The Supply Chain of the Future – Tomorrow's Vision or Today's Reality?
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Metamorphosis of a supply chain
Few people would ever think of comparing a supply chain to a butterfly, but the metamorphosis from caterpillar to a thing of beauty is an appropriate analogy for the evolution that's taking place at Motorola Inc.
The Fortune 100 telecommunications company, best known for its cellular phones, is transforming a collection of separate, independent operations into an integrated and cost-effective global supply chain. To lead that effort, Motorola tapped Stu Reed, a former IBM executive.
Reed, now executive vice president for the Integrated Supply Chain, joined the company in April of 2005. He was charged with leading Motorola through the process of linking supply chains strung across the globe to achieve efficiencies in logistics, manufacturing, procurement, and quality. "My job as the leader was to provide the vision," he says.
That vision was of a supply chain that would support growth and create value for Motorola, focusing on the three "Cs": cost, cash, and customer service. In Reed's view, the supply chain's support of these three areas is critical to the company's success. First, cost improvements enable Motorola to price its products to win business. Freeing up cash through efficiency improvements provides capital for business growth and acquisitions. And finally, customer service enables the company to retain existing customers and gain new ones.
It didn't take long for Motorola's supply chain transformation to begin paying big dividends. From 2005 to 2006, the company witnessed a 45percent increase in quarterly revenue per supply chain employee and an 82-percent increase in quarterly units shipped per supply chain employee. But that's just the beginning. The metamorphosis is not yet complete, and the company expects to see further, continuous improvements.
The task facing Reed would be no small challenge: Motorola, based in the Chicago suburb of Schaumburg, Illinois, is truly global in its business scope. In 2006, the United States generated just 44 percent of Motorola's worldwide revenue. Europe accounted for another 15 percent and Asia (excluding China) 11 percent. China alone provided 11 percent of the company's global revenue; Latin America brought in 10 percent, and other markets accounted for the remaining 9 percent.
A booming market for mobile phones helped Motorola tally huge sales increases in the past few years. In 2006, the company's three major business units reported a total of nearly $43 billion in sales, a significant jump from the $35 billion reported the previous year. Motorola's Mobile Devices unit, which makes cellular phones and handsets, accounted for about $28 billion in sales last year. Its Connected Home Solutions business, which makes digital entertainment and communication products, generated $3.3 billion. The Networks & Enterprise division, meanwhile, generated $11.2 billion in annual sales of such products as mobile phone infrastructure and network equipment, radio frequency identification (RFID) technology, and two-way radios used by police officers and firefighters.
With so many different product categories, Motorola over time had developed a far-flung, multifaceted supply chain structure. As recently as 2004, the company was sourcing from 47 countries, and the six business units it had at the time rarely shared facilities or resources.
The telecom giant's worldwide growth spurt brought these and other supply chain issues to the fore. In 2004, the heads of the various business units' supply chains approached Chief Executive Officer Edward J. Zander and recommended that the multinational company streamline its supply chain. Zander agreed, and Motorola began consolidating its six business units into four (later pared down to the current three divisions). In need of a leader for that effort, the company went outside its own ranks and recruited Reed for the job. Reed had spent 20 years with IBM, capping his career there as vice president of worldwide manufacturing for IBM's integrated supply chain.
An integrated supply chain requires that product design, procurement, manufacturing, logistics, and customer service all work in sync. When he joined the company, Reed says, there was no integration to speak of because each business vertical was narrowly focused on its own objectives. "We weren't even speaking the same language," he recalls. "There wasn't clear agreement on key metrics and accountability."
Reed kicked off the integration initiative by identifying six priorities that the company would pursue simultaneously. One of those priorities was to bring the business units' various supply chain teams together and have them identify "best in class" processes that could be rapidly replicated throughout the organization. For example, after canvassing all of its factories, the manufacturing tools team identified a portfolio of 20 best practices. The team selected five highimpact practices that could be easily implemented, and then rolled them out at all of the sites. In another case, the work-in-process inventory management team identified five practices that had enabled one site to achieve benchmark levels of work-in-process parts. Those methods were later deployed at other company sites.
Two years ago, this kind of idea sharing was rare, but it's become a permanent part of Motorola's approach to doing business. "We've created a culture where we encourage the teams to 'steal shamelessly' from each other," Reed says with a smile.
A second priority in Motorola's supply chain transformation was rationalizing its supplier base and strengthening relationships with the remaining key suppliers.
Prior to Reed's arrival, each business unit independently solicited bids from suppliers—sometimes issuing bid requests to the same suppliers for different products. Their focus, moreover, was on cost alone.
"We weren't really doing the best we could, and I'm sure we weren't the best of partners," Reed says. "All we did was beat on [suppliers] for costs, but we didn't work collaboratively."
To regain its suppliers' trust, Motorola adopted an approach it dubbed the "Rapid Sourcing Initiative," or RSI, under which all business units would treat vendors in a consistent way. One of the principles of the RSI program is to help suppliers identify ways to reduce their costs—and pass on the savings to Motorola.
The company's business units, moreover, now work together to leverage their volume when soliciting and awarding bids. In fact, Motorola currently bestows 91 percent of its $26 billion procurement spend on approximately 150 suppliers.
