In 1993, International Business Machines’ spectacular fall from grace led it to report a loss of $8 billion. Its turnaround under the leadership of CEO Lou Gerstner, who was appointed in the same year, is one of the most celebrated in recent business history. Today, IBM remains the world’s largest IT company and is the tenth biggest in the US. Last year it earned revenues of over $96 billion, almost half from its relatively young services business, and made a net profit of $8 billion.
In 2002, Sam Palmisano, Gerstner’s successor, announced that to support his strategy of turning IBM into an “on-demand business”, all of the company’s supply chain functions – procurement, manufacturing, logistics and fulfilment – were to be brought together into a single organisation called the Integrated Supply Chain (ISC), led by senior vice-president Bob Moffat. The aim was to provide a faster, more responsive service to IBM customers.
A recent report by Forrester Research, IBM Transforms its Supply Chain to Drive Growth, awarded the ISC a B grade overall in meeting its strategic objectives and said that, three years after its creation, IBM was “only midway in its journey to supply chain excellence”.
The global procurement division of the ISC is led by its CPO, John Paterson, a 36-year IBM veteran who has held the position since April 2000. The company spends around $45 billion a year on goods and services and has more than 3,700 staff in over 80 countries, including France, China, Japan, Canada, the UK and the US.
CPO Agenda caught up with him recently to discuss what the new structure means for procurement and how his own role is changing as a result.
When you heard about plans to create the Integrated Supply Chain within IBM, what was your reaction?
I was personally an advocate of it, because I had seen and was experiencing the benefits of taking supply chain disciplines and recognising them as a weapon that can add strategic value to the company. In the mid-1990s, we made a decision within IBM to reorganise and consolidate our procurement organisation around the world. We had a very decentralised organisation with more than 100 purchasing groups. Over the course of the next five years, we did a lot of process, IT and organisational work, and as a consequence of that were able to deliver substantial benefits to the company. So when it came to creating the supply chain structure that we have today, in my view the more we could do that, the better.
Logistics, fulfilment and manufacturing had also done a pretty good job in transforming themselves. What we hadn’t done was to connect them horizontally as effectively as we might. Our suppliers want to understand what is happening in IBM’s marketplace as clearly and as quickly as they possibly can. Supply chains that take weeks and months to send a signal from the marketplace to the supply base are almost by definition grossly inefficient. So when we decided we were going to make these horizontal connections, it created the opportunity for us to send that level of sense-and-respond information to our supply base much more quickly, much more effectively, and much more consistently than had perhaps been the case before. »
What were the core business objectives behind the ISC’s creation?
If you go back to the late 1980s and early 1990s, most of what IBM took to market was developed and manufactured internally. It was largely a hardware and software business. Certainly anything that was of value in the market was an internal creation and we guarded that jealously. Then the market and the business started to change and our supply chains became more complex, more far-ranging than they had been. Historically, all we had to worry about in supply chain terms was how efficient our manufacturing processes were. But clearly our supply chains today look very different. Now we are much more dependent on our external suppliers to provide ideas and capabilities, both in hardware and services.
What the CEO recognised is that not only is an efficient supply chain very important in terms of us achieving our business goals, but we could actually use it as a strategic weapon in the marketplace. That was the focus here; it wasn’t to make us operationally more efficient – as attractive as they might be – but really to unleash the capabilities of that integrated supply chain as a competitive weapon.
We don’t want to be a responsive, back-office function; that’s not our role in life. We have a lot of value and capability in this extended supply chain that can be brought to bear in helping IBM and helping our customers with issues they are trying to resolve. So that’s where we focus a lot of our time and attention.
What difference has the ISC made to the way the supply chain functions interact?
Because myself and the other leaders of the various parts of the supply chain are in the same organisation, we talk a lot more than we ever did; we understand a lot more clearly the positive and negative effects we can have on one another as we go about our day-to-day business. We are therefore able to make better balanced decisions on behalf of IBM, its customers and shareholders than perhaps we did before.
So you have to look beyond your own functional boundaries?
Yes, I think so. That would be an appropriate way to describe it. We get measured, and I get measured, on our supply chain performance, not on procurement’s performance. That is a very important element of what we’ve done here. We’re making decisions that optimise IBM as a whole and not that are necessarily good for procurement but bad for somebody else.
What have been your main objectives over the past couple of years in procurement terms?
We are always going to be focused on cost savings; that is a constant. Our focus for the past couple of years has been trying to create and establish what we describe as an “on-demand” supply chain for the company – one that’s much more responsive. In order to execute on that strategy, we have to work internally with other parts of the IBM community, including the rest of the supply chain, and very extensively with our suppliers.
Our view here as we establish this on-demand supply chain is that our relationships with our suppliers need to continue to evolve towards a status of interdependency. That is counter-cultural for most buyers: we want highly competitive marketplaces and low switching costs so we can optimise unit cost on a day-to-day basis. But given the nature of an on-demand supply chain, which implies tight and deep process and IT integration along each step of the supply chain, it’s unlikely that suppliers are going to make those kinds of investments if they think you are going to leave them tomorrow for the sake of a penny.
