Managing your entire supply chain is a simple process—if you are super human and have unlimited resources at your disposal. But in the real world, successful supply chain management takes time and a lot of hard work. And it requires a targeted strategy that embraces both the external and internal elements of the supply chain.

Several years ago, Siemens Telecom Networks (STN) recognized that we had to improve the quality of our supply chain management if we were to meet our customers' increasing demands. We knew, too, that this effort had to extend both internally within the organization and externally to our supplier partners.

While it was no easy task, STN has achieved a measure of supply chain management excellence—and continues to work on further improvement. The credit goes to the company's dedicated employees, working closely with our Tier 1 and Tier 2 suppliers.

One of the cornerstones of this success was a process initiated three years ago called SMART 2001. SMART (Strategic Material Acquisition Roadmap Technique) is an interactive process between STN and the supplier base that facilitates optimization of the supply chain. SMART encourages suppliers to submit ideas that will reduce costs and streamline the overall logistics process.

SMART, coupled with major organizational changes at STN, has resulted in an expectation of 100-percent acceptable quality from Siemens suppliers—the same expectation that our customers now place on us. Building on this premise of 100-percent quality, we have mobilized the supply chain so that the slightest demand or pull from the customer is communicated to the Tier 1 and Tier 2 suppliers so that they, in turn, can plan their operations accordingly.

To cite one example, we source cable assemblies from Tier 1 supplier Escod Industries of Lake Wales, Fla., which acquires raw cable from General Cable (Tier 2 supplier). If we receive a customer request that necessities receiving cable assemblies within days from Escod, General Cable has the information needed to fulfill Escod's request so that we can meet our customer's demand. The key to success is having a responsive chain without carrying large amounts of inventory. This can only happen when all of the supply chain's links are tightly fused together, causing the customer needs and desires to be felt when the pull comes.

That's where we are today. But before we got to this point, STN had to analyze and reorganize our way of doing business—both internally and externally.

The present structure of Siemens was formed during the early 1990s when the company acquired an interest in Stromberg-Carlson. Siemens moved its main Digital Electronic Switching System manufacturing facility from Hauppauge, N.Y., to an existing Stromberg-Carlson manufacturing plant in Lake Mary, Fla. Over the next six months, the Lake Mary facility was upgraded and modernized, and movement and integration of the entire product line was completed. British-owned Stromberg-Carlson was now Siemens Stromberg-Carlson, managed by a German parent company.

About two years later, Siemens' Carrier Products manufacturing facility in Albuquerque, N.M., also closed and relocated to Lake Mary. Three main product lines using both through-hole and surface-mount technology now were being manufactured in the Lake Mary facility. Two of the three lines—Carrier Products and Digital Central Office—were in the mature part of their life cycle in the United States. The third, the Siemens' Digital Electronic Switching System product, was in its "early life" in the U.S. market. With the two older lines in particular, we faced issues of duplicate part numbers and component obsolescence.

The Lake Mary manufacturing facility at the time was producing about 1,000 various printed circuit boards composed of more than 25,000 component types to support these three major lines. Meanwhile, as Siemens Stromberg-Carlson was moving, relocating, and integrating product lines, the competition continued its relentless march toward reducing their prices and gaining market share.

After completion of the Stromberg-Carlson acquisition, the company's main cost drivers were materials related. Accordingly, the top priorities were to lower product costs across all three product lines without sacrificing quality, while reducing overall material acquisition leadtimes.

Reductions in material costs typically were yielding about 5 percent per year—a level that barely kept up with inflation and certainly did not keep up with overall market expectations. Purchasing was acquiring production material from more than 415 suppliers and leadtimes averaged 22 weeks. Purchase orders were being placed manually without the benefit of Electronic Data Interchange (EDI). Only 30 percent of the material received was considered ship-to-stock, requiring no inspection. Incoming quality levels were running at 92-percent acceptable and inventory was turning at a little over three turns a year.

These parameters certainly did not represent "world class" performance. Siemens Telecom Networks, as the company was renamed in late 1997, realized that we had a lot of work to do in effectively managing the supply chain.

