DRIVERS OF SUPPLY CHAIN COLLABORATION IN HYPERCOMPETITIVE MARKETS

In this paper, the strategic supply chain implementation of the two most recognized ICT companies, Lucent Technology and Cisco Systems, are compared, with special mention of their supply

DRIVERS OF SUPPLY CHAIN COLLABORATION IN

HYPERCOMPETITIVE MARKETS

Norma J Harrison

Macquarie Graduate School of Management, NSW 2006, Australia

Norma.Harrison@mgsm.edu.au

Abstract

Collaboration in supply chains is becoming inevitable in hypercompetitive and innovative markets such as the information communications and technology (ICT) industry These companies are aware of the increasing pressure to move away from cost reduction as the primary driver of collaborative undertakings to strategic alliance across the supply chain to ensure quality services and customization which offer profit-making opportunities To be able

to survive, these organizations are transforming from self-focused organizations to becoming true collaborators This is allowing organizations to specialize in their core capabilities, while collaborating with other organizations (outsourcing) to carry out their supporting activities

In this paper, the strategic supply chain implementation of the two most recognized ICT companies, Lucent Technology and Cisco Systems, are compared, with special mention of their supply chain collaboration (SCC) approaches in the Asia Pacific region For both companies, their supply chain strategy for the Asia Pacific is part of their global realisation The report will examine the collaboration efforts of these two companies historically before the technology crush in 1999/00 and their current SCC approaches

Introduction

As in any industry, the advancement in technology and improvement of communication poses increasing challenges to industry, in particular, the Information and Communication Technology (ICT) sector The challenges that arise more so in the ICT industry include the following:

 Time-to-market pressures,

 Accelerated cycle of component and introductions and obsolescence,

 Fluctuation of market demand, and

 Competition within the industry, between large corporations and contract manufactures (e.g., the low cost manufacturers from Southeast Asia) AMR Research, an independent technology and software research consultant based in Boston quoted that average electronics original equipment manufacturer (OEM) introduces more than 1,000 new products annually with

an average life span of only 18 months As a result, design engineers and

procurement managers can never be sure whether their bills of materials will

be viable by the time they hit the factory floor.1

Timely and accurately communicating market and manufacturing information between all parties within the supply chain is essential in the ICT industry, and this is a powerful protection against the pressures of today’s high-tech market The right information at the right time is what allows agile, strategic decision-making and management control of processes and supply chains.2

Even when companies have efficient and accurate information, a physically long and complex supply chain will waste resources as well as delay reaction

to the market Companies are therefore focusing on four major areas to improve their supply chain:

1 Develop efficient information flow from end to end of the supply chain (SC)

2 Shorten the length and simplify the process within the SC

3 Focus on high quality and low cost resources regionally while applying global SC strategies

4 Create alliances with major suppliers/customers and reduce the potential risk of competition

Overview: Supply Chain Management & Supply Chain Collaboration

Supply Chain Management

According to the Supply Chain Council, USA, supply chain management (SCM) is “a network of connecting and interdependent organizations mutually and cooperatively working together to control, manage and improve the flow

of materials and information from suppliers to end customers”.3 Therefore, internally, SCM involves the management of material flows through purchasing, receiving and warehousing to manufacturing, marketing and distribution to ensure coordinated flows of materials and information within the organization It also involves the management of external parties such as suppliers, customers, logistics partners and other related parties to ensure increase in efficiency and effectiveness

Supply Chain Collaboration

The term SCC refers to the committed partnership between organizations in the sale, production and delivery of products or services This displays characteristics such as mutual benefits, rewards and risk through sharing of information and common understanding of issues as well as contributing towards an efficient and effective supply network

1 Buxbaum, Peter A (2002), Case study: Arrow shoots for supply chain target

2 www.oracle.com: Oracle Solutions for High Technology, 2005

3 www.supply-chain.org 23/5/2005

SCC is more often required now due to:

 Changes in organization strategy from mass production to a more customer satisfaction focus Therefore the collaboration effort enables an integrated SCM to meet the customer needs;

 The advancement and increasing affordability of information technology, allowing organizations to devise more sophisticated supply chain systems in order to deliver better products and services to their customers

Where can we collaborate in supply chain?

