Case Study

Nortel Networks Corporation’s Supply Chain

The Global Supply Chain

In order to establish a plan overseas, Nortel Corporation should take into account transportation costs and time of delivery, cost of delivery, and possible risks. Physical distribution and channels of distribution are the two basic components of the global supply chain. Both deal with physical flows and title flows. Channels refer to a number of marketing institutions linked so that titles and products can flow to consumers (Baudin 2005).

The selection of these global channels, or routes for reaching consumers, is usually based on sales, communications, and contractual considerations. The global supply chain is concerned with the physical flow of goods to markets. It views the institutions comprising channels as points of assembly and dispersion of goods. Thus it deals with the transportation, movement, loading, stacking, handling, and warehousing activities of the channel as a whole. Today, Nortel follows a product-focused production strategy through global centers focused on one particular product. “Each of “systems houses own a supply chain for a given range of products” (Nortel Corporation 2008, p. 123).

Establishing a plant overseas, it is important to take into account the location of other supply chain centers, cost of materials, and cost of production in a foreign country. In addition, Nortel should take into account packaging and order-processing activities that do not alter the physical appearance of products per se but that can damage or downgrade them. Improvements in the performance of the physical distribution functions have led to increased marketing effectiveness and reduced costs for some industries (Christopher, 2005). Not all business segments are uniformly affected. Nortel Corporation should pay special attention to the following:

  • The broad distribution of bulky products.
  • Branch warehouses.
  • Competitive customer-service locations.
  • Substantial freight costs.
  • Substantial intracompany transfers.
  • Substantial investments in warehousing space and finished goods.
  • Seasonal production or seasonal demand.

The proposed strategies will be affected by the economic and political situation in a country. The main economic indicators are high inflation rates and economic instability in a new country. Thus, improvements in the global supply chain will help to reduce certain costs and make it possible to cultivate broader markets. A unique contribution of physical distribution is its perspective. It adopts a systems orientation to plant location, transportation, warehousing, inventory, and movement and handling activities. These activities are designed as a coordinated system and linked with the other elements of the global supply chain (Cohen and Roussel, 2004).

The Market Entry Strategy

In its global expansion, Nortel Corporation following two main entry strategies: mergers and acquisitions strategy and market and a product pioneer strategy. Both of these strategies allow Nortel Corporation to achieve a leadership position and compete with medium-size and small corporations. In recent years, Nortel Corporation buys Bay Networks, and this deal allowed Nortel to enter the data processing industry. To assure profitable growth, Nortel Corporation adds new products that are tied to different phases of market development. When some products are declining, others should be enjoying market growth.

Sometimes this is achieved by a merger; sometimes, it is done internally. Regardless, the combination of the total product line as it relates to markets establishes a company’s position. Opportunity assessment, therefore, must cover a span of time and continuously add growth opportunities to a company’s present product assortment (Drejer 2002).

In order to ensure effective logistics, Nortel Corporation establishes its “own supply chain which allows managing all activities from customs initial interests to customer satisfaction” (Nortel Corporation 2008, p. 123).

The major decisions on changing product lines or automating production, for example, imply risks and should be made only after assessing the market opportunity. Thus, the choice of fundamental policies and strategies, and hence company survival and growth, depending on the opportunity. Since company resources are limited, only selected opportunities can be effectively cultivated. Technological developments and changing market environments are externally based, whereas research and development and modifications of products, packages, marketing channels, and advertising campaigns are internally based. Opportunity assessment must account for both (Bennet 1996).

Rationalization of global operations and total quality are a part of this process. For Nortel Corporation, market entry is not assured by either population growth or lower prices. Planned market cultivation through such activities as product development, credit, advertising, or personal selling has an impact on opportunities. Nortel Corporation takes into account the fact that rapidly changing technology underscores the difficulty and necessity of assessing marketing opportunities.

Technological change creates not only new products but also whole new industries. Such developments accelerate progress in such areas as electronics, miniaturization, power sources, high-temperature materials, rocket engines, and controls, all of which will have a great economic impact. Some may even result in the establishment of totally new industries. The space frontier will expand the risk-taking and thinking of businessmen into vast investments, with greater potential long-time commitments in global and interplanetary space.

