Sun Moves to Make the Virtual Supply Chain a Reality
By John Paul Quinn -- Supply Chain Management Review, 9/1/1997
In today's marketplace, the nature of the product sold, the increasingly demanding needs of customers, and the ever-more exacting emphasis on keeping pace with technology have become the driving influences on the process strategies and operational tactics that must be adopted if a company intends to be a global leader. These influences are especially critical in the areas of purchasing and supply management. In this context, Sun Microsystems' ultimate goal is to maximize the potential of the entire supply chain through virtual operations by capitalizing on the core competencies of all the players in that chain.
More than five years ago, Sun began to take steps to revise its supply chain process tactics and strategies. Over time, this developed into a company-wide reengineering effort that addressed virtually everything related to the way the firm did business. This is an account of the role played by the company's purchasing operations during this period. It should be noted that Sun did not anticipate and plan for every modification and change that ultimately became part of the new process; the perspective of hindsight has a way of rendering any series of events more neatly sequential than was actually the case at the time.
By way of background, Sun Microsystems is a leading provider of product, service, and support solutions for building and maintaining network computing environments. To facilitate innovation and provide world-class support for its global client base, the company is structured as a group of five discrete business units, each providing open-standard products and services for commercial and technical computing. Sun reported record earnings of $8 billion for fiscal year 1997.
Essentially, this is the story of how a number of efforts to improve basic process strategies moved Sun toward the goal of virtual operations. The company has no illusions that it has arrived at that goal yet and realized its vision of virtual operations. But significant progress toward that objective has been made, as this article describes.
Key Attributes of the VisionSun's vision of virtual operations embodies these five main attributes, arrived at after considerable discussion and trial and error in the field:
- Seamless integration
- Elimination of redundancies
- Trust
- Synergy
- Leveraging of core competencies.
In other words, Sun envisioned an operational entity that would so enmesh the activities of the company, its suppliers, and its customers that it would be impossible to differentiate between them. Obviously, this would eliminate redundancies in the supply chain. It also would involve a significant broadening and enhancement of the level of trust among all parties. But if those parties could successfully leverage each other's core competencies, the synergies realized would exponentially increase the capabilities and profitability of all concerned. Exhibit 1 depicts this concept.
One of the first things Sun did early on was to review the nature of its product and the needs of its customer base. The workstations that the company produces have extremely short life cycles. The rapid pace of technological change in the electronics industry is the primary cause of the short product cycles of Sun's workstation products. Customers who use these products—primarily design engineers and software developers—need and want the most advanced technology available because their needs are changing at an ever-accelerating pace. This problem is compounded by the fact that despite their best intentions, customers historically have not been very good at forecasting their own needs. Typically, they only convey their requirements shortly before they expect delivery.
So it was immediately obvious that in the volatile world of electronics and computer workstations, the pace of change was simply too fast for any one company such as Sun to be vertically integrated, to meet customer demand, and to stay competitive in the marketplace.
Going Beyond OutsourcingOutsourcing was an obvious solution, one that the company already was using. Yet it was only a partial solution, only the beginning of a process that could go far beyond conventional outsourcing arrangements—just as outsourcing itself had gone beyond traditional OEM-supplier relationships.
Outsourcing can be defined as shifting various manufacturing responsibilities from one company to another in order to cut costs, eliminate redundancies, and enhance quality. That basically was the OEM philosophy of the past two decades. Sun felt it had to break out of this mindset because its business processes were too much like those of the rest of the industry—very traditional. As an OEM, Sun recognized that it had certain responsibilities, while the suppliers had others. Sun issued purchase orders, conducted planning meetings, discussed forecasts, and so forth. Suppliers filled orders and met requirements.
But it was clear that the company could not reduce leadtimes or costs or improve quality to the extent needed within the framework of this kind of traditional process. Innovative solutions had to be found that would cause suppliers to take on non-traditional responsibilities.
