Posted: May 1, 2007
http://www.worldtrademag.com/
Customer satisfaction is the corporate mantra of mantras these days. In company after company, regardless of sector, it reigns as the core value. More than a throw-away line, it encapsulates the essence of strategy in a business climate of heightened competition and consolidation where fewer players with less and less to distinguish themselves from each other chase the same customers.
In such an unforgiving context, where does competitive advantage reside? Increasingly, well-managed companies are looking to their supply chain as a critical component—perhaps even the critical component—to assure customer satisfaction.
Few enterprises exemplify this transformation better than this year's Manufacturer of the Year for Global Supply Chain Excellence—Texas Instruments Incorporated (TI).
In previous years our winners—Procter & Gamble, Ford Motor, I.B.M.—have directly interfaced with their final users. TI, on the other hand, occupies a niche lower down in the value chain, providing the chips and assemblies that drive the cell phones, DVD players, digital cameras, and portable audio players that bear some other brand when sold to consumers.
If anything, the vulnerability of being lower in the food chain makes TI's supply chain operations even more critical, both for its own success and, as I heard repeatedly during a day's conversations with the company's top managers in the Dallas headquarters, “the success of our customers.” But the evolution of this appreciation for the centrality of the supply chain, and acquiring the capacity to execute to a new strategy, did not come easily.
Indeed, it was the abrupt and traumatic collapse of the high tech market beginning in 2001 (which left TI holding un-sellable inventory and hundreds of millions of recently acquired but suddenly unnecessary capital equipment) that brought home the lessons of the new reality and spurred the internal call to action.
Today, the company operates in a vastly different way than before the dot.bomb. “We look at our manufacturing globally, we look at our businesses globally, we look at our processes globally,” underscores Charlie Miller, TI's Controller, who shares what is typically a COO function with the company's senior vice president of manufacturing to uniquely combine finance and business operations. “And enabling all that is the supply chain.”
Texas Instruments is hallowed ground in the history of high tech. It was here that the integrated solid circuit semiconductor was born in 1958 and for which its inventor, a modest Kansas-born engineer named Jack Kilby would win the Nobel Prize for Physics. If the significance of the event was lost at the time, some fifty years later TI's chips “are reshaping the world of consumer electronics and enabling the latest portable, networked and digital devices,” explains Jan De Meulder, Director of Supply Chain and Logistics.
TI ranks as the world's number three manufacturer of semiconductors (after Intel and Samsung), producing some 50,000 different products. More importantly in terms of its ‘post-2000' strategy, it is the global leader in digital signal processors, or DSPs, and analog technologies, the engines of the Internet age. Last year, it was 167 on the Fortune 500, with revenues of $14.2 billion generating operating income of $3.3 billion and a return on assets of nearly 16% (by contrast, Intel last year returned 9.8% on assets).
Sustaining this scale of enterprise entails a vast network of production and distribution. The company maintains production facilities throughout the world—its wafer fabrication facilities where silicon gets converted into chips, its foundry partners (factories from whom TI buys chips) and TI's assembly and testing and facilities (where chips are assembled into packages). Different types of products, ranging from prototypes through samples to full volume production, come to market through different channels (catalogues, distribution centers, customer factories). The more urgent the customer's needs (cell phones, for example, are commercially viable for only nine months, leaving no margin for unmet demand) the more timely the delivery mode (80% of the company's shipping by value goes by air). It relies on 3PLs to execute these flows, including DHL, Bax Global (now Schenker), FedEx, and Kintetsu World Express.
Thus the infrastructure, the skeleton of the supply chain that serves as the backbone for the system. It is here that the ‘nerve cells,' wired enterprise-wide (a single instance of SAP for business processes around the world, a single instance of i2 for planning) are transmitting information, intelligence and command. All aggregated into ‘real time' planning documents broadly circulated and continually revised so that the relevant personnel—sales, production and financial management in the middle—are ‘on the same sheet of music.'
