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A Conversation with Gary Smith

Vice President of Global Logistics, IBM's Integrated Supply Chain Division

This interview is the first of a series on supply chain leadership at IBM. This interview focuses primarily on IBM’s experience in transforming its logistics operations and offers insights into the performance benefits obtained as a result of its strategic focus on logistics.

This interview is an abridged and edited version of an interview with Gary Smith Vice President of Global Logistics for IBM's Integrated Supply Chain division which focuses on questions suggested by members of LQ's Advisory Board. This interview was conducted in New York, at IBM's Somers location, with Gary Smith, Dave Lowry, Director, Logistics outsourcing, Frank Crnic, Manager, Supply Chain Outsourcing and Christopher Sciacca, Manager, Strategic communications, Supply Chain.

Questions for this interview were prepared by: David Closs, Ph.D., Michigan State & LQ's US Executive Editor; Tom Goldsby, Ph.D., University of Kentucky, LQ Advisory Board Member; Chris Norek, Ph.D., Chain Connectors, Contributing Editor; LQ Nicholas Seiersen, LQ Executive Editor, Senior Manager, KPMG.

Gary Smith: Let me begin by providing the context for the heightened value IBM places on the supply chain. When we started this organization in 1995 IBM was restructuring and adapting business problems due to the problems that we had endured in the '90s. At the time IBM had 30 different supply chains and wasn't leveraging its size and scale, which led to several significant quarterly losses.

The first part of IBM's corporate restructuring plan involved centralizing all of its procurement dollars. In 1993, we put our arms around all of our procurement dollars worldwide and centralized the procurement function. It was also clear that IBM would need to restructure its manufacturing operations and its distribution operations because we couldn't afford to have duplicate sites around the world making the same product.

At that point, Lou Gerstner, who was Chairman of the Board of IBM Corporation and his team decided they needed a much greater focus on the area of logistics because even though we closed down some of the company's sources of supply, our products still needed to continue to be reliably delivered to our markets. If you don't have an efficient logistics organization in place, you will lose many of the business advantages that you have achieved with these steps toward centralization. In hindsight, it was a pretty smart move on the part of Lou Gerstner and his team. That was the genesis of our supply chain organization.

At that point, IBM was not a single supply chain. It had many supply chains with different brands, in different countries. Immediately after the step toward procurement centralization, we also centralized logistics. In 2000, we began to create what I call a true-line supply chain. From the outset, an important distinction in the way IBM designed its supply chain was the accountability. Not many companies have Chief Supply Chain Officers or executives solely focused on the supply chain. Bob Moffat was appointed IBM's senior vice president, integrated supply chain or essentially its CSO in 2005, with a direct link to the chairman and a seat at the board of directors. As a line-accountable organization we had pure accountability, which excited many of my colleagues and myself.

Based on this approach, we created a supply chain strategy and implemented it. We were held accountable for the performance associated with all of our business strategies. In retrospect, this turned out to be an excellent approach. As we go into more of the details, I will elaborate on some of the benefits we have been able to accrue for our customers and shareholders as a result of this strategy.

LQ: At the genesis of your supply chain organization, you established a number of baselines to measure your performance against to quantify this performance. Can you elaborate on the value of these baselines?

Gary Smith: The culture of the IBM Corporation tends to be engineering oriented so metric measurement and performance are truly at the core of what we do. Every time we revise a process, we look for the best way to benchmark our starting point, and how to judge our performance. This performance can be categorized into three areas: What benefit do we have in terms of the cost line, hopefully, a cost reduction. What benefit do we have in terms of additional cash for the company? And, perhaps more importantly, how does this change enhance customer service? These three areas are at the forefront of what we do every day.

LQ: What were the key elements that prompted IBM to transform its supply chain?

Gary Smith: Another underlying trend for IBM's supply chain transformation was globalization. We were compelled to take a global perspective early in IBM's supply chain evolution and transformation. I call it, "great wisdom," because on a global basis we looked at how we behaved, our skill sets and the processes we used.

