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