1.
Case
Study
2
Lucent
Technologies
ISE
553
Faryal
Qasim
Prafulla
Kumar
Shahi
2. 2
Executive
Summary
Lucent,
a
subsidiary
of
AT&T
focused
primarily
on
the
markets
in
the
U.S.
and
Asia.
In
this
effect,
Joint
Ventures
were
formed
between
1990
and
1993
in
Asia
that
served
as
outlets
for
Lucent’s
products
in
Asian
markets.
These
joint
ventures
began
procuring
locally
manufactured
parts,
which
benefited
Lucent
due
to
lower
prices.
However,
the
supply
chain
started
from
an
order
being
placed
in
Asia,
and
manufactured
in
the
U.S.,
with
raw
materials
arriving
from
both
Asia
and
the
U.S.
to
Oklahoma.
The
finished
goods
were
then
shipped
to
the
joint
ventures
in
Asia.
Lead
times
were
high
and
the
product
costly
due
to
multiple
mark-‐ups
to
the
price.
To
benefit
from
high
demand
in
Asian
markets,
the
supply
chain
was
reconfigured
in
1996
after
it
became
independent
from
AT&T.
Adopting
a
“Coke
Syrup”
approach,
Taiwan
was
made
the
manufacturing
hub
of
the
supply
chain
in
Asia.
Only
the
most
critical,
proprietary
parts
were
now
being
manufactured
in
the
U.S.
Orders
were
now
processed
in
Taiwan,
manufactured
locally
and
with
other
components
from
Oklahoma,
they
were
shipped
to
the
respective
joint
ventures.
The
joint
ventures
generated
large
revenues
for
Lucent
due
to
reduced
lead
times,
cheap
local
procurement
and
elimination
of
the
bullwhip
effect.
Qingdao
became
the
local
parts
manufacturer,
and
Taiwan
the
center
for
engineering
components.
The
supply
chain
focused
on
cost
and
speed
of
delivery
for
a
limited
amount
of
demand.
Around
2000,
high
demands
in
Asian
markets
were
disrupting
the
supply
chain
by
causing
component
shortages.
We
have
put
forth
several
recommendations
for
this
crisis.
Lucent
may
choose
to
create
more
manufacturing
hubs,
use
contract
manufacturers,
or
redesign
the
supply
chain
to
avoid
stock-‐outs.
We
have
also
studied
the
effect
of
sudden
demand
fluctuations
on
the
existing
supply
chain
and
discussed
the
ways
in
which
such
an
event
can
be
handled
so
as
to
prevent
disruptions
in
the
system.
In
this
case
study,
we
have
studied
the
causes
and
effects
of
this
redesign
of
the
supply
chain
for
the
flagship
product
5ESS
of
the
company.
3. 3
Table
of
Contents
1.
Lucent
Technologies
4
2.
Asian
joint
ventures
4
3.The
Product
5
4.1995
Supply
Chain
Structure
5
4.1.
Information
Flow
6
4.2.
Material
Flow
6
4.3.
Financial
Flow
6
4.4.
Supply
Chain
7
5.
Safety
Stocks
in
1995
7
6
Need
for
Redesign
8
7.
1996
Redesign
of
Supply
Chain
10
7.1.
Information
Flow
11
7.2.
Material
Flow
11
7.3.
Financial
Flow
11
8.
Safety
Stocks
in
1996
12
9.
Transition
to
1996
Supply
Chain
12
10.
Causal
Loop
Diagram
14
11.
Market
Environment
in
2000
16
12.
Demand
for
5ESS®
Switch
17
13.
Solutions
to
Threats
in
Supply
Chain
18
14.
Reallocation
of
Safety
Stocks
in
1996
Supply
Chain
19
15.
Response
of
the
supply
chain
to
sudden
demand
changes
20
16.
Conclusion
22
17.
Appendix
23
4. 4
1.
Lucent
Technologies:
Lucent’s
genesis
was
the
manufacturing
company
acquired
by
the
Bell
System
in
the
1800s.
It
largely
supplied
only
its
affiliated
operating
companies
in
the
United
States
until
1984
when
AT&T
(then
known
as
American
Telephone
and
Telegraph
Corporation)
broke
into
eight
companies
by
an
agreement
with
the
U.S.
Department
of
Justice.
International
operations
were
a
small
part
of
its
business
at
that
time.
The
United
States
continued
to
be
the
manufacturing
arm’s
primary
focus
until
1995
when
AT&T
announced
its
intention
to
restructure
into
three
separate
public
companies.
One
of
these
companies
was
to
focus
on
communications
equipment,
and
would
include
AT&T’s
renowned
research
organization,
Bell
Labs.
This
company,
later
named
Lucent
Technologies,
went
public
on
April
4,
1996
when
AT&T
sold
approximately
17.6
percent
of
its
holdings
for
just
over
$3
billion,
the
largest
initial
public
offering
ever
in
the
United
States.
When
it
became
independent
in
1996,
Lucent
operated
in
more
than
ninety
countries,
and
was
organized
into
four
units,
the
largest
of
which
was
Network
Systems.
This
unit
generated
57
percent
of
the
total
Lucent
revenues
for
the
first
year
of
operation,
and
was
the
fastest
growing
part
of
the
company.
It
provided
networking
systems
and
software
to
local
and
long
distance
telephone
companies
and
cable
companies.
