Day 3: Lenovo Goes About Creating the End to End Transparent Supply Chain
On the third day the team visited the Lenovo “Green Data Center”, and learned of how Lenovo is working to create their “converged” network servers that are on the leading edge of being focused on sustainable high speed efficient performance.
Lenovo acquired the Data Center Group from IBM and moved the entire organization to RTP in October 2014. The Personal Systems Group is headquartered in Beijing. Lenovo is $45B in sales, with 55,000 employees in over 160 countries, and was named one of the top 100 best global brands. The head of supply chain for DCG is Tim Carroll, with direct reports of John Gannfors (CPO), Howard Katowitz (Planning and Execution), and Jerry Gross (Global Logistics). The group also has Ben Massey who is in charge of Customer Fulfillment (end to end), and has all of the Geo leads who sit around their world. Their responsibility is to be the leaders into that geography for the sales team.
Planning and Execution (Howard) owns planning, inventory and production, with Logistics (Jerry) owning inbound and outbound. But in the end, planning is responsible for all delivery KPI’s. “If you are out – it is my fault.” Howard noted that “Ben’s group doesn’t forecast perfectly, and it may also be a supply or quality problem, but the Geo Lead is the person who gets other engaged and brings all discipline together at once. Planning does allocations, but Ben is responsible for the global sales organization, but I know the difference between a firm customer order and a positional order”.
Managing inventory cost is always an issue, and it is often driven by a number of factors. For instance, flash memory is sold out globally, and as more hard drives go to flash memory SSD’s, it is becoming very constrained and will get worse. So procurement will buy ahead, and work with suppliers to understand the situation in the market, and that may drive up inventory in one sector. The big priority is on “protecting supply”. This may take us over budget in a given quarter, but we all know where we are in terms of our cost targets and KPI’s.
Lenovo has predictive models in planning and forecasting around run rates, seasonality, key deals with clients, etc. that are focused on protecting supply and product transitions. It is key to understand “where we invest our money and place our bets”, as P&L’s are managed at a geo level. Howard notes that “We are always battling something. When we are focused on inventory and Excess &Obsolescence (E&O) you know we are not doing well. If I am chasing supply, are doing great!”
There is a lot of flexibility in production planning. Lenovo can build a product in multiple locations, and can balance supply even though some sites are further away and transportation can flex. Howard’s responsibility is also to balance excess from one with to another, and identify where there are problems. One individual, Heather Holt, will meet with counterparts in sales to understand what is happening in terms of products ramping down or up, and get this from the people on the ground in different locations. We see clients shifting all the time, and we need to adjust planning recommendations to control inventory. We hae a single master planner for the system line of business globally, and centrally plan for the entire world. Lenovo uses “Steelwedge” software to bring all inventory visibility together. It is fed by SAP but comes together in an interface. This goes beyond inventory visibility and identifies potential impacts on inventory based on world events and provides a powerful tool for future planning. You can see what is getting impacted and avoid having to make phones call, instead seeing instantly what you need to be working on directly by consulting your smart phone. Howard notes that “Inventory is like waves in the ocean…we can only be as good as we can be within the context of this environment. I may be carrying inventory for supply I wouldn’t normally take, but we have to buy ahead to avoid cost increases. We can be carrying 4-5 weeks of inventory, but over the 10,000 SKU’s this will vary significantly.”
Transportation costs will vary a lot as well. We can put as much heavy stuff on boats as we can, so long as we can support the SLA’s with our clients. We can also build a product anywhere and ship directly from the plants, as most of our products are build to order, with a 3-4 week order entry to delivery day. OE to ship is about 5 days. We have a VMI hub for each plant where suppliers can store the material, and have different levels of staging. We don’t own the inventory, but we can pull it in advance if we need to.
Supply base schedule dates are based on two factors. We have products and families that get an SLA date. We know the product is available, and industry standard, and can be shipped in 7-12 days. But in other cases, we don’t plan for the in-house, low-runner products, and these will require a manual leadtime schedule. With 1000 things to forecast, we try to incentivize people to order from what is standard, which is a short 7 day leadtime vs. 25 days.
At Lenovo, manufacturing is considered a competitive advantage. Lenovo pulled everything back inhouse as we believe we can control our own costs if we manage them. We have experience and low turnover rates that nobody can match. We are able to ensure that we are always touching the customer, and because we pay a bit higher we have lower turnover, a key factor in productivity. In the end our cost per box and price per box is lower than our competition, even though everyone pays the same for the components.
Howard notes that “Supply Chain is all about speed, and we have a very innovative development team that is thinking about how our products are agile, in terms of converged infrastructure (networking, storage, and computing all in one rack). This is the future of the server market. Our development team spends a lot of time to reuse as many components as possible, but a lot of the big leaps in products are technology driven. The CPU Intel architecture changes are driving a lot of the hard drive technology, and it is tough to re-use a lot of the components that are technology-driven.
The nature of the public cloud is also changing everything in the ecosystem. Companies are no longer focused on building their own IT infrastructure, and are moving to hyper scale. The impact of this I that Lenovo will be selling to fewer providers of cloud computing. The virtualized, hyperconverged catgory is growing, which is leading to a “hyperscale mass standardization”, and the need for strategic integration capabilities. Hyperscale is, in Howard’s opinion, the biggest potential headache for Lenovo, as it will change everything. As nobdy wants to manage their own IT servers, they will want the big guys like Amazon, Ali Baba, Facebook, Google, and Microsoft Azure to manage all of these clouds. Howard notes that “these guys don’t do a god job of forecasting at all! They place an order and they want it NOW, and are driving huge volumes of sales now and in the future. If you can’t do huge orders with zero leadtime, they they will go find someone else to do it. These companies also have good realtionships with storage providers, as well as contracts with Seagate and Sandisk, and understand the markets much more. They can tell you which specific hard drive they want, and require that it be customized to their requirement (even though it is a commodity item!) They won’t want to order from our standard portfolio, but will want to tweak the motherboard, server size, etc.
