Seven steps to a lower-cost supply chain
An Intel executive explains how introduction of lower-priced Atom chips forced changes in the company's supply chain
Mark T. Hoske, Online Products Editor -- Manufacturing Business Technology, 9/1/2009 12:00:00 AM
About a year ago, Intel realized that selling new-platform microprocessors at one-fifth the cost of the Intel Pentium microprocessor would require significant rethinking of its supply chain strategies.
"The results changed how Intel projects will be done in the future, and we're looking at how we can capture what we learned and improve the rest of the supply chain," said James R. Kellso, senior supply chain master, Intel Corp.
Kellso explained Intel's process for making those changes in a session at the Council of Supply Chain Management Professionals Annual Global Conference, which took place in Chicago in September. His advice is captured in these seven steps:
1. Gather and explain. A two-day Intel seminar, coordinated by Kellso and others, presented the challenges for managers in departments across the organization. The Intel Core Duo, with $100 average selling price, carried with it about $5.50 in supply chain-related costs, Kellso said. The new Intel Atom platform, selling for about $20 or so, would support perhaps $1 in supply chain costs, from sourcing to delivery, he noted.
2. Seek realization. After long discussions covering traditional changes, it was clear no one had a plan that could cut costs by a factor of five, which was what was needed to address a new $40 billion market—an opportunity with potential to double Intel's business. Finally, someone stood up and suggested that the opportunity warranted having the company dedicate a team of supply chain masters to finding a solution. Kellso was chartered to lead the team.
3. Form an all-star team, with help. "I agreed to coordinate the effort, as long as I could have more than 10 supply chain experts of my choice, half time, for six months, plus three consultants to help with coordination," Kellso said.
Ultimately, the internal supply chain experts devoted 75 percent of their time to the project, with three company VPs helping to eliminate potential roadblocks along the way.
4. Set scope and limits. Kellso said his team had leeway to rebuild the supply chain from scratch, as long as existing Intel fabs were used. (The company couldn't afford to abandon the $5 billion plus invested in each of those fabs.) The team also had to work with Intel's existing accounting system. A key device used in this project to help determine scope was a supply chain triangle (see graphic), developed by Larry Lapide at MIT Center for Transportation & Logistics.
This triangle positions customer response, efficiency, and asset utilization at each point of the triangle. The closer a company is to one point, the further away it gets from the others. Plotting where a company is within the shape, compared to competitors, can help with related decisions. The low cost supply chain (LCSC) team used this and other tools to find ways to significantly reduce costs while increasing customer response and remaining utilization neutral. This led to a team charter to: "create the ability to deliver up to an additional 900 million units a year at $10 product costs by 2012 while increasing customer service."
5. Work the process. Working the details required looking at the business case, the process, the effect on the customer, and then repeating the cycle. After defining terms and identifying the roadmap, they looked at objective, scope, the approach, deliverables, timing, and resources. Quantifying costs was part of the challenge, Kellso noted, including putting inventory among operating costs. Considerations included simplicity, flexibility, lean, automation, and total landed cost to lower supply chain costs and increase service levels.
6. Determine changes. Kellso said the team recommended several fundamental changes to the current supply chain, including:
• Shift to a more pull-based model with cleaner signals;
• Shorter cycle times;
• Lower touch yet higher efficiency customer- and supplier-facing models; and
• Adopt lean processes and other operational changes to affordably support a new model.
7. Translate and implement. Kellso said that for Intel that meant:
• Instead of re-planning jobs several times before shipping, create a way to do them once, and faster.
• Consider building inside of the two, four-day shifts per week without rescheduling changes in between.
• Plan, build, and deliver in two weeks, to avoid building for stock.
• Quantify savings in ways accountants can understand. Build to ship means that many of the planners can do something more productive than rework order changes and updates.
• Don't increase utilization at the expense of other goals.
"Is 90 percent utilization the best choice if we're only building 80 percent of what's needed?" Kelso asked, pointing out that change orders go to the warehouse, which requires additional (wasted) transactions later. Building products to stock isn't as efficient as building and shipping.
"Working together on this, we learned more about the Intel supply chain than we had on any other project," Kellso said.