Similarly, concern with the pollution of environments will result in further development of “the ecological industries” — industries focused on the maintenance and improvement of environments and the quality. Of life. The need to dispose of waste and sewage, to reduce auto and plane emissions, to control the contamination of our food, and to cleanse our air and water presents untapped market opportunities. In this decade, billions of dollars will be spent on products and services designed to meet our ecological needs (Baudin 2005).

To view the market, a company and its products should be seen in their broadest perspective. For Nortel Corporation, extended vision is required to recognize that a company is not in the television business but is rather in communications. Similarly, a company markets household environments rather than household furniture. When assessing market opportunities, executives are confronted with a spectrum of situations that vary from the relatively easy to the most difficult to assess.

At one extreme are those stable, nonperishable items that have a regular demand pattern. At the other extreme are fundamentally new products, or those with high style and high obsolescence factors. A good system of sensing market requirements provides ideas, information, forecasts, and the evaluation of their potentialities. Salesmen can sometimes provide valuable insights (Chase and Jacobs 2003).

A “systems house” and supply chain integration are seen as supportive activities which help Nortel Corporation to enter a new market and establish a leadership position. For Nortel Corporation, the management of change implies the management of new market situations, the solution of new problems on a continuous basis. Yet change is often viewed as a threat to existing profitable markets and products. In reality, it is just the opposite (Stroh 2006).

By recognizing profitable opportunities in continuing change, companies overcome threats and achieve growth. To manage change, companies must forecast developments, predict logical consequences, translate them into potential opportunities, and plan to capitalize on profitable alternatives. Therefore, create an atmosphere in which market change is expected, anticipated, and sought. To survive, business systems must adjust to environmental changes, and be flexible enough to adjust to their consequences. New products and services must be planned and developed on a programmed basis. The opportunities inherent in change must become a major focus of executives (Slack et al 2002).

Although this approach may appear to decrease economic efficiency, such a system maintains the consumer’s freedom of choice, and has led to the achievement of the highest standard of living known to mankind. But in a market-focused economy, there is a trade-off between more efficient manufacturing processes and the free exercise of consumer choice.

Control over Global Supply Chain

The control over the supply chain is exercised through process based team and “value managed relationships”. In both cases, supply chain activities are performed as a number of independent functions rather than as a system. To plan, direct, and coordinate physical distribution activities, it is desirable to group them all within a single department. This is usually achieved in retailing and wholesaling under the operations department.

Manufacturing, however, generally lacks such coordination. For Nortel Corporation, supply chain as a concept sees the physical movement of goods as a set of related activities carried on by a number of firms at various levels, linked together to form a total distribution system. Logistical decisions and the design of a company’s movement-and-storage system result from cost-market requirement analysis of alternatives. It involves a balancing of transfer costs, operating costs, and marketing factors. Transportation is the connecting link among plants and warehouses and markets. Product characteristics affect physical distribution activities.

If the markets for products are highly competitive, then physical-distribution demands are great because of product substitution, the necessity of offering adequate stocks and prompt delivery, and competitive pricing (Simchi-Levi et al 2008).

The basic job of supply chain control system is to make products available so as to support the demand-creation activities of the company. Adequate customer service may be defined in several ways:

  1. the percentage of customers who get their orders in a given number of days;
  2. the limitation of backorders to a specified level;
  3. delivery to any customer in a specified territory in x days.

Customer service also includes such components as product availability, delivery reliability and frequency, order cycle time, and stock-out percentages. The standard of customer services offered is determined by the consideration of both customers and competitors (Pfeffer and Salancik 1979). The services offered by major competitors establish a general standard. Nevertheless, management must also think of the particular impact of service variations on customer response and profitability as a guide in considering alternative physical distribution strategies.

For example, a manufacturer may decentralize processing plants to bring them close to customers where items are low in cost and price and have relatively high handling and transportation costs, as has been done with breweries. But if customers will accept longer delivery times without shifting their business to competitors, then more efficient use might be made of centralized processing facilities, and less efficient ones could be closed (Perreault et al 2003).

