Extreme Makeover: Hardware Edition

It’s not every day you’re asked to reinvent one of the high-tech industry’s most iconic companies. But that’s exactly what’s been driving Cindy Reese since she arrived from Sun Microsystems to become Oracle’s senior vice president for worldwide systems operations early last year.

Reese’s task was not for the fainthearted. Her staff examined every aspect of the manufacturing and supply chain ecosystem.

They modernized areas they could and cut out huge chunks of the core infrastructure whenever there was a chance to save money or improve efficiency. In the end, they redesigned a common practice of maintaining sizable finished-goods inventories, eliminated two entire layers of a four-tier distribution network, upgraded to the latest versions of Oracle’s enterprise resource planning (ERP) and supply chain planning applications, and forged closer ties with suppliers and customers.

Such a monumental undertaking could easily take years to complete, but Oracle management pushed to have all the pieces in place by January 2011—less than a year after the acquisition of Sun became official.

How did this extreme makeover accomplish so much so quickly? Some powerful incentives drove the project. The first was significant ROI: the overhaul is on track to save hundreds of millions of dollars a year in excess and obsolete inventories, freight costs, and other related expenses. Secondly the effort had buy-in from management. “Larry and Safra said, ‘The Sun supply chain is too complicated,’” Reese recalls hearing from Oracle CEO Larry Ellison and Oracle President Safra Catz. “We want to drive out the costs associated with this complexity and at the same time produce high-quality products with competitive lead times.’”

With catalysts like these, she and her staff quickly started re-engineering the manufacturing operations by focusing on four primary links in the chain.

Throw Out the Inventory
First, Reese’s team overhauled Sun’s strategy of stocking large—and expensive—volumes of components for its SPARC and x86 servers and StorageTek tape products. Instead, they opted for assemble-to-order (ATO) manufacturing. “We used to build to a forecast and wait for the orders to come in. Now we don’t build anything until we have a customer order,” says Kurt Doelling, vice president of supply chain operations at Oracle, whose responsibilities include day-to-day oversight of sales and operations planning, procurement, logistics, and backlog management.

ATO is becoming a go-to strategy across the manufacturing industry, says Bill Baker, president of Speed to Excellence, a manufacturing and supply chain consulting firm. “The bottom line is that large inventories are bad,” he says. The excesses represent dollars wasting away on warehouse shelves and increase the risk that products will become obsolete and never find a customer. “If you have a flexible, short-cycle-time manufacturing operation, the factory can deliver product that’s fresh off the line, not inventory that’s been sitting there,” he explains.

In the past, Sun would stockpile products to keep delivery times to 3 or 4 days compared to the industry-standard 7 to 10 days. “We thought this would give us an edge,” Reese says. “But customers weren’t making a decision on who to buy from based on a couple of days’ lead time.”

Meanwhile, the inventories were costing Sun a bundle—tens of millions of dollars each quarter in overhead costs and write-offs for obsolescence, not to mention the managerial headaches caused by the attempt to forecast the optimum inventory volumes for thousands of items in a volatile economic climate.

By building products to order, Oracle will give customers acceptable response times while also squeezing out excess costs from the manufacturing operations.

Oracle is also shrinking the manufacturing operations from a high of 21 final assembly and test locations to just five facilities, consisting of one internal manufacturing plant and three external suppliers (one of which manages two facilities). “This was a key enabler for implementing our model,” Doelling points out, explaining that ATO requires each supplier to meet high performance standards. Assuring that 21 different locations were all meeting those requirements would have been extremely difficult to manage.

Make Deep Cuts
Building to order and eliminating finished-goods inventories set the stage for Oracle’s boldest move: strategic changes to Sun’s existing distribution system and network of sales channel partners. Sun’s previous approach relied on distribution centers in Asia, the U.S., and Europe to act as staging areas for large customer orders.

Once the various pieces of an order flowed in from the 21-facility assembly and test locations, the distribution center bundled the order and shipped it in a single delivery to the customer. “That was a difficult supply chain to manage because managers had to ask one external manufacturing partner to sell to another,” Reese explains. “We had to broker the deals for all the components.”

After the acquisition, Reese and her team took a hard look at this approach and concluded that the costs didn’t justify the benefits. Now Oracle uses an internal sales staff to cultivate business and ships products directly from the three manufacturing plants. To aggregate products within a single shipment, Oracle relies on what Doelling calls “natural consolidation.” Each external supplier is responsible for only one product line: SPARC, x86, or StorageTek.