Instead of the traditional outsourcing practice of maintaining a mutual hands-off relationship, the objective should be the seamless integration of partners. Instead of confining themselves to traditional responsibilities, each company should do what it does best; instead of periodic design reviews, there should be supplier engineers on Sun design teams; and instead of the supplier simply inheriting manufacturing, why not have a supplier leading the operations team at Sun? (Exhibit 2 contrasts the virtual operations approach with conventional outsourcing.)
These changes needed to be made because of time; time itself was becoming more and more important in the production and delivery cycle. In the 1990s, and especially in an industry such as the one in which Sun operates, lower cost and high quality had become givens. Time now had taken precedence as the primary marketplace focus. Sun believed that if time could be reduced in processes, the company automatically would achieve cost-reduction, higher quality product, and better responsiveness to customers.
The objective was to engage in something more integrated than simply outsourcing. And this required looking at the whole supply chain and deciding which companies were best suited to which operations. The next step was to link them together—integrally—via information and people.
By reducing production and delivery cycle time, the company also would be reducing infrastructure costs and putting in place a flexible systems infrastructure that would support ongoing business changes in the months and years ahead.
At this point, the vision of virtual operations did not yet exist. But Sun was rethinking some important supplier relationship issues. The concept of fully integrated supply chain management would emerge later.
Supplier Base ConsolidationSun began an intensive effort to consolidate its supplier base in order to better manage and focus the business. It was a gradual process that involved selectivity and aggregating contract awards to certain suppliers as new product decisions were made. This consolidation effort preceded the vision of virtual operations by some years. But without consolidation, it is questionable whether the vision could have evolved.
The consolidation of suppliers was stringent and far-reaching; Sun went from 200 suppliers accounting for 80 percent of purchases eight years ago to 20 suppliers accounting for 92 percent of purchases today. (See Exhibit 3.)
At the present time, Sun's top five suppliers account for a full 56 percent of all company expenditures. This kind of selectivity is necessary to achieve virtual operations, because a company can't engage in the intermingling of people assets, information assets, hard assets, and business processes if it is changing suppliers regularly.
Looking ahead, Sun intends to include in the virtual operations structure only the company's top 10 suppliers. However—and this is an important point—it plans to apply the overall concept, at least in part, to other suppliers as well. Realistically, the closest relationship and virtual operations implementation will be with the top 10.
Establishing a Culture of TrustWith the consolidation of the supply channel, Sun's next objective was to establish a culture of trust with these key suppliers. Sun defined trust as the ability and willingness of virtual operations partners to assume non-traditional responsibilities and deliver the goods as agreed upon. The distinction to be made here is that it is easy to do business as usual, with POs that have legal requirements printed on the back. But it is radically different to sit down with a supplier and say, "We at Sun are going to let you look into our systems, our inventory, and our requirements. Then we are going to let you plan for us, and we'll trust you to have our inventory when we need it."
Such openness constitutes a considerable leap of faith, but Sun felt that kind of trust was critical to the achievement of virtual operations. Moreover, since this process would involve such a close relationship with suppliers, the company initiated intensive discussions with them to bring them into the process from ground zero.
A courting analogy was employed to explain the process. "Dating" was the old traditional OEM-supplier relationship. "Going steady" was the total-cost-of-ownership relationship. "Engaged" was sharing strategies and beliefs, as in the case of some outsourcing agreements. "Marriage" was virtual operations, its goal being virtually transparent organizational boundaries, with the key elements being trust and fidelity in pursuit of maximized mutual benefits.
Sun formed a supplier council with five key suppliers. The council included presidents, chief financial officers, vice presidents of marketing, and other high-level executives from both supplier companies and from Sun.
The council was to serve as a sort of external board of directors and as a think-tank. Sun presented its ideas on what it was trying to do and how it might be done, and then invited suppliers' input and suggestions. Together, Sun and the suppliers were able to articulate the vision of virtual operations and to summarize that vision in these terms: "Through our seamless partnership we ensure innovative development of supply processes that deliver the world's best customer satisfaction, resulting in the highest returns for all."
