Supply Chain Manager of the Year: Paterson spearheads change at IBM
In his distinguished career at Big Blue, chief procurement officer John Paterson has made purchasing more global and strategic to the company, and he has turned it into a profit generator.
By James Carbone -- Purchasing, 10/16/2008 2:00:00 AM
John Paterson is not afraid of change.
In fact, in his 39-year career at IBM, Paterson has been an agent of change, helping drive the transformation of purchasing from a back-office function to a strategic role that helps IBM compete in the global marketplace.
In his eight years as chief procurement officer for IBM's Integrated Supply Chain organization, Paterson has led the charge, making IBM truly a global procurement organization with procurement headquarters in China.
He also established IBM procurement services, which generates millions of dollars from other companies that outsource purchasing to Big Blue. Paterson has also developed successful supply strategies that support the changing business requirements of IBM as the company becomes more focused on providing services to OEMs rather than providing equipment.
 "Sometime down the road, China won’t be the low-cost source of supply and we will be looking somewhere else, maybe Africa.” —CPO John Paterson |
At the same time, he has made sure that IBM and its supply chain meet emerging environmental standards and regulations ahead of schedule. Paterson has also driven socially responsible supply strategies and standards and influenced such standards for the entire electronics industry.
For these reasons, Paterson is Purchasing's 2008 Supply Chain Manager of the year.
Paterson's IBM career began in a function very close to manufacturing. "I started in production control materials management at IBM's facility in Greenock, Scotland and worked extensively with the procurement community in those early days," says Paterson. "I was planning parts requirements and placing the orders throughout the organization."
He worked there for three years and then went to IBM's European headquarters in Paris, where he managed various aspects of manufacturing at several IBM manufacturing locations.
In the 1970s he returned to Greenock where he served in supply chain materials management, followed by stints in purchasing, finance and engineering. He eventually ran IBM's PC manufacturing business in Europe.
In the early 1990s, he moved to the United States and created a purchasing organization for IBM's PC business. Later, when the late Gene Richter became CPO, he moved to corporate purchasing where he led direct procurement and then indirect procurement.
Get strategic
Paterson was a key player in transforming purchasing from a back office function to a strategic one. "Procurement's role back in the mid 1990s and earlier at IBM was largely administrative," says Paterson. "Sourcing decisions were typically done by others and procurement's role was to make sure it was done legally."
 “We now have a number of external clients who outsource their procurement to us. That is probably another $12 billion of purchases we will do this year.” |
Back then IBM had a decentralized procurement structure with more than more than 100 discrete purchasing groups around the world that didn't communicate with one another. "There was no sense of leveraging your scale in the marketplace," says Paterson. Each purchasing group had its own local suppliers.
"There were no long-term relationships with suppliers. We called suppliers 'vendors' because that's what we thought they were to us back then," says Paterson.
That began to change under Richter's leadership and continued when Paterson became CPO in 2000 following Richter's retirement. Purchasing at IBM became more centralized, with commodity councils managing IBM's spend for different commodities on a global basis. So instead of each IBM facility buying its own semiconductors and other components, IBM combined the purchasing volumes of its locations and leveraged the spend with suppliers. IBM worked toward long-term agreements with suppliers and reduced its number of suppliers, and worked closely with key suppliers, involving them in new product development efforts.
It also outsourced more manufacturing and began doing business with suppliers over the Internet, ahead of many companies.
The results were unmistakable. The strategies that were employed saved the company millions of dollars and helped IBM return to profitability in the late 1990s. IBM's stock price rose. With commodity councils leveraging purchases worldwide, IBM sourced parts at prices that were 5–10% below industry averages. By developing close relationships with suppliers, IBM guaranteed supply of leading-edge parts for its PCs, servers, workstations, and mainframes. IBM's Internet initiative with suppliers saved the company millions.
Stepping up
As head of direct procurement and then indirect procurement, Paterson was at the forefront of the transformation of purchasing as a strategic function. People who worked with Paterson say his leadership helped IBM procurement make the needed changes.
"John's leadership style is an amazing blend of intelligence, pragmatic execution with crisp articulation of thoughts and direction," says Andrew Winterbottom, who headed up component buying at IBM during the late 1990s. "John's leadership was most appreciated as he always stepped-up during any crisis," he says.