Collaboration could be done internally or externally and through vertical collaboration or horizontal collaboration (Barratt, 2004) Internal collaboration emphasizes the collaborative effort among different functional areas within the organization External vertical collaboration includes the joint effort with customers (downstream) and suppliers (upstream) Through horizontal collaboration, an organization can enter into an arrangement with either competitors or other organizations, e.g., in sharing logistic arrangements, production effort or industrial lobbying

Internal collaboration needs to develop a closer relationship within operational levels such as collaboration between different functional area through a closer information exchange, and integrating supply chain functions such as purchasing, marketing, research and development, production and logistics

It also needs a collaborative effort to implement tactical and strategic plans across the organisation supply chain in order to ensure maximum benefits to the organization Externally, an emphasis should be placed on selected strategic partners (both customers and suppliers) to ensure an effective collaboration

Understanding the elements of collaboration

According to Barratt (2004), the elements needed to implement a successful SCC include a collaborative culture, trust, mutuality, effective information exchange within the supply chain, communication and understanding, and openness and honesty To adapt to a collaborative culture, an organization must be able to manage change, have cross functional activities and joint decision making across functional areas, and be able to align processes to ensure improved business processes to meet the demands of collaborative initiatives

Figure 1 illustrates the key elements required to maintain sustainable SCC, i.e.,

1 Resources and commitment - parties in the supply chain must commit sufficient resources and effort to implement collaborative effort;

2 Intra-organizational support;

3 Corporate focus - long term focus is required to ensure a successful collaborative effort;

4 Demonstrate a business case to implement SCC;

5 Role of technology - technology is the major enabler of SCC especially in information flows, however, it is not the critical factor to ensure a successful SCC

SCC of Cisco Systems Inc and Lucent Technologies

The strategic supply chain implementation of the two most recognized ICT companies, Lucent Technologies and Cisco Systems, can now be compared,

in particular, their SCC approaches in the Asia Pacific region

Cisco System Inc is a worldwide leader as a networking equipment provider.

The company started in 1984 by a small group of computer scientists from Stanford University Over the past 20 years, Cisco has added switches and hubs, gateways and firewalls, telephones and wireless cards into its product scope.5 Cisco’s products have been widely used by business, education, government and households Cisco has pioneered the use of the Internet in its own business practice and offers consulting services based on its own experience to help other organizations around the world.6

Lucent Technologies has a much longer history; it went back to the 1875

invention of the telephone by Alexander Graham Bell In 1885 AT&T was incorporated as a subsidiary of Bell’s original company AT&T was the biggest telecommunication company recording the highest annual revenue in the

4 Barratt M (2004), “Understanding the meaning of collaboration in the supply chain”, Supply Chain

Management: An International Journal, Volume 9 Number 1, p 36

5 Annual Report, Cisco System Inc 2004

6 Source Cisco: Cisco Company Profile

world at one time On September 1995, AT&T started its restructuring into three separate companies, one of which became Lucent.7 8 Lucent was market leader for switching systems and worldwide telecommunications infrastructure equipment It became famous for its “hub-and spoke” supply chain model after the company expanded its Taiwan operations

Lucent and Cisco’s Supply Chain Evolution History

The following section will examine Lucent’s and Cisco’s approaches in forming their SCC and the difficulty they experienced

Lucent Technologies

‘For our business, traditional manufacturing is not strategic, but world-class supply and demand chain management and product reliability, are.’