“We re-do an operating plan globally three times a week,” explains Brett Whitmire, Vice President of Supply Chain Operations. Once a week, Capacity Disconnects, mid-range plans to match supply and demand up to 18 months out, are produced (“if we see a really large disconnect, we can escalate quickly and make capital decisions quickly, on a weekly basis if necessary.”) Each month the comprehensive Sales and Operating Plan is revised.
Five years ago, TI operated with considerably less enterprise-wide visibility and at a much slower speed. Marketing would initiate the process with sales projections, then product planners would create production plans to accommodate them; atop this would sit the legacy controller operation, deciding on the financial reasonability of actions. There were, in effect, three overlapping plans: marketing, operations and financial.
The system was clumsy and impeded by different silos of responsibility. Capacity disconnects, for example, wouldn't show up on the screen until a customer asked for an order that couldn't be filled—thereby prompting a mad dash to satisfy surge demands. What made this situation of ‘peak production' all the more troublesome was that the new generation of complex products would put more pressure on testing facilities than was available.
“I think what finally happened,” suggests Charlie Miller, a low-key Texan born-and-raised, “was that the CEO said, ‘I want one plan and one person responsible for it.' Easy to say!
What made the request feasible was the fact that TI some half-dozen years earlier had installed its one instance of SAP, starting in the mid-1990s. The impetus was fear of Y2K. “It didn't come easy,” recalls Miller. “It was a long five year process.” There were skeptics who questioned whether it was the right thing. “In the middle of the dot.com fray,” recalls Mike Senecal, Supply Chain Manager, “with so much enthusiasm for universal supply chain standards such as RosettaNet, or mark-up language such as XML, there was a lot of pressure on us to put new infrastructure in place to capture all that. Well, we didn't. We stayed with one infrastructure but made it scaleable to support any other type of communication. By doing that, in my mind, we invested in B-2-B the way it was supposed to be invested in.”
“Now that we have it,” affirms Miller, “the impact is unbelievable. There is one source where we can go to collect information and pull it out to evaluate. I know everyday how much revenue I generated the day before, and how many orders I had the day before. I also know how I'm doing in terms of inventory levels and on-time deliveries to customers. Operational reports come in the same way. I know how many wafers have been started in fabs all over the world, what the yield is, what the cycle time is, and how those factories are performing.”
In other words, the S&OP (Sales and Operating Planning) process at TI affords management the ability to take the pulse daily of the company and respond rapidly. “If a problem arises,” comments Miller, “I don't have to wait until the end of the month to find out. I can go down the hall and have it fixed right away.”
Because this data is broadly shared, in contrast to an earlier hierarchical management approach where information was restricted and pushed downward, because “everyone is circling along the same queues of information,” as often as not when Miller walks down the hall his colleagues have already spotted the trouble and “I get the question answered before I can ask.”
Historically, manufacturing companies, particularly up-stream suppliers like TI have devoted the bulk of their supply chain efforts to managing production. Demand monitoring typically did not go much farther than surveying their direct customers (in TI's case lots of wholesale distributors and contract manufacturers), who in turn deal with the brand manufacturers selling to end buyers.
The inventory crisis of 2001 (which was not restricted only to TI) graphically demonstrated the inadequacy of this approach. The common complaint amongst tech companies was ‘an absence of visibility'—an inability to be able to accurately identify future demand. The consequences of operating in this state of market ‘blindness' for TI proved dire.
“What was happening,” recounts Brett Whitmire, “is that we were servicing the same high volume clients out of multiple business units: catalog, custom and targeted end equipments. We would get multiple ‘buy' signals in the end, but that didn't reflect the true state of demand in the marketplace. “Thirty to thirty-five percent of our revenue goes to distribution as a channel and what was happening was that everybody was chasing different parts of the same business. A distributor here and distributor over there, we were getting separate feeds from them and nobody was trying to reconcile the differences.”
Delivering product that required multi-year ramp-up with a boom-or-bust mentality was a recipe for disaster. You geared up when everybody else was gearing up (thus buying capital equipment at the height of the price cycle) and there was too much supply; if you didn't gear up, you risked losing business and market share. “You were always wrong,” is how one executive remembers the situation.
