Kevin Carroll is the first to say procurement isn't sexy. But after years as vice president of supply chain management at Sun Microsystems Inc., Carroll understands the key isn't sizzle; it's solutions.
That's what drives him and the 500 people who work for him worldwide. "I have a lot of passion for creating a consistent process and leveraging that process to get results," he said. No glamour, certainly, but a lot of glory when they get it right.
Analysts say Sun's procurement efforts, ranging from rigorous supplier reviews to a private exchange network, a beefed up forecasting system, and savvy use of EMS partners, have helped the nearly $20 billion company weather today's sluggish economy better than many of its competitors.
Sun's inventory turns were a respectable 14 in the last quarter (although down from 16 in previous months).The company credits its close relationships with supply chain partners and its ability to forecast demand. This promotes greater cost efficiency.
"By reducing costs, Sun's procurement strategy is definitely helping the bottom line," said Andy Neff, an analyst at Bear, Stearns & Co. Inc., New York.
There's no denying it has been successful, but at least some of it is shaping up to be controversial. Sun's private exchange isn't popular with some longtime suppliers, and it's not without its risks, said Paul McGuckin, an analyst at Gartner Group Inc., Stamford, Conn. He questioned whether Sun's high standards of quality can be met in that type of forum.
Others wonder why the Palo Alto, Calif.-based systems maker would jeopardize the supplier relationships it has worked so hard to build.
And it has been hard work. At the core of Sun's supply chain strategy is its collaboration with some top 40 suppliers. These relationships aren't trendy "e-partnerships," nor are they solely about price.
Sun must have deep, long-term relationships with its suppliers that go far beyond just buying and selling commodities, Carroll said.
More than 10 years ago, Sun came up with a performance management process for its suppliers, and the company is still using the same basic strategy. Sun uses a formal process with each of its top 40 suppliers to evaluate cost, quality, delivery, product availability, and technology, Carroll said. He did not define these criteria, but did note that both sides work together to establish goals and objectives and meet once a quarter for a formal review.
"That's the time when we take a look at how things are doing, talk about challenges in the upcoming quarter, and do a lot of planning," Carroll said.
But it doesn't stop there. Semiannually or annually Sun's top management-including Carroll-meets with suppliers to review the past year and decide which areas to concentrate on in the coming year. Sun also honors top-performing suppliers once a year at an awards dinner.
What's missing from this picture? Sun hasn't moved its supplier performance metrics to a Web-based system. "There's a lot of vaporware out there," Carroll said. "I agree the Web can add a lot of value, but I simply don't see a third-party solution out there that can do what we're doing."
The fundamentals of supply chain management just aren't that tough, Carroll said.
The company has high goals for its suppliers, but setting standards makes for better partnerships, he said. "We really use these to drive the expectations of the suppliers and to help us decide where we should invest strategically."
And it works, at least for suppliers such as Micron Technology Inc., which has been a top 40 partner of Sun's for almost two years. Of course, that doesn't mean it's easy.
"The qualifying process is quite a bit more rigorous than what we've gone through with other customers," said Mike Sadler, vice president of networking and communications at Micron, Boise, Idaho. "Since Sun sells so many mission-critical systems, there's a particular focus on quality and reliability. That makes the barriers to entry pretty high."
But the structure and the "enforced" communication are helpful, Sadler said. "Communication is not a problem day to day, but the quarterly get-togethers are a good chance to be forward looking. The discipline of this process is very valuable."
And because of all this communication, Sadler thinks Sun's Commodity Management Group is a lot more open to innovative solutions to problems than other companies. "They really enable us to be creative because they do much more collaborating than dictating. This benefits both of us."
Two other issues make Sun an easy customer to work with, Sadler said. One is the fact that Micron has a "champion" at Sun, an employee who represents the chip maker's point of view to management.
The second is the fact that Sun's procurement staff is "much stronger technically than we typically see in other customers," he said. "We communicate more effectively with them, and they understand complex issues better."
The result for Micron: "We have a lot of credibility within Sun," Sadler said.
Sun not only wants suppliers to have credibility, it must have credibility too-particularly when it comes to the perennial problem of forecasting accurately. Carroll laughingly admits that his suppliers "may not agree" that the company has improved its process, but he thinks strides have been made.
In the last seven years, Sun has pushed hard to integrate marketing, field sales, and operations into the procurement area in order to get as close as possible to supplying demand. The company has integrated a number of third-party software applications to create a rolling projection of the coming six quarters. That information is regularly shared with suppliers.
The goal is to integrate the suppliers in an even tighter fashion, perhaps using a private, Web-based technology, to cut down the amount of time it takes to communicate changes.