It
was
the
market
leader
in
the
United
States
for
switching
systems,
and
was
tied
for
market
leadership
in
worldwide
telecommunications
infrastructure
equipment.
The
Switching
Solutions
Group
(SSG),
which
made
the
5ESS®
Switch,
was
part
of
the
Network
Systems
organization.
2.
Asian
joint
ventures:
To
cater
to
the
rising
demand
in
Asia,
four
joint
ventures
were
established;
Taiwan
(1985),
Indonesia
(1991),
China
(1993),
and
India
(1993).
In
each
of
these
5. 5
countries,
a
major
local
company
with
a
strong
influence
in
the
telecommunications
industry
was
partnered
with
to
gain
access
to
the
Asian
market.
Most
of
manufacturing
operations
continued
to
take
place
in
the
U.S.
even
after
the
establishment
of
joint
ventures
where
product
was
assembled
and
tested.
3.
The
Product:
Lucent’s
most
important
product
was
the
5ESS®
Switch,
a
large-‐scale,
software
based
digital
switching
platform,
which
provided
communication
service
for
any
type
of
signal
over
any
medium.
It
connected
end-‐users
to
central
phone
offices,
and
phone
offices
to
each
other.
A
full-‐
sized
5ESS®
Switch
was
capable
of
serving
up
to
250,000
subscriber
lines
(connecting
a
phone
office
to
an
end
user),
and
over
100,000
trunk
lines
(connecting
phone
offices
to
each
other).
Customers
included
major
telephone
companies,
which
in
some
countries
were
state-‐owned.
The
5ESS
Switch
was
the
world’s
most
reliable
and
widely
used
switching
system.
From
a
manufacturing
perspective,
the
5ESS®
Switch
modules
consisted
of
several
types
of
assemblies:
printed
circuit
boards
(called
“circuit
packs”
by
Lucent),
cables,
power
supplies,
and
other
assorted
electrical
and
mechanical
components
that
were
mounted
in
cabinets.
Most
of
these
assemblies
could
be
built
with
generally
available
parts,
using
Lucent
proprietary
assembly
drawings.
Some,
however,
contained
Lucent
proprietary
components.
4.
1995
Supply
Chain
Structure:
In
1995,
the
supply
chain
structure
(Appendix
17.1)
Lucent
Technologies
had
in
place
was
such
that
most
of
the
manufacturing
operations
took
place
in
Oklahoma
City
because
it
was
believed
that
this
led
to
low
product
costs
through
economies
of
scale.
At
this
time
Asian
supply
chain
had
not
been
a
high
priority.
The
flow
of
information,
materials
and
finance
in
1995-‐supply
chain
are
described
below.
6. 6
4.1.
Information
Flow:
Customers
placed
the
order
with
their
joint
ventures,
which
then
forwarded
it
to
the
AT&T
order-‐processing
center
in
New
Jersey.
In
countries
without
joint
ventures,
the
local
sales
representatives
placed
orders
directly
with
New
Jersey
office.
This
followed
order-‐processing
center
placing
manufacturing
orders
with
Oklahoma
City
factory.
4.2.
Material
Flow:
Even
though
the
main
purpose
of
Asian
joint
ventures
was
to
access
Asian
markets,
by
1992
Taiwan
had
already
started
some
local
procurement.
Still,
most
production
for
Asian
customers
was
done
in
Oklahoma
City.
Parts
locally
procured
by
the
joint
ventures
were
shipped
to
Oklahoma
City
where
the
main
manufacturing
operations
took
place.
The
Asian
joint
ventures
performed
final
assembly
and
tests
for
shipments
to
customers
in
their
countries.
For
countries
without
joint
ventures,
shipments
were
made
directly
from
United
States.
4.3.
Financial
Flow:
From
direct
sales
to
end
customers
and
joint
ventures,
the
profits
went
to
AT&T
while
for
sales
from
the
joint
ventures
to
end
customers
the
profits
were
split
between
the
joint
venture
partners.
In
addition,
Oklahoma
City
selected
the
materials,
and
fed
them
to
the
Asian
joint
ventures
for
assembly
and
testing.
Marking
up
infed
material
sold
to
a
joint
venture
was
one
mechanism
that
Lucent
used
to
recover
expenses
for
R&D,
marketing,
support,
as
well
as
generate
a
profit.
Overall
profits
and
losses
were
determined
by
the
joint
venture’s
performance,
as
it
purchased
parts
from
Lucent
and
resold
finished
products
to
customers.
7. 7
4.4.
Supply
Chain:
A
5ESS®
Switch
was
made
up
of
different
parts
or
sub-‐assemblies
some
of
which
were
used
in
high
quantity,
while
others
were
relatively
infrequently
used.
Some
could
be
assembled
from
standard
industry
components,
while
others
required
Lucent
proprietary
components.
In
addition,
some
of
the
circuit
packs
required
specialized
test
fixtures.
Due
to
the
wide
range
of
specialized
needs
of
customers,
the
5ESS®
Switch
was
a
custom
configured,
engineered-‐to-‐order
product
with
an
almost
unlimited
number
of
configurations.
As
a
result,
only
a
portion
of
its
assemblies
could
be
built
to
stock.
Therefore,
Asian
joint
ventures
were
responsible
for
final
assembly
of
the
product
moving
the
customer
order
decoupling
point
(CODP)
toward
the
customer.
However,
the
Asian
joint
ventures
were
seen
as
a
way
to
access
new
market
and
were
therefore
not
a
high
priority
as
far
as
its
supply
chain
was
concerned.
