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MicronPC: Redesigning Supply Chain Processes to Revitalize Business Performance

By Brian J. Gibson Associate Professor of Logistics Auburn University and Joe B. Hanna Associate Professor of Logistics Auburn University

PART A MicronPC Overview and Industry Background

Company Introduction In April 1995, Micron Computer, Inc., and Micron Custom Manufacturing Services, Inc. (subsidiaries of Micron Technology) merged with ZEOS International Ltd. The new entity was named Micron Electronics, Inc. and began trading on the NASDAQ. Micron Electronics, Inc., produces a variety of high tech goods and services computers and servers, Internet services, Web hosting, and business-to-business e-commerce applications. Their award-winning computers are sold under the MicronPC brand to business, government, education, and consumer markets. The MicronPC division designs and manufactures a broad range of computer products that ranks among the industry leaders in technology, innovation, price, and computing performance. These award-winning products are marketed under the following lines: Micron Millennia desktop computers, Micron TransPort notebook computers, Micron ClientPro corporate computers, and HP NetServer servers. These product lines are manufactured exclusively at the companys facilities in Nampa, Idaho. MicronPC products can be purchased directly from the companys website (www.micronpc.com), by calling a toll free 800 telephone number, through company field sales representatives, and through leading national retailers. Early Successes and Challenges As a new organization, MicronPC adopted a product-focused strategy. Their goal was to provide the fastest and most powerful PC on the market. MicronPC built a 216,000 square foot facility in Nampa, Idaho (more than doubling its capacity) and dedicated a large portion of this multi-functional facility (120,000 square feet) to PC assembly. The company quickly increased production levels of the powerful PCs and pushed them into the marketplace in anticipation of a dramatic increase in sales volume and revenue. The company experienced many early successes, as evidenced by strong sales and high levels of market acceptance. MicronPC finished fiscal 1995 with $1 billion in net sales. The brand name was well respected and the company appeared to be poised for great success in the computer hardware and PC industries. However, the good times in the PC marketplace for MicronPC were short lived. The industry changed quickly as competitors ramped up capacity, enhanced customer service, and reduced prices. MicronPC, on the other hand, was hampered by poor customer support performance and an inability to deliver finished goods on time. As a result, MicronPC lost market share and its reputation was tarnished. The Computer Industry Over 95% of the computers-in-use today are PCs. Worldwide, yearly shipments of computers surpassed 90 million units in 1998. Internet sales accounted for 1.5 million units in the U.S. that year. By 2000, Internet sales were expected to grow to roughly 2 million units, prompting a number of PC makers to build strategies around this distribution channel.
Part A 1

The computer hardware industry contains several major players including IBM, Compaq, Hewlett-Packard (HP), Texas Instruments (TI), NEC, Toshiba, Apple, Dell, Gateway, and MicronPC. These companies serve slightly different niches. Companies like Apple, Dell, Compaq, Gateway, and MicronPC tend to be PC-focused while companies like NEC, Toshiba, TI, and IBM still derive the majority of their sales from outside the PC market. These companies also employ different marketing approaches. For example, Compaq and Apple rely heavily on their retail network to generate sales, while Dell and Gateway focus on the direct sales model. The direct model has emerged as a winning formula and has been adopted by many organizations. It is possible today for a customer to order a tailored PC on-line, at store kiosks, or over the telephone from multiple PC makers. This strategy, while profitable, flexible, and able to limit finished goods inventory, is challenging to organize. In order to experience success with the direct model it is necessary to consistently adhere to several supply chain principles Computer Industry Supply Chain Practices Configure-to-Order and Standardization Heavy competition in the computer industry has driven many organizations toward a customer-focused product strategy. In an attempt to increase sales, several companies now manufacture computers on a configure-to-order (CTO) basis. The goal of a CTO system is to provide users with customized, lower-cost PCs while simultaneously addressing chronic supply problems on the vendor side. These PC vendors feel that CTO is a major part of the solution to recurring demand forecasting problems and the rapidly changing marketplace. Leading PC makers appear to have concluded that the best approach is to build final products only after specific orders are placed. Dell and MicronPC offer a broad array of CTO systems while several other PC makers (IBM, HP, and Compaq) offer limited choice CTO options. This strategy has already paid off for IBM. In the first 6 months of their basic CTO program, finished goods and parts inventories have dropped more than 65%. Even with this vast reduction in inventory, stock-out and delivery time performance have improved significantly. CTO is a viable option because manufacturers have reduced and standardized the number of parts in their products many of which are provided by component and subassembly suppliers. These actions make it possible to manufacture PCs in a very short timeframe at a reasonable cost. Typically, only a few key unique components (e.g. processor, hard drive, memory, video card, etc.) need to be selected by customers to create a customized product. Standardization also provides production efficiencies and lower cost components for the manufacturer. Ultimately, this reduces purchase and maintenance costs for the consumer. Supplier Alliances Forging strong, long-term strategic alliances with key suppliers is another trend in the computer industry. In an alliance, the focus is on building relationships rather than executing individual transactions. These collaborative relationships allow the organizations to develop mutual goals, transfer information efficiently, share risks and rewards, and coordinate strategic plans. Often, the suppliers bring expertise and or economies to the relationship that may not exist
Part A 2

