Lucent Technologies – Proprietary Use pursuant to company instruction

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Lucent TechnologiesLeveraging a strategic supply
chain

• Gary Timblin Director, Supply Chain Networks
• Lucent Technologies
• April, 2006

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Agenda

• Transformation of Lucents Supply Chain
• Lucents Supplier Management Group
• Outsourcing
• Supplier Relationship Program
• Cascaded Metrics
• Results

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Global Supply Chain Networks
Jose Mejia President, Supply Chain Networks
Engineering Planning
Integrated Operations
Supplier Management

• New Product Introduction in Supply Chain
• Cost Reduction/Value Engineering
• Demand and Supply Planning
• Business Process Engineering
• Supply Chain Architecture and Strategy

• LU owned manufacturing and outsourced mfg.
  operations
• Outbound logistics and distribution
• Repair and reverse logistics
• End of life and Re-use manufacturing

• Supplier relationship and performance management
• Global contract management
• Indirect Procurement
• 3rd party agreements for multi vendor solutions
• Global process compliance for purchasing programs

Regional Customer Support - Joint with Services
Team (NAR, CALA, EMEA, China and APAC) Organized
by Customer and focused on End to End delivery of
products and services
Regional Customer Support - Joint with Services
Team (NAR, CALA, EMEA, China and APAC)
Regional Customer Support - Joint with Services
Team (NAR, CALA, EMEA, China and APAC)
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Creating a Single Lucent Supply Chain
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Supply Chain Network Team - Supplier Management
Group

• The Supplier Management Group is Lucents key
  owner of all procurement related activities,
  including Source Selection, Deal-Making, and
  Supplier Performance Management, specifically
• Commodity Sourcing Strategies- Sourcing
  Strategies ownership and management
• Supplier Selection - Primary accountability in
  supplier selection and awarding of business-
  Leveraging EMS Sourcing Strategies
• Global Procurement Compliance- Gatekeeper of all
  purchasing contracts and processes, being the
  single channel for all contractual agreements
  related to purchasing, worldwide
• Net Income Improvements- Through negotiating
  material costs, as well as, analyzing spend
  trends on indirect material and services on total
  Lucent spend - 4B.
• Global Supplier Relationship Management-
  Management of all Lucent suppliers around the
  world (contracting and performance management) -
  Tightly manage of suppliers in certain
  technologies while managing a growth in OEM/ODM
• Regional Supplier Development- Leverage of Cost
  Competitive Suppliers capabilities along with
  Localization initiatives

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Outsourcing Model
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Before Beginning, Determine Strategy By Asking
and Answering Questions

• (A) Identify transactional work vs. strategic
  level responsibilities along the value chain.
• The purpose of this exercise is to explore which
  potential functions should remain internal to
  Lucent and what could potentially be outsourced.
  
• (B) Evaluate all areas for ability to be
  incrementally increased/grown with chosen
  supplier(s).
• What criteria do we want to apply to potential
  partners that will identify those who we will
  recognize as being able to support us as we move
  up the value chain?

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Questions (continued)

• (C) Determine what approach should be taken to
  outsourcing selective, best-in-breed, or
  bundled BPO global vs. regional.
• What is currently outsourced-to whom and why?
  What has been our approach to outsourcing thus
  far-think along the continuum of selective
  tactical activities to full scale bundled BPO?
  Strategic considerations and appetite for
  outsourcing should determine strategy.
• (D) Identify the majority stakeholders whose
  understanding/approval/consent would be necessary
  to move this forward.
• Whose organizations would this effect and what
  organizational changes would need to precede or
  succeed this effort?

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Example 1 Lucent Indirect outsourcing process

• Create Advantage
• Leverage spend with key suppliers across Lucent
  categories to build scale (e.g. Oracle) and drive
  advantage

• Innovate
• Continue to maintain control
• Partner with best-in-class global suppliers
• Joint product/process improvement
• Supplier innovation

High
IT Hardware
Impact on Lucent Competitive Differentiation

• Leverage Advantage
• Strategically source to leverage buying power

IT Software

• Outsource
• Outsource
• Use strategic sourcing strategies to drive
  additional cost reductions

Telecommunications
Professional Services
Capital Equipment
IT Managed Services
Advertising, Print Marketing
Indus. Supplies Equipment
Leasing
Travel
Non-Employee Workers
Admin. Supplies Equipment
Area to left of blue oval indicates prime area
for outsourcing
HR Benefits
Property Services
Low
Small
Large
Scale of Lucent Purchases versus Other Large
Buyers
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Example 2 What Type Of HR Transactions are
typically outsourced?
Companies tend to outsource more transactional
type work than strategic.
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Example 3 Direct Purchasing outsourcing process
Sourcing Cells
Active Optical
PWBs
High End Semis
RF Modules
BMPs
Passive Optical
Tactical Strategic
Applications
Low End Semis/Passive
CW, Connectors Assy.
Stable Emerging
Commodities/Technologies
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Supply Chain Systems Re-architecture

