From a Traditional Supplier to a Competitive Player: Nortel Networks Case Study

Introduction

Nortel Networks case study is about the transformation made by the company to survive and grow in a highly competitive environment. This competition came about due to the popularity of new technologies like the internet. New highly competitive players also began to emerge. This report is about the transformation of Nortel Networks from a traditional supplier of telecom equipment to a competitive player in the new environment. Focus of the paper will be on supply chain management, logistics and market strategy.

Global Supply Chain Issues

Manufacture of goods is often a complicated procedure and would depend on the complexity of the product itself. Take the example of a plastic doll. Availability of plastic as raw material, the mould and the injection machinery is enough to produce thousand s of dolls every day. This would be a simple process and all the manufacturer needs is a regular supply of raw plastic, which is abundantly available. But a complicated product like telecommunication equipment requires much more effort. It would need hundreds of components to make one single product. These components would be sourced from many suppliers and finally assembled by the maker in its factory.

The whole process from sourcing of raw materials and components, manufacturing, transporting, storing and making the product available in the market is very complicated in such cases.. This process is referred to as managing the supply chain. Supply chain can be defined as “The sequence of steps, often done in different firms and/or locations, needed to produce a final good from primary factors, starting with processing of raw materials, continuing with production of perhaps a series of intermediate inputs, and ending with final assembly and distribution.” (Deardorff 2001). For a company like Nortel Networks this process is even more complicated since it has to deal with global supply chain issues.

These are issues that come with the advantages of globalization and free trade. One main problem is distance since the final assembly will be made in Ireland whereas a component may be made in China. Quality is another concern since control procedures are not held by the final manufacturer, but by the partner OEM’s (Original equipment manufacturer). Making the component available on time is also of concern. According to Dr. Ir. Hans van Wijngaarden, business manager for Philips Applied Technologies (PAT) in the Netherlands, “A consumer product can become obsolete if movement within the supply chain takes more than three months”. (Thuermer 2006).

Such instances will naturally involve a factor known as third party logistics. “3^rd Party Logistics is the supply chain practice where one or more logistics functions of a firm are outsourced to a 3PL provider”. (3^rd Party Logistics(3PL): What is 3^rd Party Logistics(3PL)? Description. 2008). There would also be trade regulations to contend with along with local legislations and laws. Language and cultural barriers are also issues to be solved.

Market entry strategy

The Nortel market entry strategy evolved during a very dynamic environment where huge changes in communications technology were taking place. Nortel was a major supplier to the post, telephone and telegraph giants like GPO and British Telecom. Such companies were known as the postal, telephone and telegraph monopolies. It was also a time when communication companies remained the monopoly of governments in many counties.

The system has changed now with the appearance of many private players in the field of telephone, mobile telephony and the internet. The dynamic changes mentioned above were the integration of the internet into the telecommunication network. “Internet itself by definition was born on the crossroad of the of computer and telecommunication industries”. (Gromov 2003). Voice transfer was joined by data transfer video.

The route that was to follow was the merging of al the three into one technology. The internet became a part of telecommunication and new player like 3COM and Cisco began to emerge. “3COM was incorporated in California on June 4, 1979, and reincorporated in Delaware on June 12, 1997.” (Investor Information Investor FAQs: 3com History. 2006). The 3COM name itself was based on three words namely computers, communication and compatibility.

This point is important since Nortel itself was trying to make itself a global giant which can provide a compatible platform and solutions for the three factors mentioned above. “Cisco was founded in 1984 by a small group of computer scientists from Stanford University. Since the company’s inception, Cisco engineers have been leaders in the development of Internet Protocol (IP)-based networking technologies”. (Corporate overview: Cisco: NASDAQ: CSCO 2008).

They were small (at that time), but dynamic and able to adapt to changes. Nortel had no choice but to adapt in order to compete with such players. It should be noted that commercial use of the internet began only during the 1980’s. “Starting in the early 1980’s and continuing to this day, the Internet grew beyond its primarily research roots to include both a broad user community and increased commercial activity.” (Leiner et al 2003).