Has that meant a big shift in terms of the skills needed within your team?
It certainly does call for a different skillset. Releasing an RFP and looking at the prices that come back from three suppliers and determining which is the lowest is one skill. Managing these more complex, long-term relationships is a different set of skills. We have been developing those for several years in IBM, through a combination of internal education and training with a number of universities.
What about the key metrics that are applied to procurement?
No surprise that one of the key ones is how much money we save the company. We also measure that in terms of how competitive we are against the market. Satisfaction among IBM customers in the outside world is another key metric, given that the supply chain can have a profound effect on how satisfied customers are with the goods and services they get. The other area we are measured on is how well we are doing in selling our procurement capabilities in the marketplace. We have a business process outsourcing practice in IBM and that is integrated with our internal procurement community. So as CPO I have goals in terms of how well we are driving revenue.
That’s a fairly fundamental change in focus for procurement. How do you contribute to revenue growth?
Selling our BPO practice is one aspect, but I probably meet 100 companies a year that are IBM customers to share with them our practices from a procurement standpoint. Because if we can save money, they can save money. One Fortune 100 company I met didn’t have a CPO, and after understanding how IBM did procurement, they nominated one and I am mentoring that person on the best practices we use.
What about procurement’s relationship with other parts of IBM? How has that changed over the past few years?
I think it’s changed radically. We have historically had strong, collaborative relationships with our internal clients, certainly in our hardware brand. In the services business, which is somewhat newer, our knowledge of the supply base was not at the level it was in hardware. One’s ability to influence when you’ve got limited knowledge is not high. Because of the focus and investment we’ve made in the supply chain operation and the skills of our people over the past two or three years, we have a lot more positive influence than was the case before.
As a community across IBM, I think we have respect and credibility that we can add value and deliver on our commitments. But you have to earn that. You don’t get buy-in from the broader community unless you can describe and demonstrate the value you can provide to them. Nothing goes on in IBM with the supply base that doesn’t go through procurement, that we don’t manage, run and control. That’s because we’ve been able to demonstrate our value-add. We have a somewhat atypical procurement operation here in comparison to other companies we talk to. For example, we’ve got 700 engineers in procurement in IBM. That’s to ensure we are able to understand what’s happening in our huge supply base around the world and interpret that in ways that may be of benefit to us.
What evidence do you have to show that people’s perceptions of procurement have changed?
We have a number of mechanisms. First, we have a monthly detailed interlock process with all of the unit CFOs in IBM on how we’re doing against our cost commitments. We also run a very structured online customer satisfaction survey on a global basis where we ask people how satisfied or dissatisfied they are with the process. A few years ago the level of satisfaction was around 40 per cent. Now it is 82 per cent. I don’t think I want it to be any higher than that.
Why do you say that?
Because if we were satisfying everybody in IBM 100 per cent of the time, I would feel we were not doing our job. There needs to be some level of contention in the system to make sure we’ve got the right answer for the company.
Are there any areas of expenditure that you weren’t able to touch before that you are now?
If you go back several years the level of maverick buying was 40-50 per cent. Today that is 0.1 per cent and those are largely people who have joined us from other companies and don’t understand our process. That position is earned, we have a very good governance structure in IBM, but you can’t terrify people to comply over multiple years. We have to build capability that makes it easy and intuitive for them to engage with us and see the value we can bring.
What benefits has the ISC delivered for IBM so far?
The amount of money we’ve been able to save has improved. Last year it was in excess of $6 billion on the $45 billion we spend with external suppliers. Our inventory levels are at the lowest levels for 30 years – I think that speaks to the value of the ISC organisation, and our ability quickly to sense and respond to what’s going on, both in our marketplace and our supply base. There are times when you would like to get goods and services but they are not available from the supply base in the volume or at the time you want. We are much more effective at conditioning demand when those circumstances occur than we ever were before we created this supply chain organisation. And similarly, as I mentioned earlier, we can get changes in demand to the supply base much more quickly than was previously the case. We’ve generated through the supply chain community over $1 billion of incremental free cash flow for IBM and its shareholders.
What are the main challenges you’ve faced in transforming your procurement and supply chain functions?
I think they vary across the company. One of the challenges you clearly face in process and organisational transformation is defining and deploying a standard set of processes and IT solutions that enable a lot of what we do. That’s a big challenge because of the scale of it. In the early days, there was pushback from parts of the organisation. People want to have more control of their own business and they don’t appreciate intuitively that someone else can help them.
What I tell our people in procurement is that when somebody in IBM chooses not to engage with us, that’s our problem, not theirs. We haven’t found the right way to describe the value that they can accrue by being involved with us. So we try to be very clear about the opportunities they are missing by virtue of not engaging.
However, by and large I find in the company today a great willingness to partner, much more so than was the case 10 or 15 years ago. I don’t think there are any huge mountains that we have yet to climb, I think it’s just a question of continuing to drive our strategy forward as fast as we reasonably can.
Forrester Research recently gave the ISC a B grade for performance against its strategic objectives. Is that a verdict you share?