LQ: In this context, where IBM took a leadership position and precursory steps to transform its supply chain, can you tell us on a personal note what you view as the most crucial elements of leadership?

Gary Smith: While there are a lot of aspects to leadership, the elements that I value the most are integrity and trust. When you are in a fast-paced and complex environment, these qualities are essential. If they aren't at the core of your relationships, you are building your future on an unsound base.

Also, I highly value the global skill set that exist at IBM. We have many very bright, capable people worldwide, and we need to harness their talent, their enthusiasm and be sensitive to different cultural contexts, to apply this expertise. As a U.S.-based company, we know we do not have a corner on the intelligence market. We have found some of our greatest innovators and some of our greatest skills to be all over the world and in other parts of the IBM Corporation, which is why we are currently undertaking a transformation that will take IBM from a multinational company to a globally integrated company.

If you have the trust of the people you work with and you value their skills and capabilities, you are building whatever you're doing on a very solid base. Those are two elements that I hold very dear. As I look back at our path here at IBM, I go back to the fact that at every turn those principles have served us well.

LQ: Is there an element that you would single out that distinguishes your leadership from that of other leaders?

Gary Smith: I think that you must have a good balance between working and playing hard. If you have fun in what you do, you're probably generating a team spirit, whereby everybody feels that they have a role to play, and everybody is valued in their role and they feel their contribution is part of the company's overall success. These are some of key attributes that I think have made us successful.

LQ: Thank you for setting the context for IBM's transformation. The first question from LQ's Board is from David Closs. As IBM Global Logistics evolves to more of a Logistics Orchestrator (Integrating across multiple divisions of IBM as well as with other firms), how do you balance the internal demands with those of external customers?

Gary Smith: It's a good question and it's one that that every company in the outsourcing business struggles with. I believe we have the ability to balance internal IBM needs with those of other companies. The reason we can accomplish this can be traced back to when we started this organization. At the time we began to recast and develop the supply chain at IBM we lacked credibility. Every IBM division had its own supply chain. If you think of our portfolio of software to PCs, to hot storage to high-end servers to the medium servers, spare parts, reverse logistics, all of these divisions were completely independently run. We were able create a central view and put our arms around the entire organization.

The key thing that served us well in this process is that we took the time to understand the customers' requirements and the attributes of their business. While each of our businesses was under the auspices of the IBM umbrella, each one was unique. In creating this centralized approach we looked for things that were common and things that were not. We understood the strategic elements of this approach and knew that some aspects of what we did would be more important to some divisions than others. We were able to balance those elements and centralize operations to implement a global strategy in a very complex environment with customers constantly changing their needs.

As we've been very successful in this environment, the next logical step was to go to outside companies and offer the supply chain services IBM has honed.

LQ: Can you elaborate on this process? For example, did you find more commonalities than you had forecast?

Gary Smith: We found everybody had unique requirements, but they didn't have well understood processes, in my view. We took a process view of these different divisions, and we found there were very common elements. Whether it was importing or exporting processes, or whether it was product movement visibility, whatever the process was, we consistently found a fair amount of commonality.

Whenever we found elements that were not common or, if we required more information, we sat down with the customer and discussed the circumstances. In these instances, we often took the "best of breed" approach. After reviewing the divisional processes, we would apply a solution that existed in one division and translate it to the other. So they didn't have to go through, if you will, their own transformation; we brought it to them and said: "these guys have been doing it this way for a long time and we can see the benefit it has given them. Let's try it here." This approach enabled us to respond quickly with a solution and often get some new and, in many cases, unexpected benefits.

LQ: That's a beautiful value proposition. Can you tell us more about how IBM's journey to supply chain excellence created innovative solutions?

