Just over a year ago, Seagate Technology Inc. was in deep trouble. The maker of hard disk drives had posted a $30m loss for the first quarter of its 1999 fiscal year, ending Oct. 2, 1998. Revenue of $1.55bn was off by more than $300m from the same period of the previous year. Company founder Al Shugart had been ousted by his own board of directors after a string of disappointing quarters. And with computer prices plummeting, the future for component suppliers in general didn't look bright.

Today, Seagate is back on the road to health. The Scotts Valley, Calif.-based company claims title to being the world's largest maker of disk drives, magnetic discs and other data storage devices. Under the leadership of president and chief executive officer Steve Luczo, net income for the first quarter of fiscal 2000 hit $2m on revenue of $1.68bn, surprising pessimistic Wall Streeters.

Not counting a restructuring charge and gains from the sale of stock in a software company, Seagate earned 7 cents a share in the first quarter - versus analysts' consensus prediction of a 7-cent loss. Says Matthew Johnen, executive director of supply-chain management: "We are the only profitable independent drive maker right now."
How did Seagate recover so quickly? A large part of the answer lies in the recent overhaul of the company's global supply chain, with a heavy emphasis on Asia. Fourteen of its 20 factories are located there, spread throughout Singapore, Thailand, Malaysia and China. Seagate sources some 85 percent of its components in Asia, both in terms of value and volume.

Having lost the top spot among disk-drive makers some years ago, Seagate was under increasing pressure from its customers to cut costs and push product through the pipeline faster. Along with rivals Fujitsu, Maxtor and Quantum, it was slashing prices in order to retain market share, according to Disk/Trend, a market research firm based in Mountain View, Calif. That led to a fall in the average price per megabyte for hard disk drives from $11.54 in 1988 to an estimated 2.3 cents in 1999. With the average price projected to hit 0.3 cents by 2002, the trend shows no sign of reversing itself.

Seagate was further hindered by the industry's long product cycles - up to two years between design and shipping to market. And it was heavily laden with inventory, a dangerous position for any company in the fast-changing world of high-technology.

Meanwhile, computer makers such as Dell, Gateway and Compaq were moving to a build-to-order environment, demanding a more rapid response from vendors.

The computer industry's new mantra: just-in-time. "The question was, how do you deliver tomorrow when it takes weeks to build and months to develop?" says Johnen.

In March of 1998, Seagate kicked off a formal program to turn things around. The effort consisted of three separate initiatives: the rigorous Six Sigma quality program, which aims for virtually zero errors in production; a series of interdisciplinary "core teams" organized around specific challenges, and reengineering of the supply chain. The last focused in large part on the company's Asian manufacturing network.

Getting Down to Work
The program didn't formally get off the ground until July of 1998, about the time Luczo came on board. That was when the core teams went to work on improving processes throughout the 20-year-old company.

What got the most publicity, however, was a series of layoffs, which Seagate said that would save around $150m a year.

The company had two main goals: control costs and reduce time to market. Vendor reduction was a major part of the plan. In February, 1999, Seagate went from 24 logistics suppliers to just four. It chose Fritz Companies and Kintetsu World Express to handle trade lanes within Asia and between Asia and the U.S., and KLM and Panalpina for Asia-Europe routes. All were given three-year contracts.

The move was intended to boost the overall quality of service by logistics providers. With fewer vendors responsible for bigger chunks of the business, Seagate figured to get more attention from the remaining supplier base. "It's a simple matter," says Johnen. "Fewer suppliers mean more time to spend on quality relationships."

Seagate undertook a similar winnowing of its parts suppliers, resulting in a 30 percent cut. Johnen says vendors were nervous about the program, even though Seagate vowed to retain more than one for each part, and its parts suppliers today still number in the hundreds. In the end, he says, "relations in general got better."

San Francisco-based Fritz Companies saw its Asian business for Seagate triple overnight, according to Client Relations Executive Laurie Diekman. Among its new responsibilities was management of a Seagate warehouse in Wuxi, China, three hours from Shanghai. Fritz oversees vendors feeding parts into the supplier hub, which operates much like vendor-managed inventory programs in the retail sector. In both cases, the manufacturer delays taking title to the goods until the moment they are needed on the assembly line.