• Where we ARE
• Supply Chain Portal - real time web-based
  connectivity between LU and suppliers, resulting
  in FY02 savings of 163M
• Enabled B2B and web-based visibility with
  Tradestream, Lucents 1st global architecture
• Data aggregation from 18 international LU
  locations, 48 global EMS partners, and 11 broker
  distributor locations
• Product collaboration between Lucent and global
  EMS partners through Genesis/Agile

• Where we WERE
• Bullwhip effect on demand
• Order visibility was difficult to achieve
• Lack of centralized global inventory system
• Collaboration architecture needed to be globally
  deployed
• Database fragmentation and redundancy

CUSTOMER
INFRASTRUCTURE
PRODUCTS and SERVICES
SYSTEM
PEOPLE
REVENUE
MARGIN
CASH
The Bullwhip Effect
SP
LU Sales
LU DP
SIC / EMS
Suppliers
End Customer
SP
LU Sales
LU DP
SIC / EMS
Suppliers
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Continued Investment in the Supply Chain

• Bell Labs Ireland is focused on Supply Chain
  Technologies (SCT) Innovations
• SCT Strategic Vision
• Provide the technical innovations that will
  allow SCN and the Lucent Product Units to reduce
  development costs through highly flexible product
  realization options resulting in a leaner, more
  cost effective product development process,
  termed the New Business Model.

• 24 Bell Labs Researchers in Ireland funded
• 12 SCN associates for In-Kind Matching
• 100 academics funded by grants to conduct Bell
  Labs-specified work program. This is known as
  Center for Telecommunications Value-Chain Driven
  Research (CTVR)
• Many opportunities for academic collaborations

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BPO Project Approach At A Glance
Overall Approach (7 - 10 months)
Key Success Factors
Feasibility Assess possible suppliers and deal
types, rate suppliers on cost, service, quality,
culture, global fit, appetite for deal

• Active sponsorship from Stakeholder and Supplier
  Mgt. throughout each phase of the project.
• Clear definition of the goals of the project,
  which usually include
• Breakthrough service delivery models
• Technology improvement, efficiency
• Cost reduction
• Scalable services
• Clear definition of scope, including functions
  and geographies.
• Project management approach, including
  cross-functional team membership from Supplier
  Mgt. and other key stakeholders.
• Adequate time to complete the project
• 7 months - 10 months

4 6 wks
Preliminary Supplier Selection Give top 4 BPO
Partners Lucents business needs including key
TCs, Partners present solutions to Selection
team and Stakeholder
6 8 wks
Final Supplier Selection Complete Phase I Due
Diligence to finalize proposals, give top
Partners a list of Lucent requirements beyond the
bid request (Ask List), negotiate face-to-face,
select 1 supplier, draft term sheet or MOU
6 8 wks
Commercial Agreement Complete Phase II Due
Diligence, negotiate final TCs, sign agreement
6 8 wks
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Project Resource Requirements
Key Success Factors
Core Team Members

• Project management should come from Stakeholder
  organization and Supplier Mgt. with a high degree
  of collaboration expected and built into the
  project plan.
• Project Resource Requirements will vary
  throughout the project.
• More Stakeholder involvement will be needed
  during
• Preliminary Supplier Selection (moderate)
• Phase I Due Diligence (high)
• Phase II Due Diligence (moderate to high)
• When new team members are added during subsequent
  phases, time is allotted to bring them up to
  speed.

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• Managing the Performance of your supplier

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Lucents Supplier Relationship Program

• The Supplier Relationship Program (SRP) is a
  process for building extraordinary
  relationships with suppliers to achieve
  extraordinary results.
• Determining the appropriate relationship level
  that will drive the extent and scope of supplier
  engagement
• An Annual Process of planning, measurement, and
  feedback
• Additional Relationship-building tools and
  activities
• Aligns cross-enterprise supplier management
  activity to present one face to suppliers.

The SRP is the vehicle for creating and improving
supplier relationships that promote Lucents
supply chain vision, mission, and strategy.
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SRP Program Overview

• The SRP provides guidelines for assigning a
  Relationship Category to a supplier
• ? Strategic ? Key Preferred ?
  Preferred ? Select
• The SRP provides an End-to-End Management view
  of suppliers
• Suppliers are engaged in an Annual Process
• Annual Planning
• Executive Sponsorship Review
• Finalize Annual Plan
• Quarterly Reviews and Feedback
• Occurring in parallel with the Annual Process
• Relationship Affirmation (Strategic suppliers)
• Relationships Management Program
• Rewards Recognition

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Sample Scorecard
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Winning Environment/Winning Team
Purchasing Magazine 2003 Medal of Professional
Excellence APICS - The Association for
Operations Management - APICS Innovation Award
(December 2004) Managing Automation Magazine
2005 Progressive Manufacturer of the Year
(Finalist as of March 2005) National Minority
Supplier Development Council 2005 Minority
Business Leader Award (January 2005) Supply
and Demand Chain Executive Magazine Pros to
Know (Steve Sherman, VP SCN Strategy March
2005) Lucent Supply Chain engineer with over 300
patents (4 patent holder in the world)

Patents Awarded
20 Patents Filed by the People of SCN in FY2005