Faced with an out-of-control inventory situation and growing delays in product delivery, Fujitsu PC found salvation for its start-up notebook computer business by outsourcing a large chunk of supply-chain management responsibility to FDX Corp., parent company of Federal Express.

	"Since we were bringing a total solution, it required a cross-section of functional areas of our company, such as information technology, billing and legal." - Brent Meyers of FedEx

The shift in strategy was initiated and overseen by Bruce Anderson, vice president of operations for Fujitsu PC (FPC), a subsidiary of Fujitsu Corp.

"The difference has been huge," says Anderson. "We set a goal that by the end of 1998 we would be competitive in our performance on order fulfillment and by March of 1999 we would be world-class. Now, our reliability-of-delivery performance is above 95 percent, while some of our competitors are in the high 80s and proud of it. Our shipping accuracy is above 98 percent, and the accuracy of last week's cycle count of inventory was 100 percent."

This trend line varies dramatically from the numbers FPC was racking up in November 1997, when Anderson arrived from Compaq Computer to help the fledgling company straighten out some of the kinks in its new notebook computer business. At that time, FPC often took more than 10 days to get a notebook to a customer - despite high inventories - while competitors delivered in less than half that time.

In those early days at FPC, Anderson became aware of other problems, as well. For starters, the Milpitas, Calif.-based company's primary facilities to serve its U.S. customers were in Portland, Ore. Most of the parts and components used by FPC were sourced from suppliers in Japan. Typically, Circle Air Freight would arrange the inbound portion of the transit, with Nippon Express helping out on the Japan end. All inbound shipments moved via air freight and generally were destined to the Fujitsu facility in Portland, where additional manufacturing, assembly and testing were performed. Finished products were stored in a warehouse facility operated for FPC by Circle and eventually were shipped outbound to U.S. sales channels - retailers, re-sellers and distributors - primarily via Federal Express and United Parcel Service.

The outbound situation was fairly normal, thanks to the reliability of UPS and FedEx, says Anderson. "But we very often would get inbound surprises from Japan - large shipments destined for Portland would show up in Oakland or somewhere else, things like that," he recalls. "The thrust of dispatching from Japan seemed to be to get it to the west coast of the U.S." Eventually the right material would get to the right places, he adds, but "clearly there was a lack of visibility, control and consistency to shipment performance ... for the first couple of months I was here, I was kind of shocked at some of the events that happened."

Part of the problem was a lack of coordination and clear-cut responsibility between the two freight forwarders, Anderson says. "When you have two brains in the dinosaur, very often it doesn't walk straight. There were too many people involved on the forwarder end and there was too little control from Fujitsu, and the whole process served to increase our freight cost, delay our response to customers, and make much more confusing a lot of the logistical elements of new product introductions," he says. "In turn, this delayed the customer's service level, delayed our time to market, and ultimately was costing us considerable amounts of money." It was, he adds, an industrial accident in the making.

A Natural for Outsourcing
Since the product assembly operation in Portland was not operating as efficiently as Fujitsu wanted, and the location was not optimal for servicing the contiguous 48 states, the entire project appeared to be an ideal candidate for outsourcing.

For solutions, Anderson looked to the two companies that had been providing product delivery within the states. FDX then was providing total logistics services from its Memphis distribution center to several name-brand, high-tech companies. UPS offered similar logistics services from Louisville and Lexington, Ky. Both companies actively had been courting additional high-tech accounts, and both pursued the FPC business.

In January 1998, Anderson recommended to the FPC board of directors that the company outsource the business to FDX. In addition to his general impression that FDX was right for the job, Anderson wanted the chance to use as departure airports both Osaka and Narita in Japan to ship parts and components inbound to Memphis. FPC's primary supplier is located on the west coast of Japan, closer to Osaka.

"We considered FedEx's Asian architecture and landing rights to be very attractive," says Anderson. The availability of Memphis-area manufacturing subcontractors with experience providing FDX overnight technical services for electronics testing, assembly and repair also was a plus, he adds. Another big advantage was the familiarity board members had with the FedEx operation and the general success of the Memphis hub.

