For decades, International Business Machines was known as the bluest of American blue chips, a somewhat stodgy company that stuck to its tried-and-true methods. IBM focused on long-term R&D. It captured the market for servers, continually rolling out some of the most innovative computing products in the world. But drastic changes in manufacturing and services are driving companies to be more focused on their supply chains, gaining each efficiency possible. Consequently, IBM sees a chance to be the ultimate provider of supply chain coordination and advice.

In 2002, IBM's business model changed dramatically. In the fall of 2002, new IBM chief executive Samuel J. Palmisano announced that the company would revamp itself to focus on providing clients with business services, rather than selling them hardware. To do so, IBM decided it had to convince clients to redefine their supply chains, replacing vertical organizations by outsourcing internal functions to IBM. These operations, run by IBM, would squeeze efficiencies throughout the chain, by transforming companies' IT operations, allowing all departments of a company to interact in real time, and helping all parts of the chain to operate in unison. In the past, "we created incredible things in our laboratories and we thrust them upon you," Palmisano said at a speech to other high-tech executives. "[But] this incredible industry is no longer going to be driven by gizmos and guessing. It's going to be driven by you and how you take advantage of all these incredible technologies."

In the two years since, IBM has embarked upon perhaps the most radical transformation in the high-tech industry, altering its own supply chain and those of its customers. In reshaping itself as well as its clients, IBM has coined a strategy it calls "on demand," which will help manufacturing move to a modular supply chain, in which every part moves together. And so far, Palmisano's bet seems to be paying off, changing internal manufacturing and services for many of Big Blue's customers.

The money's in business solutions

When Palmisano took over IBM in 2002, he confronted a computer sector becoming tougher for companies that were only manufacturers. The go-go late 1990s had left the IT industry with a glut of product, and many companies already owned far too many servers. Mainframe computer sales were falling. "The development of the basic computer infrastructure is almost complete," says Larry Downes, professor of information sciences at the University of California-Berkeley. "Now, the money is in business solutions."

Facing these obstacles, IBM executives decided to utilize globalization, rather than fighting it, by helping customers manage their global supply chains. Palmisano chose to transform the company into a services provider that would handle functions companies used to perform internally. "Palmisano has made it clear to every IBMer that e-business on demand is the company's future," argues Tom Kucharvy, president of Summit Strategies, a Massachusetts IT consulting firm that studies on demand.

The core of on demand resides in several key ideas. Most important, by combining business consulting, technology provision, and computing power, IBM will be able to help companies manage their business decisions of all scales in real time. Sometimes, IBM would do so by working with customers to combine finance, human resources, procurement, and other operations in one outsourced center. IBM would keep control of these centers, renting clients processing power, software, storage, and advice on a need-to-use basis. Clients would pay only for the exact amount of each item used with an IBM center - as a customer might do when buying electricity from a local utility. Using a meter, IBM then charges the customer for every task done at that consolidated center. Company executives can reallocate to fit their needs at any time, any way they wanted, whenever one part of their integrated supply chain needed more of certain types of skills.

This shift in strategy has helped customers radically change their supply chains. Often, outsourcing is built into every part of the supply and information chains. Ideally, IBM believes, this strategy would allow both IBM itself, and its customers, to gain significant efficiencies in their chains. What's more, IBM would help customers restructure their entire supply chains, so that they operated horizontally rather than vertically.

For example, says Scott Penberthy, chief technology officer for IBM's industrial sector, Big Blue has started working with several automotive parts companies. "Auto companies have 60 days of inventory and are trying to get to fifty days - they need to get to market faster, and at the same time the software in the cars is becoming more complex." So, Penberthy says, IBM has analyzed several auto parts companies' entire chains, and discovered ways to rethink themselves entirely. "What we are looking at is transitioning their whole business processes - you can't just do one part of the process," he says. "We consult with them to so they can learn to integrate lean manufacturing, procurement, accounting, so they make decisions internally in all these areas at the same time." Meanwhile, he says, when demand rises, on shorter time frames, for the auto parts companies' products,

Similarly, says Penberthy, IBM has worked with major airplane companies so that their manufacturing operations are more integrated. "Boeing came to us and was thinking of building a big new aircraft," he says. "We wanted everyone in the project to be able to exchange data in real time, to share data ... Everyone had to share data to collaborate on the building." Penberthy continues: "[So], we made everything for entire manufacturing life cycle on demand. Everyone involved in the project subscribed to an external service we set up, so that everyone could exchange data on demand. Subscribers to the service paid per seat [per person]."

