Alcatel-Lucent targets TCO in design
Upstream involvement of purchasing in design has helped Alcatel-Lucent reduce new product costs by 50%.
By James Carbone -- Purchasing, 3/13/2008 2:00:00 AM
At Alcatel-Lucent involving purchasing in design is not an option—it is a requirement.
That's because the company takes a holistic approach to new product development with a keen focus towards total cost of ownership (TCO). Its goal is not only to design and build equipment that is technologically and functionally advanced but also make sure the equipment has the highest quality levels and the lowest possible cost of ownership.
"That's why purchasing is involved upstream," says Jerome Krieg, vice president of purchasing for the enterprise business group of Alcatel-Lucent, based in Colombes, France.
The enterprise group designs and builds private automatic branch exchange (PABX) systems, terminals and communication servers. Purchasing provides its expertise to design as a member of "core" design teams, along with engineering quality, manufacturing and marketing. Those teams develop new products.
Krieg says members of his group who work on design teams have strong design backgrounds and can form the link between the design team and the supplier. They are degreed engineers.
"I try to have people who have five to 10 years of design background," says Krieg. "We have people who can challenge the designers to make sure they are not over specifying, but they also promote new technologies that are coming from suppliers and understand what the design team needs."
Krieg adds one of the upstream duties of buyers involved in design is to align the company's purchasing strategies with the technological roadmap of the business division.
"We have to have those two strategies match to get the best purchasing mix, not only lowest cost, but also the best supply chain flexibility and the lowest risk level," he says.
Time is also a major factor: leadtimes of components, flexibility of suppliers and timing a new technology's introduction are all important pieces of the total cost equation. For instance, purchasing must provide input on when it makes sense to introduce a new product that uses a new technology. If a new technology is introduced too early, there may not be enough suppliers in the market and "we may be dependent on one single player," says Krieg. "If we are too late, maybe we miss a competitive opportunity."
Buyers involved in design at Alcatel-Lucent also screen the markets for available technologies. "We also talk to the design team to have a better understanding of their needs are and develop a supply strategy so we are ready when a new product with a new technology is starting," says Krieg.
How sweet it is
Brad Magnani, senior director development engineering for the enterprise business group, works with Krieg on design issues and says purchasing provides input on when a part reaches its "sweet spot," the time when the part is made in volume by a number of suppliers and the pricing is favorable.
"For instance, purchasing helps us to decide whether we should spec in double data rate (DDR) DRAM, DDR2 or DDR3 or some other type of memory," says Magnani.
While engineers know the technology advantages of the different types of memories, purchasers provide input about the supply base and availability and pricing trends.
Although buyers involved in design spend a lot of time evaluating new technology they must also keep a watchful eye on older technology parts. "Goal number one is to make sure that end-of-life parts don't get designed into a product," says Magnani. "We have to make sure we don't have to design products twice."
It is not just a matter of having to redesign a product. When a part matures, there is usually less demand and suppliers cut back production and some may cease making the part. Sometimes there may be a sole source. With a sole source, it is hard to have any purchasing leverage and there could be availability issues if the supplier doesn't produce enough parts.
Cost is everything
While timing concerning new and mature technology is important in design, so is total cost of ownership. At Alcatel-Lucent, TCO includes inventory, design changes, quality and leadtimes.
For instance there is a cost associated with inventory. "But sometimes we get vendor managed inventory from suppliers so that decreases TCO for us," says Krieg.
He says changing a component in a design can impact TCO so "we have to take that into consideration." A new component could involve a process change or might result in the need to use other components further impacting cost.
Of course there is always a cost associated with poor quality parts from suppliers because defects can result in line shutdowns, field failures and higher warranty costs. But Alcatel-Lucent also "looks at cost of quality associated with a supplier that is brand new vs. a supplier that has been in the market for a long period of time," Magnani says.
A new supplier may be improving its quality, but an existing supplier may have already invested in quality systems. A new supplier producing lower quality parts will have an impact on TCO of end equipment.
Quality is one reason Alcatel-Lucent is designing in common components across its product lines.
"We want to deliver fewer defects to customers," says Magnani. "One way we do that is by re-using design circuits and components that are known to be superior in quality."
There is also a leverage advantage because the more one part is used in designs, purchasing volumes increase and the unit price goes down.
Time is money
Purchasing involved in design at Alcatel-Lucent also factors in leadtimes into TCO. "If I am on a highly leveraged design team, I want the lowest overall cycle time and operations," says Magnani. "I can't afford to have 16-week leadtime on resistors. There have to be popcorn parts available. ASICs (application specific integrated circuit) leadtimes need to be four to eight weeks, not 16–24."
Another part of TCO is the return policy of parts. "Buyers factor in whether parts from a supplier are non-cancellable, non-returnable. Says Magnani, "If parts are returnable is there a fee? That will go into some our decisions."
He says that purchasing upstream involvement in design has paid off and new product costs are reduced 50% because of the cross-functional approach that involves purchasing in new product development.
Early purchasing involvement in design results in components being available for new products for rapid time to market and introduction of early prototypes, he says.
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