To all CPQ faithful,
A long but worthwhile article on CPQ's emerging business model and strategy. Go CPQ.
Regards,
Craig A. Anderson
xcitfan@mailexcite.com
Industry Week - May 4,1998
By: Teresko, John
Compaq's build-to-order strategy--a competitive leap--is powered by information.
LAST JULY WHEN HEADLINES trumpeted "Compaq Computer Cuts Prices," the emphasis was not on the company's new focus on customers and the way it hopes to serve them better. Or the IT-driven restructuring that is making it possible. Price alone was in the news.
While it is true that the new business strategy enabled lowering U.S. business desktop prices across the board by as much as 22%, there was little reporting of new corporate initiative directed toward the more significant issues of customer satisfaction, product quality, reliability, and stockholder value. Instead, the media dwelled on the fact that the price of the entry-level Compaq Deskpro 2000 PC was lowered by 14%, with three models being priced below $1,000.
Beyond mere price reductions, Compaq Computer Corp. was really announcing a strategy for long-term survival via a new business model that it believes will create a new customer-value revolution. The new model--the Optimized Distribution Model (ODM)--is one it believes will enable the industry's most satisfying and complete product-ownership experience and the most efficient, cost-effective, and comprehensive order fulfillment process. A key part of 0DM is a build-to-order concept in which Compaq is, in effect, using information technology to replace inventory.
"0DM signals the beginning of a new era at Compaq," says the company's president and CEO Eckhard Pfeiffer. "With the launch of 0DM, we are sending a shock wave through the industry. 0DM sees our entire business from the customer's point of view. The new model will shape the way all Compaq products are designed, built, configured, distributed, ordered, purchased, serviced, and upgraded, as well as the way Compaq engages customers and works with its reseller partners... . This is our way of enhancing relationships with our customers while increasing shareholder value."
The first phase of Compaq's 0DM strategy was the launch of build-to-order (BTO), a set of integrated business processes that span the length of the supply chain from suppliers to end customers. Compaq also announced the first products to be shipped under the model-a new generation of commercial desktops that have been built to customer or channel orders rather than to forecast. Tim Cook, former vice president-corporate procurement who recently left Compaq for Apple Computer Inc., explains the dynamics of the of the change:
"Under the old business model we would have decided what we wanted to build for the next eight weeks, in essence guessing about what the customers wanted. By building, shipping, and storing [computers] in a distribution center we not only increased our costs, but we also created an artificial constraint by tying up critical parts in machines that did not meet customer needs. Secondly, if we built and stored them at a time when component costs were falling, it would be impossible to quickly capture the reductions and pass them on to the customer. . . . You're not pleasing the customer because you're stocking out on things and you may be asking your customers to pay more during a period of declining component prices."
With BTO Compaq doesn't start building until an order is received, and therefore the company is more likely not to have a problem in terms of building the units because the components are at a parts level, rather than tied up in inventoried machines. As a result, predictability goes up and the number of constrained products goes way down. The resulting cost savings are passed on to the customer- instead of having the costs associated with weeks or months of inventory, the savings that come from BTO are passed along. The customer benefits from greater value as well as from a more predictable delivery mechanism.
To accomplish the benefits of BTO, Compaq is drastically changing supplier relationships both in terms of numbers and the nature of the relationships.
"The focus is on having synergistic relationships replace the traditional transactional mode of doing business," Cook says. Suppliers are engaged very early in the development process, and in some cases do some of the development work. With thousands of suppliers, doing that effectively would be impossible. Compaq's goal for this year is to reduce the supplier base by 50% by the end of the third quarter. Those that remain will have development capability, and some will be on-site. They will have their inventories positioned around the world at all of Compaq's facilities, including Houston, China, Singapore, Scotland, and Brazil.
COMPAQ ENVISIONS A RELATIONSHIP THAT WILL GO FAR beyond writing a purchase order. Cook gives this example: "I can get tens of thousands of people to do a transaction. That's not what I'm looking for. I'm seeking someone to help me run my business. So I don't do business with [companies that can't contribute] in the development processes." A look at the speed and length of the product-development cycle shows why an involved supplier is important. Compaq isn't building anything today that it was building a year ago-or even six months ago.
The transition from build-to-forecast to BTO began with an enterprise-information-technology vision developed in 1994 and implemented beginning in 1995, says Bill Page, corporate vice president for supply-chain strategy. "We wanted to take a 'FedEx' view from a production planning and operations planning standpoint." His reference is to the courier's practice of sending all of its shipments through its Memphis distribution point regardless of origin or destination.
