How three external challenges made Nokia’s supply chain stronger

| Interview

The history of the €12 billion telecommunications-infrastructure giant now known as Nokia Networks has been one of wrenching change, from its origins as a joint venture through to becoming one of the three businesses that comprise today’s Nokia Corporation, which sold its handset division in late 2013. On this journey, the organization faced three major challenges in close succession, creating what Johannes Giloth, senior vice president for operations, describes as an “existential moment.”

The first challenge resulted from the 2007 establishment of the joint venture, which led to the unification of two supply-chain organizations into an integrated, end-to-end structure. A second soon arrived in the form of a determined drive for profitability, which had the side effect of depressing sales and margins and was followed by a major restructuring effort to establish cost-optimized, lean operations. The final challenge occurred in early 2014, as the demand for certain products tripled over the course of a quarter and required significantly higher agility from the supply-chain organization.

Each of these events was a major test for the company’s supply-chain operations. And yet each proved to be an invaluable catalyst for Nokia Networks to develop new supply-chain capabilities, such as comprehensive performance dashboards that allow senior leaders to monitor all relevant supply conditions in real time. As a result, supply-chain costs per unit sold have fallen markedly since 2011, while flexibility has risen considerably. And as of 2014, the company as a whole appears to have regained its footing, with an operating profit that almost tripled over the previous year.

For several years, Mr. Giloth has led this transformation effort—both in his current role as head of operations and in his previous position as vice president for supply chain and logistics. Mr. Giloth discussed the contribution of the supply-chain organization to this organizational turnaround with McKinsey’s Christian Johnson and Mads Lauritzen.

McKinsey: In light of what Nokia Networks has experienced, how would you describe the current business landscape for data networking and telecommunications equipment?

Johannes Giloth: Personally, I believe the major pressures are intensifying. The first concern is price, and with that the related cost pressure. Competition in the industry remains high and hardware continues to become more commoditized. Second, the ongoing shift from voice to data traffic makes the product portfolio larger and more complex: our customers—which are mainly communication-service providers—are now operating four technology generations in parallel.

The next pressure we feel is greater demand volatility, even as the overall market remains flat—with very short requested delivery times compounded by the difficulties of achieving accuracy in forecasting and managing long internal lead times. And the final challenge is that the very different needs of this diverse customer base require us to segment our supply-chain approach, rather than letting us follow a traditional one-size-fits-all model.

To satisfy these changing market requirements, we had to strengthen our ability to deliver quickly and at scale. From an operational perspective, cost cutting is no longer enough. Supply chains in particular must become far more flexible, so that we can adjust capacity among our products to suit our customers’ needs. Meeting demand is impossible without a major increase in operational performance—not just in the procurement or supply-chain functions but throughout the organization. As a result, a crucial area of investment for us is in developing the skills and engagement of our people.

McKinsey: To meet these changed requirements, what sorts of capabilities did Nokia Networks need?

Johannes Giloth: The starting point for establishing a strong set of capabilities is an organizational structure with a clear vision. Back in 2007, for this part of the business, our supply-chain functions were fragmented across different areas of accountability. There was no real supply-chain mind-set—no perception that supply chains have strategic value and involve much more than logistics. With our first catalyst—the initial integration—our major goal was to create a supply-chain and operations organization that would function on a true end-to-end basis. That gives us a one-stop shop for all supply chain–related needs, including for manufacturing- and procurement-related questions.

At the same time, we needed to realign our structure away from functional specialties such as procurement or product design and toward a model that reflects how value is actually created—the process of turning an idea into a real product, for instance. That focus on value streams created a new flow to our operations, with new accountabilities to match.

Increased cost pressure—our second change catalyst—required us to renew our vision with innovative thinking and greater flexibility. Supply-chain specialists are often seen as back-end focused. We have changed that. Streamlined processes led us to intensify our collaboration with external partners. And, even more importantly, 50 percent of our supply-chain people sit directly with customer-service teams, so they know what customers want and feel the same pressure to respond. It’s a one-team approach, and it means we are involved in decisions at a much earlier stage, when we can still influence them.

The third catalyst—the spike in demand volatility—pushed us from flexibility to agility. Our investments further optimized our processes by intensifying our internal collaboration and creating a culture of continuous improvement.

McKinsey: Those are major changes. What persuaded people to go along with them?

Johannes Giloth: If people understand the reasons for business decisions and can see the resulting value, they usually engage with the changes. We were careful not only to create a compelling vision—our ambition for excellence in our organization—but also to make it come to life in a very tangible way. We translated the vision into shared, defined targets across the organization, so people could look at our progress reports and see real, continuous performance improvement. Their day-to-day experience showed them that with a disciplined, cost-conscious mind-set, we can make great things happen together.

The long-term payoff from these commitments became clear at the beginning of last year, when the enormous demand volatility hit us. Suddenly, the variability in demand increased exponentially—a flexibility our supply-chain did not allow at that time. That meant we had to work even harder, together. I could feel the dedication in the team, and this has certainly been a game-changer for us.

McKinsey: What further steps did the organization take?

Johannes Giloth: In purchasing, for example, there was an urgent need to integrate what had been an isolated, transactional unit into an integrated function that could take a total-cost-of-ownership view and manage suppliers through each stage of a relationship.

