Seagate Technology Profile: Real-Time Response to Demand Driven by a vision of multitiered visibility and real-time demand fulfillment, Seagate Technology is investing heavily in technology and process improvements and an electronically linked end-to-end supply chain. Founded in 1979, Seagate helped fuel the information age by building the personal computer (PC) disc drives needed to store vast sums of data. Today, data-storage technology has evolved far beyond the PC. And as our appetite for storage keeps on growingdriven by the Internet, consumer electronics, and our desire for anytime, anywhere access to information so does the need for increasingly sophisticated disc drives. What few people realize is just how complex these products are. Seagate notes on its Web site that building disc drives is considered the \"extreme sport\" of the high-tech industry, involving expertise in physics, aerodynamics, fluid mechanics, information theory, magnetics, process technology, and many other disciplines. The company constantly strives to boost storage capacity and set new records for disc-drive performance. Besides staying ahead of the technology curve, Seagate faces a number of unique business challenges that drive its supply chain strategy. KEY BUSINESS CHALLENGES Seagate's products use components that are so complex to manufacture that lead times can range from one month to an entire quarter. Then there's the geographic challenge. The component manufacturing plants are often far removed from the subassembly and drive manufacturing plants. Explains Karl Chicca, senior vice president of global materials, \"Every disc drive has several hundred of these very complex parts, each of which 249 Copyright 2005 by The McGraw-Hill Companies, Inc. Click here for terms of use. 250 Strategic Supply Chain Management has process technologies that are literally bleeding edge, coming together from all corners of the world, in massive quantities we produce 15 to 20 million disc drives a quarter.\" This translates into about 65 million components a daymany purchased from outside suppliersthat go into disc drives that are increasingly customized to specific customer needs. Customers range from Sony and Microsoft which use Seagate's drives for consumer applications, to companies with high-end storage systems, such as EMC. For every customer, Seagate maintains one or more just-in-time (JIT) hubsinventory warehouses operated by a third-party logistics provider. These vendor-managed inventory (VMI) arrangements are the industry norm. Each hub is stocked with anywhere from one or two to dozens of different types of disc drives, depending on how broad a range of products the customer sells. Some of Seagate's customers have 15 to 20 locationsand just as many JIT hubsbut they don't pay for the inventory stocked in their hubs until they use it. Now add the complexity of unpredictable demand. In this business, customer Seagate's ambitious demand is infinitely dynamic, and Seagate's ambitious goal is to ship to real-time goal is to ship to changes in demandnot to plans or forereal-time changes in casts. This means that the company has to monitor the economy, the high-tech indusdemandnot to try, and the information-technology subset of the industry to get a sense of which way plans or forecasts. demand is flowing. In the early days, a plan would hold for six months. No more. Notes Richard Becks, vice president of e-business and supply chain, \"Looking back on almost 25 years in this business, the biggest change has been the demand dynamic. It can't be predicted anymore. We've had to migrate from a mind-set of plan-based stability to a model of infinite flexibility and building to pure customer demand.\" Extreme product complexity, lengthy component lead times, global operations, high volume, dynamic demand, customized productsSeagate has to meet these challenges as well or better than its competitors to sustain and build on its leadership position. The company's supply chain plays a critical, strategic role. Seagate produces 15 to 20 million disc drives a quarter using 65 million components a day. SEAGATE TECHNOLOGY PROFILE: Real-Time Response to Demand 251 REAL-TIME DEMAND FULFILLMENT Earlier in its history, Seagate focused on low-cost manufacturing and operating to plan. But the company has evolved. Today, the focus is on being a technology leader, getting more innovative products to market more quickly, and building speed and flexibility into the organization for greater agilityall while maintaining a sharp focus on customer satisfaction. Notes Chicca, \"Everything we do has the fundamental premise that it has to benefit the customer.