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Business Transformation: Procurement Strategy at IBM Corporation



Women Executive Supply Management Summit (WESMS)

San Antonio, TX
February 2009

Author(s):

Mei-Chan Duan, Director, Client Services Procurement — Americas, ISC/IBM

With a 30-year career in finance, human resources and procurement at IBM — half of that spent living and working in Asia — Mei-Chan Duan is clearly passionate about global leadership. In her session, Duan melded her unique personal story with the challenges and successes in her role of supply chain leader in the transformation process at IBM.

"Business transformation is so key right now, given the struggling economy," she began. "The supply management role is more crucial than ever, but also more complex."

Building a Globally Integrated Company

First, Duan touched upon the fading concept of a national economy. "If you think the world is flat, you're right," she told attendees. "If you see economic changes in the United States, you also see the markets in Tokyo, Taiwan and other countries affected. Doing business in a flat world requires rethinking the very structure of the enterprise."

To this end, IBM engineered a strategy to replace vertical hierarchies with a horizontally integrated model called the globally integrated enterprise. Meanwhile, across the organization, core processes and functions — once regionally managed — were shifted to a globally integrated model.

According to Duan, IBM will continue to invest in emerging markets, including India, China, Brazil and Russia, to support business growth. On her first trip to IBM's India location, for example, she found only five procurement employees. One year later, there were 12. Today, there are more than 300.

Obviously, she pointed out, global integration is a reality at IBM. "Deepening of global trade, capital and information flows — enabled by a 'flat world' — is changing where and how business value is created," Duan told attendees. "This is driven by the core principle of global integration: When everything is connected, work flows."

Where it flows and how it gets integrated, however, is shaped by three forces: economics (profit potential, including labor); expertise (access to talent, ideas and innovation); and open business environments (the degree of open systems, standards and approaches).

Echoing the sentiments of IBM CEO Sam Palmisano, Duan added: "Global integration is about doing the right work in the right places and at the right cost. It's not simply labor arbitrage — moving jobs offshore, or doing work because it's low-cost."

Today, with a procurement presence in more than 60 countries and 400-plus locations, procurement spend was equivalent to 49 percent of IBM's revenue in 2007, and cost savings contribution by procurement was several billion dollars.

IBM's Procurement Transformation

Looking back, Duan recalled the early 1990s as "very challenging, tough years." At the time, IBM's sales had dropped, profits had declined and the organization grappled with a negative cash flow, rising debt and falling stock. (Duan recalled the stock price at the time in the low $40-per-share range.) "It was a time of crisis and a case for change," she told attendees.

To remain competitive, IBM embarked upon a transformation of all its key enterprise processes and began breaking down the barriers between the business units, reengineering processes and implementing common standards.

According to Duan, IBM procurement's transformation has focused on the organization, its people, its processes and technology. Procurement moved from a decentralized to a centralized organization, changed the traditional view of procurement from service providers to "change agents" or "influencers," enhanced procurement employees' skill sets from generalists to experts, and deployed global tools and processes to drive efficiency and productivity.

Duan then recalled procurement organizations in China, Hong Kong and Taiwan with just one or two full-time employees. In these locations, the majority of purchases were made by many employees working in part-time procurement roles.

As Duan recalled, these employees were very reluctant about change at first. "I had to get senior executives' support to centralize the organization and consolidate the purchasing volume," she explained. "But, we got much better buying leverage."

Over the past 15 years, IBM has experienced measurable improvements in procurement performance. As evidence, key procurement metrics indicated that with the establishment of sourcing councils, procurement reported a cost saving of $6.5 billion in 2007; compliance to procurement strategy/policy has improved from 50 percent to 99 percent; and end-user satisfaction increased from 40 percent to more than 80 percent, post-transformation.

Additionally, global e-procurement tools and processes were deployed. Electronic requisitions and purchases have grown from less than 20 percent, pre-transformation, to about 98 percent today. Purchase order processing cycle time has reduced from five to 30 days to just a few hours now. Finally, contract management is automated with a standard tool. Before the transformation, this was conducted on a nonstandard, manual basis.

Furthermore, with the successful transformation, IBM Global Procurement launched an organization in 1999 to provide procurement services to external clients. "Today, the IBM CPO has much broader responsibilities than in the past, overseeing sourcing and client services procurement to worldwide engineering and manufacturing," Duan explained. "To support the company's globally integrated enterprise strategy, the CPO has moved procurement headquarters from the United States to China to be amid the growth market." The objectives for doing so were to offer immediate response to the business needs, develop supply chain leaders and enhance the supplier base in this fast-growing region.

