'Big Bang' Works Best

When it comes to supply chain improvements, bold action yields a bigger ROI than incrementalism.

Last year's merger of Hewlett-Packard Co. and Compaq Computer Corp. gave rise to more than just a bigger company. It also presented an opportunity for the combined corporation to streamline processes and cut costs, especially in the supply chain.

The new HP delivered $3.5 billion in reduced costs one year after the merger, the company says. Of that, $1.5 billion was associated with supply chain reductions. Could such impressive results have been achieved without going through a huge and tumultuous merger?

A paper published recently by the management consultancy Booz Allen Hamilton Inc. suggests that companies taking bold approaches toward revamping their supply chains are likely to achieve better results than those that merely tinker with them. Those conclusions seem obvious to many supply chain and IT practitioners. But not every supply chain problem is a candidate for the "big-bang" approach, and most companies require some cataclysmic event -- in HP's case, the merger coinciding with a high-tech downturn -- in order to make it happen.

Booz Allen's survey of 200 industrial companies in North America, Europe, Asia and Latin America found that companies willing to "break constraints" -- consultantspeak for transforming supply chain management into a multidisciplinary process that cuts across departmental lines -- achieve 36% to 55% more savings than companies willing only to make adjustments within their existing supply structures. Why does revamping a supply chain yield better results?

A company's supply chain is a multifaceted entity, often including a myriad of transportation, warehousing and procurement relationships, practices and systems, as well as a company's vendors, customers and distribution systems. Tinkering with the supply chain might change just one or two of those elements, such as renegotiating trucking contracts or relocating distribution centers. Revamping the supply chain involves re-examining and completely optimizing the process from A to Z.

"Supply chains have typically grown organically and without comprehensive thought to consistency or the interrelated nature of the process," says Bruce Blitch, CIO at Tessenderlo Kerley Inc. (TKI), a chemicals company in Phoenix. "Tinkering [with] a few links doesn't necessarily make the whole better. In fact, it may even make it worse by focusing the strain on the weakest links. You can't expect revolutionary change from an evolutionary process."

In the case of HP, the company consolidated 40 separate geographical and product-line supply systems into five generic supply chains based on common attributes, according to Dick Conrad, HP's senior vice president for global operations and supply chain services. HP's formerly decentralized supply system and Compaq's relatively centralized model were discarded in favor of a pragmatic approach based on individual supply chain needs. And 70% of the company's logistics providers were replaced.

Catalyst Required

"Major improvement in an organization's business processes usually requires a catalyst," says Blitch. TKI's catalyst came in the form of an SAP R/3 implementation five years ago.

"Implementation of SAP as an enterprise information backbone meant that we had a chance to review business processes from a macro perspective, as opposed to the usual day-to-day basis," Blitch explains. "We sat down as a group and talked in a quiet environment in a room full of whiteboards. Once we got the whole supply chain process down, we saw that it was a spider web with so many interconnecting pieces that there was no way to deal with one segment without bringing it all together."

So TKI consolidated its customer service, distribution and inventory management functions -- formerly handled by separate departments -- under a single head. Blitch says the benefits of that integration included greater visibility of inventory, reduction in transportation assets and costs, and an improved ability to react to supply chain changes. "Disruptions that formerly would have been a challenge to overcome, such as product outages, customer requirement changes or rail carrier transportation disruptions, are now dealt with by a single organizational entity," he says.

The revamping of HP's supply chain likewise took place in an atmosphere of quiet contemplation. "Prior to the merger, we picked several senior executives from both companies, exonerated them of their former duties, and quarantined them in a 'clean room,'" recalls Conrad. That group's accomplishments included identifying the two companies' common parts and lowest-cost suppliers, which allowed the merged company to take advantage of lower prices and save $300 million.

'Burning Platform'

Other companies don't have the luxury of meditating on the supply chain in a rarefied atmosphere. "From what I have seen, major changes come when a business is in crisis from a shareholder value perspective or when it is in danger of losing a customer," says Robert Benny, director of systems and process integration at Motorola Inc.'s Semiconductor Products Sector, a $4.9 billion annual business based in Austin. "When the business needs to be turned around, it becomes imperative to do business differently."

A major crisis, or "burning platform," as Larry Lapide, an analyst at AMR Research Inc., puts it, forces a company to focus on a particular issue. For example, "some companies got burnt as a result of the West Coast dock strike last year," Lapide says. "They realized they could no longer count on their supply from the Far East. They needed to figure out how to operate their supply chains without disruption."

When a strategic issue arises, notes Benny, the corporate executive level is galvanized to drive major change from the top down. CEO participation in supply chain transformation was one of the key success factors identified in the Booz Allen report.

Big-bang supply chain projects may produce a better return on investment, but the reality is that in tough times, CIOs seek smaller victories.

Because of the economic downturn, buyers have been less receptive to large-scale supply chain IT projects that require long, complex implementations and internal change, says Romala Ravi, an analyst at Framingham, Mass.-based IDC. Instead, Ravi says, there's a clear preference for small-scale projects that fix immediate problems and have a quick ROI.

Benny says that he's a "big supporter of the concept of breaking constraints" and that such projects generate "a great deal of excitement, fun and challenge," but he adds that not every problem represents an opportunity for that kind of project. "There are many times when a series of five or 10 smaller Band-Aid-type projects can add significant value," he says. Smaller projects often focus on specific customer needs and requests.

Lapide says there's a trade-off between the big-bang and Band-Aid approaches. "You can generate savings of 5% to 15% when you implement point solutions for transportation, warehousing or order management," he says. "The downside is that achieving departmental goals might defeat company goals. Lowering transportation costs might be bad for customer service," for example. A company that implements a transportation management program that consolidates outgoing shipments into full truckloads, for instance, will save on transportation costs, but its customer service might suffer because deliveries will be slower.

Implementing supply chain management on a cross-functional basis, on the other hand, allows "the whole to be greater than the sum of its parts," according to Lapide. "But the bad news here is that now you need to change what each department does and to get them to work better with other departments," he says. "Putting a new business process in place means changing people's jobs and getting them comfortable with that. It won't work unless you put a great deal of effort into change management."

HP's Conrad acknowledges that the big bang isn't appropriate for every time and place. "You have to balance the need for fundamental change against meeting customer requirements," he says. "You can't disrupt customer service or detract from revenues for the sake of revamping the supply chain."

In the absence of optimal conditions, Conrad suggests embarking on a continuous improvement approach. "If you are constantly fine-tuning your results, there is really no discernible difference over time," he says. "But when the company is undergoing some other fundamental change, that is the time to seize the opportunity and jump ahead in the marketplace by restructuring."

Besides coinciding with the Compaq merger, HP's supply chain efforts also benefited from the high-tech industry downturn, according to Conrad. "Had tech been booming at the same time," he says, "it would have been like changing engines on a 747 while it was still in flight."

Buxbaum is a freelance writer in Potomac, Md. He can be reached at pab001@aol.com.

Copyright © 2003 IDG Communications, Inc.

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