\" Seagate's supply chain has evolved accordingly. A cornerstone of the company's supply chain strategy is meeting customer demand in real time literally responding to customer orders as they arise. To do this successfully and cost-effectively, Seagate has to maintain a greater degree of flexibility in its factories and lower levels of inventory overall. The key is information flow, and that's been a critical focus of the company's supply chain efforts. Seagate acquired a jumble of dissimilar processes and information systems in its early years as it grew through acquisition. For the last five years, making processes, systems, applications, and databases consistent throughout the company has been a top priority. For example, the company had several engineering-change control tools to manage product configurations. Now Seagate has just one worldwide systemMetaphase from EDS. The company also consolidated nine enterprise resources planning (ERP) systems from Oracle into two worldwide systems and eventually will move to a single system. This effort to consolidate and standardize is paying dividends now. Information is flowing more freely throughout the supply chain because it no longer has to be reworked or reentered manually. And integrated systems give the company a clear view into every aspect of operationsa must for real-time demand fulfillment. \"Electronic connectivity gives us visibility up and down the supply chain, so we don't have to generate new capacity every time there's a request for more product,\" says Chicca. \"We understand what our capability to flex really is, and we can commit to the customer very quickly.\" Responding to customer requests used to take a week or longer. Now it takes about a day to inform Responding to customers if and when they'll get product. Seagate's goal is to commit on the spot. customer requests END-TO-END CONNECTIVITY Seagate's customers and suppliers are linked electronically to its internal network. used to take about a week. Now it takes about a day. 252 Strategic Supply Chain Management When a customer pulls a drive from the JIT hub, that pull sends a signal back to the factory and triggers two things: an automatic shipment request to replenish the drive or drives that have been pulled and an automatic order to the manufacturing line to start additional drives to backfill the ones used. Seagate's automatic response to real demand allows the company to maintain lower levels of inventory, while industry competitors still shoulder the cost of loading up the JIT hubs. Seagate's annual inventory turns have nearly doubled, going from 8 per year to 15. But it doesn't stop there. Those pull signals are also conveyed upstream to Seagate's internal subassembly and component manufacturing plants and to external suppliers. Seagate's internal subassembly plants use the same JIT hub processes that are required of external suppliers and stock inventory ahead of the downstream factories that use the inventory. These internal hubs are continually resized to accommodate actual customer demand. By integrating electronically with its factories and suppliers, Seagate eliminates the touch points that slow things down and lead to errors. Over 160 suppliers are connected, with a direct view to Seagate's daily consumption rates. The suppliers can track changes in demand over time, analyze consumption rates, and start to make better use of their own capacity. To make this work, Seagate partnered with e2open to set up a business-tobusiness (B2B) supply chain hub to communicate real-time demand and immediate supplier acknowledgment. e2open worked with suppliers that already used electronic data interchange (EDI) to translate their feedback into the RosettaNet signals that Seagate uses. During this transition, Seagate became one of the world's largest RosettaNet implementations, sending supply and demand information to all its direct materials suppliers. Unlike a few years ago when EDI put this level of connectivity out of reach for many suppliers, the Internet has leveled the playing field everyone can access the World Wide Web. e2open provided an Internetbased application that any supplier with a Web browser can use. This allowed even small suppliers with limited information technology capabilities to have the same visibility as larger, more sophisticated suppliers. The suppliers that adopted the Web-based system are very pleased with the results. Now they're looking for the next level of integration, where the unfiltered demand goes directly into their planning systems so that they can respond even more quickly to Seagate's needs. To this end, e2open is developing a low-cost B2B server appliance with integration software premapped and loaded for most of the popular ERP systems in use today. This server appliance will sit behind a supplier's firewall. SEAGATE TECHNOLOGY PROFILE: Real-Time Response to Demand 253 Seagate sees this as a major opportunity to cut costs both internally and externally while increasing the speed and accuracy of information flowing up and down the supply chain. Linking with suppliers also gives Seagate a better idea of where its orders are in the queue. This information is especially critical when suppliers have long lead times, such as semiconductor