Gary Smith: An important element to consider is the breadth of our business and history. If you consider our PC business, which is essentially both a a consumer product and a business-to-business operation and then you think about our high-end server business, or our server business in general, you can take some of the attributes of one type of IBM business and create tremendous value for the high-end or server business.

For example, if you can take some of the attributes of a PC business, which is very low cost, and uses a highly streamlined supply chain and apply that to our server environment, there is tremendous opportunity and competitive advantage.

If you are only in the server business or the storage business, and you don't have the overview of how much different and more competitive it is in the lower end products, you could be blind to these supply chain opportunities. Based on this perspective, we were able translate some of the process changes that we implemented in the very aggressive and complex environment of IBM's PC and lower-end businesses to the higher end of our business. I think we generated some important value in that way.

Dave Lowry: It gets tricky with the higher end businesses because there are a lot more configurations available with the high-end servers. I think one of our higher-end processors, the System z9 mainframe, has as many configurations as a Boeing jet. We have to think about that, and we have to think about PCs where you don't have as many options. The scale and the complexity are tremendous, and on a global level it adds even more complications to the process.

LQ: Let's go to Dave Closs' next question. How would you describe the core competencies of IBM Global Logistics?

Gary Smith: Clearly, the skill of our people and optimizing those skills on a global basis is vital. It's also taking a process view of business. When we created the supply chain within the IBM Corporation, because it was a line supply chain, we did not abandon our responsibility for functional excellence. With Global Logistics, for example, we were expected to be world class in our insights, our strategy, our direction and our processes. This same standard of excellence applied to procurement, fulfillment, and manufacturing. A key element and a primary strength built into IBM's supply chain is that in addition to that core deep functional excellence, we asked all of our people to, wherever they sat in that functional excellence pipeline, look left and right. It's a simple concept, but it helps to enable you to understand business from an end-to-end supply chain point of view. It creates efficiencies when you look at what is coming towards you and assess its value. If you see elements that are not valuable coming down the pipeline you may want to push them back upstream to see if there's a process improvement opportunity.

When you look left and right and see what you do in this overall context and how you send that (product) down to the next level of supply chain, it's important to question and dialogue with those people you're sending information to. It's important to make sure that the effort you are putting into that piece of information, if you will, has value all the way down and through the supply chain. Or, how could it change to have greater value? It sounds like a simple exercise, but it is surprisingly difficult to do. This approach offers us tremendous opportunity.

In this process, most of the value that we found was not in the functional silos, it was between the functional silos. We were functionally excellent, doing what we did very well. But there were gaps between what we did in terms of optimization and as we started looking left and right to better understand what was coming to us and what we were sending downstream. This enabled us to make tremendous strides in process improvement and in cost savings.

LQ: In some situations, undertaking this type of view may not appear to yield immediate benefits in the short term for those involved in the supply chain practice. But you're suggesting that for the organization as a whole, it offers great benefits.

Gary Smith: Absolutely. It became acceptable and celebrated that if you could sub-optimize what you do and had a far greater benefit to the overall IBM supply chain, that was something we rewarded. It sounds counterintuitive. After all, you are taking many years of history of optimizing your silo and applying a completely different set of rules.

For example, if we move IBM's manufacturing to an emerging market will look at my overall cost in the supply chain.

As I move manufacturing from a mature market to an emerging market, it's clearly going increase logistics costs, partly because of demand/supply in terms of air transportation, and the sheer length and distance as well as the infrastructure required. Overall, this was the right decision for IBM because it brought us closer to our sources and our component suppliers and it introduced IBM to new skills and ideas, which led to new innovations. Some of my costs increased, but the overall IBM benefit was greater than these increases, and that was held up to be a good thing to do for the IBM shareholder and the IBM customer.

This interview is the first of a series on supply chain leadership with IBM. LQ's next article, which will be published in a digital newsletter format, will focus on David Closs' question regarding how IBM Global Logistics determines which activities it does internally and which it chooses to outsource, as well as other questions from LQ's Board members.