The challenge, of course, was how to make this work. While discussions with the council had been quite productive, there was a sense that critical mass had been reached as far as theorizing was concerned. There was a distinct danger that implementation of the process could be unnecessarily delayed by "analysis-paralysis."
To avert that possibility, Sun bluntly asked the supplier council members if their companies would be willing to take the risk of actually trying out some of the concepts that had been discussed jointly. Specific, tactical, operational pilots were chosen to prove the viability and the efficiency of the virtual operations concept. This was no longer theory or philosophy; it was a question of working in real life and real time with suppliers to see if these concepts would fly.
Reaching the Turning PointThis was a critical turning point in the drive toward virtual operations. The suppliers agreed to become involved—hands-on. Altogether, 10 pilot programs were initiated, each involving Sun/supplier teams. The groups took 10 new business processes that had been developed, each involving specific suppliers or specific products.
These processes were wide-ranging in scope, and quite disparate in nature. For example, one zeroed in on how to configure a disk drive at the latest possible moment to enhance its applicability for multiple products.
On another front, Sun convened some of its external manufacturers and told them that it was no longer necessary to have their salespeople call since they already had the business. Instead, Sun requested that they provide an operations person who would be given a Sun badge and put in one of the company's shops. That individual would use Sun's planning system and do order-entry with his own company based on the needs of the system to which he now had access.
Over a six-month period, Sun and its suppliers worked on the 10 pilots. Six had proved successful; four were off-track and did not come to fruition. The council reconvened and analyzed the successes and the failures.
Most importantly, the process had been set in motion. Sun's suppliers had received the message that we all were iving in a time- and technology-driven marketplace where we could only survive and prosper by focusing on our core competencies in order to get the product out in the least amount of time. For Sun's part, the core competencies were identified as the production of the SPARC™ microprocessor chip, the operating system called Solaris,™ final systems integration and testing, and enterprise network computing, or ENC.
By Sun's definition of virtual operations, everything else would be left to whoever was the best practitioner in that field among suppliers, whether it be memory, disk drives, or monitors. This approach called for the intermingling of staff as well as the exchange of information. This led to the development of virtual organizational charts. As opposed to traditional organizational charts, virtual organizational charts show not only the business one is operating, but also people from multiple companies performing the functions that they do best. The people on the chart are not only from Sun, but also from companies such as Sony, Seagate, Solectron, and Zytec. This underscores that company names don't matter in this process; the value chain is what's important.
Proliferation of Sun/Supplier TeamsNow, having established the original 10 pilot programs involving Sun/supplier teams, and having analyzed the results achieved by each, an unanticipated benefit began to emerge—one that has contributed immeasurably to progress toward virtual operations. Specifically, other departments and groups within Sun heard about the successes of the original teams and asked if they and their supplier partners could be involved in the process. The concept spread like wildfire.
Consider this dramatic progress over a two-year period: In 1995, there were the original 10 teams; in 1996, there were 50 teams. To date in 1997, there are 150 teams. And remember, these are all tactical operations involving Sun people working with specific suppliers on specific processes or products. These teams all are fundamentally changing the nature of their supply chain operations. Sun found it no longer necessary to manage this process; the people involved manage it themselves. When one team hears about another team doing well, they interact. It's a self-fulfilling, self-renewing process.
At this point, the role of the customer in virtual operations should be discussed. Obviously, the move toward virtual operations involves integration with customers as well as with suppliers. As in the case of suppliers, Sun has had to exercise selectivity for this process to work. But here a distinction is required.
Sun sells its product both directly and through resellers. In terms of striving for virtual operations, this split has been helpful for practical reasons. If the company wants to achieve a seamless integration from supplier to customer, it cannot possibly involve 300 direct customers any more than it can 300 suppliers.
Today, Sun involves its largest resellers in the virtual operations process rather than all of its direct customers. The company has no intentions of becoming Wal-Mart just yet, and is not involving itself with point-of-use integration. Instead, it has decided to interact closely with some of the high-volume resellers to optimize the efficiencies and mutual profitability of the value chain.
