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Transforming Nortel’s Logistics Practices: Charting a Course to a Variable-Cost Logistics Model

Joe Grubic

During the late 1990s and early 2000s, Nortel Networks undertook a major transformation of its supply chain on a scale and scope, which at the time, was unprecedented in the networking industry. The goals of this transformation, which involved the entire end-to-end supply chain, from sourcing to manufacturing, to logistics to installation – were to drive greater efficiencies, make it easier for customers to do business with the company and create a faster, more flexible, and more agile supply chain for the delivery of end-to-end networks.

A key enabler of that transformation was the decision to move from a vertically integrated model – where most supply chain activities were done in-house – to a virtually integrated model that leveraged the capabilities of strategic suppliers by outsourcing and divesting those parts of the business that were no longer a competitive advantage in-house. As a result, Nortel Networks improved its leverage of the economies of scale offered by its suppliers, realized significant cost reductions and increase its competitiveness.

Also central to this transformation was the creation of virtual end-to-end supply chain teams to support specific customers and/or clusters of customers, as well as single points of accountability (Customer Operations Leaders) for managing the customer’s experience across the supply chain and beyond, from the time an order is placed, to when the customer network is operational, and through to post in-service support. The right tools gave these teams the ability to proactively manage the end-to-end supply chain. Of particular importance were visibility and event management capabilities that helped coordinate and integrate the information for managing material flows.

Making the transition from a fixed to a variable-cost logistics model posed numerous challenges to Brampton, Ontario-based Nortel Networks. Complicating Nortel’s transformation was the telecommunications sector’s sudden and unprecedented decline in demand after a period of soaring growth. This article looks at the challenges Nortel Networks faced and how it realized success.

A closer customer alignment brought a deeper understanding of customer requirements, as well as valuable insights into how to increase agility and flexibility to better respond to ever-changing customer demands.

Also, embarking on this supply chain journey clearly helped to minimize some of the external pressures associated with this sector’s market downturn. For example, it contributed significantly to Nortel Networks’ ability to quickly ramp down to meet the realities of a recessed market environment, while maintaining consistent and aggressive pressure on the competition.

Five steps to a more agile logistics model

An important success factor in this overall supply chain transformation was an equally dramatic shift in the company’s logistics business model. The transition to a variable-cost logistics model involved five strategic phases: inventory reduction, supply chain analysis, footprint reduction, warehouse closures/renegotiations, and supply chain synchronization.

Inventory reduction

The first step in the transition, inventory reduction, took on particular importance given the market environment at the time.

Between 1998 and 2000, Nortel Networks had expanded its global logistics network to both support the rapid surge in demand (Nortel Networks’ revenue grew 72 percent up to (U.S.)$30.3 billion during this period) and manage orders from the growing number of supply points that stemmed from outsourcing and divesting the bulk of its manufacturing to contract manufacturers. As well, the company put in place strategically located warehouses within each region globally to integrate and marshal orders from the different supply sources prior to delivery to the end-customer. By 2001, Nortel Networks had approximately 2.5 million square feet of warehouse space.

During this period of high growth, driven primarily by the Optical Networks segment, inventory in regions close to the customer was increased to keep ahead of anticipated demand. Optical components were in short supply and this inventory helped to ensure a sufficient supply to meet aggressive customer timelines, grow revenues and gain competitive advantage. Further, the creation of Customer Fulfillment Centers (CFCs), which were co-located with global multipurpose warehouse facilities called Logistics Operations Centers (LOCs), also helped position unassigned finished goods inventory closer to the customer. These CFCs maintained an inventory of ready-to-go product dedicated to individual customers or customer clusters, while the LOCs housed product inventory and installation-related material. The LOCs also served as distribution and marshaling centers, consolidating all products and equipment necessary to ship and install a complete network order.

From 2001 onward, however, the demand for optical networks began a dramatic slide, and the warehouse network suddenly housed a significant amount of excess inventory, a situation that complicated the move to a variable-cost logistics model. Slow-moving inventory consumes warehouse space and can weaken a company’s leverage with logistics service providers (LSPs) when negotiating for increased variability in pricing terms. This is because it reduces the productive space that would otherwise provide the LSP with potential revenue opportunities.

Declining demand put increased focus on reducing all types of inventory, including pre-process materials, manufactured finished goods, purchased finished goods, assigned finished goods and customer-owned inventory. At the same time, the company took the opportunity to streamline other inventory management systems it used, such as Enterprise Resource Planning (ERP) systems, Material Resource Planning (MRP) systems, Warehouse Management Systems (WMSs), legacy applications, and even manual spreadsheets – to created unprecedented efficiencies in inventory management.

"From 2001 onward the demand for optical networks began a dramatic slide and the warehouse network housed a significant amount of excess inventory – a situation that complicated the move to a variable-cost logistics model.”

The implementation of warehouse management systems across most of the LOCs helped address this challenge, as did integrated web-based tools that provided inventory updates and visibility in those locations, such as temporary project warehouses, where investment in a warehouse management system could not be justified. The result was a consolidated view of inventory across the entire logistics network. This much-improved visibility also allowed other organizations within the company to effectively manage and reduce inventory.