-George Foo, International Manufacturing Vice president, Lucent Technologies, 1999

By 2000, Lucent has four joint ventures in Asia, viz., Taiwan, Indonesia, China and India

Lucent’s Supply Chain before 1996:

Before 1996, Lucent’s Asia business operation was final product assembly and sales Parts suppliers around the world shipped components to its US factory in Oklahoma City, where the majority of assembly took place The Asia factory performed only the final assembly The whole process was highly centralised The orders from Asia were first placed at the Asia offices and communicated to AT&T office in New Jersey The semi-finished goods were shipped to Asia, which were then delivered to the customer 1

Product Order Placed

Shipped with JV Order placed with AT&T

Kits exported

Manufacturing Subassemblies order placed Shipped with factory Parts shipped Parts shipped

Parts Supplier Asia Parts Supplier US

Customer

Joint

Centre, California

Order Processing

NJ

US Factory, Oklahoma

7 Lucent Technologies: Global Supply Chain Management GS-01 Stanford University, 2001

8 http://www.lucent.com/corpinfo/history.html

1 & 13 Lucent Technologies: Global Supply Chain Management GS-01 Stanford University, 2001

Figure 2: Asia Supply Chain, 1995 2

In this case, information originated from Asia and processed in US, parts were shipped from Asia to US, but finished goods shipped back to Asia Resources were wasted in the two cycles between Asia and US The delay on delivery and misunderstanding in communications lead to a large amount of working capital held up in the supply chain pipeline Management recognised this problem and redesigned their supply chain in 1996

Lucent Supply Chain After 1996:

The 1996 supply chain model was called the ‘hub-and-spoke’ approach As Taiwan had advanced infrastructure, technologies and skilled labour, it was selected as the hub of the Asian supply chain The basic concept of the new supply chain was that the parts from Asia were shipped to Taiwan joint venture Orders were placed directly with the Taiwan joint venture.3

The short-term improvement was significant when the hub-and-spoke model was implemented in late 1998 By 1999, 82 percent of the parts, by value, were being sourced within Asia and had achieved 80 percent on time delivery

by the end of the year

Product Order Placed

Shipped with JV

Order placed Parts order with TW

Kits exported

Parts shipped

Parts Supplier Asia Parts Supplier US

Customer

Joint

Ventures Staging

Centre, California

US Factory, Oklahoma

This model took into account the increasing competitive advantage of cheap resources in Asia as well as the demand boom in this area Major players focused on dealing with material shortage, cutting cost, expanding manufacturing while achieving on-time delivery, and customer satisfaction This increased Asia operation and geographical relocation of Lucent’s supply chain created short-term benefits

Challenges from the year 2000 market crash:

2

3 & 15 Op cit

4

While Lucent was celebrating its achievements on increased revenue, capital investment, employee increases and overall company value, demand began

to diminish at the same time when many contract manufacturing companies also became networking equipment vendors The long and sophisticated supply chain decreased Lucent’s ability to reduce its cost and quickly respond

to market changes Lucent’s supply chain was not adaptive and its reaction to meet market demand was costly

Lucent’s redesign of its supply chain on geographical bases proved to be insufficient to address its operational problems In contrast with its growing revenue, Lucent had a negative cash flow of $2.2 billion in year 2001

Lucent’s collaboration with the customers was insufficient to provide the information to make accurate forecasts or to detect market changes Market pressures forced Lucent to consider outsourcing its manufacturing worldwide Also, to avoid competition from its partners, Lucent needed to enhance its upstream collaboration

Cisco Systems

Even though our analyses focuses on Asia Pacific operation, most of Cisco’s products apply across its global operation

During 1995-96 while Lucent was struggling with its geographical supply chain redesign, to respond to the same market pressure, Cisco developed its Internet Business Solution model.5 This model focused on communications and collaboration, and characteristics included the following:

 Automated routing data transfer through electronic data interchange (EDI)