Before that the internet was in the hands of a few players like the military, the government and several universities in the United States.. The events mentioned in paper happened a decade later when the full potential of the technology began to be understood by corporations and businessmen. In a sense, the steps taken by Nortel were quite visionary in the sense that the internet revolution was just beginning to catch the attention of the world.

Even as late as 1994, (just four years after Manufacturing 2000 plan was launched by Nortel) people even in the United States had to know their bank balances either by a personal visit or through customer service using the telephone. The introduction of two browsers namely Mosaic and Netscape changed all that and the internet revolution truly began. “The World Wide Web has transformed the way people live, work and play”. (Almasy 2005).

Nortel would have been perfectly placed to make full use of this new trend since it had four years preparation. The first step taken by Nortel was reorganization and integration of operations. Previously, most of Nortel’s telecommunication equipment was meant for long term usage. Their products were expensive but were designed for long term use. Technology had not rapidly caught up in the telecommunication sector until the advent of mobile telephony and the internet, especially the latter. But the new trend brought in much product life cycles which required that investment be recouped and profits made much more quickly.

Existing technology soon became obsolete as new discoveries and innovations began to emerge in quick time. Nortel wanted to make itself the world’s most ‘responsive and most accessible supplier’. A mission critical company called Bay Works was acquired with an investment of nearly 10 billion USD in 1998. Acquisitions of smaller companies in the telecom and internet market continued.

This appears to be a correct move since mergers and acquisitions (M&A) are the easiest way to gain competitive technology quickly. “There are several advantages in M&A — cost cutting, efficient use of resources, acquisition of competence or capability, tax advantage and avoidance of competition are a few.” (T C A Ramanujam 2006). Nortel could also take advantage of the other factors mentioned above to be more competitive in the new and emerging global environment of telecommunications. Another important step taken by the company was to be more dynamic and responsive to customer needs, something that was becoming more and more important in such a situation.

For this purpose Nortel decided to streamline its operations by cutting down on the number of its manufacturing bases from twenty three to just seven. Called the Manufacturing 2000, this initiative also involved streamlining its association with other global suppliers. It should be noted that this move brought forth resistance from employees since the company had to lay of jobs during the process. The company’s manufacturing units especially the one in Ireland had a self-assessed quality control system along with ISO and EFQM certification. The EFQM is a quality certification process for product quality in Europe. (The EFQM Excellence Model.).

Global supply chain of Nortel Networks

Nortel decided to make the Monkstown facility in Ireland the hub of all its supply chain operations. In a global scenario, the real competition was between supply chains and not between companies. (Tsai 2003, p 76). Nortel then took steps to streamline the process integration of its global supply chain. The factor that plays a significant part in the above two factors is flow of information starting with customer requirements and the subsequent customer satisfaction through the supply of products.

Many organizations focus on this and do not give suppliers, manufacture and other support functions enough importance in the supply chain process. Nortel also saw to it that this mistake was not made and took steps to integrate all the above factors in its supply chain and process integration. In effect Nortel took steps to see that the competition among the supply chains was turned into integration. This was done by designating as functions the major suppliers, the customers, processes and the relevant information that is required to run the whole operation. Activities and operations that are not important or relevant to the business was divested.

The number of suppliers was reduced and those that remained and the new ones were seen in a long term relationship. Agreements were signed accordingly. A supply chain engineering team was set up to ensure that the supply chain functioned smoothly and according to plan. Customer focus was given extreme importance since. The number of customers will increase in the new environment of Nortel which is a change from the past.

For this purpose customer satisfaction surveys were conducted regularly and corrective action taken when necessary. During the early days the company had fewer, but much larger customers. Power was decentralized to a large extent and managers were given the authority to make strategic decisions. Many activities began to be outsourced also. At the time of writing of the original article implementation of the Manufacturing 2000 plan was 80% complete and well adapted by everyone concerned.