The proposal was approved by the FPC board in April 1998, and a contract was designed and signed a month later. FPC hired Bill Rea, an independent consultant from the Bay Area, to lay out the logistics details and requirements and specify the supply-chain architecture for the project. Anderson knew of Rea's performance from earlier consulting jobs and wanted a thoroughly independent party to work the details from the FPC end. Details on the FedEx side of the equation were handled by a group then specializing in logistics, electronic commerce and catalog operations.

"As an organization, it required us to work on a global basis not only with FPC but with the parent company in Japan and with Asian suppliers as well," says Brent Meyers, then managing director of sales for FedEx's electronic commerce unit. "Since we were bringing a total solution, it required a cross-section of functional areas of our company, such as information technology, billing and legal."

There were a lot of nitty-gritty issues that needed to be worked out in addition to mapping the physical flow of the material, Meyers adds. "Fujitsu was interested in our information and physical assets as well as our business practices," says Meyers. "They talked a lot about flawless execution, and it takes a lot of planning on the front-end to accomplish that."

E-commerce capabilities were crucial. Information had to move smoothly and in a timely manner between all necessary parties; money had to move to the right accounts at the right time, and all parties needed to have certain exact information regarding the exchange of goods and services to satisfy various international trade regulations.

Due to the unusual detail involved in planning, implementing and managing these more comprehensive logistics service programs - and the growing demand for them - FDX this summer established a dedicated unit called e-Supply Chain Services to handle accounts with electronic commerce requirements. Meyers currently is director of the new unit.

"The demand for this type of service continues to grow, and it's gotten a lot more intense," says Meyers. "Our objective is the marketing and selling of total supply-chain solutions, to analyze the supply-chain processes of FDX customers and then identify and implement streamlined solutions that will reduce costs, improve cycle times and increase revenue for that customer. Creating e-Supply Chain Services gives us the mechanism to really leverage all of our assets for the customer."

FDX Launches New Supply-chain Unit With comprehensive supply-chain management projects like Fujitsu PC already in the Federal Express portfolio and with others coming down the chute, parent company FDX Corp. this summer launched a new operation, e-Supply Chain Services, to support this growing business segment. "We were created for the purpose of designing total supply-chain solutions," explains Tom Schmitt, corporate vice president of e-SCS. "This includes analyzing the supply-chain processes of FDX customers and identifying and implementing streamlined solutions that will reduce costs, improve cycle times and increase revenue." Over the last two years, the type of questions FedEx hears from its customers has changed, says Schmitt. "Two years ago customers were asking if we could move their products from Asia to America and vice versa. Now, we hear companies telling us that they want to focus on their core competencies and have a partner to come in and manage all or part of their supply chain." The challenges can be daunting. "In Fujitsu's case, they came to us with the goals of increasing customer choice and trying to get from a 25-day customer response time from first call to product delivery to an average of four days," says Brent Meyers, director of consulting services for e-SCS. "When you get a challenge like that - to reduce a response time by a factor of five or six, you have to go through the entire physical layout of their worldwide network, including interfacing with customers, including technology that ensures that partial shipments get delivered at the same door on the same day and at the same time." This often involves working across an organization that may well have different operating companies as well as functional areas, a painstakingly detailed task for e-SCS and the customer, adds Meyers. Typically for projects that result in taking over supply-chain management, it's six months to a year from the first problem-solving or workshop discussion of the issue and improvement potential to having a program in place for actively managing all or part of a supply chain. The demand for this type of service has continued to grow and intensify, and the growth of this business segment is linked to an ongoing transition - from a cost to a value perspective - in the way many customers view their supply-chain management strategy, says Schmitt. For example, where customers previously compared the basic cost of providing supply-chain services in-house with the cost and benefits offered by a third party, now they can look at options offered by sophisticated information technology to broaden those considerations. For example, they might consider the impact of tightening internal processes in order to reduce work-in-progress inventory. IT can quantify these savings as well as project sales lost due to lengthy turnaround times or an unsatisfying initial encounter with the company. "We can quantify those lost sales and project which of those sales losses could have been avoided with a much tighter, response-based cycle," says Schmitt. "And if you do the math, it's amazing how much value you can unleash." Schmitt says that for large companies, there can be as much as a 3 percent to 10 percent difference in total revenue between supply-chain costs of the average performer in the industry versus the best performer. "And companies are starting to make investments into unleashing those value potentials," he adds. The creation of e-SCS enables FDX to marshal appropriate resources and focus on a market that is shifting from transactional transportation decisions to more enduring relationships with a supply-chain partner that can manage, either through its direct holdings or alliances, everything that is non-core to that customer, adds Meyers. "Often, this includes everything but research and development, manufacturing and marketing."