So
taking
into
account
the
economies
of
scale,
maximum
production
volume
at
the
Oklahoma
factory
was
believed
to
keep
the
costs
to
a
minimum.
The
structure
of
the
supply
chain
ensured
that
the
maximum
share
of
total
profits
went
to
Lucent.
Not
only
was
Lucent
getting
all
profits
from
manufacturing
but
also
its
share
of
profits
from
the
joint
ventures.
Secondly,
this
structure
gave
a
lot
of
control
to
Lucent
over
the
overall
supply
chain.
5.
Safety
Stocks
in
1995:
All
components
including
low
and
high
volume
parts
are
required
for
assembling
the
final
products.
The
final
assembly
depends
on
availability
of
each
and
every
component
that
makes
it
up
and
if
one
component
is
not
available,
there
is
an
increased
holding
cost
for
other
components
and
a
shortage
cost
for
not
meeting
the
demand.
Therefore
both
high
and
low
volume
parts
should
be
considered
together
for
strategic
location
of
safety
stock.
8. 8
In
this
case,
safety
stocks
were
located
toward
raw
material
end
of
supply
chain
since
the
system
involved
assembling
of
parts.
For
low
volume
and
therefore
low
demand
items,
the
coefficient
of
variation
is
high
which,
in
effect,
can
be
reduced
due
to
pooling.
Since
manufacturing
took
place
in
Oklahoma
followed
by
the
product
being
shipped
to
joint
ventures,
both
high
and
low
volume
items
had
same
lead
times.
Therefore,
considering
the
all
or
nothing
safety
stock
policy
in
serial
systems,
for
lowest
inventory
costs,
the
optimal
location
for
safety
stocks
turned
out
to
be
Oklahoma
City.
This
safety
stock
location
ensured
products
pooling
by
manufacturing
similar
sub-‐assemblies
for
different
products
at
the
same
time
and
pooling
across
customers
by
serving
all
joint
ventures
and
therefore
all
end
customers
through
Oklahoma.
Of
note
is
no
lead-‐time
pooling
because
there
is
no
central
warehouse
to
which
the
parts
are
shipped
from
Oklahoma
before
shipping
to
the
joint
ventures.
6.
Need
for
Redesign:
When
Lucent
became
independent
in
1996,
it
lost
AT&T’s
large
cash
flow
from
phone
bills
that
had
insulated
its
manufacturing
arm
from
the
consequences
of
inefficient
asset
management
and
long
delivery
times.
Therefore,
asset
management,
product
lead-‐time,
and
supply
chain
efficiency
took
on
new
importance.
With
its
huge
population
and
relatively
small
base
of
installed
telephones,
Asia
promised
tremendous
future
growth
in
this
industry.
Therefore,
Lucent’s
customers
were
changing.
Furthermore,
competitors
were
emerging
and
Lucent
faced
two
critical
competitive
issues:
cost
and
delivery
time.
In
some
cases,
quick
delivery
became
a
more
important
factor
than
price
because
of
rapid
development
of
infrastructure.
In
addition,
many
contracts
included
penalty
clauses
for
late
customer
delivery.
These
penalties
might
be
as
high
as
30
percent
of
the
contract
value.
joint
ventures
were
going
for
expensive
solutions
like
chartered
747s,
to
ensure
timely
delivery
to
customers
just
because
cost
of
incurring
penalty
was
too
high.
9. 9
The
capabilities
of
supply
chain
partners
were
also
evolving
with
time.
By
1996,
Asian
joint
ventures
had
developed
a
varying
range
of
manufacturing
capability.
They
had
started
local
procurement
of
parts
certified
by
Bell
Labs
to
use
them
in
their
production.
This
lowered
their
costs
by
leveraging
the
advantage
of
lower
cost
material
originating
in
Asia.
Taiwan
was
the
most
mature,
having
started
some
local
procurement
as
early
as
1992.
With
the
passage
of
time
and
growth
of
Asian
electronics
industry,
AT&T
began
to
use
parts
produced
in
the
region,
which
were
shipped
to
Oklahoma
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.
Asia
was
seen
as
an
opportunity
from
a
marketing
perspective
not
only
because
of
its
rapid
growth
in
communications
industry
but
also
because
of
its
economic
growth.
To
get
a
substantial
share
of
this
market,
Lucent
needed
to
compete
on
price,
delivery,
technology,
and
support.
Long
time
between
the
placing
orders
for
product
at
New
Jersey
and
getting
the
finished
good
inhibited
Lucent’s
competitiveness
in
Asia.
From
a
supply
chain
perspective,
Asian
manufacturers
were
producing
more
and
more
of
the
component
parts
used
in
the
5ESS®
Switch.
In
addition,
the
contract
assembly
industry
developing
worldwide
was
particularly
strong
in
Asia.
Local
companies
had
developed
that
could
assemble
basic
electronic
products,
such
as
cables
and
printed
circuit
boards.
The
industry
was
getting
more
and
more
competitive
with
customers
demanding
fast
delivery
and
rapid
response
to
changes.
Since
final
assemblies
of
orders
to
meet
customer
requirements
were
done
in
Asia,
there
were
major
disruptions
in
the
supply
chain,
which
was
focused
on
the
needs
of
the
United
States.
Structural
changes
in
the
supply
chain,
giving
Asia
more
priority,
were
required
in
order
to
succeed
in
this
environment.