On demand works outside manufacturing as well. To take one example, during 2004's major Grand Slam tennis tournaments, IBM handled much of the real-time scoring. On demand computing ran the scoring. When fans were using IBM's score websites, computing power would be directed to them by IBM servers; when there were breaks in the tournament, the servers would direct computing power to other places, reducing waste.

Similarly, Mobil Travel Guide, one of America's leading suppliers of travel information, was one of the early clients of on demand. (The travel guide was spun off from corporate parent ExxonMobil two years ago.) Travel Guide chief information officer Paul Mercurio says that, by going with on demand, the guide did not have to invest in any servers or other major upfront costs. It allowed IBM to handle the initial architecture of their chain, and IBM built in bulk computing power, easily reallocatable.

With IBM having designed an on demand strategy from day one, the Travel Guide was able to tailor itself to the demand of its market. When the guide announces its annual ratings, Mercurio says, its demand for orders spikes, but on demand deals with the change. "On demand handles that, absorbs it. I'd never have wanted to have to buy a computing environment to handle that," he says.

Alliance with business schools

What's more, in pushing on demand IBM has increasingly integrated its research department into the equation. Indeed, over the past two years the company has established "On Demand Supply Chain" laboratories at four leading business schools around the world - at Michigan State, Penn State, Arizona State, and University College Dublin. These labs will create simulations of complicated supply chains, using the simulations to examine each component. IBM researchers who still focus on hard science now often will study ways to help computers diagnose and fix their own problems, making supply chains run even more smoothly. IBM calls this self-diagnosis "automatic computing."

The business schools have played an integral role. Dave Closs, a professor of business administration and expert on supply chain management at Michigan State's Eli Broad College of Business, says the school has already done numerous simulations of how on demand helps manufacturing supply chains.

Closs says Broad studies how on demand helps manufacturers' chains in three ways. For one, Broad researchers have found that on demand can enhance manufacturers' revenue by creating more distribution capacity on call. With clothing manufacturers, for example, Closs says on demand allows them more customization of clothing types under production, so they can alter the volume of clothing produced more easily. Secondly, the school's simulations examine how manufacturers can lower costs. "On demand helps you lower fixed asset costs by having less fixed costs tied up in assets," says Closs. Finally, he says, on demand can help manufacturers improve asset utilization in their chains. "I have production and inventory assets," he says. "If I can use them both more flexibly, I can operate with less lead time."

IBM will benefit from all this research and development as well. Kucharvy notes that IBM has used its research, and the lessons it has learned through its clients, to transform its own supply chain, making it far more horizontal. Indeed, the company has reduced its own supply chain costs, in part by dealing with nearly all its suppliers online, and in part by more effectively integrating all elements of its chain. Indeed, IBM has consolidated many of its own human resources, finance, and procurement divisions into one of the same kind of external centers it uses for Big Blue clients. These changes have saved the company over $5 billion a year.

Earnings impact

These contracts, as well as IBM's blitz of advertising, have made Big Blue a standard-bearer in on demand and business services. One study by Gartner, a research firm, showed that nearly 40 percent of companies in the Asia-Pacific region now would consider using IBM for on demand computing. Similarly, Kucharvy reports, "the firm [IBM] is increasingly communicating a more detailed on-demand vision and architectural roadmap and is building customer awareness."

Clients have jumped on board. In the third quarter of 2004, IBM's earnings rose 4 percent, and Big Blue signed a total of $10.6 billion in new services contracts in the second quarter of the year. Amazingly, for a company so long associated with hardware, services, many centered on the on demand model, now account for roughly half of IBM's total revenues.

Jumping on the bandwagon

Perhaps the best sign of IBM's success with on demand is that competitors are trying similar strategies. HP, for example, has announced that it will focus on printing on-demand, convincing clients to use HP printer centers, with a fee per task, rather than necessarily buying HP printers. HP has touted this as its version of "the adaptive enterprise," though Larry Downes worries that, having not purchased a consulting group like PriceWaterhouseCoopers, HP may lag behind IBM in its ability to blend consulting and technology. Indeed, research by Summit Strategies last year showed that business customers are more familiar with IBM utility computing, and are more willing to work with IBM than with HP.

Yet HP is hardly alone. Xerox has created an internal division, called Xerox Global Services. "Xerox will always be a very dominant provider of products, but it'll be even more successful because of the services we'll be selling," says Tom Dolan, president of Xerox Global Services. Dolan notes that Xerox is aggressively pursuing the outsourcing of companies' complex document management Like IBM, Xerox is charging some clients via an on-demand process. "They buy by the drink - if you need to triple it in February 2005, that's what you pay for - no capital investment," Dolan says.