"We chose SAP AG's R/3 enterprise-resource-planning [ERPI software to have a standard set of business rules to optimize decisions centrally for local execution," Page continues. "That way the decisions are made with the best corporate outcome in mind and not the local optimum answer.
"At the moment we're collecting about 80% of our revenue through our SAP order-management system." Brazil was the company's first major site completely converted to the new ERP system, followed by European operations in the first quarter of this year. Asia is converting this quarter, North America in the third quarter.
"We've also custom-developed some tools that sit on top of the SAP execution system to give us a data-warehouse capability," Page adds. "To the users inside Compaq, it's SAP, although it is custom-developed software that links our legacy systems with SAP during the changeover. That's where we've used tools from i2 Technologies Inc. [Irving, Tex.] and others to provide the planning architecture to do the central-based planning for the company."
An important part of the strategic plan was to have the ability to use the new software not only to run the company, but also for planning. "Evolving this capability via a data warehouse was a difficult thing to do, but it has proved to be a competitive advantage for us."
Every day all of Compaq's global transactions are captured and are available through its IT systems, adds Page. "For example, if we sell a product in Switzerland today, we ... are able to record its identity, the revenue attained, and the cost of that product. Our IT capability could even make it possible to track that information on a daily P&L."
He contrasts that information availability with the stories that appeared when the Asian economic problems surfaced recently. "Some very large, well-known companies reportedly had a very difficult time understanding the basics--like exactly how much inventory they had over there and where they stood against their plans."
The data warehouse, custom developed by Compaq, essentially takes operating data and feeds them into another database that can be used for decision-support purposes. The main tool is a relational database from Oracle Corp., Redwood Shores, Calif. Page says the custom-developed data warehouse is an interim strategy, designed to be used during the SAP implementation. The data would be contained within SAP when the implementation is completed.
Electronic data interchange (EDI) is part of Compaq's new look. "As we developed our supply-chain strategy, one area we went after was the supplier interface. We developed an EDI capability that feeds into our data warehouse. Every week our suppliers use EDI to report on their delivery capability and status. EDI also brings in orders from some of the channel partners."
LONG-TERM, HOWEVER, PAGE DOES NOT THINK EDI is the answer. "Since EDI is really a serial process and basically dictates certain times that you do things, we will eventually have to migrate to an Internet/Web-based type of transaction with our suppliers and our customers," adds Page. He considers Microsoft Corp.'s Value Chain Initiative (VCI) a step in that direction. "VCI is trying to bring a consortium of software providers together to develop the needed standards and facilitate Internet commerce." He thinks that these goals can be achieved in three to five years.
In the meantime, Compaq's evolution from build-to-inventory toward build-to-order is delivering results. In 1997, Compaq says, the IT initiative led to quality improvements across product lines, market-share growth, and improved competitiveness while greatly reducing cycle times and inventory costs.
"On inventory turns in 1997, for example, we went from five to 14," says Page. Compaq is targeting 25 for the end of 1998 and 30 by the end of 1999. "As we lowered our inventory, we also increased our ability to hit our customer commitments by 33% while paring cycle time," he adds. Revenue for 1997 grew to $24.6 billion, representing a 23% increase from 1996. Last year the company introduced 188 new products. The final reflection on the company's performance was the market value of the stock--it climbed 90%.
Compaq is using outside help to inaugurate the new IT strategy. For lead consultant, the company partnered with Price Waterhouse, a firm with a project management, IT, and business process-history at Compaq. In 1994-95, Compaq relied heavily on McKinsey & Co. for expertise in business-process reengineering. Those consultants "helped articulate our vision and helped us map how to accomplish it," Page says. "We also use other consultants with special skill sets, such as Cap Gemini."
Page offers advice for those considering an IT-based reengineering move: "It takes longer than you think. Originally people thought we could reengineer the company and deliver the new IT infrastructure in 12 to 24 months, but in reality it is taking 24 to 48 months. Whenever we looked at a problem, we tended to look at it through the eyes of the business today, and we didn't envision the growth that would continue and the broadening of our product line and customer base. Our growing business was the main inhibitor in meeting our original schedule."
Also critical to a successful ERP implementation is corporate leadership and direction from highly engaged senior management, he adds.
|