Supply chain management metrics in Nortel

Nortel Networks has implemented an effective supply chain management metrics as a part of its new global strategy. Supply chain management metrics is simply a way to measure the different aspects, functions and processes in the supply chain. “Supply Chain measurements or metrics such as Inventory Turns, Cycle Time, DPMO and Fill Rate are used to track Supply Chain performance”. (Supply Chain Metric.com).

The following are the main activities in the company that are measured using metrics. One is the delivery to original promise date which measures any variance between the contract date and the date of actual delivery (or installation in most cases). Another is the faultless installs. Installation of sophisticated machinery is a time consuming and complicated process and errors and faults could happen in the process.

This could lead to more wastage and loss for the company. Hence this will be a useful measurement. Other metrics measured at Nortel include bid management cycle times, order fulfilment lead times, delivery to customer requested date, cash to cash cycle time, upside production flexibility, total supply chain management cost, bid management costs, and inventory days of supply. It should be noted at this stage that even as late as 2007, a universal set of metrics that is acceptable to all supply chain management systems have not yet been formulated.

The main reason given for this state of affairs is that the goals as well as the activities of organizations differ and hence a universal set cannot be formulated. Most companies would focus their metrics on only a few areas like customer service, technology and cost reduction. It should be generally up to the individual company to formulate an ideal set of supply chain management metrics. In this context, Nortel has taken a reasonable set of activities for which measurements are made.

Comparison

It is proposed that the multinational telecommunications company Alcatel-Lucent be taken up for review of strategy. The company “provides solutions that enable service providers, enterprises and governments worldwide, to deliver voice, data and video communication services to end-users”. (Fact Sheet: Alcatel Lucent Fast Facts. 2008). The company has global presence in over 130 countries and has a turnover of nearly 17 billion USD.

The company has its headquarters in Paris and employees about 77,000 people worldwide. The company is essentially a manufacturer of telecommunication equipment and related services for land lines, mobiles, internet etc. The core area of the company is carrier business which means that its products are used for carrying data, voice, images and other media from one area to the other. The company also sees itself as a solution provider in many areas of telecommunications. The end users include large corporations, government and government agencies, and individuals. The company is research intensive and invests nearly 3 billion dollars on it.

Alcatel’s original name was La Compagnie Générale d’Electricité (CGE) and was founded in Paris in 1898. (Alcatel Lucent History. 2008). Its present name came about after the company acquired telecommunications part of ITT Corporation in 1995. Lucent was originally the European division of AT&T the well known American company. Lucent was merged with Alcatel in 2006.

The merger itself is a strategy by Alcatel to obtain the technical expertise of Lucent. Even before the merger, Alcatel had engaged in the practice of acquisitions of many other well known corporations. So it can be said that like Nortel Networks, Alcatel-Lucent is also focused on staying competitive though mergers and acquisition. The advantage of such moves has already been mentioned in earlier section of this paper.

To stress the main advantage, mergers and acquisitions will help the new entity or the company is to get hold of necessary technology without having to spend money and time on developing it. The highly competitive and technology oriented world of telecommunications make it and ideal field for mergers and acquisitions.

Specific strategies

Alcatel has a three pronged strategy that was introduced in 2007. It should be noted that the dates in the case of Nortel was a decade earlier. The strategies are building and strengthening its carrier business, expanding its service and application offerings and strengthening its position in all its key markets. This will be done with a “strong focus on helping customer derive the greatest advantage from the IP transformation of their networks”. (The Alcatel-Lucent Strategy. 2007).

With regard to the carrier business, the company plans to expand its base in both wireline (with wire) and wireless fields. The company will continue to provide specific and general solutions and products to its customers. Another notable strategy is to focus almost entirely on IP (internet protocol) especially in the developed markets. In developing or emerging markets the company will provide high capacity and cost effective carrier solutions.

