The changing face of Nortel

For most of Nortel Networks' 110-year history, the communication equipment company was vertically integrated.

It purchased most of the production materials it needed to build its gear and manufactured the equipment at its facilities around the globe. In fact, it was so vertically integrated

However, about four years ago as the communications industry was going through its worst downturn ever, Nortel decided it was time to do things differently.

It determined that outsourcing was the way to go. It decided to sell off its semiconductor, power systems and optoelectronics divisions. It also began to divest itself of its manufacturing plants, selling them to electronics manufacturing services provider (EMS) Flextronics. That company and a handful of other EMS providers and original design manufacturers (ODM) now handle most of Nortel's manufacturing. Those manufacturing partners build Nortel's wireless networks, voice-over IP, optical networking, multimedia communications, and other equipment.

To support the outsourcing model, purchasing at Nortel needed to change. Purchasing had been decentralized at Nortel with a lot of procurement handled by individual business units, although there was a corporate purchasing organization in place.

The company decided it needed to have a strong centralized purchasing operation to manage its manufacturing partners and key strategic commodities, to formulate supply strategies, and to develop a unified process for choosing suppliers and evaluating their performance.

"The vision we have at Nortel is to move the function to a strategic role," says John Haydon, vice president of global supply management at Nortel, based in Brampton, Ont., Canada. Haydon oversees a $6 billion annual-spend with suppliers.

"Nortel is a technology driven company. The challenge is to blend our technology heritage with our supply management knowledge and really get the whole supply chain working end to end."

Although Nortel is technology driven, it still needs the technology of suppliers. "We are good at systems architecture, and to set that systems architecture, we need a thorough understanding of what is going on at the component level," says Haydon. "We need good strong partners who can use their technology to complement our technology. We had to evolve our engagement model and listen to suppliers."

In the past, Nortel may not have been the best listener or an easy company to work with from a supplier point of view. "Suppliers said it was hard to do business with Nortel," says Joanne Read, leader, business operations for Nortel. "With the size of the company we had, suppliers were not sure who to contact to make sourcing decisions. There were multiple points of contacts back then."

Make it clear

To make it easier to do business with Nortel, supplier management developed its supplier-business engagement model.

"The supplier business engagement management model provides clarity to Nortel suppliers on how to establish and meet our contractual commitments and conduct business," says Jason Picco, project manager of the supplier-business engagement model. "It makes it clear what our expectations are. It puts in place a level playing field for everyone. It provides a collaborative organization and decision-making process on how we source the best in class suppliers," he says.

Key to the supplier-business engagement model is Nortel's supplier portfolio teams. The teams manage certain product commodities and are responsible for developing strategies and evaluating the supplier's performance. Nortel has portfolio teams for software, network solutions and alliances, network field services, hardware, design services and components, corporate business service (indirect procurement), and manufacturing services.

Because Nortel has outsourced much of its manufacturing over the last several years, the manufacturing services portfolio team has been busy developing outsourcing strategies.

"As we move from decentralized to centralized, we are cutting our EMS guys down from four to two," says Haydon. "With ODMs we have been as high as nine and now we are at three or four."

Haydon says Nortel's strategy is to use EMS and ODMs to build different types of equipment. "We use ODMs in our enterprise business, which is more or less consumer oriented," he says. "The product lifecycles are short. So it is advantageous to work with someone with design and manufacturing capabilities. With our carrier business, optical products' life cycles are longer and the business is just as competitive as enterprise these days, but you need someone who has a global footprint for manufacturing. EMS companies provide that," says Haydon.

ODMs typically have strong design expertise as well as manufacturing know-how. EMS providers historically have been strong with manufacturing, but weaker with design, but that is changing.

"I think it is getting blurry between EMS and ODM. Many EMS companies now are doing design on the front end and are investing in design so that EMS is like the ODM model," he says.

In developing an EMS strategy and deciding whether to use EMS providers or ODMs, the manufacturing services team has to take more into account than design expertise.

Think globally

Nortel's manufacturing partners must have a global footprint.

"If you look at the global market, there are hot spots where you want manufacturing capability," says Haydon. He says Nortel needs manufacturing in Eastern Europe, Mexico and China.

"Now India is opening up. They have outstanding capability for software and it is a growing source of hardware. You will see the EMS industry move into India in a bigger way," he says.

EMS companies have manufacturing in those locations now, but ODMs are concentrated in Taiwan. "ODMs use fast turnaround and great designs, but they don't have manufacturing reach into those areas," says Haydon.

It's not just having manufacturing in certain areas of the world that is important. Nortel wants its manufacturing partners to be agile and flexible and have the capability to move manufacturing to a certain area of the world if necessary.