Xerox is only one of many. Sun Microsystems, EDS, and Accenture also have been rolling out their own versions of on demand; in Sun's version, customers will pay $1 per hour to use Sun computers. Indeed, one day soon, perhaps, we all may be living in an on-demand world.

Sidebar

Driving the Integrated Global Supply Chain from the Top:
Robert Moffat Leads IBM's Supply Chain Re-organization into 'On Demand' Computing

Company's first-ever Senior Vice President for Integrated Supply Chain talks with WORLD TRADE MAGAZINE about how logistics fits into the new business model.

By Mark Bernstein

In 2002, IBM moved to bring its 30 existing supply chains into an integrated whole. IBM chairman and CEO Sam Palmisano appointed longtime company executive Robert Moffat to the newly-created post of Senior Vice President, Integrated Supply Chain.

The task was huge. IBM manages 33,000 suppliers and 45,000 business partners, and each year orders two billion components, ships 50 million spare parts and maintains 6.5 million client records.

But the pay-off was fast. IBM's Integrated Supply Chain (ISC) is accountable for approximately $40 billion, or roughly 50 percent, of IBM's total expense. During its first full year, 2003, the ISC reduced costs by $7 billion, saving an average of $27 million per business day. At the end of the year, IBM's inventory had been reduced to its lowest levels in 20 years.

At first glance, Moffat's appointment was not an obvious one. He is not a "supply chain guy." His quarter century at IBM has focused on the business side. At the time of his appointment, Moffat was senior vice president and group executive of IBM's Personal and Printing Systems Group, where he was responsible for worldwide sales, development, manufacturing, and marketing.

In this World Trade interview, Robert Moffat reports on the task, the hurdles and the progress to date.

WT: IBM initiated this effort in 2002. Why?

Moffat: Consider the IT industry at that time. The days of double-digit growth were starting to wane. There was the dot-com bubble bust. These, and globalization of supply. With the incredible competition that existed, Sam Palmisano [chairman and CEO of IBM] made the decision that it was time not only to integrate the supply chain, but to integrate the supply chain into the business strategy of the company.

We called this supply chain reorganization 'on demand.' Many people think of 'on demand' as a utility computing scenario. We're talking about a business model. The company has to respond to the fact that the business world is much more uncertain than in the past. Upturns and downturns are more dramatic, and a company needs to be able to handle those types of business cycles. You can only do that by integrating your company end-to-end.

WT: So it was a top-level corporate initiative. Why so important?

Moffat: Some people think of the supply chain as 'a cost of doing business.' I think those people are incredibly na•ve, incredibly disadvantaged in the marketplace. I think they have to think of it as a strategic part of the business and as a strategic weapon in the competitive landscape.

WT: How do you measure progress?

Moffat: We set some targets: cut the time sales reps spend on fulfillment. Improve payables by 1 day a year. Improve inventory turns by 1 day per year. And others.

WT: How has IBM performed?

Moffat: We achieved every one of our goals and did it in our first year of existence. We cut $5.6 billion dollars from costs out of the supply chain in year 2002. We cut roughly $7 billion in 2003. We reduced our Days Sales Outstanding-which means, how long until you collect the money-by approximately a day. We reduced inventory to the lowest level in IBM history. We improved customer-sales force face time by over 20 percent.

WT: Can you tie this back to corporate strategy?

Moffat: The important part is what it means to the company. Traditional supply chain measurements don't really show the change you're going through. The more important part is when you start talking about lower inventory, better collections, more cash for the organization. When you reduce costs, you are making your products more competitive. By being more competitive, you improve margins. And you can use that money for more acquisitions, or more product development, or more advertising and marketing.

WT: You've been at this nearly three years. What's been the hardest part of the effort?

Moffat: I was asked the day we started: what's your toughest challenge? And I said 'culture.' We had a leadership meeting after the organization was formed. I remember looking out at the audience and everybody was sitting with their site or their organization. A table for Rochester, Minnesota; a table for Scotland. The procurement people had a table; so did the logistics people.

We had a similar meeting a year later, and I saw no such tables. People had come together. They understood that, yes, there was power in deep functional expertise, but their real power that would differentiate them in the marketplace was the ability to approach a problem end-to-end.

WT: A supply chain is situation specific. What characterizes IBM's supply chain?

Moffat: First, you have to step back and say: what is IBM? When people think about IBM and supply chain, they think hardware: how do I get a Z990 computer from here to there? But hardware is only about a third of my job. The supply chain also supports all of our services businesses, all of our software.

WT: How does your supply chain support services and software?