Rough Start
By the end of May, the partners were ready to flip the switch and shift the assembly and shipping operation to Memphis. However, all did not move as smoothly as hoped once parts and components started flowing.

"We had a difficult start-up and a long, hot summer," admits Anderson. "It was crucible crunch time - the forging of an operational relationship between Fujitsu and FedEx. Suppliers are made, not born, and the forging process involves some heat every time. We went through the start-up and now the relationship is very durable and strong."

During that start-up period, security issues were huge, says Anderson. "When you combine the value of one of our notebooks with its ease of concealment and marketability on the street, it's a natural theft item." Although other high-tech computer makers were in the FDX facility, their products primarily were large servers that lacked the concealability and sales potential of notebooks. FDX had experienced no theft problems with these larger products, but inventory shrinkage quickly became a problem with the FPC notebooks.

Another hassle stemmed from the information technology. For example, FDX agreed to allow FPC to extend its Oracle ERP system into the FDX facility in Memphis. "We were so small, we could not afford the IT resources required to use the FedEx systems," says Anderson. "They agreed to use our Oracle system right in the warehouse and down on the shipping dock, so they could do our ERP transactions right on site. That saved us the usual network and file transfer and translation expenses, but we did have a learning curve as some of the people got acquainted with Oracle."

FDX management immediately stepped in and assigned two top troubleshooters to the FPC project with instructions to stay until it was fixed.

"The IT bugs were cleared up, and security measures were heightened by several orders of magnitude," says Anderson. "By September-October, things were really starting to shape up."

FPC kept in touch with its customer base during the changeover to keep them aware of the project's progress and explain any erratic service they may have received. "We had to communicate directly with our customers and explain that we were going through a transition that would dramatically improve their service," says Anderson. "We also got a letter of explanation from FedEx management, which also was sent to customers."

After asking for patience and understanding from his customers, Anderson assigned senior director of logistics Kevin Wrenn to help file any remaining burrs from the system.

Here's how it works today. The FPC ERP system is centered at the company's headquarters in Milpitas with an electronic link to the FDX facility in Memphis. The primary architecture is provided by a company called Vitria.

FPC offers a standard product line of notebook products. Inbound parts and components arrive in Memphis from Asian suppliers via FedEx planes and are stored in a FedEx warehouse facility. Orders are received into the Milpitas Oracle system, which takes the data and runs its MRP (materials resource planning) program. Production schedules are passed electronically from Milpitas to another FedEx facility in Memphis that houses the company's Integrated Repair and Return (IRR) operation as well as to a separate FPC operation housed about two miles away and staffed with FPC employees. Roy Young is program manager for the FPC account, and Mark Kurth is general manager. They communicate directly with Wrenn, who is back in Milpitas.

In a designated space connected to the IRR by a separate tunnel, a subcontractor called EFTC provides the technicians and capability to assemble and test the FPC notebooks. The alliance between EFTC and FDX is in its fourth year. Similar assembly, software loading, testing and some refurbishing activity also is done at the other FPC facility in Memphis by FPC employees.

Milpitas assigns tasks and product lines individually to each facility depending on volume demands and order patterns. A master scheduler on the Oracle system in Milpitas moves orders into the appropriate assembly queue once the orders have been cleared by other administrative elements within the Oracle package.

