Alcatel buyers focus on cost, time-to-market
Alcatel has saved millions by involving purchasers in design. Buyers push design teams to use preferred suppliers and standard parts whenever possible and make sure soon-to-be obsolete parts never make it into new products.
By James Carbone -- Purchasing, 3/18/2004 2:00:00 AM
There are many reasons why electronics OEMs involve purchasing in design. Some companies do so to make sure only preferred suppliers who have proven themselves are used in new designs. Other companies involve buyers in design to assure standard parts rather than custom components are spec'd in. And still others want purchasers involved to make sure that parts that are soon to go end of life aren't designed into new equipment.
Data communications equipment maker Alcatel involves purchasers in design for all those reasons and more. Alcatel purchasers help decide whether a product will be developed and manufactured. If a proposed new product gets the green light, purchasers are involved in deciding whether to make the product internally or outsource it to a contract manufacturer. Buyers must also decide which suppliers should be brought into the design process.
Larry Howe, senior director of sourcing technology for Alcatel, says the heavy involvement of purchasing in design has had a significant effect on Alcatel products. Alcatel has avoided millions of dollars of unnecessary costs by making sure preferred suppliers are used and that parts that are about to become obsolete never get designed into equipment. Alcatel has also reduced time-to-market for new products and improved time-to-ramp. That means the company can bring a product to market in large volumes at low cost from the beginning rather than gradually increasing production and lowering cost.
Greater emphasis
Howe says purchasing's involvement in design at Alcatel is not new. "Purchasing has been involved in design in some form or another for years. But over the past four or five years, there has been a stronger focus and more emphasis on it," he says. "There has been a lot of adding of technical capabilities into the sourcing organization."
He says purchasing's design involvement is part of a larger initiative at Alcatel to drive a standard product development life cycle across the company. "In the process, there are a series of decision reviews. The reviews start with a business case analysis at the early stage and run through discontinuation of the product at the back end," says Howe. Purchasing is involved in those reviews.
Howe says Alcatel has first decision review teams that assess proposed new products. Members include engineering, marketing and purchasing among others. The teams assess what the markets would be for products, how much demand could be expected and what resources would be needed. A key role for purchasing is to assess if Alcatel should build the product or outsource it.
If it is decided Alcatel will develop and build a product, it's purchasing's job to make sure the right suppliers are used. "Driving preferred suppliers would be a key thing that purchasing would be doing upfront," says Howe. Buyers must identify the suppliers of the key commodities and technologies for the proposed product and involve those suppliers in the design.
"Engineering counts on purchasing pretty heavily for supply chain issues," says Burt Rabinowitz, vice president of procurement and sourcing, Alcatel North America.
"We maintain a list of preferred suppliers that we traditionally work with. Engineering counts on us for our business experience with suppliers so we go to market with a supplier strategy and our manufacturing plants don't get hosed by the new product development design," he says. A plant could get "hosed" if chosen suppliers had quality, delivery or leadtime problems or used technology that did not match with Alcatel's technology roadmaps. "When we recommend a supplier for a new product solution, it is someone who has done a good job for us across the board," says Rabinowitz.
Advancing purchasing
Purchasing is involved with design in two ways. One is through commodity managers who manage preferred suppliers. The other is through an advanced procurement group, which works on design teams with commodity managers and with Alcatel's individual business units.
Advanced purchasers don't have buying responsibility, but work on design teams handling supplier issues. They tend to have technical and business degrees, although the ideal is a buyer who has both. "The reason it would be ideal is, at the same time we are making product decisions involving technology, our suppliers are making investment decisions on the components," says Rabinowitz. Advanced purchasers need to understand the technology and what it means for suppliers in terms of the investment that the supplier needs to make, which is often significant.
"We have to be able to present to suppliers the business case that encourages them to keep investing, keep believing in Alcatel and help us be successful," says Rabinowitz.
Howe adds that advanced purchasers also need to have "strong product management skills because one of their roles is to assess the situation and pull in key people as appropriate." Advanced purchasing is part of the technology engineering organization, but it is linked to the corporate purchasing organization and commodity management, says Rabinowitz. It is also linked with individual business. Advanced purchasing people work on design teams at the individual business units.
The vice president of those units "will not make a move" concerning supplier issues without first consulting with the advanced purchasing person on-site, according to Rabinowitz. "We tell advanced purchasing people they work half for the business unit and product development and the other half for commodity managers," says Howe. "Advanced procurement identifies the key commodities and technologies and pulls in the selected commodity managers to work the key deals on those," says Howe. "Commodity managers own the relationships with suppliers and provide input about the preferred suppliers and handle long-term relationships."