The market environment presented another challenge. Telecom reform was being debated across the United States; customers were downsizing; new, non-traditional competitors were entering the market; and strategic suppliers were being chosen by the regional Bell operating companies. Within this environment, the critical question was, "How can you, as a supplier of telecommunications equipment, make money for me?"

At the beginning of the process to "fix ourselves," STN established targets for the year 2001 for each of the following parameters: percentage of annual purchase price reductions, total number of suppliers, average leadtimes to procure components, number of purchase orders placed via EDI, ship-to-stock/point-of-use percentages (STS/POU), incoming quality levels, inventory turns, and flexibility. Based on this activity, we realized that tremendous strides had to be made to compete effectively and meet the customer base's demands.

We started with organizational changes. There was no one organization responsible for all of the materials functions. Purchasing, supplier quality, and receiving reported to value engineering, while the stockrooms and traffic reported to manufacturing. The goals varied across each of the organizations, and there was no common supply chain optimization thread.

To establish that thread, purchasing, supplier quality, receiving, stockrooms, and shipping were integrated into one organization called Materials and Purchasing. To this integrated function was added a Supply Chain Development Department, whose mission was to identify activities and processes needing improvement. Cost, leadtimes, flexibility, and quality were the first areas targeted.

We also formed commodity teams composed of one employee from purchasing, supplier quality, manufacturing, and development. A commodity team was created for printed circuit boards, passive components, active components, metals, OEM, and Siemens AG (to cover the material that was procured from Siemens Germany). The purchasing member of the team was the designated team leader. Each team was responsible for its members becoming global experts on their particular subject matter with respect to leadtimes, market analysis, pricing and trends, next-generation technology, and obsolescence.

To reduce leadtimes across all commodities, we realized we had to increase the flexibility provided our customers. Because we were unable to find that one "super human being" who possessed all supply chain management expertise, we decided that the commodity teams would become the nucleus for achieving our supply chain goal—meeting and exceeding customer expectations. (STN's supply chain vision is depicted in Exhibit 1 on the preceding page.)

Local conversion. In the early 1990s, a large portion of the components used on our printed circuit cards were sourced through Siemens in Germany. This process not only was costly and inflexible, but led to leadtimes that were not consistent with U.S. market demands. STN established a process with our counterparts in Germany that allowed us to qualify both printed wiring board and component suppliers. At the time, several thousand parts were being sourced from Germany and the commodity teams were asked to start the conversion process from Germany to U.S. sources.

Supplier reduction. The number of suppliers had to be reduced to achieve our quality and cost-reduction targets, and each commodity team was given targets for supplier reductions. Those remaining suppliers actually would benefit by getting more business volume.

Ship-to-Stock (STS)/Point-of-Use percentages (POU). STN could not continue "inspecting in" the quality of the components and hardware received from its 415 suppliers. Suppliers had to achieve a quality level that required no inspection based on the history of lots received. In addition, the commodity teams worked with suppliers to ship the hardware and components directly to point of use. Loose hardware, cables, racks, and surface mount components initially were targeted for this process.

Just-in-Time I, II. The majority of the Digital Electronic Switching System components were set up as floor stock in two Kanban buffers. Component leadtimes were changed in the Manufacturing Resource Planning (MRP II) system to reflect JIT deliveries. In addition, Anixter and Escod (STN's momat and cable suppliers) agreed to locate their personnel in purchasing to plan, order, and expedite hardware using our MRP system.

Leadtimes. Leadtimes were extensive, especially from Germany. Overall, they averaged 22 weeks. This afforded no flexibility with regard to forecast swings up or down. Downturns resulted in too much inventory, while upturns could not be readily supported. We decided to migrate to domestic suppliers that could meet our demands in much shorter leadtimes. We now use about 300 German suppliers compared to 3,000 to 4,000 in the past.

Value analysis. Each of the commodity teams applied the value analysis process to determine if an item's functional cost could be reduced without sacrificing product quality or integrity. The Orlando Chapter of the Society of Value Engineering taught in-house seminars to commodity team members. Siemens trainers supplemented these seminars with their own curriculum.