Nortel Corporation designs its control system to give customers the maximum service; yet they are also supposed to minimize distribution costs. The former goals suggest many distribution centers, large inventories, and rapid transportation; the latter suggests the opposite. The realistic perspective involves a balanced approach designed to develop a feasible system that satisfies customers and consumers within given limitations of cost, time, and competition. Physical-distribution decisions produce a chain reaction in marketing. They have an impact on customers, retailers, and wholesalers as well as on manufacturers’ marketing policies and vice versa.

Closing or shifting warehouses, for example, reverberates throughout the system (Paley, 2006). The major responsibility of marketing is to deliver and maintain the highest possible standard of living, to see that products and services offered for sale are those desired by consumers, and to distribute them in the most effective manner possible from the point of view of both consumers and companies. Therefore, the delineation of profitable market segments becomes critical for individual companies.

Comparison of Global strategies

Company selected for comparison is British Telecom. This is one of the leading telecommunication companies in the UK specialized in broadband and telecommunication services. In contrast to Nortel Cop rotation, BT follows adopter’s strategy. BT expends globally through global alliances such as the alliance with MCI and AT & T. This strategy allows Bt to enter new markets, but it limits its independence and strategic choices.

Similar to Nortel Corporation, BT focuses on an entire process, even though legal control may be in several hands; that is, it is frequently concerned with the linkage of several independent firms. Solutions for distribution problems require cutting through the constraints of legal and organization arrangements (Murphy and Wood, 2005), Companies must think of their independent distributors as part of their own distribution system.

The value characteristics of products should also be considered. For Nortel Corporation, valuable items bear these costs more easily than can low-value items such as lumber and coal. Variations in product lines and such features as packaging, color, size, style, and variety place a heavy burden on the distribution system. Now more products have to be handled with lower volume per item and higher costs of storage, inventory, and handling.

Transportation and handling costs, distant locations, and time are barriers to the development of markets. Through physical distribution, costs are reduced and time and geographic barriers are hurdled, thereby enabling companies to cultivate additional markets profitably. Logistical costs have, in fact, forced firms to withdraw from previously served markets (McDonald and Christopher 2003).

In contrast to BT, Nortel’s supply chain activities are dynamic, responding to market shifts and competition forces. Its policies are flexible and reviewed frequently to achieve a balance between the goals of servicing the markets and reducing distribution costs. To develop better flows of goods to customers and consumers, marketing managers must achieve a balance of physical-distribution components. BT’s uncoordinated decisions in logistics result in relatively high costs.

Modern analytical tools, new technology (especially data processing), and handling and moving equipment increase services and lower costs. The integration of vehicles resulting in the design of two-level and three-level railroad cars to transport autos, the development of containerization and special loading and unloading terminals, the use of highway transport for local pick up and delivery, and air transportation to eliminate warehouses, are examples.

Further, physical distribution is the area of marketing in which quantitative methods have been applied most successfully. Linear programming, simulations, and waiting-line theory have been used to solve problems. For instance, linear programming has been used to minimize costs of shipments and to locate warehousing facilities. Simulations have been applied to solve problems of the number and types of warehouses. The use of mathematical models may be due to the concreteness of the factors, the availability of data, and the approximate linearity of relationships as contrasted with other marketing situations (Lansdowne 2007).

Nortel Corporation follows diversification strategy. This broadening of product lines is sometimes achieved through merger. Carefully planned diversification strategies can lead to more rapid growth, better use of resources, capitalization on the results of research and development, and better fulfillment of corporate objectives. Product diversification may be horizontal, vertical, or heterogeneous.

Horizontal refers to diversification with new products in the same industry; vertical refers to movement backward or forward as in the manufacture or extraction of products that were formerly purchased; and heterogeneous diversification refers to moves to new products and industries. Product-diversification programs must be related to marketing objectives. The maintenance of profits and sales positions requires changes in product-and-service mixes — sometimes drastic changes.

A company’s product line, therefore, is far from stable, even in a five- or ten-year period. The life cycle of products dictates changes, and products in developmental phases must have sufficient market capability to overcome the loss of those in stages of decline. Multiproduct firms must have a mix that is growing in total potential and profits. Between these extremes, they may choose to be reimbursed for their original outlays while still holding a competitive advantage, and then use the advantage to increase volume and build a stronger market position.