Moffat: We are applying traditional manufacturing supply-chain principles to the people aspects of the business; understanding how to get the right people in the right jobs with the needed skills in the appropriate way. It's different, because people aren't parts, but the basic principles that you apply are those of understanding what skills you need, where you need them and how you need them.

WT: But how do you sustain improvements?

Moffat: I would argue that some of the early improvements we made were low-hanging fruit, things that were pretty obvious when we went out and looked at them across the organization's silos. Each organization was run very well by itself. But, you could see where it was obvious that you could take out waste and drive efficiency.

The way you sustain improvements-the important thing is that we haven't been one-night wonders. We've been able to drive operational efficiency, improve customer satisfaction and shareholder value and, actually, move supply chain from being a cost of doing business to a strategic weapon for IBM.

WT: What new skills did this require?

Moffat: I'm going to elevate this to the leadership level, because honestly that's where we're finding the largest gap. The first conflict that we had to deal with is-every line of business, given that they owned their own supply chain, believes is that the last thing in the world they wanted to do is give it to a centralized organization. And, I was one of those people. I ran three businesses for IBM: our PC business, our printer business, and our retail stores business.

And, Sam did a very intriguing thing. When he had me run the supply chain, he had me continue to run those businesses simultaneously. I think that was clairvoyant on his part. I didn't understand what he was doing at first, but he was making me deal with those day-to-day conflicts between the systems view and the single business view. Because there were things that sub-optimized the business units that I ran, but that optimized things for IBM. So, I had to figure our how to deal with those things in my supply chain in the bigger picture.

It's also important because my peers running businesses don't look at me as a supply chain guy. They look at me as a line guy helping them run their business. They listen to me because they saw me run a business. Therefore, when I said something it had credibility. It wasn't viewed as self-serving for the supply chain.

WT: How does this affect relationships with your suppliers?

Moffat: Our relationships with suppliers are just that, relationships. We don't just go out and buy things based on price, because we don't think that will serve us long-term best and we certainly don't think it will serve our customers long-term best. We're looking for suppliers that live by a code of conduct-that have appropriate programs to ensure supply chain security; to ensure they are not exploiting people in their supply chain; that have similar commitments to diversity that we at IBM have. I am looking for people who are leaders in innovation, leaders in technology. And, obviously people who are producing the stuff that IBM needs.

WT: You mentioned that end-to-end understanding of your supply chain improves responsiveness.

Moffat: I'll give you a physical example. The SARS outbreak changed the movement of goods from Asia. More cargo had to move not from Asia to the U.S., but from Asia to Europe to the U.S. Flight patterns started to shift. Because of our supply chain understanding, we sensed that before our competition. We got lift capacity out of every one of the places we needed lift capacity. And, we were not disadvantaged; in fact, we were advantaged in terms of moving our goods around the world.

WT: So the supply chain can be the organization's responsiveness?

Moffat: Yes. We had a problem with an ordering system which, unfortunately, bottlenecked the rest of the process in that country. We knew it was going to take time to fix. But the point is: we were able to see it. And, we were able to see that we could get the congestion out of the supply chain by utilizing capacity around the world. We had to turn the supply chain in a different direction. That meant new import/export things; new logistics. A box that goes into Germany isn't the same as a box that goes into Detroit. It's got a different language keyboard on it.

Because of the end-to-end understanding of our supply chain, we were able to sense and respond. We turned it in a day. And it made a difference.

WT: At companies smaller than IBM, does the supply chain guy understand these possibilities?

Moffat: First of all, some supply chain guys are threatened by it. Because-it sounds like a derogatory statement-they've got to come out of their world. And many of them like sitting in their manufacturing world, in a sense they're an adjunct. Supply people are not comfortable with it; because one of things that happens is they can no longer blame the person they were blaming before for their problems. The manufacturing guy can always blame the person who was supposed to put in the order or the procurement people for not getting the parts. The logistics guy would either blame the manufacturing guy for not producing on schedule or the suppliers for not having the pasts lined up for delivery when they were supposed to. What it became was a vicious circle, in which no one was to blame except the customer for placing the order.

WT: So, if a company wants to integrate its supply chain, who gets the task?

Moffat: If I was CEO of a $100 million company and I was going to put someone in charge of my supply chain, I'd make it a business guy.

WT: Any final thoughts?

Moffat: We started this interview off with the thesis that in the future the supply chain has to be elevated to the top of the company-I absolutely agree with that thesis. You're finding more and more companies deciding to have a supply chain person at the highest levels of the company. And I think that they're getting CEO buy-in. I think supply chain will be what differentiates companies. It's an enabler of your business strategy.