StorageTek/WorldChain Case Study
These days, it’s good to hear an encouraging success story. StorageTek’s turnaround using WorldChain fits the bill. I recently visited this $2B manufacturer of tape and disk storage, SANs, and storage software and services, who was one of only two companies on the Goldman Sachs Hardware Index to post a stock price gain last year. They were on the most recent Forbes’ Platinum 400, BusinessWeek’s InfoTech 100, Fortune’s Most Admired Companies, WSJ’s Shareholder Scoreboard, ColoradoBiz’s Manufacturing Company of the Year, and The Bloomberg Top 100 Hot Stocks.
It hasn’t always been so. Founded in 1969, StorageTek was for a time considered a leader in high quality innovation, but went through a period of complacency. In the late nineties, their build-to-forecast approach and lack of accurate operational visibility and discipline led to slow responsiveness and bloated inventories. During the past two years the company has turned around: inventory levels have been cut in half, turns doubled, cash more than tripled, and debt taken to zero.
Elements of the Transformation
So, how did it happen? In August 2001, Roy Perry left Dell to join StorageTek as VP of Global Supply Chain. He saw lots of opportunity for improvement. With a lack of visibility and accountability, StorageTek buyers would purchase six months of supply at a time, just to play it safe. The same lack of visibility meant inventories could become depleted without anyone noticing, so sudden rush orders were commonplace.
An inspired and determined leader, Roy was able to find and leverage motivated, knowledgeable employees within StorageTek and focus them on rapid, high-impact changes. Roy wanted to move the company to a true pull-based system, synchronizing execution across the supply chain around actual customer orders. The 3Pe elements of StorageTek’s transformation included:
- Policy: Outsource anything we’re not good at
- Process: Move to lean manufacturing
- Performance: Control inbound supply
- Enablers: Implement a networked visibility and execution solution
Outsourcing and Going Lean
Within nine months of Roy joining StorageTek, the team outsourced manufacturing of their printed circuit boards. By November 2001, their Puerto Rico factory adopted build-to-order lean manufacturing methods, eliminating piles of inventory at each build operation. With the space freed up from outsourcing and inventory reductions, StorageTek was able to shut down their Colorado and Minneapolis factories and some offsite storage facilities and move it all to their Puerto Rico plant.
Using VMI to Control Inbound Supply
At the end of Q4 2001, Roy challenged his team to establish a VMI hub within 90 days, pulling at least 80% of their spend through it, in order to provide JIT inventory for their BTO factory. Roy understood that StorageTek was not a Dell in terms of size and power, so they would have to make the VMI arrangement palatable for their suppliers. His goal of “Win-Win VMI” (See sidebar below “Win-Win VMI?”) required giving suppliers accurate, real-time visibility of pulls into the factory and inventory levels in the hub. StorageTek selected WorldChain’s Synchronized Supply Management Solution as the best-in-class critical piece of enabling technology to provide the required visibility.
The Teams-How it Got Done
There were four combined StorageTek/WorldChain teams for the project:
- Supplier readiness-Manage the integration of suppliers
- Training-Train suppliers, materials/factory personnel, and management
- Business Analyst-Document as-is vs. to-be processes, discuss impact with buyer and supplier participants
- IT-Implement and integrate WorldChain with existing SAP backbone
Overcoming Internal Resistance
At first there was a lot of resistance from the embedded culture: “It’s good enough,” “We’re not Dell,” “We need all that inventory to make sure we can deliver.” Roy had a lot of convincing to do. He found Sourcing Manager Cindy Armenta, a StorageTek employee with 14 years tenure. Well respected by her fellow workers, Cindy soon became the greatest advocate for the VMI program. The buyers in Puerto Rico, in particular, feared a painful process or, worse yet, losing their jobs to an automated ordering process. Cindy and WorldChain personnel spent five months in Puerto Rico, getting to know these people “like family” and building the trust. Eventually, the buyers understood that they weren’t losing their jobs, but were just transitioning from tactical order placing to proactive management of supply and suppliers. Now Roy’s team is one of the most aggressive in the company in championing improvements. Roy likes to say, “Now when I talk about order-to-ship in 48 hours, people aren’t running out of the room saying ‘the man’s crazy’.”
Forging the Supplier Link
Linking and integrating suppliers was the most labor-intensive part of the project, consuming 70% of deployment resources. Don’t forget, this was not one of those wimpy 90-day proof-of-concept pilots with two suppliers and five parts. In just three months, StorageTek was attempting to integrate all of the spend for 43 of their largest suppliers, representing more than 80% of StorageTek’s total direct spend! With one person managing every eight suppliers, the Supplier Readiness Team had weekly calls with suppliers reviewing and escalating tasks that were falling behind.