But those suppliers had to earn the right to continue to do business with Motorola. A third element of the company's supply chain strategy was quality improvement. Motorola wanted to put an end to what it calls "spills," or quality problems (such as a misplaced label or a defective part) that "spill" out of its operations and directly affect its customers.
An investigation found that 51 percent of the quality problems reported in manufacturing or in the field could be traced back to the original suppliers. Motorola took action. Suppliers that wanted to continue doing business with Motorola were required to develop "quality renewal plans" to ensure craftsmanship. "We drew a line in the sand," says Reed. "To enter this game as a preferred supplier, you have to be a quality provider of the products you're bidding on."
Today Motorola awards contracts to suppliers that meet its tough quality requirements. The company also has instituted a performance scorecard system to measure compliance with its procurement standards. "We said to our suppliers, quality is number one," Reed explains. "We started to measure, and people lost business for not performing. People who didn't have quality products lost out as we consolidated our supply base."
The renewed emphasis on quality has paid off handsomely: To date, Motorola has achieved a 30-percent reduction in "spills" and has cut in half the number of suppliers' defects, as measured in parts per million.
Focus on commonality
Optimizing its manufacturing and logistics operations was another piece of Motorola's improvement plan. Over the years, the company had developed a sprawling supply chain where business units worked somewhat independently of each other. Even when they did share facilities, there was little coordination between them. For example, five different business units were using the same facility in Tianjin, China, yet all five were running different information technology (IT) systems and three had separate loading docks.
Reed recognized that Motorola could save money and increase efficiency by strategically consolidating plants and warehouses. "Simply put, you need mega-facilities that can build everything within the Motorola portfolio, and then you need facilities that can distribute into regions or markets," he says. "We developed our model, looked at each region, and then picked the best site if there was competition."
That exercise led to a number of facility closings that ultimately reduced the square footage of Motorola's manufacturing and distribution operations by 40 percent. Today the company operates 16 manufacturing and distribution facilities in 10 countries. The remaining factories often produce products for more than one business unit, and they engage in lean manufacturing practices. The distribution and manufacturing teams are encouraged to exchange ideas and share best practices. "Our objective is to have a common footprint and common approach across all facilities," Reed says.
The fifth component of the supply chain transformation involved leveraging the company's expenditures on IT. In the past, the business units had acted independently when buying software and other technology. That practice not only led to variations among the business units' systems but also meant that the quality of those systems was variable. Reed wanted to bring consistency to this area, too. "We knew we had enough tools that we could pick the best of the best," he says.
Motorola's supply chain chief told his direct reports that they could only conduct five IT projects a year— and they had to be projects that would drive commonality across the organization.
Thanks to that tough-minded and practical approach, 90 percent of Motorola's IT dollars are now being spent on commonly focused projects that help the various parts of the organization run in sync. The company is no longer spending money on one-time applications for a single business unit. "We've held our IT spending flat, and we've become more effective with it," says Reed. For example, Motorola is now developing a single engineering-data system for all of its business units. In another case, manufacturing is working on a centralized system for parts purchasing, and it has begun field-testing an advanced planning system in one business unit that will later be rolled out across the organization.
The sixth and final item on Motorola's supply chain agenda was to create a business culture that prized taking action to drive organizational efficiency. "We said that a strategy that was 80-percent accurate and deployed rapidly was a better approach than a 100percent accurate strategy," Reed says. "By the time you figure out the 100 percent, the world has changed, and you'd have to start over. We shifted the orientation from talking to doing. Judging from the results, we think it's working."
Motorola's supply chain transformation is still in progress, but results to date have already allowed the company to meet the goals it set in regard to the three "Cs." Customer service levels have markedly improved, in part because Motorola has cut number of defective parts per million supplied parts, and reduced the halved the number of defects in its total "spills" by 30 percent, units in factories by 20 percent. In addition to boosting product quality, the company has also improved delivery times for shipments to its customers. Some business units have made great strides, moving from a 30-percent on-time delivery rate to the mid-80-percent or low 90-percent range.
In terms of cost, Motorola's Integrated Supply Chain initiative produced a 40-percent improvement in material expenses, product quality, and manufacturing efficiency from 2004 to year-end 2006. Moreover, because its supply chain now operates more efficiently, the company holds less inventory, which has freed up cash. In fact, Motorola saw an 18-percent improvement in inventory turns from 2004 through 2006.
It all adds up to some impressive numbers. Supply chain productivity has risen by 71 percent without adding staff, Reed notes. This improvement is even more impressive given the growth in Motorola's annual sales. "We have achieved more with fewer people, with better quality and at a lower cost," Reed says.
But Reed has no intention of slowing the pace of change under Motorola's Integrated Supply Chain initiative. He has made a commitment to the company's chairman that supply chain activities will achieve a 36-percent improvement in productivity in 2007. He expects those gains will come through a continued focus on key metrics, such as inventory turns, productivity per employee, and further reductions in manufacturing and logistics costs as a percentage of sales. "Great supply chains are maniacally focused on a few set of metrics, where there is a great transparency to those metrics and full accountability for those metrics," he asserts.
It's safe to say that at Motorola these days, the value of having a great supply chain is recognized at the very highest levels. "The best-kept secret over the past several years," CEO Zander recently told financial analysts, "is the phenomenal work Stu (Reed) has done in Motorola's Integrated Supply Chain."
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