The Global, Make-to-Order Supply Chain: Is it Time to Examine Alternative Models?

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1 The Global, Make-to-Order Supply Chain: Is it Time to Examine Alternative Models? By Steve Banker Keywords Supply Chain Management, Supply Chain Event Management Summary While Dell's supply chain capabilities When one thinks of a global, just-in-time, make-toorder supply chain, the first company that comes to have for the past several years been highly praised, the Dell methodology is not the only way to run lean in a mind is Dell. Dell's model might be characterized as a global make-to-order supply chain. Command and Control model. This, however, is not the only model for running very lean with a global supply chain. Sun has a different model - which we call the Empowered Trading Partner model - that is also worth studying. Analysis Dell s fiscal third quarter results somewhat tarnished their sterling reputation as a paragon of supply chain efficiency. Fiscal third-quarter profit fell by 28 percent on charges. In a pre-quarter warning, they announced that weak sales in the UK business and excess inventories in that area were part of the problem. Inventory write-offs are not something you expect from a smooth running supply chain. However, even make-to-order manufacturers must forecast, and forecasts are not always accurate. Dell has historically used pricing as a mechanism for balancing supply and demand. In its second quarter, Dell said that price cuts that normally lifted sales had failed to provide enough of a sales lift to offset the fall in product prices. This Insight compares and contrasts Dell's Command and Control supply chain with Sun's Empowered Trading Partner model. The Command and Control and Empowered Trading Partner models exist on a continuum. Neither Dell nor Sun can be categorized as being purely in one camp. Nevertheless, within the High Tech industry Dell is the best example of Command and Control and Sun the best of the Empowered Partner model. THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN

2 ARC Insights, Page 2 Dell's Command and Control Supply Chain Dell is a $53 billion public company that manufactures a range of computer systems. The company is headquartered in Round Rock, Texas. The broad outlines of Dell's supply chain are well known. Dell has a direct to the consumer model - it does not sell to retail outlets or use distributors. Global component suppliers ship goods to warehouses generally located within 15 minutes of Dell regional plants, including Dell's newest factory in Austin. Every twenty seconds Dell aggregates its telephone and Internet orders and analyzes the material requirements. Dell uses i2 SCM to compare their onhand raw material inventory with their suppliers' inventory and create a supplier bill of material to meet their order requirements. Suppliers have 90 minutes to get their parts to the assembly line. Dell offers their suppliers a secure extranet that they can use to get a customized view of their materials at Dell, performance management scorecards, and other pertinent reports. Supplier's truck trailers line up in front of the cargo bays encircling the factory, 110 of them in Austin. When an assembly line runs low on a key component, a signal goes out and a forklift pulls the components from a trailer. Only once the forklift crosses a white line in the factory, and the shipments bar code Dell's supply chain can be is scanned proving that it has crossed the line, does characterized as Command and Control dell take ownership of these components. because Dell is doing much of the overall planning and synchronization Dell holds inventory only for the six to eight hours it and asking it's suppliers to react to the signals it sends them. takes to build and configure their computers and for the 18 hours it takes for the completed PC to be trucked to a merge center in Reno, Nevada where the unit is bundled with a monitor and shipped to the customer. Most suppliers, in contrast, are required to stage eight to ten days worth of buffer stock in multi-vendor warehouses. FastCompany has estimated that Dell's suppliers hold anywhere from 20 to 80 days' worth of total inventory. 1 ARC recently talked with a supply chain manager that previously worked for Dell. What is not broadly known is how important the use of Supply Chain Event Management (SCEM) is for synchronizing their global supply chain. "We were pulling information from almost 200 supplier systems. 1 Bill Breen, "Living in Dell Time," FastCompany, November 2004, p. 86.