Market analysis. Team members analyzed U.S. and international markets and pricing to determine if STN could take better advantage of global pricing. Siemens' purchasing organization in Bruchsal, Germany, agreed to let STN "piggyback" off its supplier contracts. Because Bruchsal's purchasing volume was about 10 times STN's, this yielded a tremendous price advantage for us.

Concurrent with these focused improvement activities, SMART 2001 got under way. The aim of this comprehensive initiative was to remove the slack in the links between STN and the Tier 1 and 2 suppliers. When striving to mobilize or optimize a supply chain, it is important to recognize that both internal and external forces "act" on the process. In STN's case these forces were multiplied by a factor of eight—our number of business units at the time.

Commodity teams identified internal and external forces that would either hinder or promote excellence within their respective product groups. Some typical internal factors were the culture of the various suppliers, dependence on legacy systems, supplier strategies, and acceptability of risk. Externally, the teams had to gain expertise on pricing trends and new market entrants on a global basis. This required input from both domestic and international suppliers as well as from Siemens' International Procurement Office. Once we identified these forces, we instituted plans to foster the positive elements, while eliminating or minimizing any hindrances.

At the same time, commodity teams identified several areas for potential analysis within their commodity groups. These included design specifications, leadtimes, packaging methods, freight carriers, supplier warehousing, make/buy, and purchasing efficiencies such as EDI and long-term contracts. Each of the teams identified specific SMART 2001 objectives. These were determined through meetings with the respective business units and materials and purchasing management and through benchmarking STN's supply chain performance against best in class. Exhibit 2 summarizes the overall objectives and specific improvement initiatives embodied in SMART 2001.

STN was interested in the following benchmarking information:

• Annual cost reduction (%).
• Leadtimes.
• Incoming quality levels.
• Education level in purchasing.
• EDI usage (%).
• Ship-to-Stock and Point-of-Use (%).
• Inventory coverage or turns.

The SMART process began with each team reviewing the cost and performance issues pertaining to its various suppliers. Suppliers were reviewed for delivery, quality, and service performance as well as their participation in the SMART program. For each supplier, the team also determined overall material acquisition leadtimes and whether or not stocking programs were in place.

The management of the materials and purchasing organization prioritized the objectives based on the goals and requirements of STN and the business units. Based on this priority listing, the commodity teams scheduled workshops with STN's various suppliers.

Importantly, before these sessions began, the respective commodity teams met to determine the workshop objectives. Team members reviewed purchased hardware, packaging techniques, freight carriers, specifications, tolerances, finishes, and leadtimes. They also analyzed data from the supplier rating system to determine areas needing improvement.

At the beginning of each workshop the chairperson stated the objectives, then conducted an open forum with the supplier and the rest of the commodity team in an effort to achieve those objectives. The SMART Steering Committee then would do a "reality check" on all of the ideas emanating from the workshops. Those ideas accepted by the Steering Committee are turned over to the Supply Chain Development Department, which conducts further savings threshold analyses and develops implementation plans. Exhibit 3 illustrates the SMART 2001 process flow.

Prior to conducting a SIPA, we request key indicator data. Management reviews this data to determine what type of expertise to apply to the in-plant visits. STN identifies key data points of interest and forwards them back to the respective supplier. STN and the supplier then would schedule a SIPA kickoff meeting. In essence, the teams work together to "peel back the onion" to better understand the key indicators.

If analysis determined that an idea had potential for savings or throughput improvement, a joint STN-supplier team would draw up appropriate recommendations and present them to management. Once a recommendation was approved, STN and the supplier would draw up an implementation plan to achieve the identified savings. The savings passed on to STN varied, depending on the internal rate of return at the supplier's facility.

Exhibit 4 shows the overall progression from initially stating the SMART 2001 objectives to actually achieving the supply chain mutual goals. Suppliers can submit ideas to STN via the Internet or fax, or download them to an STN server. Each supplier receives a brochure that describes the SMART process and overall objectives. The brochure contains pre-formatted disks that facilitate the downloading.

