 112,
114, 115, 117, 118, 120, 121, 123, 125-128, 148, 214, 224
product launch 19, 27, 43, 45, 85-90, 93, 94, 98, 101, 127
product lifecycles 19, 100
product platform 103, 104, 106, 108, 111, 116, 121, 123, 127
product quality 13, 44, 102, 103, 115, 116, 126, 127

R
realtime 29, 34, 39, 42, 48, 59, 63, 214, 253, 275, 276, 290, 302, 303, 324
regulatory 13, 14, 16, 17, 20, 27, 31, 110, 223, 306
replenishment 47, 49, 51, 253, 254, 257, 261, 265-268, 273, 275-278
retail 15, 18, 20, 21, 29, 38, 91, 215, 216, 253, 258, 259, 265, 268, 272-274,
276, 281, 322, 324

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 333

reuse 25, 43, 52, 85, 102, 104-110, 112-121, 125, 126
RFID 15, 26, 28, 29, 31, 215, 252, 254, 258, 259, 261, 265, 270, 273, 282,
294, 296-299, 301-306, 324
risk 9, 11, 12, 17, 21, 22, 34, 42, 141, 150, 151, 155, 220, 223, 250, 290
roadmap 14, 108, 122, 222, 284

S
sense-and-respond 7, 9, 12, 22, 33, 34, 37, 38, 40, 215, 286, 287, 288, 290,
293
serviceability 122, 124, 125, 127
service levels 15, 17, 19, 32, 36, 226, 232, 237, 276
shipping 38, 213, 217, 220, 222, 224, 226-228, 258, 269, 271, 273, 279
shrink 15, 261, 278-280
specialized enterprise 11, 12, 321
standardization 15, 43, 102-105, 107, 108, 110, 113, 232, 238, 240, 248, 250,
251
Strategic outsourcers 244
strategic sourcing 8, 42, 51, 52, 55, 143, 155
supplier management 52, 55, 57, 110, 140, 144, 148, 149, 155, 246, 257
supplier relationship management 18, 57
supply chain 7-10, 13-27, 29-46, 48, 49, 51, 55, 57, 59, 62, 63, 86, 88, 90,
93, 99, 102, 103, 140, 144, 148, 157, 214-216, 218-220, 223, 226, 229,
232, 236, 240, 244, 246, 247, 250-258, 263-265, 269, 272, 273, 276-
279, 282, 284, 290, 294-297, 302-304, 321
supply chain management 7, 18, 51, 86, 220, 226, 244, 245, 294, 296
supply networks 17, 19, 52, 253, 272, 278
synchronization 25, 27, 29, 32, 46, 49, 51, 120, 229, 232, 237, 238, 246, 250,
305
Synchronized Providers 246-248, 250

T
TCO 55, 146, 148
time-to-market 95, 98, 100, 123, 125
time to market 44, 52, 86, 89, 100, 102, 105, 116, 124
total cost of ownership 55, 57, 146
traceability 16, 27, 28
track and trace 254, 257, 272
trading partners 17, 29, 252, 260-262, 269, 274-276, 278, 281-284
transformation strategy 222

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 334 RESHAPING SUPPLY CHAIN MANAGEMENT: VISION AND REALITY

U
UPS 250

V
value chain 7, 20, 26, 29, 31, 32, 41, 42, 51, 95, 144, 148, 155, 232, 241, 261,
264, 269, 276, 285
value net 215, 288, 293
visibility 25, 26, 29, 30, 32, 34, 35, 38, 40, 48, 52, 57, 59, 63, 104, 106, 113-
215, 220, 229, 237, 241, 244, 246, 250, 251, 253, 257, 258, 267, 268,
274-279, 296, 301

W
Wider service outsourcers 232, 244

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