10. 10
7.
1996
Redesign
of
Supply
Chain:
In
1996,
Lucent
redesigned
its
supply
chain
to
a
“hub-‐and-‐spoke”
(Appendix
17.2)
model.
The
hub
and
spoke
model
greatly
simplifies
a
network
of
routes.
In
the
sense
of
supply
chains,
it
means
that
the
company
routes
all
of
its
material
flow
through
one
central
hub
or
hubs
in
order
to
make
it
more
efficient.
The
design
of
a
hub
and
spoke
model
is
highly
efficient
for
a
myriad
of
reasons.
By
centralizing
control,
the
company
can
afford
a
smaller
staff
that
concentrates
on
management
from
a
central
location.
Centralizing
also
reduces
the
risk
of
error.
According
to
this
model,
Taiwan
was
made
the
hub
of
the
Asian
supply
chain.
Orders
were
placed
with
Taiwan,
rather
than
New
Jersey.
Custom
engineering
and
manufacturing
of
Asian
orders
were
done
in
Taiwan.
Instead
of
infeeding
Taiwan
from
U.S.,
Asian
joint
ventures
were
infed
from
Taiwan.
This
structure
gave
more
control
to
the
joint
ventures
as
far
as
decision-‐making
was
concerned.
Production
volume
of
each
joint
venture
determined
how
much
product
was
assembled.
At
very
low
volumes,
it
was
most
efficient
to
do
only
final
assembly
and
testing
using
materials
supplied
from
Taiwan.
As
volume
increased,
the
level
of
local
production
content
increased.
First,
cable
assemblies
and
later
simple
circuit
boards
were
outsourced
to
local
suppliers
and
if
volumes
continued
to
increase,
these
tasks
were
to
be
brought
in-‐house
by
the
joint
ventures.
Due
to
this
redesign,
CODP
moved
towards
the
customer
end,
making
the
order
more
flexible
and
responsive
to
changes.
Therefore,
the
competitive
advantage
of
this
structure
was
time
and
flexibility,
which
was
exactly
what
Lucent
required.
In
1996,
the
cost
of
losing
sales
was
high
so
this
redesign
made
it
possible
for
Lucent
to
compete
successfully.
It
also
mitigated
the
bullwhip
effect
in
the
system.
The
flow
of
information,
materials
and
finance
in
1996-‐supply
chain
are
described
below.
11. 11
7.1.
Information
Flow:
This
redesign
made
it
possible
for
the
information
to
flow
faster
than
before
by
streamlining
the
process
and
therefore
reducing
the
order
processing
time.
Customers
placed
the
order
with
their
joint
ventures,
which
then
forwarded
it
to
the
hub
i.e.
Taiwan.
In
countries
without
joint
ventures,
the
local
sales
representatives
placed
orders
directly
with
Taiwan
office.
This
followed
manufacturing
orders
with
Oklahoma
City
factory
for
parts
that
Taiwan
could
not
manufacture.
7.2.
Material
Flow:
Production
of
proprietary
parts
and
low
volume
components
was
done
in
Oklahoma
City
while
the
high
volume
parts
were
manufactured
in
Taiwan.
So
the
material
flowed
from
Oklahoma
to
Taiwan
where
the
manufacturing
operations
were
completed.
Due
to
this
change,
parts
locally
procured
were
used
in
the
manufacturing
immediately
cutting
down
on
transportation
costs
and
lead
times.
The
Asian
joint
ventures
received
orders
from
Taiwan
and
performed
final
assembly
and
tests
for
shipments
to
customers
in
their
countries.
For
countries
without
joint
ventures,
shipments
were
made
directly
from
Taiwan.
7.3.
Financial
Flow:
From
sales
to
Taiwan,
the
profits
went
to
AT&T
whereas
for
direct
sales
to
end
customers
and
joint
ventures
from
Taiwan,
the
profits
were
split
between
Lucent
and
Taiwan.
Profits
from
sales
to
end
customers
from
joint
venture
partners
were
split
between
the
joint
venture
partners.
Overall
profits
and
losses
were
determined
by
the
joint
venture’s
performance,
as
it
sold
finished
products
to
customers.
Due
to
the
redesign,
Asian
joint
ventures
were
earning
more
through
sales
in
comparison
to
the
earlier
1995
model.
12. 12
8.
Safety
Stocks
in
1996:
Safety
stocks
for
high
volume
and
therefore,
high
demand
items
were
located
in
Taiwan,
whereas
for
low
volume
components
and
the
components
that
could
be
manufactured
only
in
Oklahoma,
safety
stocks
were
held
in
Oklahoma.
At
Oklahoma
as
well
as
Taiwan,
the
safety
stock
locations
ensured
demand
pooling
across
products
and
customers
as
both
were
manufacturing
their
respective
parts/assemblies
for
the
total
demand
from
end
customers.
Only
Oklahoma
ensured
pooling
across
lead-‐time.
9.
Transition
to
1996
Supply
Chain:
As
the
telephone
density
in
a
country
increases,
the
demand
for
telecommunications
technology
and
related
devices,
such
as
the
5ESS®
switch
also
goes
up.
Thus,
the
teledensity
in
a
country
for
a
particular
year
can
be
considered
to
be
a
measure
of
the
demand
for
the
5ESS®
switch
for
that
year.
By
1996,
the
Asian
market
experienced
heavy
demand
for
switching
technology
because
of
increase
in
teledensity
in
several
countries.
