Lucent Technologies :Global Supply Chain

Management Group 10

Yogesh BagleYogesh KumarHarish ThakurVikram Virkar

Sachin Kumar

AT & T corporation in 1885

On Sept 20th, 1995 AT & T split into 3 public companies, one was Bell Labs

Bell labs became Lucent Technologies and went public on Apr 4th, 1996.

Company Background

Growth of Lucent Technologies After becoming independent in 1996,

operated in more than 90 countries.

Network Systems unit generated 57% of revenue.

Market leader in US for switching systems.

Flagship product was 5ESS® Switch.

Large-scale, software based digital switching platform.

This switch was custom configured (unlimited configurations possible).

Engineered-to-order product.

5ESS® Switch

5ESS® switch office

Administrative Module

Communications Module

Switching Module

•Market entry vehicle, not manufacturing strategy•Joint ventures with Taiwan, Indonesia, China & India•Infed materials marked up for cost recovery

Asian Joint Ventures

•Multiple suppliers – tremendous cost pressure•Rapidly developing infrastructures tight delivery schedules•Quick delivery became more important than price

Competitive Issues: Cost & delivery time

•Deregulation of telecommunication market•Increasing capacity fast deployment became high priority•Penalty clauses for late customer delivery = 30% of contract value

Additional Factors

Case Facts

Scenario Before 1996 Redesign

Asian customers away from order processing and manufacturing activities.

Parts produced in Asia shipped to US long lead times & high costs.

Parts & subassemblies shipped to staging center in California.

Final assembly & testing done by Asian joint ventures.

Asia Supply Chain : Before Redesign

Customer

Order processing,New JerseyStaging

Center, California

Joint Venture

US factory, Oklahoma

City

1.Order placed with JV

2.Order placed with AT&T

3.Manufacturing order placed with factory

4.Parts shipped4.Parts shipped

5.Subassemblies shipped

6.Kits exported

7.Product shipped

Parts supplier, US

Parts supplier, Asia

Supply Chain Redesign in 1996

Changed US centric supply model to “hub & spoke” approach.

Taiwan : hub of Asian supply chain.• Orders placed with

Taiwan• Custom engineering &

manufacturing of Asian orders done here

• Infeeding to Asian JVs and technical support too.

Asian JVs did final assembly & testing

using materials from Taiwan if low volume.For higher volumes

level of local production more.

Sourcing from local suppliers – quality control essential

Asia Supply Chain : After Redesign

Customer

US Factory, Oklahoma

CityTaiwan Joint

Venture

Joint Venture

1.Order placed with JV

2.Order placed with Taiwan

3.Parts Order

4.Parts shipped4.Parts shipped

5.Kits exported

6.Product shipped

Parts supplier, US

Parts supplier, Asia

4.Parts shipped

Discomfort of employees with change

• Functions in US reduced• Fear of losing control & jobs

Uneconomical to assemble Asian parts in US, so Lucent concentrated on parts that were proprietary or costly to obtain locally.

• Higher mark-ups applied to such parts

JVs felt vulnerable to Lucent’s parts pricing & led to animosity among partners.

Issues in 1996 Redesign

Scenario After 1996 Redesign

•By 1998 all Asian orders processed in Taiwan.•82% by value sourced within Asia.•Changed to pull from push manufacturing.•Throughput time decreased form over 5 weeks to 1 week.•Margins improved by 10% 5ESS® Switch had greatest cost advantage.•By 2000, unprecedented growth in cellular & internet sectors.•Component demand outstripped supply•Material shortages

Sole sourced component lead time more than

doubled

Inventories increased by 25%,

as assemblies could not be completed

Commit to early parts delivery to

ensure availability

Product shipments to customers jeopardized,

inability to ship on time

Premium prices were required in order to obtain

expedited shipments of missing parts

5 Problem Areas

5ESS® Switch efficient for voice networks. Current demand was for data networks Product life cycle was shortening, and

telecommunication technology was progressing at an ever increasing rate

Contract manufacturers got involved in telecommunication electronics

5ESS® switch reaching mature part of its product life cycle

Other Factors

Was the hub and spoke process, despite its success, the right model for this evolving environment?

How could they take advantage of the maturing resources within and outside Lucent?

What could Lucent do to mitigate exposure to material shortages without increasing inventory?

Was today’s leading edge procurement effective for future environments?

Questions

Should they continue to drive internal breakthrough improvements or should they harvest their previous supply chain investments and direct their attention towards outsourcing for their future needs?

Questions... Contd.

Recommended Action

Sales & Marketing

• Direct customers to readily available configurations.• By steering customers to configurations with ample parts supply

on-time delivery rates will increase. • Continue to focus bidding on projects where the switch has cost

and feature advantages over competing products.

Forecasting

• Forecast the quantity and features required on 5ESS® switch orders.• Also forecast the number of parts needed, thereby reducing potential part

shortages.• Forecast the need for data network products.

For existing Customers

• Offer reconfiguration service for 5ESS® switches from landline voice networks to cellular voice networks.

• Connect the switch to lines from new cell towers & configure s/w for cellular use.

Countering Parts Shortage

• Pre-order all generic parts necessary for any 5ESS® from suppliers and joint ventures at the time of order.

• Notify the suppliers about part quantity, design, and deadline changes, fine tuning the actual number of and type of parts needed.

• Keep suppliers informed throughout design process, this will enable them to forecast and plan their production properly.

• Synchronize order placement with supplier manufacturing cycles. • Although communication about forecasts and needed parts help reduce inventory and costs,

aligning part orders with manufacturing cycles can reduce inventory levels and reduce out of stock parts

Track the supply chain

• Track all materials in the supply chain and the supplier production capabilities. • This will reduce the lag time from waiting for the local supplier to fulfill its orders. • The internet and internet technologies can be used as an inexpensive method to

link in real-time suppliers, and joint ventures.• Change the interactions from a Lucent-supplier partnership to a Lucent-vendor

relationship, which will increase the vendor’s commitment to success. • Create partnerships with second tier suppliers. This will reduce the probability of

material shortages.

Manufacturing

• Manufacturing in close proximity to customers cost saving.• Develop products using generic off-the-shelf components while focusing resources on software. • Switch software can be easily implemented and upgraded, thereby generating revenue mainly

by intellectual property with little influence from material costs, shortages, and hardware development.

• Use factory expertise to reduce manufacturing lead-time, improve product quality, and reduce costs.

• Send the largest orders to Oklahoma City, the most complex to Taiwan, and the least profitable to Qingdao.

Other Methods

• Twice per year, hold a symposium to discuss and transmit information on how one factory is able to specialize in one area.

• Sharing knowledge will help all factories improve their production capabilities.

• Build proprietary parts in wholly owned Lucent facilities; assign the remaining production as close to the consumer as possible.

• Distributed manufacturing assignments will balance concentrated demand across a wider supply source.

THANK YOU