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SUPPLY CHAIN

How to Create a World-Class Supply Chain

Lenovo has transformed three parts of its supply chain: 1. Implemented a

new direct ship enablement program that allows it to integrate new
partners quickly to meet new demand. 2. Added a new capability that
called “sell on the water,” which allows it to allocate product to customers
while a ship is in transit. 3. An end-point vision to leverage the platform to
go fully “touch-less” in order processing.

Jon Pershke, vice president, strategy & transformation, global supply chain, Lenovo | Oct 10, 2012

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Whether they are consumers or businesses, customers today have unlimited

access to information, which can be shared instantly around the world. As a
result, they want transparency and simplicity in how they order. They’re using
social networks, mobile devices, websites and influencers to make buying
decisions. And they’re using social media to broadcast their opinions.

All this makes it very tough on manufacturers. In particular, these raised

expectations have significant implications for how manufacturers should run
their supply chains.

Recognizing this, we recently worked with IBM Corp. to revamp key end-to-end
supply chain processes. We recognized that an outstanding customer experience
is more than just making ordering easier; it requires a fully aligned supply chain
to ensure complete satisfaction from the order to fulfillment to invoicing and
post-sales service.

We’re leveraging IBM’s Smarter Commerce as an important element in our drive

to create a world-class supply chain. Under that strategy, we’re using IBM’s
unified integration platform to improve significantly the way Lenovo does
business with its various trading partners and customers, resulting in a more
highly synchronized supply chain.

This has enabled us to transform three parts of our business:

1. We’ve implemented a new direct ship enablement program that allows us to

integrate new partners quickly to meet new demand.
2. We’ve also added a new capability that we call “sell on the water,” which
allows us to allocate product to customers while a ship is in transit.
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How Lenovo Created a World-Class Supply Chain

MENU 3. And finally, going forward, we have an end-point vision to leverage the SEARCH
platform to go fully “touch-less” in order processing. In this vision, there would
be no scenarios requiring manual intervention, regardless of how a customer
places an order.
Direct Ship Strategy vs. the Perfect Order

Lenovo’s supply chain strategy uses a carefully balanced mix of in-house

production facilities and outsourcing partners, such as original design
manufacturers (ODMs) and electronic manufacturing services (EMS) providers.
This approach gives Lenovo optimal supply chain flexibility, agility and cost-
competitiveness, while mitigating risk associated with market volatility.

Direct shipping is an important part of our supply chain process. It makes us

more customer-focused, improves order visibility and lowers costs. However,
execution can be challenging, particularly on orders for products built by
outsourcing partners.

This is a key decision for any OEM: Should they receive finished goods from the
ODM or EMS supplier, and then ship to its customers? Or should they ship
directly from the outsourcing partner to the customer?

Unless the OEM is doing some final assembly or packaging, it usually makes
sense to do direct shipments rather than introduce an intermediate stocking point
that may lead to increased inventories, costs and lead times. Within our mixed
supply strategy, the large majority of customer orders today are direct shipped.

As part of our new direct ship enablement program, we developed a highly

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standardized methodology for on-boarding ODMs and EMS providers, both for
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those using electronic data interchange (EDI) connections and those using the
web portal. The results have been impressive, with a more efficient process that
enables us to start up and integrate a new ODM or EMS in an average of 12 weeks.

We found that the key benefits of the direct ship program were reductions in
three categories: cost, cycle time and inventory. The result has been higher
margins, higher perfect order attainment and leaner inventories (higher turns).

Managing the Outsourcers

As we deployed the new platform, we studied a sample group of new ODM

partners to assess the benefits of the solution. We found an annual cost savings in
2011 of nearly $1 million, and order cycle time reduction of two work days
compared to the legacy process.

Further, one ODM that produces Lenovo notebook PCs and uses the EDI Direct
Ship enablement solution cut its cost per box by 1%, reduced its order cycle time
by five working days and improved quality by avoiding a second touch.

A major challenge, however, is carefully managing the outsourcing relationships

to ensure good performance. The customer’s perspective on perfect order
attainment is largely in the hands of these partners, but Lenovo’s brand and sales
suffer if things don’t go smoothly. Once an order is sent to an ODM, it normally
takes three days for the ODM to ship. Although there is some lack of visibility
during this period, Lenovo still can monitor this time window to measure
fulfillment rates within the cycle time. We’re looking to expand our analysis
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capabilities in this performance area in the future.