Until then, supply chain was predominately viewed within the company as largely the domain of procurement and information technology. But with the realization that it was imperative to significantly improve TI's ability to monitor true demand and adapt production accordingly (rather than to advance projections), priorities changed. “One of the things we push real hard is to tell our planners to understand the end market,” says Whitmire. Relationships with end customers were made more collaborative in order to facilitate information sharing.
Take wireless. “We're the leading supplier to the market, so we can aggregate broad data. We know that if customer X demand's declining, customer Y should be filling the void or, if not, the whole market is going down. We know where to go to find the hole. Before, we didn't believe it was incumbent on us to look across the entire supply chain from start to end-user. We'd just go to where we recognized revenue.” From TI's perspective, it is in everybody's collective interest to have the same market read.
The technological challenge is to integrate those final points of sales data into TI's system. “How quickly can the signals from your end customer translate to us?” is TI's question to the likes of Nokia and Sony Ericsson and Motorola, “and let's just agree to levels of inventory that you want to keep stocking and we'll all rally around that order.” This allows TI to reduce ‘double dipping'—overproducing for what is effectively the same order. The quid pro quo is TI's willingness to share the information within the sector, advising the individual customers that “you guys are going off to do this based on demand, but we don't see this with end users.”
To deliver production based on this order of calibration, several major organizational transformations occurred. One entailed how the supply chain would be managed. Operations were consolidated, no longer would separate business units maintain autonomous supply chain processes.
In conjunction with these initiatives, TI further evolved its business model in early 2007, announcing that it would expand its use of its foundry partners to include process technology development for digital chip production. This allows TI to avoid the peaks-and-valley syndrome of the market, and redirect capital investment to assembly and test facilities, and other areas where it can bring differentiation for customers and the markets they serve.
“We're expanding our relationships with the foundries with the theory that we keep production at a consistent level and that we use the foundries to deal with peaks,” explains Charlie Miller.
An added value, from the perspective of corporate finance, is that such outsourcing enables the company to go through adjustment periods with considerably less impact on profit margins. Indeed, during the 2001 period of industry-wide chip corrections, TI's profit margin varied by some 35 points from positive to negative; today, with in-house production stabilized and out-sourced foundries taking up demand surges, the margin of variability is 3-10 points. Having a steady course instead of peaks-and-valleys is of huge impact. “It enables the company to follow consistent levels of investment in product development, something that historically used to come under pressure when margins cycled significantly. This is our fuel to drive innovation over time.”
“A few years from now,” explains De Meulder, “we will have an amazing systems infra-structure in place. There are not too many people that truly do global logistics like TI. We look at the complete global picture and can ship from anywhere in the world. We are aligned with our partners on specific cycle time goals for every shipping lane used.”
“Currently, TI does not have custom supply chains for every customer, but it can, and does implement them for major customers. The tools are in place right now, for example, where we can handle a situation where a major customer says ‘those five thousand units that we wanted next week in the Brazil factory, well we've changed our mind and now we need them in Korea.'”
As the TI folks continue discussing the x's and o's of their supply chain transformation, a reporter begins to sense that what they're doing is not simply re-tooling their supply chain with global partners and distribution but—more significantly—introducing a heightened degree of agility and responsiveness to a multi-billion dollar capital intensive high tech business.
Managerially, they're doing this by conflating vertical chains of command previously organized into operational and business unit silos into the horizontally integrated closed loop aligning supply and demand with finance—embodied by Charlie Miller—poised at the central leverage point empowered to make tactical decisions in the best interests of the enterprise as a whole. “We've taken the finance organization and integrated it much more into the business. Very few controllers at other companies have the responsibilities I have. What we've found is that taking the sales people who are close to the customer and tying them into the finance side and the production side and holding everybody accountable for being on the same sheet of music is very, very effective.” wt
Sidebar: Supply Chain Resilience in the Face of Hurricane Rita
In September, 2005, soon after Hurricane Katrina devastated Louisiana and Mississippi, all eyes turned to Texas when Hurricane Rita entered the Gulf of Mexico. Texas Instruments comprehensive emergency plan kicked into action.