"The devil is in the details," Carroll said. "We've got lots of room for improvement here, but I really believe we're doing the right things to narrow the gap."
Sun, at the very least, has the courage of its convictions, Micron's Sadler said. "They commit to taking what they've forecast, and they live up to that. That shows integrity."
Giving the Web a whirl
However, Sun's newest supply chain effort-its private exchange network-may put its integrity to the test. In the last four months, Sun has spent $500 million purchasing components through this portal, and by the end of June (Sun's fiscal 2001 close), Carroll estimates that number will hit $1 billion.
It's a serious investment for the company, but Carroll contends big dollars were necessary to see if this really is a good long-term option.
The benefits of a private exchange are easy to understand. On the invitation-only portal, approved suppliers and select others are given the same list of requirements, such as an RFQ.
The suppliers then have time to examine the list and get more information if necessary. The bidding takes place over a 90-minute period and happens dynamically, though most often suppliers don't get to see what competitors are bidding. At the end, Sun is reasonably certain that it's gotten the best price the market has to offer, according to Carroll.
Today this portal is powered by a third-party application, although Carroll wouldn't say which one. However, Sun is seriously interested in entering the private exchange business.
Carroll's reasoning? "To get off the price negotiation and on to the strategic negotiation."
The traditional bidding process-with an RFQ, FedExing, and a long cycle of bids-can go on for months, according to Carroll. That's a waste of time and isn't necessary when looking for commodity products, he said.
Carroll didn't say when Sun will launch a private exchange, but analysts say its high on chairman and chief executive Scott McNeally's to-do list.
A supplier's take
Of course, Micron isn't so sanguine about the idea. The chip maker doesn't participate in this private exchange and has "vigorously resisted" participating in any network, Sadler said.
"There's very little give and take and not much motivation to work with the customers," he said. "If someone were to buy a lot of products on an exchange and end up in an excess inventory situation, we'd tell them to get lost. We'd never do that with a company like Sun."
There's another risk, too, Gartner's McGuckin said, and that's quality. Sun has had well-publicized problems with bad SRAMs in the past 18 months, despite a rigorous quality program, he said. Exchanges are fundamentally about price, so the OEM has much less leverage to work with suppliers on quality.
That greatly increases the risk of quality problems. Still, Sun's top management has said it's seriously committed to exploring the use of private exchanges, according to McGuckin.
And there's certainly a reason for that, said David Cahn, an analyst at AMR Research Inc. in Atlanta. "Exchanges are the direction everyone is headed. They make sense for commodity parts."
It does make sense, Carroll said, but he's also highly sensitive to how his major suppliers are going to feel. "We're not going to trash our supplier relationships," he said. "They've made a big investment to support Sun, and we're not going to compromise that. We're not going to throw everything out to bid."
The challenge, according to Carroll, is to figure out how far to go with private exchanges. One of the driving forces: 30% of Sun's procurement workforce is involved directly in negotiating with suppliers.
The EMS side
The last major piece of Sun's supply chain management strategy is its relationship with EMS providers. Although this is a fairly common practice among computer makers, Carroll believes Sun pushes its EMS partners harder and sends more products through them. In fact, he expects the company's EMS partners to produce between 65% and 70% of Sun's unit volume by the end of June. From his perspective, that accomplishes a few things, including lowering Sun's manufacturing overhead-the company has only three factories-as well as letting it respond to the market more quickly.
"We've always been highly leveraged, but over the last five years, we've progressed from having our partners build simple boards for us to today building four-way group-server-level products," Carroll said.
Sun manages its relationships with EMS partners in the same way it manages its leading component suppliers, by setting goals and meeting regularly.
For Celestica Inc., which has been an EMS partner of Sun for 10 years, the relationship works, in large part because it's a two-way street, said Michael Augustinavicius, vice president and general manager of Sun's global customer unit at the Toronto-based manufacturer.
"We're very focused on being a virtual extension of Sun," Augustinavicius said. "This is a very mature relationship. There's a big difference between a six-month partnership and one that's 10 years old. We're very focused on mutual goals."
Keeping partnerships with EMS providers tight is key because they do 100% of the procurement for the products they build. Carroll sees the relationships evolving as the market changes.
Sun wants to do more to link its EMS and other external partners to the inner workings of the company. And, according to Carroll, the easiest way to do that is to move to a private network where information can be shared.
"We want to let our suppliers see our raw demand," he said. "There's an e-design opportunity here."
But he also envisions a private portal where partners can co-plan and share information in real time. His strategy: start with his top five suppliers and key EMS partners, then roll this out to everyone else.
Valerie Rice is a freelance writer based in West Newbury, Mass.