Fritz also does a smattering of ocean transport - 99 percent or more of Seagate's drives move by air - as well as some global warehousing and distribution of product. Along with Seagate's three other logistics providers, Fritz conveys shipment data via the transportation module known as GLM, part of the supply-chain software package of Irving, Texas-based i2 Technologies. Use of that system would not have been possible without Seagate's vendor-consolidation program, says Diekman. Fritz was chosen to conduct beta testing on the GLM link, which was scheduled to be rolled out to 28 trade lanes in January 2000.

For Seagate, having major logistics providers in the Asia-U.S. trade lanes might have made all the difference in getting product to market on time. The last year has witnessed a severe capacity crunch in the eastbound trades, with Asian suppliers scrambling to feed the voracious U.S. economy. Only through long-term relations with airlines did Fritz manage to find space for Seagate's disk drives, Diekman says.

Virtual Stockroom
Seagate will continue to review its supplier base, while building up capacity with existing vendors. Johnen says the company is utilizing more supplier hubs operated by third parties, as a means of funneling product to customers on a just-in-time basis. The result is a "virtual stockroom" that removes Seagate from the day-to-day headache of individual pull orders. The third party, which is usually chosen by the manufacturer, becomes responsible for receiving, storing, tracking, packing and shipping of materials.

The internet will play a critical role in Seagate's efforts to improve its responsiveness to customers. Up to now, it has relied chiefly on electronic data interchange (EDI) formats to transmit shipment information. In partnership with several major accounts, it gradually is migrating to a reliance on the net, which offers greater flexibility at much lower cost, Johnen says. In a pilot program with one customer, Seagate already is receiving orders via the net.

Seagate is past the hurdle of enterprise resource planning implementation. Its ERP system, from Redwood Shores, Calif.-based Oracle Corp., is up and running. Attached to it is advanced planning and scheduling software from i2. Johnen says the i2 implementation began on a modest scale, and is now being expanded to cover the full range of global supply-chain functions.

In less than two years, the Seagate reengineering program has racked up dramatic results, especially in terms of cost and efficiency. The company has boosted disk-drive production by 25 percent, with 27 percent fewer workers. At the same time, the average price of its drives fell from $195 in 1998, to $116.70 as of late last year.

Inventory trends are equally positive. Seagate went from 7.5 inventory turns in the fourth quarter of fiscal 1997 (ending July 1) to 13.9 turns in the first quarter of fiscal 2000. During that same period, the total value of inventory was cut in half, from $808m to $404m. Worldwide employment levels fell from 111,000 to 78,000.

Seagate's manufacturing plants are being streamlined and overhauled for additional flexibility. In a shareholders' letter in the 1999 annual report, Luczo said the company was redesigning production "so that any drive can be built on any line at any Seagate facility." He added that the advances would "deliver lower cost and higher quality throughout our broad line of products, enhance our ability to respond quickly to customer requests and enable us to develop the processes and technologies to build increasingly sophisticated storage products and deliver them to market faster."

New products are already being introduced at a speedier pace. Two years ago, says Johnen, Seagate was three to nine months behind the competition in getting new desktop drives to market. Now it is often first.

Most recently, Seagate introduced the U8, a state-of-the-art disk drive with storage capacity of 8.6 gigabytes. A company spokesman called the project "Seagate's quickest, most successful volume ramp ever" - a supreme test of its newly streamlined supply chain.

Seagate faces the continuing challenge of integrating its logistics network with those of acquisitions. The latest is Eden Prairie, Minn.-based XIOtech Corp., a leader in virtual storage that was picked up late last year for $360m in Seagate common stock. Johnen says it's too early to say exactly how the XIOtech supply chain will be combined with that of Seagate.

One thing is certain: Seagate can't afford to rest on its laurels. The sheer volume of future demand dictates that the company find new efficiencies within its supply chain. With worldwide demand for data storage doubling every nine months, the market is expected to reach $100bn by 2002. In addition to the growth of traditional computers, Seagate predicts a wave of "intelligent devices" such as video cassette recorders, home appliances and automobiles - all of which will require some kind of disk drive.

It will take a flexible supply chain, in Asia and beyond, to keep Seagate in the game. Says Johnen: "It has opened our eyes to endless opportunities."