Lucent Technologies

Lucent Technologies: Case Analysis

Introduction:

Lucent Technologies is a global communications equipment giant spun off as an independent entity in 1996 by AT&T. The case under consideration focuses on the supply chain redesign of the 5ESS digital switch for the Asian market. The 5ESS switch was an industry standard digital switching platform providing a whole range of communication services and a profit engine for Lucent. In the last decade of the twentieth century, the strong growth of Asian economies coupled with the deregulation of the telecommunications sector led to an explosion in demand for telecom equipment in the region. However, Lucent was faced with one major challenge to overcome before it could take full advantage of the situation.

Lucent's Challenge:

The 5ESS switch was a highly complex device consisting of a large number of printed circuit boards, cables, power supplies and other assorted electro-mechanical components. Some of these assemblies could be manufactured from industry standard components while others were Lucent proprietary. In addition, the switch itself was a highly customized, engineered-to-order product, and as a result only a limited amount of pre-fabrication was possible.

By the early 1990s Lucent had established four Asian joint ventures (JV) in Taiwan, China, Indonesia and India. These JVs were primarily market entry vehicles to gain a foothold in the markets and not seen as strategic partners that could be leveraged to help with the operations. Most of the manufacturing for the Asian orders continued to take place at Lucent's Oklahoma City plant in the US, where economies of scale could be achieved. The sub-assemblies were sold to the Asian JVs at a mark up, which did the final assembly and testing and sold the assembled switch to the customers. The profits from the final sale were shared between Lucent and the other JV partners.

Lucent faced two major issues with this model:

1) High costs: The emergence of competitors had created significant cost pressure for large contracts. The manufacturing and shipment from the US placed Lucent at a cost disadvantage. In addition, a large proportion of circuit packs used in the switch were now being manufactured in Asia, which were being shipped to the US and then back to the destination in Asia as part of the switch, which was a highly expensive and inefficient solution.

2) High delivery times: The rapidly developing telecom markets in Asia placed a premium on quick delivery and the penalties for schedule slippages were huge. With an increasing number of orders being placed, the current supply chain design was put under a lot of stress for timely delivery.

Fig.1. Lucent Supply Chain before 1996 Redesign

Lucent's Supply Chain Redesign:

In response to the aforementioned challenges with their existing supply chain for Asian orders, Lucent embarked on a radical overhaul of their entire supply chain for the 5ESS switch. The proposed solution was based on a hub-and-spoke model, with Taiwan designated the local hub for all orders originating in Asia. The manufacturing and engineering for all the Asian orders was to be done in Taiwan and the parts were infed to local JVs. Taiwan would also be responsible for the technical support for these products.

Barrier to the 1996 redesign:

- Employee's natural discomfort with change because their afraid of losing control and their jobs.

- Lucent product management organization afraid that the transfer of production to the joint ventures would reduce company profits.

- Resistance from the sales and support organization in Asian Countries because they already use to old system and they were concerned about the loss of a "made in USA" label.

Under the new supply chain design new local suppliers were sourced, while product quality was maintained through regular qualification and certification from Bell Labs, USA. Asian suppliers directly sent components to the Taiwan JV instead of shipping them to the Oklahoma City. Only low volume or high speciality components were assembled at the Oklahoma City location.

Lucent also reduced the mark up on intra-company sales and changed the profit sharing arrangement with the JVs so that the partners in the JVs received a fixed return on their invested capital. This arrangement was to the satisfaction of the JVs since there was a more equitable sharing of the profits now.

Fig.1. Lucent Supply Chain after 1996 Redesign

Effects of the Redesign:

The redesign of the procurement and manufacturing practices led to a number of structural changes in the supply chain. Some of these changes are listed below:

* A greater percentage of parts (82%) were manufactured in or sourced from Asia.

* Lucent switched from push to pull based manufacturing, and paid greater attention to managing floor space and material flow.

* Leading