Over a five-year period, the cost performance of our procurement department rose to match the best in the industry. Whereas previously the main focus was on unit-price reduction—what I would call “classic” procurement savings—today our goal is more holistic: to get the strongest possible contract across all of its provisions, from low prices through to optimal payment terms. We also added techniques to our tool box, such as online auctions and “clean sheet” costing analysis. And we needed new relationships all along the value chain, under a sustainable supplier-management approach to help them as our innovation partners reduce their own costs as well as ours. It’s a much wider view of procurement and requires a different set of capabilities.

Of course, procurement is only one of the functions in our global operations organization. We set similar performance expectations for our engineering, supply-chain, and manufacturing people as well—and we also made sure that sales, R&D, and services teams understood the level of commitment they needed to make to operations to achieve enhanced business results. We needed everyone to think collaboratively, outside their own silos, and to step up their engagement and commitment, all as part of a shift in mentality that we have worked on relentlessly.

McKinsey: How could you tell that the changes were really making a difference?

Johannes Giloth: I knew that we had reached a new level of performance when I saw how our teams were working together: how senior salespeople were sitting together with our R&D and supply-chain specialists to design solutions. I saw a common purpose that cut across all of our old internal barriers, and we were able to move mountains while working together. The interesting thing is that people realized, “Hey, it feels great to work together like this; the value is obvious. Let’s maintain this.”

Ultimately, people see their own success in our results: costs, inventories, and lead times that are much lower and flexibility that is much, much higher.

McKinsey: What worked for you in developing those relationships and alliances within the organization?

Johannes Giloth: You need to be able to bring value to the other functions. We were able to do that by being understood as a neutral party. We have no business interest of our own—we are not a profit-and-loss department—so people trust us when we say we are looking out for the company as a whole.

For instance, when demand suddenly outstrips supply, we have to choose which of our customers’ orders to fulfill and to what extent. The supply-chain organization was asked to come up with a neutral allocation proposal. The sales teams quickly understood that we had sought to achieve the optimum outcome, and that further increased our credibility throughout the company.

McKinsey: What sorts of effects have these changes had for the business as a whole?

Johannes Giloth: At the most basic level, it helps us minimize all sorts of costs. One example is obsolescence. So many costs are avoidable—but only if you have an end-to-end perspective, which requires sales and supply-chain personnel to interact closely. Now they do that, and together they have created a seamless ramp-up and ramp-down process so that our obsolescence costs have fallen considerably.

Better integration also lets us accelerate the supply chain and increase our agility in a cost-effective way: at the same time that our product-delivery volumes were doubling, we actually reduced logistics costs significantly. Consistently applying total-cost-of-ownership principles makes us much more efficient.

McKinsey: How do you institutionalize the changes to keep people from reverting to their old practices?

Johannes Giloth: It’s a tricky thing, because people who have been put out of their comfort zone naturally try to get back to it. We recognized that we needed to create a new ecosystem based on what we had learned. Our goal was to keep what we had achieved in an extraordinary situation, while subtracting the manual effort that the extraordinary situation required. What resulted was an entire program dedicated to turning our lessons into new processes, accountabilities, and tools that should keep us doing things differently.

McKinsey: To find people to lead the change, did you focus more on recruiting the perfect candidate or on building the skills of the candidates who were available?

Johannes Giloth: A bit of both. Historically, people who wanted to go into sales were interested in kick-starting their careers with our organization. People joined the supply-chain organization right from university, were detected by the customer teams, and then moved on to sales roles.

One of my ambitions has been to become the employer of choice, both within the company and outside it, and persuade our people to stay because of the satisfying results and the clear appreciation by other units.

Once the program was under way, it became easier, because a high-performing organization attracts many more talented people. The first few acted as multipliers. All of a sudden, candidates from services, sales, and even R&D started applying to operations.

McKinsey: Once these high-potential people join your team, how do you retain them?

Johannes Giloth: A big part of it is communication—defined broadly, not just from the top down. The idea is to really connect with people. Whenever I travel, I meet all my people in their respective areas, and I ask everybody on my leadership team to do the same. At each site, we have a leader who coordinates communications activities—the town-hall meetings and social gatherings. We also invest in satisfaction surveys, feeding the data back into how we lead and manage the company.

What’s probably more important, though, is the right attitude: openness. We encourage people to be skeptical, to ask critical questions. In the beginning it was a bit more difficult, but the more we do it and people see that it is appreciated, the more valuable the responses become.

McKinsey: If you were to start this whole process again, knowing what you know now, what would you do differently?

Johannes Giloth: I think we probably underestimated how far we can go—we could have been faster and bolder in some areas. That was partly because we did many things in parallel. Now I would focus more on just a few priorities and then expand the changes quickly.

McKinsey: What effect has this experience had on you as a leader?

Johannes Giloth: It’s difficult to answer objectively, of course. But I think my perspective has broadened. I realize now that if you want to run a successful operation, you need not only to think two or three steps ahead, but also two or three dimensions wider than your direct accountability area might imply. That does not mean I am now an R&D person, but I try to engage much more in areas such as that in order to make my core business successful.

McKinsey: What emerging issues do you see in the telecommunications-infrastructure industry?

Johannes Giloth: In order to bring out the best in a supply chain, it is fundamental to combine high agility and low cost. For the moment, we seem to have done something right, because over the last couple of years our profitability has been strong. But we see further competitive pressure on the horizon, potentially including well-funded new entrants. Also, I think we can expect further consolidation in the market, requiring further integration and differentiation. My belief is that flexibility and agility will thus be required not only from the supply chain but also from the entire company. And that means the lessons we have learned and the experience of the last few years will be doubly valuable.

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