 Eliminated need for purchase orders and invoices

 Developed partnership with suppliers and created test cells on supplier line

 Test procedures automatically downloaded on order configuration

 Suppliers test using Cisco methodology

 Engineers’ aggregate design information at the touch of a button

 All companies in supply chain work off same demand forecast reducing inventory costs

 Suppliers ship directly to customer and do not require Cisco interface Similarly to Lucent’s example, Cisco’s model obtained good results in the short term It achieved 50 percent of units directly shipped to the customer; new product introduction time to volume accelerated by a quarter; lead times reduced from 6-8 weeks to 1-2 weeks; engineering change notice time down from 25 days to 10 days; and annual operating costs reduced by $75 million.6

Cisco experienced rapid growth in a relatively short time, and to manage its vast product marketing and distribution, it developed its Strategic Alliance

5 Gaining Competitive Advantage Through Internet Business Solutions, Cisco System 1999

presentation.

6 Op cit.

program, where Cisco would work with industry leaders to drive technology growth, and to deliver value to Cisco via incremental revenue, over time allowing Cisco to strengthen its position as a market leader To create this kind of value chain required many resources to build and maintain long-term relationships, thus a separate organization was developed to foster and monitor the growth of these relationships within Cisco

Cisco launched various online tools with different designs and functionalities during this period, aimed for catering to the needs of various partners and suppliers In addition, Cisco planned to integrate these tools with its internal

IT systems, thus allowing greater visibility and transparency of information to flow through the supply chain Cisco Connection Online (CCO) provides its suppliers and contract manufacturers with a central focal point, a one-stop-shop for customer demand information and removing the redundancy of overlapped responsibilities Also Cisco started building management teams to specifically address the needs and monitor the performance of its suppliers and partners, providing constant feedback to its supply chain, and revaluating the alliance against constant changing market conditions

The IT solution system was efficient It covered most functional areas within the company from purchasing to customer care, and extended to suppliers It has also included other functional departments such as Finance, HR and Marketing However, it had its inadequacy

In the year 2000, Cisco took a $2.2 billion inventory write down with a realized gain of only $187 million The problem was not with Cisco’s supply chain mechanism but with the forecasts and orders it was getting from start-up telecom companies and Internet businesses Many of those companies went out of business, leaving the market flooded with almost-new Cisco routers and other networking equipment.7 Cisco was unable to make an accurate forecast

in the weakening economy Without sufficient information from first and second tier customers, Cisco could not achieve an accurate forecast Also analysts observed deficiency with Cisco’s supply chain when forecast market growth slowed, resulting with Cisco having its inventory built up from 54 days to 88 days over the years Some other limitations were that actual customer usage and contracted service level were not considered; its inability to manually intervene the quantities of equipment to keep as spares; and there were ineffective diagnosis and expertise from its engineers In addition, similar to Lucent, Cisco was facing the challenges from smaller rivals including Enterays, Extrem, and Foundry,8 whom were able to meet customer demands and expectations in shorter turn around time Cisco was desperately looking for a solution

To address some of the issues above, Cisco developed another online tool, called eHub, where it eliminated bidding wars of scarce resources from different factions of the supply chain Furthermore, it provided a new mechanism for the firm to provide end-to-end supply chain visibility, foster collaborative planning, supply demand alignment, and encouraged inventory optimization

7 & 19 Ojo, Bolaji (2001), Getting its house in order after gross miscalculation, CMP Media LLC

8

Analysis of Lucent and Cisco’s Current SCM

Cisco and Lucent faced the same market challenges Both of them realized the importance of downstream collaboration with the customer However, two companies had very different approaches Lucent decided to selective outsource its manufacturing while Cisco decided to retain its original model and then expand its capability to cover customers’ supply chains, increasing the visibility into the end market

Lucent Technologies

‘So we have this belief that supply chain is actually a way of understanding the marketplace It’s a way of understanding customer behaviour It’s the way of understanding, given the changes that are taking place in the marketplace, what it will take for us to compete a year from now.’