One
major
factor
that
contributed
to
better
performance
by
the
joint
ventures
was
the
distribution
of
manufacturing
responsibilities
though
the
supply
chain
and
parts
sourcing.
At
very
low
volumes,
it
was
most
efficient
to
the
joint
ventures
only
performed
final
assembly
and
testing
using
materials
supplied
from
Taiwan,
while
for
very
high
volumes,
the
materials
were
produced
locally
by
the
joint
ventures
themselves.
Parts
began
to
be
outsourced
to
local
suppliers
for
increased
volumes,
who
built
assemblies
from
Lucent
drawings.
Lucent
selected
those
parts
to
outsource
in
which
it
didn’t
do
very
well,
while
at
the
same
time
served
as
a
contract
manufacturer
for
those
processes
it
did
well.
Thus,
it
shared
a
fixed
overhead
with
others,
by
incurring
costs
on
one
product,
while
not
incurring
the
costs
for
which
the
parts
were
outsourced.
The
suppliers
were
selected
on
the
basis
of
cost
13. 13
evaluations
and
comparisons
between
local
and
outsourced
manufacturing
costs.
Quality
control
was
carried
out
at
Bell
Labs
on
products
manufactured
by
local
suppliers.
Initially
Lucent
Production
Management
organization
was
concerned
about
reduced
profits
by
making
Taiwan
a
manufacturing
hub
for
the
Asian
supply
chain.
The
manufacturing
planning
director
(Ben
Nan)
worked
with
the
Product
Management
organization
to
understand
the
actual
costs
of
the
assemblies,
and
the
impact
of
inter-‐company
mark-‐ups
on
Lucent’s
competitive
position.
By
adding
multiple
mark-‐ups
to
the
price
even
though
the
products
were
being
shipped
within
the
Lucent
organization
between
U.S.
and
Asian
joint
ventures,
the
final
price
increased.
Lead
times
were
also
high
which
inhibited
sales.
The
redesigning
of
the
supply
chain
would
result
in
reduced
prices,
lead
times
and
thus
higher
sales
and
profits.
These
profits
more
than
made
up
for
the
loss
due
to
sharing
profits
between
the
joint
ventures.
Lucent
switched
from
push
to
pull
manufacturing
that
resulted
in
lesser
inventory
costs.
The
reorganized
shop
floor
resulted
in
better
materials
flow.
As
the
system
improved,
bottlenecks
were
spotted
and
attention
was
focused
on
them,
which
resulted
in
a
more
lean
system.
Leading
edge
inventory
policies
were
implemented,
which
included
consignment
and
vendor
managed
inventory
arrangements.
The
result
of
these
measures
was
that
the
factory
was
about
three
times
as
productive
in
1998
as
it
had
been
in
1995.
14. 14
10.
Causal
Loop
Diagrams:
Causal
Loop
diagram
for
the
effect
of
holding
inventory
in
different
stages
for
the
1995
supply
chain:
+
+
+
+
+
-‐
+
-‐
Demand
joint
ventures
Oklahoma
City
Facility
Orders
placed
Parts
Supplier:
U.S.
Parts
Supplier:
Asia
15. 15
As
we
analyze
the
effect
of
holding
inventory
and
safety
stock
in
one
stage
on
the
other,
we
realize
that,
as
a
joint
venture
places
order
with
the
Orders
processing
facility
in
New
Jersey
on
account
of
the
observed
demand,
it
causes
an
increase
in
the
inventory
levels
by
supply
of
parts
through
suppliers.
Due
to
strategic
location,
however,
we
can
see
that
we
either
hold
the
inventory
in
one
stage
or
the
other,
i.e.
Oklahoma
or
the
joint
ventures.
Hence
they
have
a
negative
effect
on
the
inventory
levels
of
each
other.
Causal
Loop
diagram
for
the
effect
of
holding
inventory
in
different
stages
for
the
1996
supply
chain
redesign:
+
+
+
+
+
+
-‐
+
-‐
Demand
joint
ventures
Taiwan
joint
venture
Orders
placed
with
Oklahoma
City
Factory
Parts
Supplier:
U.S.
Parts
Supplier:
Asia
Oklahoma
City
Facility
Orders
placed
with
Taiwan
16. 16
In
this
case,
we
can
see
that,
as
the
different
joint
ventures
place
orders
with
the
Taiwan
joint
venture
on
account
of
the
observed
demand,
it
causes
an
increase
in
the
inventory
levels
by
supply
of
parts
through
the
Asian
suppliers.
By
2000,
the
Asian
supply
had
been
largely
through
Qingdao,
China
due
to
its
low
cost
labor.
Due
to
strategic
location,
however,
we
can
see
that
we
either
hold
the
inventory
in
Taiwan
or
the
joint
ventures.
Hence
they
have
a
negative
effect
on
the
inventory
levels
of
each
other.
Taiwan
places
orders
to
Oklahoma
City
Factory
as
it
receives
from
the
joint
ventures,
It
causes
a
positive
effect
on
the
inventory
levels
of
the
latter
through
parts
supply
from
the
suppliers
in
the
U.S.
It
is
easy
to
see
that
since
different
types
of
components
are
being
manufactured
in
Taiwan
and
Oklahoma,
based
on
the
high
volumes
(Taiwan)
and
low
volume
and
proprietary
components
(Oklahoma),
the
do
not
affect
the
inventory
levels
of
each
other
11.