As a result of these initiatives, inventory levels in Nortel Networks logistics networks fell by more than two-thirds between 2001 and 2002.

Supply chain analysis

The second phase involved a complete analysis of the supply chain to determine the future requirements of the logistics infrastructure.

With outsourcing, the traditional manufacturer/customer relationship would become more complex and require a more thorough understanding of supply chain product, information and financial flows. Understanding these flows, which were expected to become even more fluid and dynamic, would be critical to aligning the logistics strategy to current and future business requirements. Today, for example, it is not uncommon for a single customer order to include several transactions, involving both internal and external purchase orders with various Original Equipment Manufacturers (OEM) suppliers and/or contract manufacturers.

Some of the challenges in this phase involved understanding and provisioning for various factors that could potentially impact the degree of supply chain flexibility. For instance, what would be the impact on order lead times and inventory if a supplier chose to relocate its manufacturing plant to another continent? Would the company’s systems still be integrated with the supplier for order-status updates and delivery-status information?

These and other potential influencing factors were included in the supply chain analysis, which involved a review of the entire distribution infrastructure and led to a redefined logistics strategy with regard to such items as warehouse locations, cross-docking and marshaling requirements, order fulfillment inventory and service. As well, as the business stabilized, a better view emerged of the future capacity requirements for the logistics network, easing the challenge of more closely aligning this logistics network with business and customer service requirements.

During this stage, Nortel Networks made the critical decision to outsource global management of its logistics operations to Kuehne & Nagle LeadLogistics (KNLL), a fourth-party logistics provider (4PL). KNLL became the single point of contact between Nortel Networks and the services of multiple third-party LSPs worldwide, and assumed responsibility for the performance of these LSPs. For the most part, Nortel Networks had already outsourced to third-party LSPs all existing in-house operational logistics activities, such as transportation, warehousing, export readiness and customs brokerage activities.

The objective was to leverage KNLL’s resources, capabilities and technology to further develop, integrate and optimize the supply chain network across the various third-party LSPs. The divestiture to KNLL was notable because it was the first of its kind within the industry on a global scale.

The decision to divest to KNLL was based on the following business rationale:

In summary, leveraging logistics capabilities externally would enable Nortel to put a stronger value proposition – increased supply chain visibility, reduced cost, and improved service levels – in front of customers.

Footprint reduction

The third phase involved reducing fixed infrastructure and other costs within the logistics network. The result? The company reduced its warehouse footprint by more than 60 percent. This was a significant as the logistics warehouse network was primarily managed through fixed-contractual relationships with logistics service providers (LSPs).

Warehouse closures/renegotiations

The next step engaged the LSPs to review ways to reduce costs in such areas as transaction-based and variable-pricing models, footprint reductions, sub-lease opportunities and operational consolidations. Most LSPs rose to the challenge. In instances involving dedicated warehousing operations, the level of support received was dependent on the ability of the LSP to bring in other clients to take over or sub-lease the space Nortel Networks no longer needed. Additionally, opportunities to sub-lease the space depended on the capital investment to separate the space for additional clients.

The company also investigated whether it should close some operations in some facilities, based on a calculation of the termination costs and an understanding of the liabilities as they related to the terms and conditions of the associated LSP agreements. Factors in this decision included such items as unamortized capital, severance liabilities, loss-of-profit compensation, real estate lease obligations and facility leasehold improvements.

The company reduced its warehouse footprint by more than 60 percent. This was a significant as the logistics warehouse network was primarily managed through fixed-contractual relationships with logistics service providers (LSPs).

Next, Nortel considered opportunities to renegotiate agreements with particular LSPs. It might have been possible, for instance, to move operations from one facility to another that was managed by the same LSP. The LSP may have had other clients interested in sub-leasing the facility.

Supply chain synchronization

The final step was the evolution to a synchronized supply chain, – an ongoing process that the company continues to pursue.

Synchronization is the strategic implementation of tools and processes that optimize inventory flows, transportation and other touch-points within the supply chain. Requiring extensive collaboration among supply chain trading partners, supply chain synchronization leads to a variable and flexible logistics network that minimizes inventory levels and transaction costs and optimizes inventory flows.

One of our primary objectives in moving to a fourth-party logistics provider was to leverage KNLL’s IT infrastructure and toolset to promote this synchronization between Nortel Networks and its supply chain trading partners. The success of this evolution depends on tools and processes as well as the buy-in of people across Nortel and its supply chain providers. It needs to be a win-win situation for both parties.

As these synchronization efforts continue, the anticipated supply chain efficiencies are beginning to be realized. Already, for instance, a synchronized supply chain has delivered a greater level of visibility, enabling the company to more accurately time the release of inventory from its suppliers and better execute and synchronize the timing of shipments and product delivery to customers.

Further synchronization will require a collective agreement on the key metrics defining acceptable performance to ensure that all parties are contributing to some of the company’s key objectives of revenue growth, minimized costs, improved asset utilization and ultimately, shareholder value.

Nortel Networks is aggressively pursuing these initiatives and expects to see significant improvements to its supply chain from an increasingly flexible, variable-cost logistics network – improvements that will provide end-to-end order visibility and supply chain command and control capabilities.