in-house for the buying organization. These relationships also allow the organization to focus on its core competencies, build supply chain flexibility and capacity, and conserve resources. These expanded, interlocking relationships effectively support a CTO system. PC manufacturers would be hard pressed to make CTO a reality without the technical expertise, infrastructure, and resources of component suppliers. These companies provide vendor managed inventory services, assist in demand forecasting, and/or supply production ready components, pre-kitted materials, and pre-assembled modules. As a result of these external services, PC manufacturers can concentrate on their core competency - assembling customized machines within short lead times. Logistics Outsourcing Supplier-manufacturer alliances alone are not enough to make CTO systems work for most PC makers. They also require the expertise of third party logistics (3PL) firms and transportation providers who facilitate the flow of materials through the supply chain. 3PL firms can ensure inventory availability for JIT assembly processes, manage logistics operations, and provide an array of finished goods delivery services. Doing such activities in-house is possible, but it would require a significant investment in information technology, warehouse capacity, and personnel. It is often far more time and cost efficient to outsource these activities to 3PL experts. Logistics outsourcing is used throughout the technology industry. For example, Hewlett Packard has outsourced U.S. warehouse operations to Menlo Logistics and Caliber Logistics. They also use Tibbett & Britten to manage their PC supply chain in Britain and Ireland. Also, Palm Computing partners with Modus Media International to provide e-fulfillment services (including some product assembly and CTO services) for their PDA products. Push vs. Pull Supply Chains The third component of an effective CTO system is a pull-based supply chain. In this type of supply chain, all activities are demand driven rather than forecast driven. This requires the manufacturer to have short production lead times and ready access to customer demand information. If product were built to forecast (a push-based supply chain), the manufacturer would have to build product of every conceivable configuration in order to provide customers with the exact product that they wanted. This is a very costly and near impossible task unless the PC maker were to offer very limited CTO options. A pull-based supply chain with CTO capabilities allows the manufacturer to postpone production until actual orders are received. This creates multiple benefits for the manufacturer and its supply chain members. Inventories can be streamlined, variation and risk reduced, and customer responsiveness increased (due to the speedy availability of customized products). Also, the manufacturer develops a low cost ability to respond to marketplace demand changes. It should be no surprise that many CTO PC manufacturers have made significant investments of time and effort to establish pull-based supply chains.