Market
Environment
in
2000:
By
2000,
Lucent
realized
that
each
major
production
site
had
unique
benefits
based
on
their
resources.
Qingdao,
China
with
its
low
cost
local
labor
could
produce
lowest
cost
Chinese-‐made
parts
and
Lucent
redesigned
their
products
to
incorporate
these
parts.
Taiwan
had
an
excellent
manufacturing
facility,
skilled
labor,
excellent
personal
computer
industry
and
engineering
and
manufacturing
infrastructure
which
was
best
suited
for
custom
engineered
products
and
new
designs.
The
manufacturing
capacity
increased
so
much
that
it
also
started
supplying
for
shortages
outside
Asia.
Due
to
unprecedented
growth
in
the
cellular
and
Internet
sectors,
the
demand
for
components
also
increased
steadily
between
1996
and
2000.
Lucent’s
restructuring
of
the
1995
supply
chain
caused
Taiwan
to
be
the
manufacturing
and
assembly
hub
for
parts.
However,
the
supply
chain
had
effectively
evolved
by
2000
into
a
slightly
different
one.
17. 17
This
supply
chain
was
heavily
dependent
on
China,
which
was
the
hub
for
providing
low
cost
parts.
This
worked
very
well
when
the
demand
was
manageable.
There
was
economy
of
scale
in
manufacturing
as
well
as
low
component
lead
times.
But
as
mentioned
earlier,
the
risks
with
using
a
hub
for
performing
a
function
was
that,
as
the
demand
increased,
the
single-‐minded
focus
on
cost
and
speed
caused
shortages.
This
put
a
huge
pressure
on
the
existing
supply
chain,
which
caused
several
problems.
The
lead
times
for
components
with
a
single
manufacturing
source
more
than
doubled.
As
assemblies
could
not
be
completed
due
to
unavailability
of
a
particular
component,
the
holding
and
shortage
costs
increased
by
about
25
percent.
As
component
shortages
increased,
Taiwan
had
to
ensure
availability
of
its
products
by
committing
to
early
parts
delivery.
Orders
could
get
cancelled
due
to
not
meeting
demand,
and
to
expedite
delivery
of
missing
parts,
premium
prices
had
to
be
paid
to
the
suppliers.
With
increasing
competition,
not
meeting
demand
would
mean
losing
business
to
the
competitors
and
this
became
a
growing
concern
for
Lucent.
12.
Demand
for
5ESS®
Switch:
On
analyzing
the
demand
data
from
1996
through
2003
(Appendix
17.3),
we
can
see
that
the
annual
demand
increased
almost
linearly.
By
2000,
the
5ESS®
switch
was
also
beginning
to
enter
the
mature
phase
of
its
product
life
cycle,
during
which
the
demand
starts
to
decline
at
a
slow
but
measurable
rate.
Also,
a
drastic
increase
in
the
wireless
penetration
sector
(Appendix
17.4)
in
several
Asian
countries
was
observed
from
1996
to
2003.
Wireless
services
demanded
new
technology
which
was
not
provided
by
the
5ESS®
switch,
and
was
threatening
to
reduce
its
scope
over
the
years.
All
these
were
indicators
that
the
demand
will
probably
continue
to
increase,
albeit
slowly,
in
the
next
few
years
and
decline
after
few
more
years.
In
2000,
the
demand
far
outstripped
the
supply
and
a
large
imbalance
was
created
in
the
supply
chain.
18. 18
13.
Solutions
to
Threats
in
Supply
Chain:
There
are
several
possible
methods
to
get
out
of
the
supply
crisis
of
2000.
Lucent
may
decide
to
restructure
its
supply
chain
in
such
a
way
that
there
is
lesser
probability
of
stocking
out
of
any
particular
component.
The
current
supply
chain
focuses
on
Qingdao
to
provide
low
cost
mass-‐produced
components.
One
method
would
be
to
use
one
of
the
joint
ventures
as
a
manufacturing
hub
apart
from
Qingdao,
which
would
serve
as
a
buffer
against
unprecedented
demands.
This
would
also
be
a
break
from
the
hub
and
spoke
approach
where
the
supply
chain
is
susceptible
to
breaking
down
if
the
hub
is
not
able
to
manufacture
for
some
period
of
time.
A
difficulty
in
this
approach
would
be
a
large
investment
of
capital
to
increase
manufacturing
capabilities,
which
could
be
significant
enough
to
prevent
Lucent
from
following
this
altogether.
Another
method
would
be
to
use
contract
manufacturing
to
cater
to
increasing
demand.
This
is
a
form
of
outsourcing
production
and
has
various
benefits.
It
saves
up
on
the
cost
of
capital,
as
the
hiring
firm
does
not
pay
for
the
facility
or
equipment
needed
for
production.
It
is
a
much
safer
option
because
of
the
contractual
nature
of
relationship
between
the
two
firms.
The
difficulties
with
this
approach
include
lack
of
control
and
quality
concerns.
This
would
not
require
any
major
investment
of
capital
from
Lucent.
However,
this
would
require
Lucent
to
share
manufacturing
designs
of
components
with
the
contract
manufacturers,
with
potential
loss
of
profit
due
to
not
manufacturing.
To
help
Lucent
retain
their
own
business,
it
should
retain
manufacturing
capabilities
of
critical
components
in
their
product
and
share
component
designs
that
are
required
to
be
manufactured
in
large
quantities.