The following example illustrates the point. A serious redundancy of effort regarding monitors was discovered. Sun was ordering them from a supplier in Japan, putting them into its distribution system, and reshipping them to one of the larger resellers. Within the context of virtual operations, the company rethought this process and discussed it with the reseller. Sun said that if, as partners, we were concentrating on enhancing the value chain and reducing time, we weren't doing a very good job with respect to these monitors. Since the reseller was buying in such large quantities, Sun suggested that the monitors be shipped directly to the reseller from Japan by ocean container. This not only significantly reduced the time involved, but also the handling activities, which in turn minimized the potential for damage or shipping errors. By shipping the monitors directly, Sun had both saved time and improved the quality process.
Objectives Met: A Progress ReportWhat is the status of the drive toward virtual operations at Sun? First of all, a number of initial objectives have been accomplished:
- Weeks have been taken off leadtimes, and inventories of some products have been reduced by half.
- In some cases, turnaround times have been cut from 15 days to one day with regard to the materials-return-to-supplier process.
- Direct shipment time from supplier to customer has been reduced by 47 percent.
- Thanks to enhanced electronic commerce disciplines, inventory turns on some products have increased from five to 14.
- Earlier supplier involvement in product design has resulted in an 11-percent reduction in time-to-market.
- Real-time field quality feedback to the supplier has cut five weeks out of the failure-analysis cycle.
Granted, these are quantifiable benefits of considerable significance, but the company still needs to tie this all together into one process. In other words, if Sun is shipping a system that has a disk drive, a circuit board, and a power supply—and the power supply component still has a long lead time—it can't ship the box any faster.
The concepts and disciplines already applied in certain areas now have to be applied to all suppliers and products. Moreover, this must be coordinated so that they all relate to one another in order to realize the maximum benefit. That is what Sun conceives of as virtual operations—and what it wants to achieve.
Sun hasn't gotten to virtual operations of that kind yet, but has made progress. The next phase of the process represents a considerable challenge. At present, as evidenced by the continuing work of the 150 Sun/supplier teams, Sun has achieved success working within product families and with specific suppliers, with the individual teams choosing operational tactics that work best for them.
The next level is integrating across the entire supply chain, setting in place one all-inclusive integrated approach. Sun has no illusions that this will be easy, because it requires letting go of old habits and ignoring traditional boundaries. Finance, for example, is being asked to buy into a system in which supplier POs are virtually nonexistent because a replenishment system is in place. Given their background, the finance people say, how do we know what the company's liability is if we can't look into the purchasing system and see how many POs are opened?
Old Norms No Longer ApplyThese are the kinds of problems that will have to be resolved because the virtual operations model doesn't resemble any older models. Accordingly, the old measurement norms used in business and industry simply do not apply to this new discipline. Seamless integration is not yet a household phrase in this or any other industry.
In summary then, Sun has come a long way, but there is still work to be done to achieve the goal of virtual operations. And there are a few caveats for any company considering going this route.
First of all, this is not something that can be accomplished overnight. Initially, the organization has to get its own house in order. It must review its own activities in the supply chain and then select its core competencies, remembering that technology moves so fast today that no one company can be expert at everything. Pick areas of expertise that represent the company's true core competencies, and find others to do the rest.
Supplier consolidation is a basic necessity if virtual operations is going to work. Once partners have been selected, the company should put together commodity teams comprised of people from its own company and from its suppliers. Then let them develop innovative processes—and test them.
Finally, those involved must always be cognizant of the critical importance of trust. It is really the relationship between the company and its suppliers that dictates whether the next level of achievement will be reached.
The success of virtual supply chain operations is not a technical issue or a money issue. Instead, it hinges on whether companies are willing to work within an entirely different relationship with their suppliers and customers, targeting seamless integration in order to achieve new levels of operational efficiencies and mutual profitability.
| Author Information |
| Free-lance author John Paul Quinn writes on a broad range of business topics for journals in the United States and in Europe. |
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