Part A

MicronPCs Supply Chain Practices While the PC industry was becoming more competitive and more supply chain driven, MicronPC stuck to their original intense focus on the product and build to forecast processes. Although they had a high quality product, their failure to adopt a supply chain orientation was a major error. MicronPC did not collaborate with suppliers effectively, did not strategically outsource their logistics functions, and did not communicate well internally or with customers. The results: a very disjointed supply chain, product lead times ranging from 10-30 days, and growing customer dissatisfaction. Supplier Management In contrast to the competition, MicronPC failed to develop strategic relationships with their supplier base. MicronPC relied on arms length transactions with more than 150 different suppliers of components, accessories, and software. Key managers felt that most, if not all, of these suppliers were needed due to the extensive number of component parts and accessories used in the MicronPC product line. This problem existed largely because the organization failed to standardize parts when possible and control the variety of options offered to customers. Managing this large collection of suppliers was extremely resource intensive. Human resources were drained as a tremendous amount of man-hours were spent maintaining communication and building relationships with each supplier. Financial resources were sacrificed as MicronPC paid higher prices for components than their competitors. They made far too many small purchases from this wide array of suppliers and did not often qualify for quantity discounts. And, other internal resources were taxed as MicronPC received few value-added services from these suppliers. Few suppliers viewed MicronPC as a key customer and most were unwilling to provide extra services that were rendered to the likes of Dell and Gateway. Inventory Woes Poor internal communication regarding inventory availability and production planning set the stage for ineffective procurement and severe inventory problems. The purchasing department, forced to make their best guesses at component requirements, often entered into purchase agreements for components that were not in demand. They also tended to overbuy in their rarely successful quest for volume discounts. As a result, unneeded inventory was flowing into MicronPC and stacking up in the system. This created bottlenecks and a glut of unneeded components that would soon become obsolete. The MicronPC logistics operation bore the brunt of the poor procurement decisions. Their limited storage facilities were already inundated with incorrect inventory and product kept arriving! In a desperate attempt to manage the inbound flow, the logistics department chose not to unload some trailers, instead using these trailers as temporary warehouses. This outside storage strategy worked for a short time until carriers started charging MicronPC detention fees. Also, the activity quickly became too difficult to manage as freight continued to arrive. Trailers were being dropped in the yard without the loads being checked for accuracy, quality, or damage, paperwork was misplaced, and inventory records were not kept up
Part A 4

to date. Additionally, the receipt of products into the inventory system was delayed dramatically. In the worst cases, the receipt of a vendor invoice was the first and only indication that MicronPC had the product on site. The inventory situation became so dysfunctional that needed materials could not be located in the computer system and/or in MicronPCs storage areas. If a manufacturing request for line delivery of a specific component could not be filled immediately, a new purchase order was placed (even before an attempt to locate the products was undertaken). This further compounded storage problems and cash flow challenges. Even worse, was MicronPCs inability to produce PCs in a timely fashion (despite having over $130 million in inventory). Manufacturing operations were constantly slowed due to stock-outs (real or merely misplaced quantities) of key components. Partially completed PCs were taken out of production and placed in temporary storage until the key component could either be located or re-ordered and received. Manufacturing Operations Obviously, the problems discussed above had a tremendous downstream effect on the manufacturing operation. While these long supplier lead times and a lack of inventory control contributed heavily to MicronPCs production problems, the manufacturing operation had some self-induced problems and bottlenecks. Poor design of the assembly floor layout was the primary problem. Component parts would enter the manufacturing area at random places and at varying times, disrupting product flow. Also, work in process had to be moved around the facility in illogical patterns (e.g., not in a straight, unidirectional flow) in order to complete manufacturing. As a result, excessive material handling and movement was needed, efficiency was reduced, and valuable time was lost. PC production was severely restricted by these manufacturing bottlenecks and inefficiencies. Fewer than 1,000 PCs were being manufactured per day in a facility that had a projected capacity of 2,100 units per day. This limited production schedule contributed to a dramatic increase in product lead-time (elapsed time from order placement to shipping) and customer order cycle time (lead time plus transit time). MicronPCs lead times ranged from 1-30 days versus under seven days from their major competitors. As a result of their supply chain and manufacturing woes, MicronPC quickly gained a poor reputation in the marketplace. Customers felt that Micron had a great product if you could ever get your hands on it. Outbound Product Movement Another costly area for MicronPC was customer delivery of finished goods. Given their long production cycles, this last link in the supply chain presented the only opportunity to make up some of the lost time. MicronPC management believed they had to use overnight shipments to remain somewhat competitive with Dell, Gateway, and others who possessed a dramatic order cycle advantage over MicronPC. Under normal circumstances, customers bear the cost of expedited shipping but MicronPC was not in a normal operating mode. They had to incur this great expense in order to placate and hold onto impatient customers.