Increased
demand
coupled
with
further
predicted
increases
suggest
that
this
method
will
prevent
Lucent
from
losing
out
to
competitors
in
the
market
who
could
earlier
fill
the
demand-‐supply
gap
with
their
own
products.
This
would
also
allow
Lucent
to
focus
on
its
own
core
competencies
and
benefit
from
the
increased
service
levels
through
economies
of
scale.
As
each
manufacturing
arm
specializes
in
its
own
19. 19
mass-‐produced
component,
the
loss
due
to
not
manufacturing
its
own
components
would
be
overshadowed
by
the
increased
sales
through
higher
service
levels.
Though
contract
manufacturing
will
provide
the
above-‐mentioned
benefits,
Lucent
will
have
to
be
careful
in
losing
control
of
the
market
through
outsourcing.
Being
an
assembly
line,
without
control
over
the
manufacture
of
some
components,
the
whole
supply
chain
will
be
vulnerable
to
the
efficiency
of
an
external
manufacturer.
If
the
manufacturer
fails
to
deliver
a
product
in
time,
there
will
be
increased
inventory
levels
of
other
components
waiting
to
be
assembled,
and
a
penalty
cost
incurred
due
to
non-‐delivery
of
the
product.
This
could
happen
due
to
different
policies
of
the
manufacturer
and
Lucent
itself;
if
the
manufacturer
has
a
lower
optimal
service
level
due
to
its
cost
structure,
Lucent
will
suffer
regular
stockouts
and
related
costs.
Component
quality
would
also
need
to
be
controlled,
through
regular
inspection
of
the
manufacturing
facility
of
the
contract
manufacturer,
if
they
do
not
want
to
incur
goodwill
loss
due
to
early
product
failures
and
returned
products.
Confidentiality
of
component
designs
would
need
to
be
maintained
through
correct
legal
procedures.
Only
then
can
both
Lucent
and
the
manufacturer
hope
to
gain
the
highest
benefit
through
the
contract.
14.
Reallocation
of
Safety
Stocks
in
1996
Supply
Chain:
Another
method
to
address
the
demand
changes
could
be
to
allocate
the
inventory
/safety
stock
across
the
different
stages
such
that
the
lead-‐time
could
be
reduced,
thus
increasing
the
possibility
of
meeting
demands
on
time.
As
an
assemble
to
order
product,
it
can
be
assumed
that
Lucent
would
have
liked
to
hold
its
inventory
as
early
in
the
supply
chain
as
possible
to
gain
the
benefits
of
demand
pooling.
But
from
analyzing
the
demand
data,
we
can
conclude
that
the
overall
demand
had
increased,
and
thus
the
coefficient
of
variation
of
the
lead-‐time
demand
had
gone
down.
Hence,
Lucent
could
place
the
safety
stock
toward
the
customer
end,
i.e.
at
the
joint
ventures,
if
the
shortage
costs,
i.e.
the
cost
of
losing
business
to
a
competitor
and
goodwill
loss
due
to
not
meeting
demand,
outweigh
the
profits
gained
by
pooling
the
demand
by
placing
inventory
upstream.
For
high
volume
20. 20
parts,
the
safety
stocks
could
be
placed
at
the
joint
ventures,
while
Taiwan
could
be
the
location
for
low
volume
parts.
Consequently,
if
Lucent
decides
to
place
the
high
volume
components
downstream
in
the
supply
chain,
the
lead
times
for
those
components
could
be
reduced
and
the
threats
to
the
current
system
as
discussed
earlier
could
be
addressed
effectively.
Reduced
component
lead
times
could
have
ensured
more
control
over
the
overall
supply
chain.
Timely
delivery
of
the
final
product
would
reduce
the
holding
and
shortage
costs
incurred
due
to
unavailability
one
component
in
the
assembly
line.
The
downside
to
such
a
structure
is
the
increased
holding
costs
incurred,
as
more
safety
stock
needed
to
be
held
at
the
joint
ventures
due
to
losing
the
advantages
of
pooling.
However,
as
mentioned
earlier,
allocating
only
high-‐
volume
components
in
the
downstream
end
would
help
mitigate
this
effect.
The
low
volume
components
would
still
have
the
advantage
of
demand
pooling,
as
they
would
be
located
in
Taiwan.
Also,
holding
them
in
Taiwan
instead
of
Oklahoma
City
would
help
reduce
the
lead
times
for
low
volume
components
too.
Inventory
costs
would
increase
slightly
as
unlike
the
Oklahoma
facility,
Taiwan
would
hold
sub-‐
assemblies
instead
of
parts.
In
effect,
by
a
simple
restructuring
of
the
supply
chain,
Lucent
would
not
lose
out
on
business
to
a
competitor
because
of
shortages
due
to
high
demand.
15.
Response
of
the
supply
chain
to
sudden
demand
changes:
Let
us
consider
a
case
in
which
the
demand
for
Lucent’s
flagship
product,
the
5ESS
switch
faced
a
sudden,
drastic
decline.
Usually
this
would
mean
a
higher
inventory
level
in
different
stages
in
the
supply
chain.
The
immediate
effects
would
be
higher
inventory
levels
at
the
joint
ventures
who
already
ordered
products
from
Taiwan
based
on
anticipated
demand.
Based
on
the
contract
arrangements,
the
joint
ventures
may
also
choose
to
cancel
the
orders,
while
paying
a
fraction
of
the
manufacturing
costs
incurred
to
the
Taiwan
facility.