On top of these cost savings, overall material acquisition average leadtimes have been reduced by 61 percent. This resulted from the commodity teams working with each of their respective suppliers. Working in parallel with the SMART initiative, manufacturing also has reduced internal throughput fabrication times by 75 percent in the last three years.

Some other project examples and their cost savings include the following:

• Qualified Far East printed circuit board supplier. STN sent a team to the Far East to find a supplier of printed circuit boards that was less expensive than its domestic suppliers. Annualized savings: $300,000
• Lower-cost sourcing by supplier. When STN informed one of its domestic printed board manufacturers that its pricing wasn't competitive enough, that supplier found a less-expensive producer of raw circuit boards in the Far East so it could keep STN's business. Savings: $22,000
• Outsourced rack kits. STN had previously purchased the various parts needed to put together a rack kit from numerous suppliers. Now, it hires one supplier to assemble the kits. Savings: $11,000
• Changed cable insulation specification. STN found a way to save money by making a design change. Savings: $17,000
• Redesigned digital electronic switching system fuse frame. STN made a design change on the frame, which allowed it to manufacture the part less expensively. Savings: $13,000

To help suppliers quickly understand the program and begin generating these kinds of cost-saving ideas, STN has developed SMART 2001 supplier kits. The kits walk suppliers through the steps of implementing a supplier management program by explaining in detail how to get started, what types of personnel are required, how to develop cross-functional teams, how to set up workshops, and how to use the tracking database. The kit also includes software disks and presentation transparencies.

Three years have passed since SMART was first implemented. And the results show the program to have been well worth the effort, as the numbers in Exhibit 5 indicate. The improvements reflected in the exhibit are percentage improvements over the base year of FY 92/93.

The original supplier measurement criteria were 15 percent for service, 25 percent for delivery performance, 50 percent for quality, and 10 percent for SMART participation. To better compete in the marketplace, however, we felt that we needed to add new criteria and change the category weightings. The current method of rating the suppliers is still 10 percent for SMART participation, but new categories of cost reduction (20 percent), customer responsiveness (25 percent), stocking policy (15 percent), leadtime flexibility (25 percent), and EDI (5 percent) have been added. Exhibit 6 shows the original and the modified SMART criteria.

Over the past several years, STN has learned much about ways to better manage the supply chain. The key ingredient to success, we've found, is the dedicated people who make it happen. In STN's case, it was the commodity teams and our suppliers.

When starting out on a program as comprehensive as SMART 2001, a company needs to develop plans that have achievable targets. Just as importantly, it needs to reward performance.

In the SMART 2001 program, commodity teams were given measurable targets in such key areas as inventory coverage, price variance, and on-time and complete shipments. The teams were given a bonus based on how well they performed against these goals. Empowered to make it happen, the teams achieved exceptional results. The targets established for the year 2001 will be met in fiscal year 1997/1998, which ends on September 30, 1998.

Overall, the results to date have met our expectations. But as each day goes by and the markets change, the expectations must change as well. There's no time to sit back and say, "We did it, we accomplished our goals."

Suppliers, from the beginning of the SMART initiative, embraced the process and immediately requested that they be included in the workshop schedule. Ideas and suggestions on reducing costs and leadtimes flowed freely and openly. Both STN and its suppliers realized that they were on the same team—a team dedicated to optimizing the supply chain.

Internally, the initial reaction was "here we go again, another program." Because people see programs come and go, SMART was introduced as a supply chain process. After a few months and a few early successes, STN employees became believers and the process began to see success.

The next phase of SMART is being developed to better position and support each of our eight business units. Supply chain development will be integrated into STN's procurement organization, and advanced procurement engineering will be better positioned to support the business units. We plan to set targets for three years. Each target will be reassessed quarterly based on the overall market needs. As we move forward, SMART will focus heavily on increasing flexibility and reducing leadtimes as STN strives to become a "procure to order" company.

Through the SMART 2001 experience, we learned that success is a journey and not a destination. When it does become a destination, then optimization of the supply chain will never really happen—and failure will inevitably follow.