IBM benefits from his integrity and his leadership by example, but "I believe John's core strength is his ability to get more from people, be they his team or other colleagues in IBM and importantly, the supply chain," says Winterbottom.
Winterbottom says Paterson had an "inspirational effect on people. He was practical and a joy to work with. There was no pressure, ego or attitude."
 “One of IBM’s business goals is to become a globally integrated enterprise, which simply means being able to work anywhere around the world where the right mix of skills and business climate can be found.” |
DK Singh, senior vice president enterprise procurement for Conagra Foods in Omaha, Neb., worked with Paterson for about six years at IBM. Singh was a purchasing director at IBM. He describes Paterson as a "great leader, very focused, very sharp, concise and to the point."
Singh says Paterson was concerned about how suppliers were treated. "He was always about doing the right thing for IBM and the supplier, truly making it win-win for both sides," says Singh. "He was not one of those guys who said it was all about IBM and I don't care about anyone else."
Singh says Paterson's leadership helped make the transformation of procurement easier.
During the procurement transformation, IBM purchasing worked to create value. "We are beyond cost savings," says Paterson.
Change has not stopped at IBM. As IBM has sold off various hardware divisions such as PCs, purchasing has further evolved. IBM still makes high-end mainframe computers and servers and purchasing buys about $14 billion of direct materials per year for those products. However, more of its business involves services and procurement at IBM has emerged as a profit center for the company. It brings in millions of dollars a year from companies that outsource procurement to Paterson's organization.
"When I took on this job (CPO) we didn't have an IBM procurement services business," says Paterson. "Now we have a number of external clients who outsource their procurement to us. That is probably another $12 billion of purchases we will do this year."
Purchasing for others
IBM buys for companies in a wide range of industries, including telecom, consumer, package goods and perfume companies.
Paterson says in some cases companies will outsource just the administrative part of procurement. "It includes placing Pos and accounts payable," he says. Other companies will outsource those tasks as well as entire categories of spend. That may include buying printers for offices or travel services for a company. "We purchase a great deal of IT equipment as part of our end-to-end solution for our customers," he says. "A typical customer may include IBM hardware and software or more often an integrated hardware, software and services solution and third-party content," he says. IBM will when necessary purchase hardware from other computer companies.
With indirect purchasing for customers, IBM buys goods and services to keep their facilities running. "So for example, with Unilever we are procuring many of the products and services that it needs to run its business in Latin America, including office equipment, travel, marketing and technical services," says Paterson.
In many ways purchasing for the services division is more challenging than purchasing for hardware. "In the hardware world, we have well developed processes and IT solutions such as MRP, which provide a foundation and a consistency of process," says Paterson.
Services are more customized based on customer needs, so there are no standard processes and IT solutions. "You don't have the forecasts that you have in hardware," he says. He adds that with the services business, the supply chain tends to be much more country focused or region focused than with hardware. "Therefore for us to be successful in supporting IBM's growth, we need to have highly skilled people and need mature strategies for sourcing in those geographies the way we have in the more mature markets," says Paterson.
Global suppliers needed
Finding suppliers for services on a global basis is challenging. "We are heavily focused on developing suppliers for our services business in some of these more emerging or growth markets that can be suppliers to us on a global basis," he says.
It is also a challenge to find direct suppliers in emerging low-cost regions of the world.
"If you go back to the 1960s, Japan was a low-cost manufacturer of electronics, automobiles and other goods," says Paterson. But as Japan's economy developed and its cost structure increased, low-cost manufacturing migrated to other spots like the Philippines, Taiwan, Korea and now China and India.
"The challenge is how do you stay ahead of that to be able to take advantage of those emerging suppliers wherever they happen to be in the world," says Paterson. "Sometime down the road, China won't be the low-cost source of supply and we will be looking somewhere else, maybe Africa, and so it will go on." IBM user Emptoris SP to and in sourcing decisions.
While the location of low-cost suppliers is changing, some U.S.-based companies—including IBM—have located their purchasing operations in countries outside of the U.S. to be closer to the source of supply. Paterson moved his purchasing headquarters to China two years ago.
While IBM had buyers in many parts of the world for years, purchasing decisions were made in the U.S. "We hadn't made the same investment in our people and supply base in other parts of the world that we had in more mature markets. That is something that is changing. And the movement of our procurement headquarters to China is part of the manifestation of that," says Paterson.