Part A

Early Recovery Initiatives In an attempt to battle back to a more competitive position, MicronPC undertook two strategic initiatives. The first effort focused on streamlining the flow of inbound materials. The second effort was geared toward better responsiveness and shorter customer order cycle times. Supply Logistics Center In an effort to alleviate product receipt problems and coordinate the inbound delivery process to the manufacturing facility, MicronPC established a Supplier Logistics Center (SLC) adjacent to the manufacturing facility. The SLC was designed to receive supplier deliveries, update the inventory system, and hold the inventory until the manufacturing facility requested replenishment. The SLC concept was intended to improve operational efficiency and inventory control, separate the receipt and storage of component parts inventories from the actual computer assembly process, and propel the organization toward implementation of a just-in-time (JIT) inventory system at the manufacturing facility. The new SLC was tested with a few select suppliers. Early results were encouraging and the concept appeared to have merit. The ongoing challenge was to identify appropriate suppliers and convince them to work with the SLC. This was not an easy task and low participation limited the success of the SLC concept. Computers Now In an attempt to combat the cycle time advantages of other PC makers, MicronPCs management launched a program called Computers Now. The program was focused around the holiday season when peak demand was forecast. MicronPCs effort involved pre-building several hundred systems and staging the inventory in MicronPC-owned facilities in Memphis, TN and Nampa, ID. The company envisioned a situation where customers would place an order, the order would be picked from stock, and it would be shipped overnight to the customer. Unfortunately, the program was a cash flow failure. It turned out that none of the product could be configured to order, fewer orders were placed than were projected, and MicronPC was stuck with the inventory after the holidays. This strategy typified the push inventory mentality that enveloped MicronPC management. Summary During the 1990s, the PC market was becoming increasingly competitive as industry participants fought for market share. While other PC makers had streamlined inbound logistics processes, improved manufacturing practices, standardized product designs, and upgraded outbound delivery operations, MicronPC stuck with traditional manufacturing methods and a build to forecast strategy. This led to major supply chain inefficiencies, poor performance, and financial difficulties at MicronPC. Later attempts to improve the supply chain and competitive position of MicronPC did little to turn the situation around. Increasingly disenfranchised shareholders clamored for major changes in hopes of saving the company from imminent failure.

Part A

PART B Revitalization of MicronPC New Management Team Uncovers Major Challenges In January 1998, a number of MicronPC executives were terminated as part of an organizational restructuring. A new supply chain management team was assembled as a part of this shakeup. As the team began addressing the task of supply chain revitalization at MicronPC, they quickly realized that major inventory, cash flow, and service challenges existed. As one industry analyst put it, MicronPC was stuck in the mud and spinning its wheels in the highly competitive PC manufacturing industry. After acknowledging the challenge at hand, the new supply chain management team began to dig into the details of the situation. They analyzed the organizations business strategies and practices, reviewed manufacturing processes, studied existing supplier relationships, and assessed current performance. These efforts validated the teams initial thoughts and concerns MicronPC was entrenched in a supply chain crisis of major proportions. Key problems included: Finished goods inventories in excess of $130 million were gathering dust in MicronPC facilities more than a months worth of PCs at current sales rates. Given the rapid rate at which technology was improving, product obsolescence was a critical concern for this supposedly leading edge maker of powerful PCs. A cash liquidity crisis existed invoices for purchased components were coming due long before MicronPC was able to generate revenue from them. MicronPCs cash flow was so poor that they struggled to meet payment due dates and could not take advantage of early payment discount provisions in their contracts. Customer service levels were anemic MicronPCs order cycle time and order processing lead times dramatically lagged behind industry leaders. Customer orders sat in the queue for nearly two days before processing began (e.g., if an order was placed at 1:00 p.m. Tuesday, it was 11:00 a.m. Thursday before it was released for assembly or fulfillment from stock), order to ship time was weeks rather than days, and specific delivery times could not be provided. Also, despite the excessive inventory in the system, MicronPC could not assure customers that the component parts necessary to build their PC were available!

Additionally, the management team discovered that a bloated, inflexible supplier base had built up over the years, excessive operating expenses were being incurred, limited production capacity was available, and poor demand forecasting performance was the norm. Table 1 provides additional information regarding MicronPCs woes in early 1998. After completing their initial assessment, the supply chain team knew that the original MicronPC strategy build leading edge PCs to inventory and push them to the marketplace would not work against highly efficient demand driven, CTO PC assemblers like Dell and Gateway. New strategies, processes, and goals would be needed.