Just south of Houston, a TI manufacturing facility ships thousands of digital signal products to customers daily from its wafer fab and test facilities. With Rita approaching, TI needed to insure employee safety, while minimizing interruptions to business operations. The plan: increase product shipment in and out prior to any disruptions caused by the storm. For success, this would require close collaboration across TI's Facilities, Security and Manufacturing organizations, and externally across numerous logistics suppliers.
At company headquarters in Dallas, the logistics team set up a war room with regular conference calls to discuss options to move product. TI's Manufacturing group helped the team define factory and transportation needs during this period.
When TI's Houston-based transportation carriers decided to cease operations, moving product almost ceased as well. However, because TI has several strategic supplier relationships in place across all key lanes, the company was able to immediately engage its Dallas-based transportation provider to move product, and get finished goods to its Production Distribution Center (PDC) at Alliance Airport outside of Dallas for shipping.
With numerous road closures, re-routing and evacuations underway, what was normally an 11-hour round trip became one that took nearly 18–20 hours. However, the trip would not have been possible at all without close coordination across all channels, including the Texas Department of Public Safety and Department of Transportation.
Simultaneously, TI had to implement another emergency request to move additional water pumps, with potential flooding eminent. TI arranged for a strategic supplier to load pumps in Dallas and nearby Sherman, drive to Austin and proceed to Houston through a secondary route to avoid outbound traffic congestion.
For backup, TI also had arranged to fly equipment and material from Conroe airport (north of Houston), given the uncertainty surrounding the major Houston airports.
In the end, TI managed to keep all delivery schedules to key customers.
Manufacturer of Honor: Michelin
As supplier of choice, Michelin to provide vehicle tires to U.S. military throughout the world.
There are supply chains and there are supply chains. Michelin wins honorable mention as a 2007 Manufacturer of the Year for its selection as the ‘distributor' of choice of the U.S. military via three new tire contracts worth more than $2.4 billion. In January, the Defense Supply Center in Columbus, Ohio (DSC-C), the largest Inventory Control Point in the Defense Logistics Agency, announced contracts with Michelin that include a $700 million deal for aircraft tire logistics, $10.7 million agreement to supply the military's Humvee fleet with BFGoodrich Baja T/A tires, and a 10-year $1.7 billion contract for Michelin Americas Truck Tires to provide aviation and land vehicle tires for all military branches deployed throughout the world.
“This is a completely new contract, something the U.S. military has never done for ground tires before,” explains Luc Minguet, COO of Michelin Americas Truck Tires. “The contract is the largest in monetary value ever signed by the Defense Supply Center. Vehicles to be serviced include: HMMWV (or Humvee), HEMTT, Stryker Light Armored Vehicle (LAV), Armored Vehicles, as well as more traditional passenger cars and pick-up trucks.
“Michelin has been a proud supplier to the U.S. military for more than fifty years,” continued Minguet. “From the Normandy D-Day invasion when Allied troops were equipped with Michelin maps of the French coast, to current deployments in Afghanistan and Iraq where U.S. troops are riding on Michelin tires.”
By being able to take advantage of Michelin's distribution technology and management expertise, the new tire contract is expected to save taxpayers $172 million dollars over its life. The 10-year contract will involve an estimated 3.87 million tires,” said Minguet.
The scope of this enterprise is vast and exemplifies the emerging model for public-private military supply chain collaboration. “DSCC will have oversight of the contracts, but Michelin will be doing everything else,” says Matt Geary, the agency's project manager for commodity privatization contracts.