At the IRR in Memphis, workers pull the day's orders off the FPC Oracle system and process them, sending instructions to the FedEx warehouse as to what parts and components are needed. These parts and components are shuttled to the IRR and to the off-site FPC operation. Technicians at both facilities assemble the day's orders and package the notebooks for outbound transport.

Receiving transactions, shipping transactions and changes to inventory data are made directly into the Oracle system in Memphis and uploaded to the mainframe.
"From an information standpoint, we're integrated very closely into the Oracle system Fujitsu uses," says Meyers. "We're able to provide direct input as to what is coming in, what is being shipped, and monitoring inventory." In turn, Fujitsu connects with the FedEx system to provide shipment visibility for all products moving in the supply chain.

"Once orders are dropped to Memphis, the normal expectation is for delivery to be made within three days," says Anderson. "Our cycle time through the Memphis assembly operation is one day; our finished goods inventory is extremely low, but it supports our service level."

FDX uses a dashboard set of performance measures to monitor the Fujitsu business, tracking items such as inventory accuracy, return rates and fill rates. Together, FPC and FDX weigh the success of the program against jointly developed goals and objectives set forth at the front end of the project.

The strategic shift to outsourcing pays dividends in many areas of the FPC operation, providing synergies that weren't necessarily expected.

"This project has caused a tremendous decrease in the total cost of logistics," says Anderson. His shop has been tracking the total logistics cost for the FPC-FDX operations by monitoring many different asset accounts - receivables, inventory and fill rates - and they report many tangential benefits from the greater level of control and management.

"For example, return and refurbish expenses have been reduced significantly, and finished goods inventory has been reduced by about 90 percent due to the speed and reliability of the pipelines from Asia and through Memphis," says Anderson. "When I arrived here, there were 22,000 units in inventory. We now have fewer than 2,000 either finished or under construction.

"We also dramatically reduced our channel inventory," he says. "Now we are in total control of our shipping in such a way that we can prevent the unnecessary build-up in the pipeline of inbound parts and components." This gives FPC a much faster turn on inventory items, and the shorter shelf time makes the parts and components less susceptible to price deterioration.

FPC also is plugged into FedEx's proof-of-delivery system, so the computer manufacturer's accounts receivable department gets immediate electronic copies of signed proof-of-delivery forms, which enables prompt billing.

"So when you take receivable, price protection, returns and inventory, I cannot overestimate the amount of impact that has had on our P&L," says Anderson.

The faster product cycle-time enabled FPC to establish a web presence in June where it began selling directly to consumers, both corporations and individuals. "We are working with channel partners who are into using the internet, not fighting with it, and we had a million-dollar month on the web in August," Anderson adds. "So we have changed our channel strategy, eliminated distribution as we knew it, and now have direct connection with a small number of select value-added re-sellers, a small number of select retailers, our own web channel, and direct channels."

Future Refinements
FPC intends to further mine opportunities on the web and in other aspects of their operation and has formed a working group with FDX to brainstorm, examine and implement additional refinements to the partnership. "We're going to try to innovate order fulfillment capabilities in and around doing business on the web, and we're working with FedEx to set some standards in that area," says Anderson. "Doing business on the web is easy when you are sitting in front of your computer, but it's a real hassle sometimes when you physically want to get delivery of what you ordered - especially when you're dealing with something as expensive as a notebook. We intend to work that very hard."

Leaving sticky notes on the front door to inform customers that they missed a delivery is "kind of a riot when you consider the electronics that go into ordering something on the internet - it's like having Stonehenge and the Space Age all at once," says Anderson. Customers should expect to see some new service facilities to make life easier in the not-so-distant future, as well as more aggressive diversion of shipments to where the customer happens to be on the scheduled delivery date.

"A consumer only spends 10 minutes ordering this complex device on the web, then has to wait around all morning for someone to come by and deliver it," says Anderson. "Clearly there's a mis-match of capabilities at work here. In these days of cell phones, you would think that things would be easier."