Part B

Table 1 1998 Statistics for MicronPC PC Sales Manufacturing space Manufacturing capacity Product lead time a Notebook PC Desktop PC Servers Sales forecast accuracy Average inventory on hand
a

$1.5 billion 120,000 sq. ft. 2,100 units per day

10-14 days 12-21 days 21-30 days 38 percent $130.7 million

Product lead time = elapsed time from order placement to shipping

Development of a Turnaround Plan While the team wanted to maintain the organizations tradition of offering the most powerful machines in the PC industry, they knew that it needed to be coupled with a supply chain focus. They quickly laid the groundwork for a customer-based pull system that they felt would facilitate a quick and sustainable turnaround. Key goals included: a general streamlining of operations and inventory to improve efficiency, returning the company to its core competency of PC manufacturing, and producing a high-quality end product. Management immediately adopted a battle cry of 17-11-2 with the goal of increasing gross margins to 17% while dropping operating expense to 11% in the time span of 2 quarters. Strategic Supply Chain Initiatives In order to accomplish the turnaround, MicronPC management assembled a sweeping action plan that addressed multiple supply chain issues. Key components of the plan included: Revising manufacturing layout and processes to improve efficiency and effectiveness of the PC assembly process. Streamlining the supplier base and expanding participation in the SLCs to improve inbound materials flow to MicronPCs manufacturing operations. Building alliances with key 3PL firms who would operate the SLCs and manage transportation activities.

Part B

Revised Layout and Processes The manufacturing floor was completely redesigned for maximum efficiency and faster product flows. It also provided the flexibility to assemble individual PCs at a single station or large quantities of PCs in an assembly line fashion. Figure 1 provides an overview of this layout. Order processing and assembly activities were also re-sequenced to reduce delays and streamline cycle time. The flowchart in Figure 2 outlines the key steps in the newly developed process. Prior to the redesign activities, a simple supply problem or mishap in any portion of the manufacturing operation would shut down the entire operation. Partially assembled PCs were constantly being taken off the assembly line and temporarily placed in work-in-process inventory until the proper parts arrived and the product could be completed and moved to finished goods inventory. Subsequent to facility redesign and process revisions, if a malfunction occurred in one functional area of manufacturing, the impact was isolated and the rest of the facility was largely unaffected. Figure 1 High Velocity Manufacturing Configuration

Part B

Figure #2: Revised Sequence of Order Processing Activities


Customer places order Order Verified
0-6 hours

Credit Check

YES

Valid PC Config.?

NO

Reject Order

O r d e r L e a d T i m e G o a l s
72 hours

Order released to mfg. Validation Check if a) Material feasible b) Items on floor, at SLC, or in pipeline?
Parts available?
YES NO

Parts ship hold list

Motherboard preference Pick to light all internal components Physical assembly Power-up and test Software burn in

Begin manufacturing process

Final test Pick to light all accessories Pack product Ship (85% UPS, 15% LTL)

12-72 hours

Customer receives order

Part B

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Supply Base Streamlining New management also worked to strengthen their relationships with a core group of suppliers. They began by reducing the size of the supplier base through an evaluation process that was designed specifically to facilitate better supply chain performance. Each suppliers capabilities, costs, and performance were reviewed and the supplier was categorized as follows: Tolerated suppliers are those vendors who sell must have items (e.g. operating software) but do not wish to develop a strategic relationship with MicronPC. Preferred suppliers are those suppliers who have displayed a certain level of competence, are generally cooperative, and meet MicronPCs critical standards (e.g., quality). Partnering suppliers are those few, elite suppliers who truly deserve and desire a strategic alliance with MicronPC. These vendors work in concert with MicronPC employees, often sharing information, collaborating on ideas, performing joint tasks like forecasting, and participating in strategic planning meetings.