This
would
lead
to
high
inventory
levels
of
finished
goods
in
the
Taiwan
facility.
Considering
there
are
over
21. 21
200
unique
possible
configurations
of
the
components,
there
would
be
no
guarantee
of
getting
rid
of
the
excess
inventory
any
time
soon.
The
company
may
choose
to
salvage
the
product
by
recycling
its
components
or
selling
them
at
a
reduced
price,
or
even
holding
them
for
future
demands,
based
on
the
anticipated
costs.
All
these
possibilities
show
higher
inventory
costs,
lost
profits,
and
thus
show
the
vulnerability
of
the
supply
chain
to
fluctuations
in
demand.
If,
on
the
other
hand,
there
are
fluctuations
in
demand
rather
than
just
decline,
it
will
lead
to
component
shortages
in
the
stages
of
the
supply
chain.
The
Taiwan
manufacturing
facility
that
processes
orders,
and
the
parts
suppliers,
Oklahoma
City
and
Qingdao,
China
will
face
stock-‐outs.
The
net
effect
will
be
losing
out
on
business
to
a
competitor,
which
shows
in
the
shortage
costs
incurred
by
the
different
supply
chain
stages.
For
future
demands,
it
would
be
wise
to
stop
and
consider
the
sudden
decline:
Is
the
decline
temporary
or
permanent
in
nature?
For
example,
if
a
country
reduces
the
cost
of
Internet
bandwidths,
the
decline
in
the
5ESS
switch
may
well
be
permanent,
as
that
product
was
made
for
voice
networks.
The
effect
will
ultimately
be
on
the
amount
of
orders
placed
to
the
Taiwan
facility,
which
in
turn
will
be
transferred
to
the
Oklahoma
City
facility.
The
amount
of
orders
placed
will
depend
on
the
method
of
forecasting
in
use
by
the
joint
ventures
themselves.
If
they
are
using
a
moving
average
model
with
a
small
moving
average,
say,
3
months
of
demand,
the
forecast
will
be
quite
sensitive
to
the
recent
demand
fluctuations.
If
the
model
takes
into
account
the
trend
observed
through
the
past
years
and
also
the
moving
average,
it
will
be
slightly
less
sensitive
to
the
demand.
In
the
former
case,
if
the
demand
keeps
declining
in
the
long
term,
the
supply
chain
will
be
able
to
better
respond
to
the
decline
in
demand.
To
make
the
supply
chain
resistant
to
disruptions
of
this
nature,
it
is
important
to
know
whether
this
decline
is
just
a
temporary
fluctuation
or
a
permanent
one.
In
either
case,
it
is
better
to
consider
the
probability
of
a
similar
trend
in
demand
in
the
near
future
before
deciding
on
a
future
course
of
action.
22. 22
Another
method
by
which
Lucent
could
be
immune
to
such
fluctuations
is
by
employing
contract
manufacturing.
As
discussed
earlier,
contract
manufacturing
will
ensure
Lucent
a
minimum
profit,
even
if
the
demand
shows
a
temporary
fluctuation
or
a
definite
trend.
In
this
case,
however,
the
contract
manufacturer
has
a
chance
of
incurring
a
negative
profit
if
the
demand
continues
to
decline,
and
a
higher
profit
if
the
demand
keeps
increasing.
16.
Conclusion
Due
to
the
unprecedented
demand
in
2000,
the
existing
supply
chain
of
Lucent’s
Asian
joint
ventures
was
under
tremendous
pressure.
To
solve
the
crisis,
Lucent
has
several
options:
It
might
create
more
manufacturing
facilities
in
Asia
to
cater
to
the
increased
demand,
which
would
include
large
investment
of
capital.
It
could
also
use
contract
manufacturers
to
manufacture
parts
for
which
the
demand
is
very
high.
The
losses
incurred
due
to
not
being
able
to
manufacture
those
parts
will
need
to
be
compared
with
the
profits
due
to
increased
sales
to
determine
the
efficiency
and
operating
costs
of
such
a
system.
It
may
also
redesign
the
supply
chain
to
hold
safety
stocks
at
the
joint
ventures
and
thus
make
sure
the
demand
is
met,
even
though
that
would
mean
higher
holding
costs
due
to
higher
safety
stock.
There
is
also
a
risk
of
disruption
in
the
supply
chain
due
to
high
fluctuations
in
the
demand.
If
there
is
a
sudden
decline
in
demand,
it
will
cause
higher
inventory
levels
being
held
in
the
supply
chain.
These
fluctuations
need
to
be
handled
carefully,
temporary
fluctuations
may
be
due
to
variance
in
the
demand
and
there
would
not
be
any
need
to
change
the
management
of
the
supply
chain
itself,
while
a
long-‐term
decline
may
need
to
be
handled
differently.
In
either
case,
more
fluctuation
will
cause
lower
profits
due
to
higher
variance
in
demand
and
higher
safety
stock.
25. 25
17.3
Teledensity:
0
10
20
30
40
50
60
70
80
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Teledensity
Australia
India
Indonesia
Japan
Korea
Malaysia
New
Zealand
Philippines
Singapore
Taiwan
Thailand
China
26. 26
17.4
Wireless
Penetration
0
10
20
30
40
50
60
70
80
90
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Wireless
penetration
Australia
India
Indonesia
Japan
Korea
Malaysia
New
Zealand
Philippines
Singapore
Taiwan
Thailand
China