During new product development, advanced procurement and commodity managers work closely together. The role of the advanced procurement person is to identify key parts in a design.
"For instance, if the critical part for a new design is a network processor, the advanced purchaser would work with the commodity manager for processors and ask what's going on with the supply base around network processors," says Howe. The commodity manager would identify the suppliers that Alcatel has solid, long-term relationships with and which suppliers in the market may have cost, quality and delivery issues that may preclude them from being used in the design. "The goal is to engage the preferred suppliers first," says Howe.
If a new technology or a new commodity is involved, advanced procurement helps assess the potential risk of the new technology or commodity. The risk may be that a supplier has a great new technology, but is weak on manufacturing.
"A startup may have the latest whiz-bang thing, but may be able to build just one," says Howe. "We want to build thousands or hundreds of thousands, so we need to work with suppliers who have staying power and can build in large volumes."
Time is money
The two primary reasons Alcatel uses commodity managers and advanced purchasers are cost and time-to-market. Alcatel wants to introduce new products with the lowest possible cost from the get-go and it wants to reduce the time it takes to develop a product.
The company believes that by using purchasers in design and involving the appropriate suppliers in new product development, it has been able to reduce costs and time-to-market. "We can bring the commodity managers in and influence design decisions concerning the supply base versus being told, 'We have the design already done. Here's the four suppliers, go figure out what you can do with them.' At that point, you may have little or no leverage," says Howe.
Commodity managers and advanced purchasers influence design by pushing for standard parts rather than custom integrated circuits (ICs) when possible and using parts from preferred suppliers rather than unqualified vendors. Preferred suppliers have already gone through Alcatel's qualification process and are supplying parts in large volumes often for multiple Alcatel products. Alcatel has leverage with those suppliers because it is buying large volumes from them and can use that leverage to get lower prices on parts for new designs.
Alcatel purchasers also try to determine potential supply chain issues with a new design that may affect cost and time-to-market. For instance, if a recommended part for a new product has a long leadtime, it could delay the introduction of the new product. Alcatel purchasers do a thorough leadtime analysis for parts to be used.
To reduce time-to-market and avoid cost, purchasers may recommend suppliers who are vertically integrated. Those suppliers may build parts more efficiently and at lower costs than other suppliers who don't have the same capabilities. A simple example of this is a connector supplier who can supply not just a connector, but a wire harness for a product.
"Design for manufacturing and for supply chain are key for us, so we take advantage of suppliers' vertical integration capabilities," says Rabinowitz. "If they are going to make an investment, we're tooling up with them on the front end rather than later on to take full advantage."
Avoid obsolescence
Buyers involved in design also have to make sure that parts nearing end of life never find their way into new Alcatel products. "End of life is an issue," says Howe. "It's not only an issue on existing products that are mature. We like to leverage and re-use designs, so when you look at a new product. it may have 80% existing parts and 20% new. It could be that those 80% are at risk," he says.
To avoid the problem, Alcatel grades bills of materials (BOMs) to assure parts to be used in a new design have life cycles that match up well with the new product. "We need to make sure that parts don't go end of life before Alcatel's product goes end of life," says Howe. "That can be challenging because some of Alcatel's products have 10- to 15-year lifecycles."
Alcatel maintains a BOM grading database for parts that is available to buyers and engineers, which identifies preferred suppliers and parts and identifies if parts are at risk for end of life.
Another key issue for buyers in design is the European mandate banning lead in electronics equipment beginning in 2006. The ban means that suppliers will have to build lead-free parts and use lead-free soldering processes and materials. However, they also have to make sure that parts being supplied can withstand the higher soldering temperatures required for lead-free.
Alcatel has realized tangible results in its efforts to involve buyers and suppliers in design. Overall it has reduced its new product development time by about six months over the past five years. It has also saved millions in cost. "Alcatel has had significant cost avoidance where we save tens of millions of dollars over the length of a product by getting negotiating teams to obtain the best cost upfront instead of having a higher cost at product introduction and gradually reducing it," says Howe.
An example of this is a high-speed, high-capacity switch fabric module for one of Alcatel's next generation access products. The product had an initial target cost of $4,100, according to Howe. "By having advanced procurement involvement upfront working together with the development team, leveraging early preferred supplier involvement, commodity management negotiated long-term 'not to exceed' pricing and supply flexibility terms," says Howe. The terms were negotiated before the design award of key components. As a result, the cost of the product was reduced from $4,100 to $3,200.
"Based on projected production volumes over the next 2-4 years, the savings would yield $20 million plus over the initial aggressive target. In addition, the new cost also establishes a lower baseline for future cost reductions based on general market cost evolutions of the technology over the coming years," says Howe.
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