This critical examination and categorization over an 18-month period led to a fifty percent reduction in the supplier base. Of the 158 suppliers used by MicronPC at the outset of 1998, only 40 were able to support MicronPCs new strategies through JIT delivery of components to the SLCs. Another 38 were willing to develop these capabilities, while one tolerated software supplier chose not to participate. Overall, 79 suppliers were eliminated from the MicronPC supply chain which made procurement activities more efficient, facilitated communication, promoted collaboration, and made MicronPC a more important customer to the remaining suppliers. Develop Alliances With 3PL Firms MicronPC developed a three-pronged strategy to leverage the capabilities of 3PL firms. First, the 3PL firms would play a critical role in the expansion of the SLC concept. MicronPC worked with four firms to create SLCs. These centers would provide near site manufacturing and serve as demand replenishment distribution facilities. One organization assembled and delivered PC chassis, two others handled internal components and peripherals, while Modus Media Incorporated (MMI) managed all external accessories (cables, speakers, power cords, software, keyboards, manuals, etc.) inventories and flows. The strategic relationship between MicronPC and MMI is highly unique and is discussed in the next section. Inbound transportation was the second area of 3PL involvement. MicronPC decided to purchase all goods at or near the suppliers production facilities (e.g., ex works). Since they would have complete control over the flow of goods to the SLCs, MicronPC signed strategic transportation agreements with ocean providers to manage the process. These providers work with the suppliers, freight forwarders, and MicronPC to establish a tightly linked inbound delivery network.

Part B

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Finally, MicronPC partnered with United Parcel Service (UPS) to deliver finished products to customers. UPS set up and ran the outbound shipping operation at MicronPCs Nampa, Idaho manufacturing facility. Through the use of truckload pool distribution to major hubs and local UPS delivery, MicronPC can offer low cost 2-day or 3-day UPS ground service to the vast majority of its customers. Currently, UPS delivers 85% of all PC shipments and lessthan-truckload carriers deliver the other 15% to retailers, educational institutions, and other large organizations. In addition, UPS established a merge in-transit operation in Louisville, Kentucky to reduce MicronPCs delivery costs. Bulky, standard items such as monitors and some speaker systems are held in Louisville and added to desktop PC orders being delivered from Nampa to customers in the eastern portion of the U.S. As an additional benefit, MicronPC never takes ownership of the inventory in Louisville until the products are sold and removed from inventory for delivery. Hence, they benefit from a virtual inventory that is consigned by suppliers to the UPS facility. The MicronPC-MMI Alliance When MicronPC selected MMI to run the accessories SLC, the management team knew of MMIs strong reputation for inbound logistics management and their long-term supply chain relationships with key customers like Microsoft and Sun Microsystems. They also liked the aggressive plan laid out by MMI to improve the MicronPC supply chain. However, MicronPC did not realize how valuable MMI would quickly become to the Nampa, Idaho operation. MMI wasted no time in establishing their SLC to support MicronPCs manufacturing facilities. The Boise Solution Center, located adjacent to the MicronPC manufacturing plant was designed to facilitate inbound shipments of PC accessories. This facility allows MMI to warehouse small quantities of accessories, perform kitting operations, and deliver goods to MicronPC on a JIT basis. MMIs Expanding Role The close proximity and MMIs outstanding performance also fostered a trusting relationship between the two organizations. Soon, extensive communication and Collaborative Forecasting, Planning, and Replenishment were taking place. As a part of the relationship, MMI placed a buyer/planner inside the MicronPC purchasing department. This MMI employee helped manage the Materials Requirements Planning and purchasing functions of MicronPC. Eventually, MMI was responsible for helping MicronPC handle vendor quality issues and dealing directly with many of MicronPCs suppliers. MMI soon appointed key employees to bring additional expertise and new ideas to several of MicronPCs strategic planning teams. MMI participated in new product planning strategies, cost reduction programs, inventory management improvement efforts, and other initiatives. MMI also assisted MicronPC with sales forecast validation and broadcasting forecast information to MicronPC suppliers. Table 2 highlights the evolution of MMIs expanded role in managing the MicronPC accessories supply chain.

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Table 2. MMIs Evolving and Expanding Role Timeframe Phase I Supply Chain Responsibilities Added By MMI Management of accessories inventory o Receiving, storage, and delivery Procurement of software products Joint negotiations with key suppliers Procurement of accessories (keyboards, cables, etc.) Coordinating hourly JIT delivery to factory Forecasting activities o Sales trend analysis o Demand planning Managing inbound delivery from suppliers Kitting activities o Assembling customized accessory kits for individual and corporate orders o Packaging kits into individual pizza boxes o Sequencing delivery of pizza boxes to MicronPC packaging operation for addition to PC delivery box