He says the advantage of locating his office in China is that it puts IBM "closer to the action" in terms of the supply base. Being close to the supply base helps IBM become more "globally integrated."
"One of IBM's business goals is to become a globally integrated enterprise, which means being able to work anywhere around the world where the right mix of skills and business climate can be found," says Paterson.
He says that cannot be accomplished at the right cost if IBM has different suppliers in each of the 170 countries where it does business. "So IBM's global procurement team works with our suppliers to help them grow and become more global to support IBM not in any one market, but globally," he says.
An example on the indirect side is advertising agencies that IBM used. "Several years ago we had dozens of agencies supporting IBM. Many of them disjointed and supporting IBM in different regions," he says. In 2000, the number was reduced to just one, which has offices around the world and serves IBM globally.
"We need suppliers that can support us globally and being here I've been able to dedicate more time to help suppliers," says Paterson. He also works more closely with IBM's procurement team,working with them to develop their skills.
More diverse suppliers
Besides transforming purchasing and making procurement more global, Paterson is also proud of IBM's initiatives with its diversity program and with its environmental and social responsibility supply strategies.
He says with the diversity program, IBM has increased its spend with minority suppliers. The diversity program is not new to IBM. It has had one for 35 years, but the amount of business being awarded to diversity suppliers is rising.
"In 2003 our spend with diversity suppliers was $1.5 billion. Last year it was about $2 billion and $700 million of that was outside of the U.S., so the diversity focus is not just driven by legislative requirements in the U.S." says Paterson.
He says the spend is increasing because several years ago "we put in place a rule that each and every bid for new business must include at least one diverse supplier." In 2003, IBM expanded its supplier diversity program from its original U.S.-centric focus to a global one.
"When taken in its totality, IBM offers the most comprehensive and robust global supplier diversity program in the world," says Paterson.
He is also proud of IBM's focus and efforts on the environment and supply chain social responsibilities. "We have leadership in those areas. It is of great importance to us and to many people beyond us."
With social responsibility, Paterson says IBM is "trying to insure that all of our suppliers in the world behave in a socially responsible way, whether that is labor practices, payment, or health and safety."
He says IBM does not want to do business with companies that aren't socially responsible and "we don't want IBM's brand image tarnished by being associated with companies like that."
IBM has helped the industry with social responsibility. "We helped form the electronics industry code of conduct (EICC) that we chair to get a consistent set of standards for our industry," says Paterson. Those standards spell out acceptable practices concerning labor, payment and treatment of workers, child labor, health, safety, environmental concerns and ethics issues.
The EICC makes it easier for the supply base to comply with one set of rules and requirements rather than 50 or 100, he says.
"We have helped a lot of suppliers to understand what it takes to be a supplier to a large multinational western company."
If suppliers violate the standards of the EICC, they risk losing IBM business.
Paterson says environmental requirements on electronics equipment are proliferating and IBM has responded with supply strategies that resulted in compliance to environmental laws of various governments.
IBM was well ahead of requirements to meet the European Union's Restriction of Hazardous Substances (RoHS) law, which went into effect July 2006. "By year end 2005 we had already reached 87% of our products compliance to EU regulations, so we hit 100% several months ahead of the deadline," says Paterson.
IBM is also reducing its carbon footprint and wants its products to be as Green as possible. "Measuring carbon footprints is tricky still because there are many definitions on where you start measuring the footprint from," he says.
Paterson says more changes in IBM's business, the supply chain and in environmental regulations are inevitable and IBM will be ready to address them when they occur. The key to success will be to have a highly skilled procurement organization on a global basis.
"I think we are a much more professional organization than we were five years ago, 10 years ago and 15 years ago in terms of skills and capabilities our people," he says. But the challenge is to keep improving those skills on a global basis.
"We can't be a successful procurement organization supporting IBM in China or anywhere else in the world if our internal clients in those regions don't see our procurement community as credible," says Paterson. "We need to continue to improve."
FOR MORE INFORMATION: See Purchasing.com's
archive of past Supply Chain Managers of the Year
. Past winners include Shelley Stewart of Tyco, Steve Darendinger of Cisco Systems and Steven Schaffer of Boeing.
Now Playing: 