manufacturers. Seagate can get a better view into their processes and immediate updates on order status. VISIBILITYTHE HOLY GRAIL This multitiered visibilitythe ability to see up and down the supply chainis a critical component of Seagate's supply chain strategy. It's also the \"Holy Grail\" for many of Seagate's customers that have outsourced production to contract manufacturers. These customers have less control over their supply chain as a result and fear that scarce components may go to their competitors. Seagate is extending the concept of multitiered visibility beyond its immediate suppliers, as reflected in its dealings with providers of application-specific integrated circuit (ASIC) semiconductors, for instance. Once vertically integrated, ASIC suppliers could no longer afford to maintain their manufacturing facilities, so the companies sold their plants and outsourced production to major subcontractors. Seagate is now in the position of placing orders and forecast demands with suppliers that aren't actually manufacturing the partsand through multiple levels of subcontractors. The wafers may be built in Taiwan, for instance, sent to Korea for testing, and then shipped to Singapore for packaging and final testing before going back to the original semiconductor company for shipment to Seagate. To deal with this added layer of complexity, Seagate is working on a process for gaining visibility into these subcontractors. The company is piloting a project that dives deep into a supplier's supply chain. And then it is tying that process all the way through to one of Seagate's end customers for true end-to-end multitiered visibility. The bottom line of multitiered visibility, both upstream and downstream, is better capacity utilization throughout the supply chain. VERTICAL INTEGRATION Gaining visibility into subcontractors is one way that Seagate manages the risks inherent in an extended supply chain. But the company also maintains 254 Strategic Supply Chain Management control through vertical integrationa maverick approach among industry players. The industry trend has been to disaggregate, outsource, and get lean. Bucking that trend, Seagate adopted a vertically integrated model, which many observers thought was unwise. The benefits of breadth, control, and flexibility seem to work to Seagate's advantage. The company's competitors can't always be sure they'll get the critical components they need when they need them, and any change order triggers a negotiation process and a series of requests that has to trickle down through many layers. By contrast, Seagate can move more quickly on behalf of the customer and believes that developing component technology in-house gives the company an edge, given the technical complexity of its products. Seagate can codevelop and codesign each component and the respective process technologies instead of buying components from a variety of vendors and cobbling them together. Today, Seagate manufactures many of its high-cost/ high-complexity components in-house. Vertical integration doesn't come cheap, though. The barriers to entry are huge, given the capital needed for technology development and to produce components and drives. Seagate spends $700 million a year on research and development and $600 million in capitalfar more than its non-vertically-integrated competitors. This investment pays handsome dividends. Customers are willing to pay a premium for Seagate's high-performance disc drives while the company's competitors race to catch up. CHANGE-MANAGEMENT CHALLENGES Although Seagate's supply chain efforts have delivered substantial benefits, managing change has been a challenge, both internally and externally. Altering decades-old attitudes takes time and effort. Not surprisingly, customers and suppliers didn't embrace the changes Seagate introduced immediately. Customers were used to the security of a fully stocked JIT hub, even if it was a false sense of security. The drives in stock weren't necessarily the drives they'd need. And those safety cushions of inventory were driving up costs throughout the supply chain. Seagate's value proposition was a strong one: Let us cut the inventory levels of your JIT hubs, and we'll actually be more responsive to changes in your demandwe'll have the capacity in reserve to meet your needs as they arise. To further support this effort, Seagate has invested heavily in a \"factory of the future\" alliancefully automated drive assem- SEAGATE TECHNOLOGY PROFILE: Real-Time Response to Demand 255 bly lines that also are so flexible that any drive can be built on any line at any time. The education process is ongoing. Some customers get it. Others just won't hear of it, especially those with conflicting incentive systems. If a customer's procurement people aren't measured against excess inventory or total cost of ownershipeven in a VMI/JIT systemthey'll want as much inventory as they can get. Today, even Seagate's most hardened critics