Phase II

Phase III

Results of the Strategic Initiative Throughout the supply chain initiative, MicronPC tracked their progress via key performance metrics (e.g., product lead time, cash conversion cycles, inventory turnover, etc.). As the key components were implemented and stabilized, performance and customer service improved. In fact, the shift in priorities and processes allowed the management team to quickly reach their 17-11-2 goal within their desired timeframe. Table 3 highlights some of MicronPCs noteworthy capabilities and results. At the conclusion of the multi-phase implementation process in 2000, several improvements could be seen. One of the most impressive changes at MicronPC was that customer PCs were now custom built within hours of order placement. For example, if an order was received at 8:00 AM on a Tuesday, it was immediately processed. At the latest, the PC assembly process was initiated by 2:00 PM that day. PCs were now being ordered, assembled, and delivered with speed and precision! Another major outcome of the program was a tremendous increase in the cash flow from MicronPCs operations. In many cases MicronPC completed the sales, assembly, and delivery processes and received payment for the PC prior to supplier invoices coming due. This negative cash-to-cash cycle allowed MicronPC to maintain considerable liquidity, earn interest on the money from the time payments were received until invoices were due, and they were now in a position to take advantage of supplier discounts for early invoice payment.

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Table 3. 2000 Statistics for MicronPC PC Sales Manufacturing space Manufacturing capacity Product lead time a Notebook PC Desktop PC Servers Sales forecast accuracy Average inventory on hand
a

$1.03 billion 230,000 sq. ft. 10,000-12,000 units per day

< 5 days < 5 days < 9 days 70-80 percent $17 million

Product lead time = elapsed time from order placement to shipping

Better end-to-end control of their supply chain and working closely with key partners like MMI, also helped MicronPC to dramatically reduce inventory levels in their system. During the last quarter of 2000, the average level of inventory owned by MicronPC had dropped to $17 million. At the same time, customer order turnaround time was being reduced by nearly half! Additionally, the need for premium transportation services was greatly reduced. Previously, expedited freight carriers were often used to deliver finished products to customers in an effort to make up for lost time resulting from excessive supply and manufacturing delays. The revitalized supply chain eliminated the vast majority of these in-process delays and MicronPC now had some flexibility regarding the outbound shipment of customer orders. Costly expedited freight, often paid by MicronPC to salvage some semblance of customer satisfaction, was replaced by economical 2-day or 3-day UPS ground service that was paid by the customer. Leveraging Supply Chain Capabilities Into Better Customer Service With their supply chain issues resolved, MicronPC was ready to participate in a variety of new sales channels. Their main initiative was to implement an Internet-based business model that combines the positive attributes of direct and retail sales models. They called the program VelocityNet Direct. The velocity portion of the model was focused on MicronPCs new, industry leading, high-velocity supply chain operations. The net portion of the business model was based on an Internet platform designed to take advantage of B2B e-commerce. Direct is the portion of the business model dealing with how orders are placed. In the VelocityNet Direct program, customers can either buy a MicronPC model directly from a retail partners stock or they can order a customized machine from MicronPC.com through an in-store Internet kiosk. If the latter option is chosen, the order is transmitted, verified, and sent to the Nampa manufacturing operation before the customer leaves the retail store.

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This method helps reduce retail distribution center costs and in-store inventory by 40% to 50%. MicronPC currently has agreements with several prominent national retailers to sell their PCs via VelocityNet Direct, including Best Buy, Costco, and Staples. The model allows for an efficient, national retail CTO system that augments the direct model already in place at MicronPC. MicronPC has also implemented a replenish-to-order (RTO) system with their retail partners. In this system, customer purchases trigger inventory transfers to the retail outlet and product manufacturing at the Nampa facility. The system enables a retail partner to keep limited inventory in stores but still maintain high customer service levels as the inventory is replenished quickly. This portion of the business is expected to grow between 15% and 20% in the near future. Summary Over a three-year period, the new management team at MicronPC was able to make dramatic changes across their entire supply chain and ensure the future viability of the organization. They significantly streamlined the way that they plan, buy, build, and deliver PCs to the U.S. marketplace. Involving key stakeholders in supply chain strategy development, giving purchasing control and added responsibilities to experts like MMI, realigning the manufacturing process and developing CTO capabilities, and forming an alliance with UPS to develop costeffective customer delivery methods all contributed to the revitalization of the organization. Without question, MicronPC was now much better poised to deal with competitive challenges, rapidly changing technology, price pressures, and increasing customer demands.