The company also plans to enter a new market segment, by providing carrier solutions to governments and other large corporations (not from the telecommunications industry) who will need their own telecommunications system. This system will of course be integrated into the public telecommunication system used by such clients. In expanding in the carrier business, the company will also look out for strategic partners who can jointly create solutions for customer.

An example of one such partnership is with the NEC Corporation to develop Long Term Evolution (LTE) broadband access solutions. Another major strategic move is to expand into the service sector. According to the company this is a logical move. Main focus will be on providing value added services which are related to the current activities of the company. The reason for this move is that telecom products are now more and more multi-vendor and multi-technology networks. (Realizing The Possibilities: Meeting The Need for Services. 2007). The specific services in value addition include consulting, network design, integration and deployment.

It will also include operations and maintenance, managed services, network operations and multi-vendor and multi-technology maintenance. Applications used in the field of telecommunications like multi-media are also growing rapidly along with the introduction of new technology. Specific examples cited by the company include video applications, music downloads, photo sharing and user generated content. Alcatel-Lucent already has a strong portfolio of multi-media applications. The company also plans to expand its already strong presence in the enterprise industry. The company indicates that enterprise industry includes all enterprises in the private and public sector. Industry sectors include transport, health, energy, government departments, and e-communities.

Supply chain and logistics in Alcatel

This strategy was formulated by the company before the venture with Lucent. The company had a large direct selling division which was becoming a burden on the company. The company ultimately decided to stop all direct selling (to end users) and began to rely on third party resellers to do the retailing for them. This resulted in a simplification of its supply chain system by transferring all the retail part of supply chain.

This is now being handled by the resellers themselves. The company also transferred the handling of its logistics division formerly controlled by a company called UPS Logistics. Now the division is being handled by FM Logistics under direct supervision of UPS Logistics. The result is that “Alcatel’s record of delivering to promise has risen from 60 percent to 95 percent”. (Bowman 2003).

Some of the specific strategies of Alcatel-Lucent has been given here. The similarity between Alcatel-Lucent and Nortel Networks is that they operate in the same competitive environment. Both are in the telecommunications and information technology field. Both companies also have ambitious plans for the future and have resorted to acquisitions in the past to gain hands on technology and market share. The one major area of difference is that of the logistics and supply chain division of the company. The logistics of Nortel Networks is managed by the company itself where as that of Alcatel-Lucent it has been efficiently managed by a third party.

Conclusion

Global supply chain management and logistics is a complicated field especially in the context of globalization and free trade. This has enabled multi-nationals to become even larger by entering into new markets and territories. It has also enabled companies from emerging markets to enter the global arena. The complication in the field is all the more in the case of high technology fields like telecommunications. Merging of data, voice and multimedia as a result of the internet boom has been one of the main reasons for this. Moreover the field is characterised by the existence of multi-vendor and multi-technology products.

In this scenario a case study of Nortel Networks has been analysed. Nortel has emerged from being a supplier of high end and expensive (and long lasting) telecommunication equipment to many of the traditional giants of the field. But during the end of 1999 the company had realised that this style of doing business has changed. New dynamic companies were emerging that could easily adapt to the fast changing environment in the industry.

Nortel had successfully managed a transformation to emerge as a strong player in the new scenario. An analysis of the market strategy of the company was done here. The issues in global supply chain have also been discussed. The new supply chain management system of Nortel was also reviewed. Finally Nortel strategy was compared with that of Alcatel-Lucent of France, another multi-national telecommunications company.

There have been similarities in the strategy of both companies. Both are ambitious players in the new scenario. Both companies have also resorted to acquisitions in their effort to obtain new technology quickly. The main area of difference is that the logistics department of Nortel is handled efficiently by the company itself. In the case of Alcatel-Lucent this has been transferred to a third party. This has resulted in a drastic improvement in the delivery schedules of the company. It can be concluded that both companies are trying hard to survive and expand in a globally competitive environment.

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