Because of WorldChain’s flexible architecture, the technology integration was actually the easy part. Convincing and changing the suppliers was harder. One of suppliers’ main concerns was that inventory was going to be pushed back into their laps… and onto their books! StorageTek showed suppliers how the WorldChain solution provided visibility to help suppliers avoid all the surprise orders, expediting, and excess inventory of the past.
In May 2002, the solution went live, less than 120 days from the start of the project. Although it was a one-month slip from the original goal (mostly due to overcoming internal resistance) it was nevertheless an amazing accomplishment and a testament to the determination of the StorageTek/WorldChain teams as well as the ease-of-implementation of the WorldChain solution. Suppliers could see in real time when items were pulled and when min levels were hit. The system would automatically send a replenishment signal to the supplier when the dynamically calculated reorder point was hit.
The system highlights in yellow or red events needing attention, such as below min parts. If the number of parts received by the 3PL was different than in the ASN, the discrepancy was immediately flagged and quickly rectified, keeping inventory counts accurate and up-to-date. Personnel at both suppliers and StorageTek were spending much less time in mundane management of inventory, thereby focusing on quickly resolving real issues.
When the system first went live, the people in the plant continued their old habit of pulling four or five days worth of parts. As discipline and confidence in the systems increased, StorageTek moved to true just-in-time replenishment for the factory, only pulling when there was an actual sales order to build against. StorageTek has been able to dramatically reduce inventory and build to actual demand. They generally ship within 48 hours of receiving an order.
The numbers tell the story:
- Automatically replenished materials went from 2% to 85%
- Total floor space reduced by 42%
- WIP in factory reduced by $41% in the first six months
- Overall inventory reduced by $100M over a two year period
- Turns increased from 3.9 up to 7.3, with a goal of 12 for 2003
- Almost tripled cash and brought debt virtually to zero (see Figure 2)
The WorldChain solution provided a low-risk, high-return path to these benefits. WorldChain’s hosted model, easy-to-configure business rules, and pay-for-performance approach meant no up-front capital investment was required, total cost of ownership was kept low, and payback was fast.
|Roy Perry on Inbound Supply Chain Project Success:
|Supplier integration is often the hardest part-Usually the biggest consumer of resources, much of the effort is in helping change attitudes and processes, and training suppliers on new methods and tools.Preempt internal resistance-Change is not easy. People naturally resist change. Buy-in from employees is crucial. Find the people employees trust, who understand the need, and have the conviction to make it happen. Make them your champions. And those people are not necessarily high up in the organization.Aggressively eliminate transaction discrepancies- Inaccuracies cripple supply chain execution. Visibility from your technology platform and proactive discipline from your team is required to keep everything precise and current.Closely manage your 3PL-The 3PL is key. Implement a system with real-time visibility for all parties involved.Select technology and deployment partners with proven experience in high-velocity supply chain networks- Someone you can trust and that has shown that their technology can scale and is rock solid. You can’t afford downtime on your execution systems. Contract with partners on pay-for-performance terms- Insist that technology and system vendors only get paid for results.
Source: StorageTek and ChainLink Research
StorageTek is not sitting still. They are looking to improve customer responsiveness, for example being able build to and ship to any customer in Europe within two days of the order (even though it takes three days to get through customs!). They are looking at getting even more value out of the WorldChain platform by using it to extend visibility downstream to some of their channel partners, in particular VARs and VADs, so StorageTek can replenish the channel based on knowing the actual consumption. They are extending Six Sigma process improvements from the operations to the rest of the company. And then going further to send Six Sigma teams to help suppliers improve, with the idea of sharing the savings. Roy Perry and his team are making sure that this company is not sitting on its laurels.
People have been talking for years about network models and n-tier collaboration, but mostly it’s been blue sky theory or toe-in-the-water pilots. Leveraging WorldChain’s state-of-the-art platform, StorageTek dove in head first and got more than 80% of their spend operational in less than five months from start of implementation. This is the kind of gutsy transformation we can get inspired from. When you look at the nature of StorageTek’s turnaround, it confirms something we’ve been saying all along at ChainLink-supply chain is strategic. Supply chain innovations are not just about driving cost savings, but also driving revenue growth, profitability, increased shareholder value, and in StorageTek’s case, generating employee excitement and pride.