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With the help of automatically generated reports and purchasing information

updated daily by ODMs, we’ve greatly improved visibility to customer order
status. Once Lenovo receives the dispatch advice (ASN) from the ODM, it
immediately sends this electronic information to the carrier, along with the
routing guide and consolidation instructions. The latter two are fairly static, and
are selected when the ASN is sent. From this point, Lenovo has visibility of the
shipment all the way through to delivery at the customer’s dock.

Lenovo controls suppliers for both its own internal production and ODMs. Like
most OEMs that rely on outsourcing partners, Lenovo employs processes to
maintain confidentiality of negotiated volume pricing agreements with parts
suppliers while they produce finished products through ODMs. These partners
have visibility to approved suppliers, but not pricing, in many cases initiating
replenishment orders to the suppliers on behalf of the OEM. This gives us better
control of both spend and quality of sourcing.

Lenovo currently has about 100 customers that place orders electronically via
EDI. All e-commerce orders flow electronically via business-to-business (B2B)
links from a web portal to the Lenovo fulfillment system. Other customers place
orders via the call center or fax, but use EDI to report inventory positions and
usage. This process tends to cover very-low-volume customers.

With retailers, we now use a modified “pseudo” EDI process, but we’re migrating
to IBM’s B2B platform. The next step is to use a portal for smaller customers.
With this change, we expect on-boarding times to drop dramatically and this
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improvement will make it possible for Lenovo to shift more of the order mix to an
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automated B2B environment such as EDI/XML. 

Optimizing the Customer Order

One of Lenovo’s objectives in creating the optimal customer experience with its
supply chain is to enable “touch-less” ordering. Regardless of how a customer
places an order – EDI, web, portal, mobile device, etc. -- there should be zero
exceptions that require manual intervention.

In general, the level of touch-less ordering is much higher in mature markets than
emerging markets, which is to be expected. As Lenovo further expands our use of
EDI, portals and the web to do business with customers, we expect the percentage
of touch-less orders to increase over time.

By establishing a unified, global integration platform, we’ve eliminated some

“information black holes” that limited our ability to serve our customers. And in
fact, this improvement has enabled us to implement a new process, called “sell on
the water,” that gets product in the hands of our customers faster. With this
process, a ship can be loaded at the point of origin with product based on
forecasted demand, and then can be seen as a “virtual warehouse,” through which
we can begin allocating product to customers while the ship is in transit.

Previously, this was not possible because Lenovo didn’t have a complete view of
inventory. Now when a shipment is loaded on board a vessel, this event triggers a
receipt into a virtual warehouse location in the U.S. This allows allocation of
customer orders against the expected stock up to six weekssooner than actual
physical receipt of the goods in the warehouse.

The bottom line? With our advanced, stable collaboration platform implemented
with IBM, we literally have millions of transactions flowing through the system
each month with multiple trading partners. We have visibility into the entire
supply chain, which means we can now work smarter and make the data work for
us in a way that wasn’t possible before. This will be a significant leap forward in
our drive to be a leading supply chain and provide the ultimate customer
experience.

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SUPPLY CHAIN

The Solution to Transforming the Supply Chain: Back to Basics

It is critical to examine the basics of your supply chain before an

improvement strategy can be designed and implemented.

Udit Sharma | Jan 26, 2019

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Demanding customers, emerging technologies, global supply bases and ever-

changing market landscapes require companies to continuously adjust their
supply chains to stay competitive. Most supply chain executives find themselves
trapped in a vicious cycle where every new or newer technology presents the
panacea that the previous version could not address. To break the cycle, rather
than reaching for the latest technologies, some managers have gone back to basics
and have emerged with lasting return and a competitive advantage.

The Issue

Over the last couple of decades, the Internet has made customers increasingly
more discerning and selective of products and services. Companies in all
industries are responding to customers’ changing needs by making their supply
h i il Whil ll l h i
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chains more agile. While all supply chain executives see the need to transform
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their supply chains to be more efficient, few are confident of the starting point.
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Most gravitate towards the latest technology solution, be it strategic sourcing

application, advanced supply chain planning software, manufacturing execution
system, or a warehouse management system.

