Microsoft’s ten year journey

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Microsoft’s supply chain has changed dramatically over the past decade, so to keep up with an ever expanding product base and on top of changing market conditions, agility and adaptability are paramount, according to David Warrick, general manager, manufacturing and supply chain EMEA and Asia Pacific (entertainment and devices division). The company moved from being a software company to a hardware and software company which forced it to re-evaluate and overhaul its supply chain.

“Microsoft has been on an interesting journey over the past ten years,” says Warrick. “If you’re just selling software and you get a problem you can release a patch and the problem is solved, but hardware doesn’t work in the same way.” This pushed the company to review its supply chain, which is now an integral part of Microsoft’s overall business strategy.

“I can firmly say that supply chain not only has a seat at the table, but now the table doesn’t exist unless we are there. Supply chain has become less of the guy in the middle and is now the guy at all ends. From our perspective, supply chain includes everything from the concept right through to after sales.”
Although he points out that the department is still called manufacturing and supply chain “so we still need to make that final step”.

Microsoft’s supply chain is now completely outsourced which has allowed it to move to being completely demand driven. The company now has 15 supply chain partners and around 600 suppliers around the world.

“We’ve been experimenting with different models,” say Warrick. “We’ve tried to consolidate the number of 3PL vendors we use globally…We’ve taken providers in EMEA and asked them to run our two distribution hubs, on top of that we have what we call FMV (Freight Management Vendors).

“We want them to use the best possible logistics solution in each area, the strongest in each region. DHL may be a global company, but may not always be the best option for the smaller regions. Our model allows us to pick and choose which provider to use depending on location and product. Is it successful?
Sometimes. We’ve had some major successes in difficult regions, but we’ve also had some calamities in relatively easy regions.”

When it comes to finding a suitable 4PL vendor, Warrick says: “We’re so tired of not finding a 4PL which offers the right level of service operation that we’re considering setting up our own company.”

There are mixed opinions about using a number of logistics providers compared to just one and Jon Chorley, vice president of supply chain and sustainability product strategy at Oracle, reckons having a “single logistics service provider is much more advantageous in centralising and standardising operations”.

However, Warrick was keen to point out that Microsoft “understood the limitations of outsourcing, so we have our people on the ground too. We have the final say. If we see things going wrong we will stop the line…Outsourcing is not abdicating – it’s still your name on the product so if it’s not right it is your responsibility.”

Triple A
He talks about the idea of a “triple A” approach to supply chain – alignment, agility and adaptability, the guiding principles of which are to:

  • Pick the right partners especially in an outsourced environment.
  • Know what your strategic value is and work out where it adds value.
  • Understand the difference between what you do and what you manage.

Henrik Hjalmarsson, supply chain transformation director at Findus Group, says Findus went through a similar transformation period following the merger of Findus and Young’s Bluecrest in 2008.

The company was keen to improve core business processes and strengthen information support, an important aspect of which was S&OP ownership and business planning to improve forecast reliability with one balanced and signed off supply, demand and financial plan. Additionally, the company wanted to improve decision making, strategy alignment, cross-functional alignment, service and working capital.

The core principles of business-owned S&OP are creating the S&OP strategy as a core business process, early adoption and “making sure S&OP is not seen as a supply chain process” according to Hjalmarsson.

Findus applied these principles together with its implementation partner StrataBridge and labelled the process Integrated Business Planning.

The company now puts the emphasis on the customer perspective when planning to create more robust commercial plans with a clearer proposition to the customer and consumer, which has improved cross-functional alignment and consensus around one plan. It has also driven better understanding of cause and effect and an improvement in service level due to alignment.

Key to any strategy is the agility to incorporate new business and products quickly and efficiently into the supply chain at any time. “It’s about accommodating the rapid scaling of data without compromising the effective distribution of information,” says Warrick. He uses the launch of Kinect for the Xbox as an example. The product was launched on 10th November 2010 in time for the Christmas rush and some eight million products were sold in 60 days, which is said to be the fastest selling consumer electronics device of all time.