Shuttering distribution centers also relieved Oracle of an annoying legacy workaround for inventory processing. The distribution centers accounted for newly arrived items by physically stocking each product even if it was scheduled to leave immediately as a bundled order. These unnecessary stocking activities alone were costing Sun millions of dollars a year. “We eliminated all the material handling, potential losses, and logistics challenges we used to experience,” Reese says. “The tracking and paperwork requirements behind those two tiers alone were phenomenal.”

Modernize the Technology
Business process changes—even seismic ones like these—aren’t enough to guarantee success in today’s highly competitive, global marketplace. Oracle also had to update and expand the underlying applications that were managing the manufacturing and supply chain activities. “Without the right ERP and distribution tools, we wouldn’t have been able to pull this off,” Reese says.

The reason: consolidating production lines and building to order means that Oracle staff is spending more time in planning and forecasting talks with key suppliers. “We replaced inventory with information and effective communication,” Doelling says. The risks of not coordinating more closely are just too high. “Now missteps by a supplier potentially have an immediate negative impact on a customer,” he adds.

As a result, the manufacturing operations will use every part of Oracle E-Business Suite, from its core ERP functions and Oracle Advanced Supply Chain Planning to the supply scorecard tool and the Demantra Real-Time Sales and Operations Planning logistics module. At the top of the modernization list was upgrading Oracle E-Business Suite to the latest Release 12 version to generate invoices, export paperwork, and handle other essentials for completing transactions.

The new ERP system has helped Reese’s team retire another antiquated business process that sent transactions to a non-Oracle application used by a third-party logistics partner. That system generated the actual paperwork for export licenses and other documentation. But for this two-step process to work, Sun had to write custom interfaces between the two systems. Not only were the interfaces costly to create and maintain, but they often created processing bottlenecks. “When problems arose with the interfaces, you couldn’t get a transaction played,” Reese recalls. That delayed shipments and made accurate financial accounting difficult. “When it’s the end of the quarter, you want to make sure all the transactions get played so you make your quarterly numbers.”

Oracle no longer has to worry about kludgy communications between two platforms. Reese’s team recommended reducing the number of logistics suppliers from five to one. The new logistics partner, Kuehne + Nagel, uses Oracle technology so integration will be tight between critical IT systems. “They will play the transactions directly into our Oracle system without any interfaces,” Reese says.

Another change to the application lineup is Oracle’s Agile product lifecycle management (PLM) applications, which replace an old PLM system that was too complex for anyone other than specialists to use. Early reports for this change are also encouraging. “I get e-mails from people saying how it’s so much easier to write a change order or to collaborate with external partners,” Reese says. “Our ability to move a lot faster as an organization has gotten so much better since we implemented Agile.”

The full implementation of Oracle E-Business Suite 12 is slated for completion early this year. Extensive early testing is already showing transaction volumes at significantly higher rates. “We’re also seeing vastly reduced amounts of excess and obsolete goods, vastly reduced levels of rework, and reduced levels of premium freight and supplier overtime expenses,” says Doelling.

“Putting in the Oracle software is giving us a tenfold payback,” Reese adds. “It gives us greater visibility into the broader manufacturing ecosystem, and it just makes everything we do work much more smoothly.”

Continuously Improve
Although Reese’s team is still bringing the makeover to life, lessons she learned will guide future modernizations. Among the most important is a decision to do away with an old practice Reese calls the “infinite right of appeal” for people wanting to customize new software. Sun used to entertain suggestions from business users about how to tweak new applications to accommodate individual business processes. That would result in extensive modifications that delayed implementations, added to software maintenance costs, and produced headaches when it was time to reconcile the customizations with new releases of the programs.

“Now the mandate from the top has been to put in place the vanilla software, and if there are areas where we really need something different than vanilla, we’ll go in and change the software itself so it’s available to every customer that uses it,” Reese says. “We haven’t had many of those situations.”

Instead, Reese has found it beneficial to get people to change their business processes before changing the underlying software. She admits that this hasn’t always been easy, especially for something as large and important as an ERP implementation. “It took about three months of discussions, but we got people to accept the idea,” she says.

Her staff forged support by pointing to real-world examples of how other high-tech manufacturers were using standard software to solve similar problems. “That really helps the team to realize, ‘OK, it does make sense for me to change a business process I’ve been using for the last 20 years,’” Reese says.

Listening to alternative ideas and concerns was another key to drumming up support. Three times a week for the past six months, Reese’s team has been sitting down with the end users to review business processes, discuss concerns, and decide how best to use the new resources.

“A project like this requires not only my direct attention but also that of all the vice presidents and directors who work for me,” Reese concludes. “All of the management staff has to be in there listening to people.”