3M Applies Its Technology Prowess to Realize Supply-Chain Transformation
It only makes sense that The 3M Company, with a business model resting almost entirely upon technology, would eventually get around to deploying it as a tool for realizing new operating efficiencies, while meeting rising customer demands for service.
3M had come to the point where an analog supply chain was no longer tenable, says senior vice president of supply chain Paul Keel. The future lay in digitization.
In the case of the company’s supply chain, “legacy” meant “linear.” For years, 3M had achieved better results by hiring more people, building more plants, adding more energy. Keel describes the old philosophy: “You want more ‘Y’ to come out of the supply chain, you need to put in more ‘X.’”
It was a way of thinking that was rapidly becoming outdated. As with any successful manufacturer, 3M was faced with rising customer demands for better quality, more features and lower cost. Shareholders, meanwhile, were demanding a higher return on their investment.
“All companies like 3M have to find a way to bend that curve,” says Keel. “You need to go from a linear relationship to something better.”
With an organization the size of 3M, that’s easier said than done. 3M defines “supply chain” in the broadest possible terms, says Keel. It comprises some 220 plants worldwide, 100 logistics and distribution centers, the design and implementation of all process and plant equipment, $15bn a year’s worth of procurement activities, and some $1.5bn in capital expenditures. Then there are the company’s efforts in Lean Six Sigma, environmental health and safety, and sustainability. All told, roughly half of 3M’s 90,000 employees are involved to some degree in the supply chain.
To tackle that massive organization, a culture of continuous innovation was key. “It’s been central to our business model for 115 years,” says Keel. “Technology to 3M is like air and water.” The company spends between 10 and 11 percent of sales each year on technology, and 6 percent on research and development. Between 4 and 5 percent of capital expenditures are directed to the supply chain, and most of that involves some aspect of technology.
The arrival of Inge Thulin as chief executive officer in 2012 was the catalyst for change. That’s when 3M latched onto the concept of “efficient growth” — the notion that it could expand markets and improve products without a commensurate boost in resources. Other companies call the approach “bimodal,” describing a strategy that addresses operational efficiency, customers’ current needs and innovation all at the same time.
On the efficiency side, 3M was seeking to get its cost of goods sold (COGS) down, and inventory turns up. At the same time, it vowed to accelerate top-line growth with an eye toward achieving better quality, increased service and more assured capacity in line with actual demand.
Digitization became the tool of choice for synchronizing all links of the 3M supply chain, promoting collaboration and open communications both upstream and down, with suppliers and customers alike. Helping to make the task easier was the company’s history of vertical integration. It manufactures 85 percent of everything it sells, ranging from Post-it notes to medical dressings to acoustic insulation.
Most of those products have some degree of chemical content, meaning that even a highly integrated organization such as 3M must interact with the large chemical companies that provide raw materials. With a couple of those suppliers, of which BASF is one, 3M maintains real-time communications ties that synch supply with demand — an example of successful horizontal integration.
Linking With the Plants
The arrangement with BASF links a couple of dozen of the supplier’s plants with five of 3M’s, as well as with the latter’s network of D.C.s. The setup provides “a lot of opportunity for balls to be dropped,” says Keel. But glitches are minimized today via a cloud interface, whereby the partners’ planning systems “speak” directly with one another.
“Now, in pretty much near-real time, BASF can see how much of their inputs are being consumed in a 3M plant and we can look upstream and see available materials,” says Keel.
While 3M has a less intimate relationship with other major chemicals suppliers, it does maintain strong physical and information links with those partners. In one case, says Keel, a physical pipeline extends directly from the supplier’s factory to that of 3M. Such an arrangement, of course, requires that the two sites be close to one another — in this case, a distance of about a mile. Information flows equally smoothly, ensuring that the supplier’s plant receives an accurate demand signal from 3M.
Any global supply chain manager will tell you that internal collaboration can be just as tough to achieve as that involving outside partners. 3M simplified the task by aligning incentives across functions. On the planning side, the company runs three “centers of expertise” — entities that others might call “control towers” — around the world.
One location oversees the supply chain across Europe, the Middle East and Africa (EMEA), involving more than 50 plants and 10 D.C.s. Because 3M operates in so many countries within the EMEA region, it needs a common planning approach. Today, it’s able to aggregate demand across 25 divisions for a couple of dozen countries, then convert that number into an organized production plan.
The effort is half a business-process exercise — getting the right people in place at the right time — and half an information-management task. 3M needs to access data and execute planning for some 65,000 products across the divisions. The digital side of the equation requires a common enterprise resource planning platform, integrated business planning (IBP) process, and shared demand-planning interface.
When it comes to achieving internal harmony within a business, there are plenty of stories about the dangers of mismatched objectives. Say, for example, that one part of the operation wants more inventory because it leads to better service, while another strives for less because it results in lower costs, and each department is judged by its corresponding metric. Sounds plausible — except that Keel calls that disconnect an urban legend. “We have found empirically that it is untrue,” he says. “Lower inventory levels equal shorter recycle times, and better service.” In other words, “less cholesterol.”
That said, it’s essential to properly manage the downstream pipeline to customers. And for 3M, technology has proved to be essential to devising consistent, accurate and aligned measures of service.
Elements of a Portal
The company has invested considerable energy and money in setting up a global service portal. The effort consists of three distinct elements: customer-defined scorecards, an internal performance dashboard, and a customer-survey database.
The scorecards align 3M with the service metrics of major customers, especially those of retail accounts that provide point-of-sale data. Fill rate, on-time percentage, backorder dollars — 3M uses whichever yardstick the customer in question is deploying. And that requires an information-technology interface that allows for real-time measurement.
The internal dashboard assigns service data the same weight as other metrics within the company, ensuring that individuals in various departments focus as much on service as on activities geared toward making shareholders happy. Says Keel: “It’s critically important to having everybody maintain a customer-first mindset.”
Finally, there’s the customer-survey database, providing 3M with a common survey format, which allows it to compare results throughout the end-to-end supply chain. As a result, what the company is hearing from a big customer in Asia lines up with input from that same customer’s U.S. operations. Efforts at calibrating customer service worldwide proceed by way of an “apples-to-apples” comparison.
3M’s own technology, consisting of 46 core platforms, drives the underlying business model by which the company communicates and collaborates with customers. Its goal, says Keel, is to “understand those capabilities and co-innovate with them, using 3M technology to solve their programs.”
It’s a relationship built on trust. To be able to drill down into customers’ problems, 3M needs access to their new-product pipelines, R&D teams, and inner workings of their supply chains. Simply put, says Keel, “our interface with customers is central to our whole business model of how we serve them.”
Technology will continue to play a central role in 3M’s supply chain. The company is developing digital systems, in areas such as automation and robotics, that will squeeze even more productivity out of existing physical assets. They’ll make a line run faster, a packaging system more efficient. On the I.T. side, better systems will provide improved links from plant to planning, “between individual assets and the freeway,” as Keel puts it.
Think of those systems as a physical interface, where disconnects are common. “A door breaks at the hinges,” explains Keel. “Car wheels wear down. We focus on how to strengthen the connection points. Often it’s the data that does that.”