From a social perspective, the benefits of various innovations are often challenged. Fundamental innovations that create something new in the physical sense are hailed as beneficial. Adaptive innovations, particularly those that generate psychological values and are based on style or design obsolescence, are often criticized. Yet even the latter are beneficial in a highly industrialized economy. Another strategy to spread risks and adapt to changing environments is product diversification (Kotler and Armstrong 2006).

The cases of BT and Nortel Corporation suggest that coordination of distribution activities requires a perspective that takes into account the properties of products, markets, and logistical process; the breakdown of lines among carriers and methods of movement and handling; and the development of integrated systems that utilize many physical-distribution modes in order to lower costs. Even if all these factors are considered, however, managerial and organizational limitations often prevent the reduction of costs, for the authority of a distribution manager extends only to activities undertaken after products are made (Naylor 2002).

Manufacturers like Nortel, who use regional distribution centers have the option of owning warehouses or leasing warehouse space. Leasing is a more flexible option and requires lower capital outlays. Leasing costs are roughly proportionate to volume since warehousing space can be expanded or reduced to meet needs. In determining whether to have regional warehouses, companies must balance the benefits of better delivery and services and reduced freight costs against the costs of operating such centers. Large national and international companies often own their own warehouses. They have the volume and stability of demand to support them.

Conditions in companies like BT usually favor leasing or a combination of owning and leasing. Large companies usually have several plants and several distribution centers. They must then decide what quantities to ship from each factory to each warehouse, or from each warehouse to each customer, so as to minimize distribution costs. Linear programming has been used to reach the optimal solutions for such questions. The more complex problem of future distribution-center locations to minimize distribution costs, or at least realize savings, has been approached successfully by simulation (Fill, 1999).

Supply chain approaches followed by Nortel Corporation have resulted in increasing marketing effectiveness and in substantial reduction in costs for many companies. They adopt a systems orientation to plant location, transportation, warehousing, inventory, movement, and handling activities. They have resulted in the containerization movement, the integration and linkage of various modes of transportation, and the use of computer-based information systems and models to increase logistical effectiveness.

The effect is that physical distribution has been hailed as one of the best business areas for effecting economies. Nortel Corporation focuses on specific factors influencing physical distribution decisions, and useful decision guidelines in such areas as location, warehousing, and inventory. Specific results realized from applying physical-distribution concepts and approaches are noted (Grunig and Hunt 1994).

Conclusion

Nortel Corporation develops effective strategies which helps it to achieve a competitive position on the market and enter new countries. These strategies are mergers and acquisitions, product innovation, and unique customer relationships. The global supply chain has brought a change in concept. The gap between traffic and marketing thinking is painfully evident in many companies’ distribution methods; little has been done to relate transportation methods and service to the objectives of the distribution system in support of marketing efforts Business logistics and physical distribution are synonymous terms.

The activities encompassed by these terms are concerned with the movement and storage of products and supplies to implement marketing strategies and tactics and satisfy customer needs. They focus on coordinating supply and demand and creating place, time, and possession utilities. It is concerned with achieving economies in the logistical transfer of goods from one point in the channel to another.

This situation is multidimensional and no simple definitive answer is possible. Any position taken will depend first on the perspective adopted — micro or macro. Then there are concerns with the desirability of maintaining a free market system, with companies free to introduce new products and styles and offer them to the marketplace, and consumers able to exercise a choice over a wide range of products. Questions have been raised about the productivity of individuals spurred on by altruistic motives rather than their own self-interest. Business has often argued that planned obsolescence is particularly important in creating markets in an economy of abundance, and that it creates employment opportunities and even provides used products at lower prices for people in lower-income groups.

Although definitive conclusions are not possible in the abstract, it is evident that product development has a role to play in the effective deployment of resources. Nortel Corporation links its entry and supply chain strategies concentrating on customers’ demands, customer satisfaction issues, and innovative technologies. The case of Nortel Corporation shows that physical distribution activities are diverse, and one ideal form of organization does not exist.

Decisions concerning the level of executive responsibility of the physical-distribution officers, the activities to be grouped within the department, and the functional area to which the physical-distribution department is attached, vary for similar businesses. Some general guidelines for physical-distribution organization, however, are developed. Centralized and decentralized organization structures are reviewed. A chart of the general process and activities involved in designing a physical distribution system is presented.

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