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PART C Future Directions New Ownership for MicronPC On June 1, 2001 a new chapter in the history of MicronPC began. Citing a desire to exit the cutthroat PC business and focus on their web hosting and B2B e-commerce applications, Micron Electronics, Inc. sold MicronPC to Gores Technology Group (GTG), a privately held international acquisition and management firm that pursues an aggressive strategy of acquiring promising high-technology organizations and managing them for growth and profitability. GTG currently owns and manages 35 interrelated but autonomous technology-oriented companies with locations throughout the world. The newly acquired entity is named MicronPC, LLC and will be headquartered in Nampa, Idaho. Desktop PCs, notebook computers, and computer servers will continue to be produced in the companys state of the art Nampa production facility. GTG expects MicronPC to continue their efforts to eliminate redundancies and inefficiencies with the goal of achieving lasting viability and profitability. A Supply Chain Opportunity? Boosted by their successes, the management team wondered if supply chain management could be a viable route to lasting viability and profits. The management team truly believed that MicronPC was uniquely positioned to provide U.S.-based BTO/CTO manufacturing services to other technology organizations. Moving forward involved two initial activities - defining MicronPCs core strengths and identifying the marketplace opportunity for such services. Core Strengths The management team feels that MicronPC is an industry leader in supply chain performance and has a proven ability to improve asset management, streamline order fulfillment, and provide seamless relationships with their current customers. Another strength is MicronPCs industry leading B2B information architecture which links suppliers and customers to the organization. Figure 3 depicts their supply chain configuration and capabilities. Of course, the heart of MicronPCs capabilities and value proposition to future customers is their manufacturing facilities and processes. The Nampa, Idaho facility offers proven state-ofthe-art technology and equipment to optimize speed, flexibility, efficiency, and product reliability while minimizing the level of inventory. This ISO 9001 certified facility produces customized product configurations according to individual customer specifications. Leveraging MicronPCs information architecture, the manufacturing facility is uniquely designed around a pull-replenishment process. The process minimizes in-factory inventory, ensures that materials are used in a flexible manner to quickly respond to customer demand, and provides replenishment on-demand from suppliers.

Part C

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Figure 3. MicronPC Supply Chain Network

Marketplace Opportunity After investigating the technology marketplace, the management team realized that key opportunities are created by the complexities that exist. That is, the challenges of short cycle times, rapid technological change, changing customer requirements, and congested inventory pipelines have created the need for a company that can efficiently deliver technology to the marketplace. Especially challenged and in need of assistance are those organizations that manufacture finished goods offshore. Given their poor proximity to the U.S. marketplace and the slow transit time of ocean carriers, they must rely on a push inventory strategy and a build-to-forecast manufacturing model. These practices often create twelve to sixteen weeks of inventory in the pipeline and a significant finished goods inventory liability. Such organizations are vulnerable to price drops, technology change, and changes in demand patterns. MicronPC believes that these international manufacturers may be ideal customers for their pull-based BTO/CTO services. The company believes that it could dramatically cut the number of days product is in the inventory pipeline for these companies. By assembling goods in Nampa after an order is placed, ocean shipping time is eliminated, Customs delays are avoided, and excess inventory (due to poor forecasting and/or the need to protect against long order cycle time) at the customer location is reduced (see Figure 4). Ultimately, these overseas customers would benefit from minimized resources waste, improved cash flow, and reduced product obsolescence risk. Similar, though less dramatic improvements could be realized by domestic organizations that currently rely on build-to-forecast processes.

Part C

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Figure 4: Inventory Pipeline: Build to Forecast vs. Build to Order

Domestic BTF Model Overseas BTF Model MicronPC BTO Model 0 10 20 30


Days

Raw Materials Manufacturing Transit to West Coast Customs Transit to Customer DSI at Customer Site

40

50

60

70

Summary The management team at MicronPC has uncovered what it believes to be a viable opportunity to leverage existing supply chain capabilities, facilities, and networks into a new line of business. The question is: will they pursue this supply chain venture as successfully as companies in other industries (e.g., Fingerhut, Caterpillar, etc.) have already done? Only time will tell!

Part C

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