- Jose Mejia the president of the Supply Chain Networks group of Lucent, 2005

Learning from previous experience, Lucent realized that purely relying on geographical design of the supply chain could not meet the requirements of the fast changing market Based on the strength in Asia that Lucent had already built up, Lucent changed its purchasing and supply chain strategies

in 1999 and reformed its supply chain from vertical to virtual Similar to Dell’s virtual supply chain model, Lucent developed its own partnership with EMS Lucent set up 6 groups in the supply organization to handle various responsibilities as seen below1:

 Product development and realization

 Supplier component management

 Virtual manufacturing

 Customer facing

 Electronics systems and strategies

 Indirect service

This reform enabled Lucent to focus on its key competency as a leader of communication technologies and shorten the reaction time to market changes The reduction of cost over the last several years was significant Lucent focused on several issues, including the following:

The customer speaks:

Lucent intended to build up a long-term relationship with the customers and look into what the customer’s supply chain requires, providing end-to-end solutions.2 In order to ensure customer requirements (both routine needs – such as demand forecasting and demand planning - and unique needs such

as packaging) are well defined and being met, Lucent developed the positions

of customer general managers, who report to the SCN (Supply Chain

1 Lucent Supply Strategies Evolve, Jim Carbone, Purchasing, 33004448, 12/22/2000 Vol 129 Issue 11 2,22 & 25 1 Carbone, J (2002)Lucent’s supply chain focus fattens margins, Purchasing, Sept;

2 Bernstein, Mark (2005) Lucent Counts on Re-Designed Supply Chain to Drive its Turnaround

Network) A large customer would get one dedicated team whereas smaller customers would share one team

Leveraging the Buy and Attitude Building:

Lucent worked on reducing the number of supplies Lucent reduced its supplier base from 3,266 in 2000 to around 900 in 2005 At the same time, Lucent built up a collaborative attitude Lucent arranged supplier partnership workshops which focused on how Lucent was interacting with the suppliers

On time delivery reached 95 percent in 2002.3

Lucent chose suppliers with the best technologies, price and willingness to jointly develop new products and the delivery system Companies included AVX Corp, FCI, JDS Uniphase, and Texas Instruments In return Lucent gave them early access to advanced technologies.4 The company also set up the Golden Link Awards to honour top suppliers.5

The outsourcing journey:

Since 2003, Lucent decided manufacturing was not a core competency and decided to further outsource its manufacturing It sold a number of facilities to contract manufacturers Solectrom, Jabil and Celestica now manufacture about 80 percent of Lucent’s products As a result, Lucent has moved $1.2 billion of fixed costs to variable cost, reduced its operation from 157,000 employees to 31,000 and reduced its inventory from 7 billions (2000) to 700 million (2005).6

Information Technology Utilized:

Lucent officially announced the company would apply global e-business process standards and included RosettaNet as a member RosettaNet is an independent, self-funded, non-profit consortium dedicated to the development and deployment of standard electronic business interfaces to align the processes between supply chain partners on a global basis.7 Lucent implemented its Partner Interface Processes (PIPS) from that time

In 2003, Lucent launched the One Manufacturing Execution Global Application (OMEGA) project The project applied a software called Datasweep’s Advantage developed by Datasweep Inc This software connected some of Lucent’s internal systems with EMS partners on a manufacturing level.8

Currently, the Lucent Supply Chain Portal is in use for its business unit and supply chain partners to access real-time information and gain global visibilities on the virtual supply chain.9

3

423 Mawhorr, S A (2001), Lucent forms alliancds to boost supply chain, Daily Business, 19 Dec

524 Source Lucent: www.Lucent.com

626 Lucent Technologies supports implementation of industry standards for electronic supply chain transactions, M2 Presswire, 11 Oct 2000

7

8 Baljko Jennifer (2003), Lucent using more software tools to get kinks our of supply chain, ,CMP Media

9 Source Lucent: www.Lucent.com