"As the market moves around and you have to look at customs and duties. You have to make sure you can move production around at the same time," says Haydon. "EMS has a global footprint to move around without investing per se so if you want to move manufacturing from Eastern Europe to Mexico, the infrastructure is already there," he says.

To support global production as it moves around, Nortel has set up a supply chain center in Shanghai and plans to open several others in different regions. "We will have one in Mexico and Eastern Europe and India," says Haydon. "What these offices do is allow us to be closer to our suppliers who are in these areas."

The offices will also monitor the developing supply bases in those regions. "We are continuing to look in the marketplace for high quality suppliers to work with," he says. "Each day there is opportunity in India and China. Not as much in Eastern Europe and Mexico, but I think over time you will see the supply chain get established in those regions."

Haydon says the supply chain offices are somewhat similar to international procurement offices (IPOs) because they will help to identify new suppliers. But the offices do other things like check out a supplier's quality and work with suppliers to set up supply chain architecture to support the manufacturing of Nortel products.

EMS role

While the supply chain offices help Nortel identify emerging sources of supply and monitor a supplier's quality, Nortel will also rely on its outsourcing partners to handle much of the sourcing of lower-value production components and materials.

"We have a solid belief that we have to give more responsibility to the EMS industry," says Haydon. "We have Nortel-controlled and supplier-controlled commodities. The commodities that are supplier controlled give the suppliers complete authority on who they use and what prices they pay, assuming the suppliers meet our quality, reliability and dependability requirements for products," he says.

"However, products that are severe cost drivers or technology enablers, we keep the contracts ourselves. We negotiate the price and terms but we pass contracts over for management by EMS providers," says Haydon.

One example of a Nortel-controlled commodity is digital signal processors. "We contract with a number of DSP providers and pass the contracts to our EMS providers," he says. The providers buy off that contract.

"With resistors and printed circuit boards, we don't get involved with suppliers other than making sure our quality, reliability and dependability specifications are achieved," says Haydon.

One reason that Nortel keeps control of certain key commodities such as DSPs and optical components is that it needs access to new technology. Supplier management works closely with suppliers on technology roadmaps.

"Our supplier-business engagement model and our supplier management teams are engaging DSP providers and optical providers trying to define these roadmaps and influence a supplier's R&D outside of Nortel," says Haydon.

Call the authorities

Supply management function owns the relationship with suppliers concerning technology roadmaps and brings in design authorities to meet with suppliers concerning their roadmaps.

"Design authorities are individuals in our R&D organizations that represent Nortel on a common platform," says Haydon. "They sit on portfolio strategy teams, work through the technology roadmaps with individual suppliers and bring back that information into Nortel so a supply strategy can be developed for the component," he says.

Supply management also brings in key suppliers to new product development projects.

"The earlier you can bring suppliers into a project, the better the product you're going to end up with," says Haydon. He says EMS companies are also often brought into new product development as are component suppliers such as Texas Instruments, Freescale, Agere, Agilent, JDU, and Bookham.

"What you are seeing is a three-way decision between Nortel, component suppliers and EMS and ODM suppliers," he says. The idea of involving suppliers is to make sure Nortel releases new products in a timely fashion that have the latest technology at the lowest cost.

Fewer the better

Those suppliers that are brought into new product development are often strategic suppliers—the cream of the crop of Nortel's supplier roster. Nortel also has preferred suppliers and approved suppliers. Nortel is moving more business to strategic suppliers, says Read.

"Our goal is by 2006 to have 55% of spend with strategic suppliers," she says. About 35% should be with preferred suppliers and the rest with approved suppliers by 2006. In 2004 about 25% of Nortel's spend was with strategic suppliers.

"By the end of 2006 we want to have 90% of spend with about 180 suppliers," says Read. Of the 180 suppliers, 30 to 50 would be strategic; 75 to 100 in the preferred category. By comparison in 2004, 75% of Nortel's spend was with 167 strategic and preferred suppliers.

Obviously it is in a supplier's best interest to try to become a strategic supplier because it means more business. Strategic suppliers are automatically included in new bids. A preferred supplier may not be.

Besides more business, there are other differences between strategic, preferred and approved suppliers. For one thing strategic suppliers get more attention.

"We have supplier relationship managers who are responsible for preferred and strategic suppliers," says Haydon. "They are single points of contact for the supplier into Nortel for technology, commercial or legal discussions."

A strategic supplier has a dedicated supplier manager. A preferred supplier shares a manager with other suppliers. Nortel also does quarterly business reviews with strategic suppliers, but biannual reviews with preferred suppliers.

"We also do technology roundtables with strategic suppliers," says Read. That's where technology roadmaps are shared.

Because Nortel has embraced the outsourcing model, its future success will be dependent on now well it chooses and manages its strategic suppliers.

"If you take a look at our strategy, it goes back to the fact we can't do it all ourselves," says Haydon. "We need suppliers and we need them to perform well."