“Unleashing trapped profitability” may sound like a tall order in this tough economy, but it has become a mantra for executives at storage-systems maker StorageTek. Their strategy to invest in IT during the downturn, ensuring readiness for an eventual upturn, included a supply-chain overhaul that netted substantial savings by enabling the company to unfetter itself from financially draining inventory burdens.
In fact, since implementing its new supply-chain program more than two years ago, StorageTek has slashed its inventory in half, saving more than US$100 million. The company also has increased inventory turns to 7.3 from 2.8 and is targeting 12 turns by year’s end — which would mean that the entire inventory would cycle 12 times in one year. The greater the number of turns, the less the amount of overhead and the less the amount of dead inventory. As a result of these inventory reductions, its debt now hovers near zero, and its cash reserves total more than $800 million.
To achieve these impressive results, StorageTek turned to WorldChain for what Bruce Richardson, senior vice president of research strategy at AMR Research, termed a “supply chain performance management” program. With the new system, he told CRM Buyer, “the most significant benefit is that suppliers are getting real demand information.”
From Push to Pull
The Web-based tool from WorldChain, implemented in less than 120 days, transformed StorageTek’s “push” supply chains — in which materials were positioned based on forecasts — to “pull” operational models, in which the entire supply chain network is synchronized based on actual execution of customer orders or service events.
This automated, demand-driven supply-chain system connects StorageTek’s ERP system to a third-party logistics hub. It also provides an integrated view of the forecast, demand, inventory and shipment status of StorageTek parts to the company and its suppliers, resellers and contract manufacturers.
Quick Benefits
The company said it realized the first benefits of the new program in just four months, as inventory declined by $25 million. Within six months, StorageTek reduced raw-materials and work-in-process inventories by $41 million.
Other advantages gained include faster, more accurate execution through elimination of manual processes; shorter, more predictable supplier lead times to manufacturing; and automated monitoring and measurement of supplier and third-party logistics provider performance, according to the company. In addition, suppliers have gained better visibility to manage their own production and sourcing inventories, and they now can synchronize their execution with StorageTek.
In fact, one supplier reduced its inventory by nearly 20 percent after a year of using the new tools, according to Cindy Armenta, StorageTek’s worldwide sourcing manager. Roughly 20 percent of StorageTek’s suppliers and 80 percent of its materials flow are in the new pull system, she told CRM Buyer.
The Rules
The WorldChain software includes a policy-management component that describes the business rules and commitments between manufacturers, suppliers and third-party logistics providers. The rules describe minimum and maximum supply levels, suppliers’ requirements for replenishment, and how shortages will be escalated between companies, AMR’s Richardson explained.
While implementing WorldChain’s software, StorageTek found that half its products typically ship in the last two weeks of a given quarter, requiring everyone involved in the supply chain to be responsive at a moment’s notice during that period, Jay Mitchell, WorldChain’s director of marketing, told CRM Buyer.
Toward that goal, the software’s business-process component includes forecast collaboration and commitment, inventory monitoring, return-order processing, replenishment status updates, discrepant shipment notification and in-transit shipment monitoring.
Nothing Is Easy
Although the implementation was quick and relatively painless, the biggest challenge was convincing StorageTek’s top suppliers to change the way they had conducted business for many years. There was some internal resistance as well.
“Like any organizational transition, you have to ensure that everyone is on the same page and help people make a cultural shift,” said Donald Anderson, project lead for global supply chain at StorageTek. Fortunately, he told CRM Buyer, the company’s top management was convincing and emphatic about its profitability goals and targets for suppliers. Long term, StorageTek is looking to keep adding suppliers to its program. If the benefits are as significant as they seem, that should not be difficult.
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