Alcatel doesn't want to repeat the past, when a glut of inventory crippled telecom manufacturers
Much of the telecommunications nuclear winter of the past few years has been attributed to the billions of dollars in inventory write-offs that leading equipment manufacturers were forced to take when declining demand rendered existing components and systems ineffective or obsolete.
Alcatel doesn't want to be caught in that position again. Its Enterprise Networking Division, which gets about half its income from sales of the OmniSwitch line of data-networking switches, has recently completed a move to a real-time direct order fulfillment model that the company says can help eliminate overstocking. The change also will provide customers with shorter order lead times, higher product quality, and lower overall costs, says Tom Burns, senior VP of operations at Alcatel.
"We've had a relatively reactive organization in the past," Burns says. "We had a load of inventory on our shelves of semifinished goods and could do the final assembly and test, and then ship it directly. But that also led to inventories, and our balances and turns were never greatly competitive."
One of the telecommunications original equipment manufacturers crippled by the inventory glut in early 2000, Alcatel began working with third-party logistics providers, electronics-manufacturing service providers, and semiconductor suppliers to create a virtual factory that has eliminated in-house manufacturing. But such a move requires extraordinarily close communication among all the partners in the supply chain if the company hopes to avoid repeating the past.
Using collaborative-planning software from Oracle, Alcatel created a mechanism for sharing product forecast changes with partners to keep deliveries, inventory levels, and component requirements in better step with demand, says Stan Stopka, VP of operations for Alcatel's e-Business Network Division.
It's a tricky business, considering that Alcatel has multiple types of configurations of particular switches, and customers can change the configuration right up until just prior to an order. "We could have $20 million in inventory on the shelf, all to our sales forecast plan, and then the orders come in slightly different," Burns says.
A master data repository of all Alcatel's orders and activities mirrors all its partners' activities, says Stopka, so there's always a real-time picture available to Alcatel or any partner. Alcatel works with contract manufacturer Celestica Inc. as well as two other manufacturing service providers. The company also is working closely with component suppliers, particularly IBM, which is the leading supplier of application-specific integrated circuits used in its OmniSwitch products. Because of the close control and monitoring of components, logistics, and capacity, Alcatel doesn't manufacture a device until an order is placed.
Alcatel also has introduced quality control and logistics efficiencies that let electronics-manufacturing services providers' internal-manufacturing systems and third-party logistics providers' warehouse-management systems communicate electronically with Alcatel's quality systems.
The implementation of the direct order fulfillment model, a project that has cost less than $500,000, let Alcatel reduce its break-even structure by more than 40%, inventory by more than 50%, planning time by 75%, and material liability by 80%, Stopka says. In completing this borderless virtual factory and the necessary IT infrastructure, Alcatel is well equipped to quickly adapt to sudden changes in the market, he says. In the still downtrodden telecom sector, such adaptability is critical.
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