3 ARC Insights, Page 3 They were very different systems. We were pulling product extensively from the Far East into the US and then trying to integrate it with the production planning modules. (We had to build a) reporting overlay (to the SCEM solution) to pare down the events to the 20 or so you might be able to manage." Those events included shipment notification from each supplier's factory in Asia. "We wanted to know what product, quantities and model numbers or serial numbers by SKU being shipped by each one of our suppliers. And then we wanted another alert when it was on the vessel, either the ship or the plane. We would get an alert once we cleared customs. Once the plane landed, we needed to know where the product was and how it was being routed. We wanted to know when it hit the dock at the (DC) and when it was in inventory, (that is) when it was actually put-away. When the part hit the factory floor, we wanted to know that as well. We extended it so that each time the product comes off the assembly line it will tell us, 'this type of product is ready for shipment.'" Dell's supply chain can be characterized as Command and Control because Dell is doing much of the overall planning and synchronization and asking it's suppliers to react to the signals it sends them. Sun's Empowered Trading Partner Supply Chain When it comes to Logistics Service Providers (LSPs), some companies use Command and Control while others empower trading partners to make the right decisions, within a set of predetermined guidelines, and then measure the results. What is interesting is that Sun has used the latter approach not just for selected LSPs, but for managing a global supply chain of server manufacturing and shipping that runs very lean. This was an audacious undertaking. Sun Microsystems is an $11 billion public company headquartered in Santa Clara, California. The company sells it products and services for network computing both directly and through indirect channels. In recent years the company has restructured its supply chain for server products. This restructuring included: Moving a growing percentage of manufacturing, currently over 90 percent of production, to partners in lower cost geographies;

4 ARC Insights, Page 4 Rationalizing their supply base and cutting tiers out of their supply chain so that key strategic partners engage in a greater number of supply chain activities; And, migrating from a Command and Control business model to one in which trading partners are provided visibility to forecasts and orders and are then expected to reliably fulfill orders according to fixed competitive lead times that range from four to thirteen days, depending upon the product, and with one day expedited delivery if customers are willing to pay a premium. Sun built portals for three tiers of their supply chain that include key component suppliers, contract manufacturing partners, and LSPs. This portal shares information residing in Sun s Oracle enterprise applications with partners through customized views that support their data needs. Sun also built their own customized Supply Chain Event Why do we characterize Sun s strategy as Management solution, using internal resources an Empowered Trading Partner model? and Sun middleware and development tools. Because they don t plan the production or fulfillment activities. They set goals for Sun s SCEM supports three key events. The first performance, provide appropriate visibility event is the order schedule date. Exception tools, measure performance, and hold partners accountable. events are created whenever a partner reports that they cannot make and ship by the required date. Exceptions run at less than 1 percent for this event. The second event is notification from their contract manufacturer one day before they are scheduled to ship. Exceptions occur when their partner has not sent the required acknowledgement or if they send a message that they will not be able to ship as scheduled. This class of exceptions occurs about six percent of the time. Contract manufacturer ASNs are routed to Sun's LSPs. The third event occurs when an LSP confirms delivery. Again an exception is created whenever there is a failure to confirm delivery or an acknowledgement that they will not be able to pickup the goods on the required day. Such exceptions are very rare at this level, less than 1 percent. Why do we characterize Sun s strategy as an Empowered Trading Partner model? Because, they don t plan the production or fulfillment activities: they set goals for performance, provide appropriate visibility tools, measure performance, and hold partners accountable. One benefit of this approach is reflected in the way that partners can bring additional intelligence to the table in this environment. An incident occurred in Singapore

5 ARC Insights, Page 5 in early September of this year that highlights the value. Eugene McCabe, Executive Vice President for Worldwide Operations, was on a panel with this analyst at SCMLogistics World when he read an from a second tier component supplier. The supplier had reviewed orders that Sun had issued to their contract manufacturer in China. Based on what they saw, they doubted the size of the component order that they were receiving from the contract manufacturer. They queried Eugene to see if the contract manufacturer was ordering too much. They were. This visibility, and the empowerment to operate on that visibility, ended up saving everyone money. Other advantages of this model are lower fixed costs, the ability to run with a much leaner supply chain organization, and less total (supplier plus OEM) inventory in the supply chain. Recommendations Selecting strategic partners, particularly in Asia, takes a considerable amount of work. Sun has discovered that contract manufacturers that have other Command and Control style customers are unsuitable for the Empowered Trading Partner model. They have developed a habit of waiting for commands and struggle to do the planning and execution themselves. High tech companies working with contract manufacturers in Asia tend to operate in Free Trade Zones. Not only does this provide lower duties, they have discovered the logistics and IT infrastructure to be far superior. For further information or to provide feedback on this Insight, please contact your account manager or the author at sbanker@arcweb.com. ARC Insights are published and copyrighted by ARC Advisory Group. The information is proprietary to ARC and no part of it may be reproduced without prior permission from ARC.