DSC-C will still decide what tires are appropriate for what vehicles, much like homologation in the original equipment industry where manufacturers produce to specs determined by the buyer. Michelin will manage all tasks related to sourcing, supply, storage, and distribution. To face an extraordinary surge in demand due to the OIF operation in 2003 and 2004, Michelin has invested $16 million in its Spartanburg, S.C. and Waterville, N.S. truck tire facilities. Most of the investment was for new and upgraded equipment.
U.S. military tires are produced in Michelin North America's truck tire facilities in Spartanburg, South Carolina and Waterville, Nova Scotia. Michelin has received a $10 million-plus contract to produce HMMWV (Humvee) tires at its Fort Wayne, Indiana plant. The new tires will significantly improve the evasion and load carrying capabilities of the vehicle. To the extent that passenger and light truck tires are included in the ground tire contract, those can conceivably be produced at several of Michelin passenger and light truck plants across the country.
Delivery standards for the ground tire contract call for a sliding scale of delivery times, based on the priority of the types of tires and geographic location. The fastest delivery will guarantee priority tires within two days. The maximum acceptable delivery time, for non-critical applications, is 10 days. The U.S. military has established the priority levels within that range that Michelin will meet.
“This contract is recognition of the superior quality of Michelin tires, and the technical leadership of Michelin in the design and manufacture of tires adapted for military vehicles of today and for the future,” said Minguet. “We're proud to expand on this strong relationship with the U.S. military by now taking over the total logistics function for 100 percent of its tire needs.”
Manufacturer of Honor: Burton Snowboards
Finance is to trade as gasoline is to an engine, the stuff that drives the whole machine. This can pose problems for smaller businesses. Typically, as their supply chains go global and stretch outward, the process of transacting settlements with their different independent vendors becomes more complicated and expensive.
Burton Snowboards, honorable mention Manufacturer of the Year, exemplifies how a small company with an innovative approach to trade finance can get an edge over its competition.
Jake Burton founded the company in 1977 building snowboards in his garage in Manchester, Vermont. The sport was in its inception, Burton one of its pioneers. “I was a complete loser in shop class in school,” he recalled, “yet there I was, working out of a barn in Vermont, figuring out how to manufacturer a snowboard. There was no road map. I combined some skateboarding and a little bit of surfing experience, then added some common sense.”
With the business booming (encompassing 800 employees world-wide), some 18 months ago the company was at an inflection point. While high-end boards are built in Vermont, the rest of the product line (life style soft-goods, bags) is manufactured and sold all over the world. In order to sustain this product flow and still maintain its reputation as the ‘leading edge' manufacturer of equipment, a new approach was required.
“The business was growing so quickly, we had to up the management of the process,” recounts Carolyn Rainville, Director of Sourcing. “The first decision was to expand the supply chain and take the product development guys out of it. In the past, the product team had to design product, figure out the market, do price negotiations with vendors, oversee sourcing and timetables.” Needless to say, with all those duties they couldn't devote themselves full-time to product.
Which is what the whole enterprise ultimately relies on. “If we can get better product to market,” continues Rainville, “we're going to help customers.” Supply chain is now handled by the expanded Sourcing, Logistics and Sales Operational Planning groups.
Equally important, with supply chains so extended, was the need to get products quickly to market from distant production sites in China and Vietnam. This prompted opening a 150,000 square foot distribution center in China (leased through its 3PL DHL) this year. “Our business is very seasonal with peak inventory in June and July,” explains Josee Larocque, Director of Global Logistics. “Rather than open another D/C in the U.S., we'll take advantage of what we have in China to get optimal transit time and pay the least cost to get to the customer.”
Maintaining this ever broadening supply chain was “very expensive, administratively difficult and time consuming to manage,” explains Treasurer Tom D'Urso. Then he was cold-called three years ago by a salesman for TradeCard, asking him “how would you like to be able to eliminate letters of credit and also become a profit center for payments to your vendor?” He took the meeting and now Burton manages the bulk of its trade finance through the TradeCard platform with less and less LCs. Automation of the payment process (“I now know where I am in the payment process with each of the vendors”), along with offering the option for vendors to receive payment in as little as 10 days after shipping, has significantly streamlined vendor relationships.