Lenovo’s vision is to become the most trusted partner in the Data Center market.
“Our supply chain principle comes down to removing all distractions that inhibit the creation of value and drive excellence in customer satisfaction, revenue, cost, and cash flow. We will achieve this by ensuring that supply chain is a competitive weapon, that begins with an unparalleled customer experience enabled by an agile supply chain. It requires the ability to execute efficiently in a mass customization environment, while providing strategic integration capabilities for our clients. We are enabled by talented people, as well as strategic IT partnerships and capabilities, (e.g. Elementum). We don’t want our people to have to worry about fulfillment. We are pursuing this strategic vision with a very flat organization structure, that drive speed in decision-making and ownership of decisions at all levels – there is little bureaucracy – don’t ask, just go and do it! We don’t have time for a lot of approvals. Make a decision with 60% of the information. We tried merging with the PC division, and form one big supply chain to drive cost savings. We did this in 5 months. We realized it wasn’t working, because the procurement and IT guys in PC’s looked at it differently then the server guys, and it was too fragmented. But it only took 1 ½ years to first merge it and then switch it back to the way it was! Not many companies can work this quickly to make organizational changes. It would have taken 15 years at IBM. But Lenovo is willing to try different models and we did wind up taking a lot of cost out of manufacturing, so we kept that part of the structure for manufacturing and distribution, but for supply and demand where you are buying different hard drives and CPU’s it made no sense as the volumes are so different. We were having negative customer experiences, and once we decided to make the switch the customer sat problems disappeared in 3 weeks!”
“We have a digital operations strategy that is focused on end to end integration. We have a mature S&OP process, and our forecasting has to be collaborative to allow scenario modeling and analytics. We can’t forecast for hyperscale clients, but if we stay close to them we can be more responsive. We use social networks, customer surveys, Twitter, and customer reviews to collect data and monitor our customers. Howard notes that taking all of these data and figuring out how it will impact you cannot be determined with a single tool. You have to go to multiple people and multiple geographies, and the only way to make it useful is to digitize it and ensure it influences your decisions. We can’t do it with 5000 messages on our smart phones – there has to be a better way.”
“This has led us to begin working with a trusted partner, Elementum, to focus on speed, velocity, and being agile. Elementum is constructed as a series of apps, including the modules of inventory, transport, manufacturing, and source. Each of these apps focuses on activities within their domain. We began by enabling the source app, which allows us to see wehre all my suppiers and DC’s are located an what things are going on. It provides end to end views of all the nodes of our supply chain. You start with the supply chain nodes, and then link the product graph, to enable monitoring of events – typhoons, etc. – and what suppliers could disable them. We then get notifications on our smart phones and know if something will affect an area, and the suppliers in those parts, and how to respond.”
“One of the key features is the “issue manager”. All people involved or impacted by an issue are attached to it – and we quickly get a view of the world and know what the status is and what our specific situation is. This allows us to generate options. For instance, if we learn that supplier A is okay but B’s test facility is down we can determine to substitute parts from B by A. And can move it from yellow to green, and quickly get all the information available. We know Lenovo has their own version, an Elementum aggregates all of our information plus those of others and integrates in a way to create “crowd-sourcing” information. For instance, we will know that it normally takes 4 weeks to ship from Shenzhen to Mexico, but because of delays it is 5 weeks in Transport. Our providers can give us estimated days of delivery, but Elementum will give us information that there are delays in the shipping lines and expect it to be a week late! This is a great way to integrate all of those issues that impact us in the world. And the more people that join, the better the aggregation of views and the better information you have. Soon we will have suppliers also inputting information. They are working on a fifth app called Client that will work for online shipments.”
“We are seeing that there is variation in the level of transparency and willingness that suppleirs have with respect to Elementum’s databases. Thirty suppliers will say yes, but others will say “I need to learn more”. And others don’t respond. We argue with them that the benefits are there will be fewer touches, and this should reduce the amount of time sending emails and reduce miscommunications. It will all be in one spot. Some people see it quickly, that I won’t have to field 10 calls from Lenovo, they will be able to see where the shipment is right now, what the ETA is, and in the Inventory app will know it is delivered. But this is an education process. Elementum presents a single world where everyone sees everything that everybody else does! We are also seeing that we will have to coach not only our own but also our suppliers’ executive team on the cultural change that goes with transparency. Elementum is real-time information with a single view of the world, and the behavior that accompanies this requires that people must fend off the need to send mail to people if they see an issue! Howard notes that “We need to give them time to work through it! That is the hardest part, and everyone needs to be counseled NOT to hit the panic button, and start asking questions. We need to use the 24 to 48 hour rule, which went something like “Don’t tell the boss for 24-48 hours until things have settled. Now I have to give myself that rule to apply! The transparency culture requires people to step back and tell themselves not to touch issues constantly.”
Elementum take data feeds from multiple sources, including SAP, inventory systems, and data from any system, anywhere, including social media.. We are able to identify suggestions we need, and can begin to see the news events occurring all over the world. The issues manager is being used for things that are not live, and also gives us a record of issues that helps us identify how long did it take to close issues, what success rates do we have in selling, scrapping inventory and analyzing the issues we generate. This pilot will continue to improve the system.
These issues were discussed at length by the executives, and several people discussed the possibility of getting together in a roundtable to share insights and experiences related to the Elementum experience.