However, Warrick says it was not heralded as a sales or marketing success, but a supply chain success, and thanks to its virtual supply chain concept, Microsoft was able to manufacture the product in China, sell, ship and deliver goods on time.

But Warrick is not resting on his laurels. “Xbox spent a long time in the red, but now we’re in the black there is even more pressure. When we were in the red it was still seen as an investment, now we’re being pushed.”

Constant re-evaluation and refinement are key to honing the right process, particularly in an ever changing and tumultuous market. It’s also important to realise when a complete supply chain overhaul is required, as Dell did in 2007.

The company set about moving from a regional structure led by regional divisions to a global organisation with one level of accountability for supply chain, design, manufacturing, cost, service and transport. As Bill Hutchinson, vice president of global logistics and fulfilment puts it: “one throat to choke”.

Critical to its success is a variable cost structure and a global IT structure. Through its segmented multi-channel supply chain, Dell reduced customisation and outsourced a number of supply chain functions, which it is now ready to leverage.

Hutchinson says Dell’s key focus areas are now: Our model allows us to pick and choose which provider to use depending on location and chain resilience, risk and security, talent, sustainability and S&OP maturity.

Warrick touched on the need to integrate teams, and from a chief finance operator’s point of view, the same is true according to Lourens Schouwink, chief financial officer of Samsung Benelux. He says: “Finance sometimes operates on an island so companies must make sure it integrates with supply chain.”

He refers to it as “box movers versus bean counters” but says it is important to move away from this culture and align thinking. At Samsung the company’s goal was “value creation” and now budgeting is very much a joint process between the supply chain team and the finance team. Samsung has also switched from a cost centric approach to a demand driven supply chain which gave the company a “different perspective”.

Case Studies

Nike brings supply chain strategy to life
An Claes, director of supply chain innovation and performance management at Nike, offered advice on how to go about implementing a new supply chain strategy and bringing it to life throughout an organisation – something which Nike embarked upon two years ago.

Without giving any specific strategy details away, Claes discussed how to make a supply chain vision become reality in a consistent way and highlighted the six step approach which Nike followed. Any plan must begin by all teams agreeing and understanding the strategic goal.

In order the make things clear and precise, Claes reckons it is important to have a concise understanding of what the strategy is at any one time that all teams can quickly and easily refer to. Nike has its entire strategy on one A3 sheet.

Two years on, Nike still has regular meetings to monitor and refine its strategy. Claes says the team meets for four hours each week to discuss two game changers and to focus the plan, four hours each month for a business review and functional prep cycle and four hours each quarter for a status review of its A3 plan.

Sun Microsystems shines brighter at Oracle
With any merger or acquisition there is always going to be a period of change and transition as the two companies align their thinking.

When Oracle acquired Sun Microsystems in 2009 the software company became a manufacturing firm overnight and saw a drastic need for change to the supply chain model.

Prior to the Oracle take over, Sun was committed to fulfilling short lead times, on highly configurable products, which meant supporting large inventories. Over time this had become a dispersed and fragmented manufacturing strategy, with a complex and expensive four-tier distribution network and its ERP footprint had become disjointed as it was interfacing with several 3PLs.

Ewan Burgess, director of supply chain development at Oracle, who had been at Sun and moved over at the time of the acquisition, says: “The acquisition by Oracle increased the pace of making these necessary changes.” In fact, he reckons he saw the same amount of change in supply chain in the first 12 months at Oracle than the previous 12 years at Sun.

After doing some research, Sun discovered that while customers wanted high quality products they didn’t necessarily require the three to four day lead times currently on offer, so long as delivery was competitive and accurate. And, by increasing lead times Sun would also be able to make cost savings by reducing excess inventory in freight and warehousing.

Sun also made key business model changes, moving from make to stock to 100 per cent make to order. It moved to offering 100 per cent configured systems, and all products were fully integrated and tested. But after restructuring its product offering it had to restructure its supply chain.