However, in order to create effective change, managers need to start with the
basics before considering any technology enhancements and revamps. What
follows is an illustration of the value of supply chain basics focusing on MedD, a
mid-sized medical devices manufacturer and distributor. (Note: The name of the
company and some of the financials have been changed to protect company
information.)

The founders of MedD were considering selling their company to a private equity
firm. One of the founders wanted to improve profitability to afford them a better
market valuation. To do so, they focused their efforts on supply chain costs and
performance.

A recently hired supply chain executive was tasked to enhance the performance
and reduce the cost of the supply chain. With inventory fluctuating from $110
million-$170 million, an order fill rate less than 75%, forecast accuracy around
50% and an end-to-end lead time greater than 150 days, the number of areas to
improve supply chain performance were overwhelming. The supply chain officer’s
knee-jerk reaction was to revamp planning software technologies and focus on
better forecasting. However, he needed to look back to basics to find a solution.

The Solution: Back to Basics

It is critical to examine the basics of any supply chain before an improvement

strategy and trajectory can be designed. Companies should develop an end-to-end
(E2E) value stream map to understand their basic supply chain configuration and
performance. Figure 1 below shows the supply chain value stream for MedD.

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Figure 1

Basic value stream analysis quickly reveals the health of a supply chain. In the
case of MedD, the E2E product lead time of about five months did not give
leadership any reaction time to efficiently adjust to market changes. It also
became apparent that the majority of the production time was spent waiting in
various non-value-added activities: waiting for raw material replenishments;
waiting for goods to be manufactured by suppliers; waiting to be shipped to the
U.S.; waiting for value-add services in U.S. warehouses; and then waiting to be
shipped to the customer or the final consumer through e-commerce channels.

The supply chain E2E lead time also proved to be greater than 184 days. Figure 1
shows the breakdown of this time in value-add and non-value-add activities. Any
supply chain with greater than 100 days of non-value-added waiting time cannot
react fast enough to any customer- or competitor-driven changes in the
marketplace. This insight challenged MedD’s competitive position.

Armed with this information, MedD identified three major areas of non-value-
added time on which to focus the initial supply chain transformation effort. These
areas, with respective measurable goals, were:

● Reduce non-value-added supplier process time from 18.8 days.

● Reduce the non-value-added inbound transportation time from 53.3 days.

● Reduce U.S. warehouse dwell time before shipment to customers from 41.6
days.

Table 1 below shows the solutions that were developed for each of these three
areas by addressing basic supply chain principles.

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Table 1

Results

Organizations get back to basics by evaluating drivers of the end-to-end lead time,
targeting basic process changes within the four key areas of supply chain (Plan,
Source, Make and Deliver) and applying solutions to improve key area
fundamentals, which ultimately drive dramatic improvements in the end-to-end
supply chain agility.

By analyzing the E2E lead time and identifying areas of improvement in sourcing,
inbound transportation and planning, MedD was able to develop targeted
solutions, resulting in significant operational and financial gains (see Figures 2
and 3 and Table 2 below).

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Figure 2

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Table 2

Figure 3

In addition, E2E supply chain performance visibility allowed MedD to clearly

understand the limitations of current planning technology solutions that were
impeding refinement of their inventory levels both at the supplier and at U.S.-
based warehouses. MedD further detailed a roadmap to implement a technology
solution that enabled sales and operations planning and inventory level
optimization.

Ultimately, the new MedD supply chain executive created a successful

transformation of the supply chain in less than a year, enabling the company to
focus on the future with a nimble supply chain. Once supply chain managers
optimize the basics—from reducing E2E lead time and inventory to increasing
agility—they can effectively deploy the Internet of Things to enhance end-to-end
visibility, rationalize product portfolio and implement an advanced supply chain
planning tool to further secure and improve their competitive position.

Udit Sharma, managing director at business advisory firm Riveron, is

responsible for client service, specializing in supply chain improvement,
EBITDA enhancement and operational due diligence.

TAGS: CONTINUOUS IMPROVEMENT

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