“We have learned how important the supply chain is becoming,” concludes Rainville. “Big companies have already known about it but the action sports industry is just getting into the supply chain. A company like ours puts so much time and money into product and marketing but the end game is still the same—customer satisfaction. Which means we've got to get the product to the customer.”
Manufacturer of Honor: DyStar
Sports apparel customers might never realize this but getting trendy colors that truly matches your wardrobe is a technology and supply chain challenge than spans the global from old fashioned indigo dye plants in India to high tech research centers in Germany to dye manufacturing in China to support the textile manufacturer from China to Italy.
DyStar, owned by Platinum Equity, is a World Trade Manufacturer of the Year for its ability to successfully manage such a diverse, complex supply chain.
Created through a series of mergers and acquisitions involving dye divisions from many global chemical companies, the bulk of DyStar's facilities originally resided in Germany or North Carolina, the U.S. epicenter of the textile industry.
But times change. China is now the ‘world's closet' with its textile industry representing over 30% of the world's trade. In this China-centric model, moving dye (a heavy bulky product) to the textile manufacturer became too expensive relative the overall shrinking cost of textile production. The pressure of short lead times to the stores also complicated matters (the journey from northern German ports to Shanghai takes weeks). Then, of course, is the matter of cost: average hourly U.S. worker wages are approximately $18.00 for the non-union jobs prevalent in the textile industry, vs. China, less than $2.00.
The textile industry has gone through wrenching changes with huge generational sagas of lost companies, jobs, and environmental issues
Differentiation is the key to surviving, even after achieving supply chain advantage.
Therefore, DyStar's approach is instructive to others not just delivering superior products but technology services to the client. In DyStar's case, these services include color fastness tests and analytical services to make sure the manufacturing/dye application processes can really work. They then can suggest corrective action on process and equipment technique. All of this allows their customer to meet lead-time requirements for the market and save money (no rework, or quality problems). wt
Manufacturer of the Year Honorable Mention: Hasbro
Hasbro, Headquarter in Rhode Island, is the source of some of America's best-known ‘celebrities' such as GI Joe, Sponge Bob and Mr. Potato Head. But for the world's second largest toy maker (and publisher of Monopoly), delivering these guys to market is a global enterprise.
Creating such global brands, and managing the manufacturing of thousands of tiny little parts associated with them, translates to seeking the low cost manufacturing alternatives.
But the reality is that many of the Hasbro products, with their roots in the early days of the last century, have some genuine uniqueness to them that defies outsourcing. Thus Hasbro has been selected as a Manufacturer of the Year for its leadership in managing ‘dual' supply chains that are both global and national.
Though many of the toys and small plastic parts are made in China, many of the products are assembled in Massachusetts. Hasbro Far East (HFE) manages across the millions of parts, hundreds of trading partners, Patents/IP, supplier contracts thru to Hasbro's market facing departments in North America.
Axis and Allies, a Hasbro game, is a prophetic product title for this global company. It is in a sector that has attracted criticism, both as an exporter of U.S. jobs and from organizations like Human Rights Watch, which monitor the toy business for low wages and concerns about the use of prison labor. In Hasbro's case, however, the company stands out as an example for others through its corporate policies to support global business ethics.
To manage all the nodes in its supply chains, Hasbro relies on technology. Given the demand surge of their business (think Christmas morning!), supply chain efficiency is particularly critical to avoid excessive inventory carrying costs and work force management (managing surge work forces with temporary workers in the U.S. and contract manufacturing in Asia is vital to margins in the toy business). Supplier facing communication and workflow tools help manage supply and transportation coordination globally.
Globalization is not easy. Challenges abound in these environments: Global work forces, multi-channel management, counterfeiting and piracy, maintaining a good reputation within the countries you work in—Hasbro is a leader in this.
Now, Sponge Bob Square Pants represents the new international man. Unlike Mr. Potato Head (who is purely U.S.-made) he is a true international citizen, made in Asia, but loved in the U.S. wt
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