The Sourcing Oracle? Making the Sun Deal Pay Might Not Be as Easy as it Looks

I found a recent article by Dave Hannon at Purchasing rather insightful in its examination of some of Oracle's strategy to eke out every ounce of shareholder value possible through its acquisition of Sun. According to Hannon, "On a conference call … Oracle CFO Jeff Epstein outlined the company's strategy for Sun, starting with costs. And Epstein was quick to emphasize that 'the largest cost at Sun is cost of goods sold, the product cost, and so the way to save money is by figuring out a better way to produce products at lower costs.'" Dave goes onto suggest that, based on Oracle's statements, "Two major components of Oracle's cost reduction plans for Sun are SKU rationalization and consolidating its manufacturing operations, both of which will require some high-level sourcing strategy."

Oracle appears poised to focus not only on unit-cost reduction through sourcing and supplier rationalization strategies, but also on working-capital management strategies based on a "build-to-order supply chain and not a build-to-inventory supply chain." The bottom line, according to Charles Phillips -- yes, that Charles of recent NYC-billboard-mistress fame -- is that "Sun's supply chain was very complicated … we are going to make it a lot more efficient." While Oracle's talk is great in this regard, truly getting the operational value out of its Sun acquisition might prove more difficult in practice. For example, moving to a build-to-order supply chain could very well cost Sun orders to other providers (and distributors) who maintain stock for competitive products. Moreover, considering the relatively short full-price lifecycle of the many high-end servers and other gear that Sun provides, it's doubtful that customers will tolerate much of a wait between order and fulfillment, especially in the case of premium gear.

Oracle is talking the right talk when it comes to Sun, but the proof will be in the operational widget pudding -- a recipe that Oracle is not used to making when it comes to integrating software acquisition. Physical supply chains are very different from virtual ones, and building a core competence internally is very different from having a strategy or operations consulting firm tell you the right strategy to pursue. Having consulted to Sun much earlier in my career, I can tell you that the company was running fairly lean and mean during the past decade following a number of changes it put into place after workforce reductions in the late nineties and into the next decade. There are reasons why Sun's supply chain ended up the way it did, and I'm not convinced that Oracle will be as successful as it thinks it will in putting all the so-called synergistic pieces together without sacrificing the core of what made Sun, Sun: engineering, product excellence, and customer empathy.

Jason Busch

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