Report for Lucent Technologies Background Lucent’s history goes back to the 1875 invention of the telephone by Alexander Graham Bell. It’s one of the three companies which were separated from AT&T’s restructure.
Lucent was organized into four units, the largest of which was Network Systems. It provided networking systems and software to local and long distance telephone companies and cable companies. It was the marker leader for switching systems. The Switch Solutions Group(SSG), which made the 5ESS Switch, was part of the Network Systems organization.The 5ESS Switch Lucent’s flagship product was the 5ESS Switch. It was based on a modular design consisting by AM, CM, SM. Its modules consisted of several types of assemblies: printed circuit boards, cables, power supplies, and other assorted electrical and mechanical components. Among two hundred unique circuit pack assemblies, some of these were used in high quantity, while others were relatively infrequently used.
Some could be assembled from standard industry components, while others required Lucent proprietary ASICs and other proprietary components.Finally, due to the wide range of specialized needs of customers, the 5ESS Switch was a custom configured, engineered-to-order product. Manufacturing Strategy Four joint ventures had been established in Asia in response to requirements from customers. Once a joint venture was established, most manufacturing continued to be done in the United States. It was believed that the high volume of production in Oklahoma City led to the lowest product costs through economics of scale.Oklahoma City selected the materials, and fed them to the Asian joint ventures for assembly and testing. This process was called “infeeding”.
AT&T retained all profits from direct sales to end-users and to joint ventures, but profits from joint venture sales to end-users were split between the joint venture partners. Facing the Questions before 1996 With its huge population and relatively small base of installed telephones, beginning in 1995, Asia was the fastest growing region for the 5ESS Switch. Two critical competitive issues were emerging: cost and delivery time.
Order cycles that started by going to the United States, that required products to be built in the United States, and that required support from the half-way around the world, inhibited Lucent ‘s competitiveness in Asia. Besides that, the existence of multiple suppliers created tremendous cost pressure for large contracts and many contracts included penalty clauses for late customer delivery, such as 30%. Long delivery time and delay meant losing business.
What’s more, in the early 1980s, AT&T began to use parts produced in Asia, which were shipped to Oklahoma City for assembly.This resulted in long lead times, as well as high costs associated with maintaining a parts pipeline extending from Asia to the United States and back again. When Lucent became independent it lost the deep pockets of AT&T, asset management, product lead time, and supply chain efficiency took on new importance. The Supply Chain before the 1996 Redesign For countries without local joint venture companies, orders were placed with AT&T’s offices in New Jersey. For countries with local joint ventures, the order was placed with the joint venture, which forward the order to New Jersey.
In either case, Asian customers were far removed from the order processing and manufacturing activities, which led long delay and lead time. [pic] The 1996 Supply Chain Redesign New design was to change from the U. S. -centric supply model to a “hub-and-spoke” approach. In this model, Taiwan would be the hub of the Asian supply chain.
Orders were placed with Taiwan, rather than New Jersey. Custom engineering and manufacturing of Asian orders would be done in Taiwan. The supply of parts to Asian joint ventures, would come from Taiwan. The joint ventures also sought out additional local suppliers to build ssemblies from Lucent drawings(“local procurement”). [pic] The Effect of the 1996 Redesign The “hub and spoke” model was implemented beginning in November 1996. The results of the change were dramatic.
The factory was about three times as productive in 1998 as it had been in 1995. Product manufacturing through time decreased from over five weeks to one week. Margins improved by more than 10 percentage points and inventory days of sales fell by more than half. Support of Asian joint ventures and customers improved.
These effects combined to make Lucent win the market share.Facing the Questions in 2000 Due to unprecedented growth in the cellular and Internet sectors, component demand far outstripped supply, and unprecedented material shortage developed. Leading edge procurement arrangements were sorely tested, and in some cases broke down. Lucent was vulnerable to this imbalance in supply. The problems could be broken down into five areas: 1. Sole-sourced component lead times more than doubled. 2. Inventories increased by about 25 percent, as assemblies could not be completed.
3. The Taiwan factory had to commit to early parts delivery to ensure availability 4.Product shipments to customers were jeopardized, and orders were at risk due to an inability to ship on time. 5. Premium prices were required in order to obtain expedited shipments of missing parts Solutions 1. Use contract manufacturers.
Since contract manufacturers were started to get more involved in sophisticated telecommunications electronics and the labor cost there is much lower than in United States. 2. Reallocate the major. Lucent found that each major production site had unique strengths. Like Qingdao, China provide products at the lowest cost.Through the data, we could figure out that simple components (sole-sourced component) had almost reached the upper limit of sourcing. So, it would be efficient to reallocate the production sites’ roles and let them major in their strengths.
For example, those sites with lower production costs could add their productivity and capacity, which would improved margins and mitigate material shortages. 3. Keep inventories for those really need. Through the data, we could see that simple components reached the upper limit of sourcing while other mature components did not.To decline the risk of components shortage and not to add extra inventories, Lucent should keep the inventories for those simple components (sole-sourced component) which were likely to be out of stock. 4.
Transplant the special technology from United State to Asia. Assemblies that required expensive, special tooling or test fixtures also remained in the United States, which meant the risk of an inability to ship on time or obtain expedited shipments of missing parts still existed. Therefore, Lucent could attempt to set up a branch or create a joint venture to manufacture these expensive, special tooling or test fixtures at local.