At the sourcing level, a global sourcing team was formed and an integrated supply chain approach adopted. This team is responsible for developing and executing IBM sourcing strategies. Those sourcing professionals at IBM maintain constant relationships with suppliers and share the organization's strategy and direction with them on a regular basis. "That way, suppliers can adapt to and support IBM business more effectively," Duan explained.

The establishment of three global procurement centers and three satellite locations was another component of IBM's procurement transformation. Transaction processing has been consolidated into three low-cost, efficient operations centers — Bangalore, India; Budapest, Hungary; and Shanghai, China — and three satellite locations in Vietnam, Bulgaria and inland China to support the organization's global requirements.

"We always ask ourselves three questions when choosing a global location," Duan told attendees: What is the local business environment/infrastructure? Is the talent available? Are labor costs competitive? "We keep on moving!" Duan added. "Globalization isn't going to slow down."

With the successful transformation, IBM Global Procurement has launched an organization to provide procurement services to many external clients, and IBM is recognized as a leader in this space.

Skills Development

In view of the need to further enhance worldwide procurement skills, Duan has secured additional funding — several million dollars — since 2006 and established an education council, or task force, consisting of representatives from all procurement functions, human resources and the IBM learning organization to develop and implement a global procurement education plan. "We got the funding because we said exactly what we were going to do," she explained. "We also focused on rapid-growth markets to demonstrate the potential value to IBM as a whole."

Today, in addition to instructor-led classroom courses, IBM offers an extensive suite of basic, intermediate and advanced e-learning courses for procurement professionals. "It can be expensive to send people on-site to learn new skills, so we needed to adopt new methods and technologies to train our people," Duan said.

Succeeding in 21st Century

Duan is sensitive to the unique challenges faced by 21st-century workers — multiple time zones, virtual teammates, working remotely and mobility issues, to name a few. "In the Asia-Pacific region alone, there are six time zones for me to consider," she told attendees. "So, we've established that early morning, U.S. time, the afternoon in Europe, and early evening in Asia works best for a global teleconference."

Meanwhile, she acknowledged, telecommuting and working remotely can leave workers feeling isolated. "At IBM, it became 'I By Myself,'" Duan joked.

Then again, this is all part of "the new normal" workplace, according to Duan — a dynamic which requires employees to work on weekends and local holidays, early in the morning, late at night, at home and on the road. Low-cost technology makes it possible and drives an increasingly 24/7/365 work culture.

Beyond adapting to this new round-the-clock model of work, Duan suggested that successful 21st-century supply chain leaders pursue continuing education (advanced degrees and certifications, for example), as well as the ability to sustain comfort in a highly diverse environment.

"The new environment is highly matrixed and reflects generational and multicultural differences," she explained. "You may have more than one boss and manage employees across functions and/or geographies, which might reflect how important your position is," she said. "You need to have the skills to effectively manage the operation in such environment."

For those looking to advance to leadership positions, IBM looks most favorably upon candidates with a passion for the business, according to Duan. "While we want our leaders to focus on winning and to sustain momentum, this is the trait we prioritize," she said. "The best IBM leaders are passionate about their work and winning in the marketplace. They're excited about what IBM technology and services can do for the world. They're enthusiastic about how we serve our customers and win over competition."

In Integrated Supply Chain (ISC), Asia Pacific, leadership candidates have entered into a "leadership accelerator program" which cultivates five core areas: cross-functional development, leadership development, business acumen, global view and soft skills. The lattermost aptitude — soft skills — is "especially vital for younger generations of workers in emerging markets," Duan pointed out.

Thriving on Change: Lessons Learned

Wrapping up her session, Duan outlined the traits that will ultimately differentiate the organizations that will thrive on change from those that will get left behind in an increasingly global economy.

First, she said, change-oriented organizations recognize the world is now flat. Additionally, they embrace new thinking and new business models, as well as the concept of working in alliances.

But most importantly, she concluded, they accept that innovation and risk-taking are the new norms. "Whatever you do, be innovative," she advised. "Be creative, and be a change agent, and you'll be successful."


Reporting by RaeAnn Slaybaugh



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