acknowledge a night-and-day difference between current service and that of five years ago. \"They'd much rather have today's supply chain servicing them than yesterday's,\" notes Becks. Suppliers also were reluctant to change their old ways of operating. Before coming on board, they suspected that Seagate was just passing costs on to them. In the late 1990s, VMI had begun to spread throughout the industry, and the suppliers were getting pressure from all sides. Their first reaction was that it would not be good for their business. But Seagate's value proposition was that if suppliers would agree to link up electronically and share information on order status, Seagate would be completely open with them on consumption. This is critical information for suppliers, especially in times of constraint, when many buyers start to double-book. Explains Becks, \"I can look those suppliers in the eye and say, 'Look, I don't have the ability to waste your capacity by double-booking you you've got online visibility in real time to what we're actually consuming.' The suppliers love this.\" Industry observers have commented on the \"new\" discipline in the electronics industry today, notes Becks, but it's not really more discipline it's more visibility. He explains, \"When everyone switched to VMI, suppliers got a better sense of consumption, of what the customer was really using, as opposed to just delivering pallets of partsonly to be surprised by unexpected demand once those pallets ran out.\" NEW REWARD SYSTEM Changing internal attitudes and behaviors has been equally challenging. Seagate is in the process of putting in place new reward systems that better align with its new ways of working. The company's old \"build to forecast\" incentives rewarded plant managers for using capacity to its fullest extent. Now Seagate realizes that running capital equipment or a plant \"full out\" actually wastes capacity if the product it's building isn't what the customer really needs. The result is high levels of inventory waiting for customer demand. This hurts Seagate in two ways. First, an oversupply of 256 Strategic Supply Chain Management finished goods inventory can quickly cause price erosion. And second, if a customer comes along with a real order and capacity is unavailable, then there's the opportunity cost of wasted capacity. At Seagate today, success is more often defined as changing the manufacturing line many times and getting lower scores on capacity utilizationbut better scores on meeting customer demand and reducing inventory levels. The key is to balance immediate customer demand with forecasted demand that's expected, validated, and underpinned with a sales commitment but hasn't yet arrived. It's a trade-off. Sometimes it makes sense to prepare for expected spikes in demand; other times it makes sense to wait to see the demand first. Seagate knows that it can't truly anticipate changes in demand or build to plan. Instead, by electronically linking to its customers and suppliers, the company can sense and respond to real demand based on actual pull rates and tee up suppliers to restock inventory based on actual consumption. This makes Seagate's supply chain very opportunistic and nimble. AN EVOLVING SUPPLY CHAIN To make sure that Seagate's supply chain strategy stays aligned with the company's business strategy, Becks's team chairs a monthly meeting of senior-level supply chain sponsors and project team members. Meeting participants review the status of all supply chain projects that are underway and recalibrate those efforts as needed to align them with changes in business direction or new customer requests. Seagate has already invested about $5 million in supply chain improvementsa reflection of the company's commitment to supply chain excellence. The company typically tracks about 30 supply chain projects at any given time. One major new initiative is enterprise planning, which will improve data accuracy and integration among functions and processes, eliminating data silos and separate functional plans. The goal is that when a customer calls and wants to double its order on one disc model and cut another order in half, the order-management group will be able to commit to the order immediately but also calculate the impact on revenue, margin, and capacity utilization throughout the company. Seagate often puts in place one building block of its supply chain architecture and then monitors how well it works out. If a better solution comes along that delivers more flexibility, responsiveness, or value, the company doesn't hesitate to rethink its first approach and deploy the new solution. SEAGATE TECHNOLOGY PROFILE: Real-Time Response to Demand 257 Like its business, Seagate's supply chain is flexible, agile, and evolving constantly. What doesn't change, though, is the company's view of its supply chain as a key source of competitive advantageone well worth the ongoing investment. This page intentionally left blank