Prior to the Oracle acquisition Sun had been shipping from 21 final assembly sites and three distribution centres globally, along with 100 pick up locations locally, and it didn’t have enough people to work with suppliers. It shifted to a more focused supplier and supply chain model with just five sites and 25 pick up locations. It also now operates a 100 per cent direct ship model delivering directly from source to customer via a 3PL network, which meant it could completely eliminate the need for distribution centres.

Sun also consolidated its order deliveries as a service and moved from having four logistics providers to just one lead logistics provider which handles daily pick ups from global locations and directly ships to the end customer.

Finally, the company extended lead times to eight days, and up to 20 days for high end products.

The simplified process meant the company could eradicate warehouse costs, reduce inventory costs and rework premium charges.

When it came to upgrading its ERP system, Oracle was quick to make the switch from Sun’s existing SAP system to its own global trade management product.

Jon Chorley, vice president of supply chain and sustainability product strategy at Oracle, says: “If you just say yes to each customer request you end up with such a high cost profile its will put you out of business, and that’s what Sun was close to doing.”We’ve had some major successes in difficult regions, but we’ve also had some calamities in relatively easy regions.

Journey to a pan-European supply chain
Yves Kerstens of Bridgestone explained how the tyre company has shifted from a feudal logistics network, to a pan-European supply chain.

From 2007 Bridgestone reorganised its structure, changing its country-based networks into a European supply chain, with regional distribution facilities.

It opened one major European logistics centre to act as a hub, with several regional distribution centres. In this shift away from national DCs, it effectively closed half of its warehouses across Europe.

The new central control of goods makes it easier to share inventory. Before, increased demand would force neighbouring countries to diminish their own supplies to service that demand, essentially moving the shortage from one country to another.

Bridgestone also outsourced 80 per cent of its warehousing operations. Kerstens says it was important to keep some of the more complex warehouses in-house, to retain an accurate understanding of productivity, absenteeism and storage density, as a basis for future negotiations with the service provider.

The supply chain has also become more information driven. Incumbent silos were broken down to form a new “Supply Chain Control Tower” covering planning and execution. The idea is that more information gathered upfront will decrease unexpected costs.

The firm did experiment with demand driven supply chain, but found that the forecasting was not accurate enough, and mistakenly drove them into over-production. Kerstens said that Bridgestone learned the hard way that real-time information is a necessity.

More information and visibility has brought greater flexibility, and leaner DCs. Each warehouse can give more space to key promoted lines, with niche items stored further upstream. This better serves the growing demand for “fresher tyres”.

Kerstens says the transformation has so far yielded greater overall efficiency, particularly control of product lifecycle management, and also costs which has lead to a 15 per cent reduction.

This success has already been emulated by Bridgestone’s sales division, which has followed the shift from 21 separate national markets, to six EU regions.

The human factor
Focusing on ERP systems, six sigma, and data collection is reaching the point of diminishing returns, Dr John Gattorna told delegates in his presentation on dynamic supply chains. Unless we address the human behaviour behind the strategies.

Organisational design is the biggest hurdle for people to achieve a dynamic supply chain. Vertical silos do not galvanise energy for change. Gattorna pointed to a few companies including Zara and Adidas that have co-located staff from different departments into clusters that work together for joint KPIs.

Gattorna has developed the study of how personal behaviours impact on business style. His conjoined analysis techniques look beyond personal biases to find dominant behavioural segments that help understand and shape supply chains.

For example, Gattorna says supply chain models must respond to fit customers’ styles, and he has identified four types of buying behaviour for any market that respond best to particular supply chain styles:

  • Buyers who value the business relationship, and will respond best to a collaborative supply chain.
  • Efficient buyers who prioritise price and are resistant to sharing information will require lean practice.
  • Dynamic buyers where everything is always urgent, and volatility is the norm. These require capacity, and an agile supply chain.
  • Emergency buyers, responding to one off events or crises will need an innovative approach.

Importantly, these categories are not static. Any business can become an emergency buyer temporarily, so supply chains must have the flexibility and agility to cope with unexpected demands.

Gattorna has made a science of using people to effectively enact supply chain theories. As well as studying markets and systems, there is clearly untapped value in studying people – the true drivers of supply chains.

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