It’s a fair overall view. I think in our hardware business I would say we are probably an A, because we’ve been at it a very long time. In our services business, it would be fair to say we’re a B. We acknowledge that there’s a lot more opportunity for us to improve in that business going forward, and that is where we are spending a lot of our time and energy.
Can you give a specific example of where there is more work to be done?
Well, IBM’s services business is a labour-based business. We continue to focus on how we can make that labour much more effective and productive. One of the ways in which we are addressing that is by applying traditional hardware supply chain principles to that labour market. We criticise ourselves in hardware about the inadequacy of our forecasts, and everybody in our industry does, but at least we have forecasts. Typically in the services world that is not the case. We have established the processes to provide global labour-based forecasts that we can share with our supply base. That ensures that we get lower pricing than when you are doing this at a transactional level, but also access to higher-quality labour.
What can procurement do to make this “labour supply chain” more efficient?
We spend a huge amount of money with external suppliers on contract labour in various categories, and we’ve done a lot of work in terms of reducing the number of suppliers. Not so many years ago we had several thousand suppliers around the world in this space. Now we’ve got a couple of hundred. That’s more efficient for us and it gives our internal clients a lot more leverage with those suppliers. It also makes the suppliers’ life a heck of a lot easier when they can see greater volume and continuity in the business than they could before.
The forecasting activity that we have under way is a key ingredient in that, and we have built a series of applications and processes that fully automate the activity of acquiring labour within IBM. Internally, we call it our workforce management initiative and it’s going to give us a much better grip of the talent we have within the four walls of IBM. Procurement then feeds that with the talent from suppliers. When we have clients that need a particular skill, we can quickly find that person. It’s supply-demand inventory management activity – it just happens to be labour rather than hardware.
In terms of your own time, how much is focused on cost reduction and “traditional” procurement, and how much on the sales-based work you described earlier?
Five years ago it was 100 per cent on the internal IBM account. Now, I would guess it’s 60 per cent traditional and 40 per cent innovation and revenue growth activities. I can’t lose sight of the fact that today my number one client is IBM, and procurement has a set of responsibilities that we have to meet on behalf of the company. But increasingly we are going to spend a lot of time on this revenue growth and transformation activity in the marketplace.
Do you expect that balance to shift further over the next two or three years?
I sincerely hope so. I think we’ve got a very strong community that can continue to deliver the kind of results that IBM needs on our core purchasing role. But there is a huge market opportunity for us to take those skills and capabilities forward to help customers and prospective customers with their own transformational needs. I don’t think there’s anything like tapping into the experience of someone who’s been there before. I certainly don’t want to suggest that everything we’ve ever done has been a rip-roaring success; we’ve had our fingers burned, made our mistakes in the past few years. But in my discussions with prospective customers they say they value the voice of a practitioner much more than a salesperson or a consultant.
FACT FILE: IBM at a glance
- The world’s largest IT company
- Ranked No. 10 in the Fortune 500
- 329,000 employees in 175 countries
- 3,248 patents earned in 2004 – the most for any US company
- Net profit of $8.4 billion on revenue of $96.3 billion in 2004
Integrated Supply Chain:
- 19,000 employees (3,700+ procurement in 80 countries)
- 33,000 suppliers
- $45 billion spend in 2004 (47% of revenues)
BRIEFING
Procurement’s four imperatives
The key to our strategy is the alignment of our strategic actions into four imperatives, which can be applied to almost any procurement organisation:
Imperative 1:
Transform supplier relationships to be on-demand extensions of the company
Procurement should deliver on-demand solutions through a unique set of supplier relationships that can deliver exceptional value to customers. To sustain a competitive advantage and move towards an on-demand model, organisations need to redefine their fundamental supplier relationship model and develop a proactive plan to reach interdependence with key suppliers. This will require a new level of supplier relationships (“premier suppliers”) and an approach to certify on-demand suppliers. These premier relationships will be differentiated by the commitment to a true “win-win” relationship between both the OEM and the suppliers. Underlying this redefinition will be the continued drive towards collaborative and integrated processes, systems and IT infrastructures, and unique governance structures with these suppliers.
Imperative 2:
Influence and provide leadership to internal partners in the delivery of
on-demand solutions
This imperative drives collaboration and focuses on suppliers’, internal partners’ and the customer’s business strategy. By seamlessly integrating suppliers with the needs of a corporation’s individual business units, procurement will help to mould and influence product strategies, solution development, and life-cycle management. This can be a key competitive differentiator.
Imperative 3:
Achieve best-in-class operational efficiency and functional excellence
The procurement unit needs to be committed to driving operational efficiency by leveraging best-of-breed practices across the enterprise, and automating or eliminating low-value-add activities. Organisations need to take advantage of global resource capabilities and dynamically optimise the placement of workload across all worldwide locations.
Imperative 4:
Transform the global strategic sourcing process
This focus here is to leverage global opportunities, supplier optimisation, and full integration of supplier relationship models. Procurement organisations will need to have a consistent sourcing strategy that will enable it to support a world-class on-demand supply chain capable of providing industry-leading performance in end-to-end cost, quality and supply across the value chain.
John Paterson, CPO, IBM
Interview by Geraint John
