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Lucent Technologies Global Supply Chain Management

Umashankar Joshi (131) Pravesh Kumar (184) Satyabrath Kaushik (193)

Company Background
AT&T corporation was formed 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.

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.

5ESS Switch
Large-scale, software based digital switching platform.
5ESS switch office

Administrative Module

Communications Module

Switching Module

This switch was custom configured (unlimited configurations possible). Engineered-to-order product.

Case Facts
Asian Joint Ventures Competitive Issues: Cost & delivery time Additional Factors
Market entry vehicle, not manufacturing strategy Joint ventures with Taiwan, Indonesia, China & India Infed materials marked up for cost recovery Multiple suppliers tremendous cost pressure Rapidly developing infrastructures tight delivery schedules Quick delivery became more important than price Deregulation of telecommunication market Increasing capacity fast deployment became high priority Penalty clauses for late customer delivery = 30% of contract value

Scenario Before 1996 Redesign

Production for Asian customers done in Oklahoma city.
Parts & subassemblies shipped to staging center in California. Final assembly & testing done by Asian joint ventures.

Asian customers away from order processing and manufacturing activities. Parts produced in Asia shipped to US long lead times & high costs.

Supply Chain Redesign in 1996

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.

Changed US centric supply model to hub & spoke approach.

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

Issues in 1996 Redesign

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 Lucents parts pricing & led to animosity among partners.

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

5 Problem Areas
Sole sourced component lead time more than doubled

Premium prices were required in order to obtain expedited shipments of missing parts

Inventories increased by 25%, as assemblies could not be completed

Product shipments to customers jeopardized, inability to ship on time

Commit to early parts delivery to ensure availability

Other Factors
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

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 todays leading edge procurement effective for future environments?

Questions... Contd.
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?

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.

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 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 by 14% and reduce out of stock parts to 2%.

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, pants, and joint ventures. Change the interactions from a Lucent-supplier partnership to a Lucent-vendor relationship, which will increase the vendors commitment to success. Create partnerships with second tier suppliers. This will reduce the probability of material shortages.

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 leadtime, 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.