1. Outline the factors that explained why the original supply chain network strategy used by Lucent in Asia was adequate prior to 1996
Factors behind the viability of the original supply chain network strategy used by Lucent in Asia prior to 1996 can be given as:
Prior to 1996, the demand from the Asian market was less. Demand w as mainly driven by government -owned telephone operating companies Also, rate of capacity addition was low due to regulated telecommunication market and hence low bargaining power of buyers AT&T had huge cash flowing from phone bills and to add to that there was no pressure for lower cost, fast delivery and quick response Further, since Lucent was producing in high volume at Oklahoma city, it was able to realize low production cost due to economies of scale Joint Ventures were also not lucrative at this point of time because most of them were lacking in manufacturing capabilities. For example cost of Manufacturing was high in JV manufacturing in Taiwan compared to Oklohama’s Manufacturing in the US Although the manufacturing capability was low in Taiwan, the assembly and testing lines in Taiwan never went in short of supply due to additional local suppliers
2. What were the factors that drove the necessary changes in Asia in 1996? What did you see as the benefits of those changes?
The factors that drove the necessary changes in Asia in 1996 are:
Cost - High costs in the contracts with multiple suppliers
Competition- Deregulation of the telecommunication market gave entry to new competitors
Penalty for Delay- 30% of the contract value for delay in delivery was charged as penalty
Delivery Time- Boom in the Taiwan market led to multiple orders. Also, delay in the delivery and deployment meant loss of customer Scale of Opportunity- Asia was the fastest growing region for 5 ESS switch. There was a huge
population with small base of installed telephones (2 phones/ 100) in China. But despite this, structural changes needed to succee d in Asian environment. Significant price erosion for equipment, parts sourcing & manufacturing capabilities were major deter rents for the company
Organization- Lucent became independent and lost deep pockets of AT&T. It was no longer insulated from consequences of inefficient asset management and long delivery times. Long lead times, high cost associated with maintenance of part pipeline existing between Asia & United
States all were detrimental for the company
The benefits were clear for all to see.
Pull manufacturing, Redesign of inventory, consignment and vendor managed inventory arrangements, and outsourcing production with low outputs made the factory 3 times productive in 1998 compared to 1995. Product manufacturing throughput time decreased from 5 weeks in 1995 to 1 week in 1997 helped in improving delivery performance – 80% delivered on time in Indonesia by Nov 1997
Profit Margins rose by 10% whereas Inventory days sales fell by more than half
Costs per termination were cut in half
Increase in responsiveness due to cut in distance and time difference
Bullwhip Effect – Information distortion within the supply chain mitigated
Great cost advantage providing competitive advantage against the competitors
100% market share in the Taiwan telecommunications market
Taiwan’s output nearly tripled from 1997 to 2000 and it emerged as the hub of Asian supply chain
US centric SCM model changed to Hub and Spoke approach
3. What internal and external factors had changed from 1996 to 2000, which necessitated a revisit of the supply chain strategy from Lucent? What would you recommend to respond to these challenges?
The internal and external factors which had changed from 1996 to 2000 are:
Internal Factors- 25% increase in the inventory occ urred due to increase in production. Also, sole sourced components’ lead time has doubled External Factors- Demand Outpaces Supply tremendously along with Competition from contract manufacturers. This coupled with Short Product Life Cycle adds to the woes. Further, 5ESS product is in the maturity stage of the product life cycle so there is pressure from emerging
innovations. Finally, with China emerging as the low cost production center Lucent is also facing a threat in that aspect. These factors lead to five main problem areas as depicted below.
Recommendations:
Lucent should make Investment in expanding the assets o f Joint ventures for more production. Rationale for this is Favorable market with a highly profitable company. Also, Supply chain should be made more agile
Lucent should undertake necessary steps to make the Supply Chain more agile.
Market Sensitive: Proper Forecasting system: - To forecast the quantity and features re quired on 5ESS
Network Based: Implementation of Information sharing system: - Notify the suppliers about part quantity, design and deadline changes
Implement a ERP system for better coordination
Process Integration: - Keep suppliers informed throughout the design process
To forecast the number of parts ne eded To forecast the need for data network products (competitors’ products)
Collaborative planning for joint product development
Virtual: - Continue Make to Order (supplier and JV manufacturers) for better management of
inventory
Summarizing, we can identify four key aspects on which Lucent can work to respond to current challenges.
Countering Parts Shortage: - Use forecasting to get an estimate on the number of parts
Keep supplier informed about deadline changes, design, fluctuations and synchronize order placement - Pre-order generic parts 4. Track the Supply Chain: - Track materials going through the supply chain - Leverage upcoming IT to link suppliers with Lucent JVs and manufacturing facilities - Create a level of second-tier suppliers are back-up in case of shortages 5. Short Term Focus on Existing Scenario: - Continue to focus on projects where switch has feature/cost advantage over competing products - Use manufacturing expertise to reduce lead time, costs and improve quality 6. Long Term Focus on R&D: - Forecast the need for upcoming data network products - Outsource the support activities a.k.a. non-value added functions to focus more on R&D in upcoming telecom technologies - Share knowledge and hold discussion forums to focus on new t echnologies
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The final Supply Chain will look something like this.
