Lucent Technologies Leveraging a strategic supply chain

1. Lucent TechnologiesLeveraging a strategic supply chain Gary Timblin – Director, Supply Chain Networks Lucent Technologies April, 2006 Lucent Technologies – ProprietaryUse pursuant to company instruction

2. Agenda • Transformation of Lucent’s Supply Chain • Lucent’s Supplier Management Group • Outsourcing • Supplier Relationship Program • Cascaded Metrics • Results

3. Global Supply Chain Networks Jose Mejia President, Supply Chain Networks Engineering & Planning Integrated Operations Supplier Management • New Product Introduction in Supply Chain • Cost Reduction/Value Engineering • Demand and Supply Planning • Business Process Engineering • Supply Chain Architecture and Strategy • LU owned manufacturing and outsourced mfg. operations • Outbound logistics and distribution • Repair and reverse logistics • End of life and Re-use manufacturing • Supplier relationship and performance management • Global contract management • Indirect Procurement • 3rd party agreements for multi vendor solutions • Global process compliance for purchasing programs Regional Customer Support - Joint with Services Team (NAR, CALA, EMEA, China and APAC) Organized by Customer and focused on End to End delivery of products and services Regional Customer Support - Joint with Services Team (NAR, CALA, EMEA, China and APAC) Regional Customer Support - Joint with Services Team (NAR, CALA, EMEA, China and APAC)

4. SSG and INS Supply Chain Activities Engineering & Environmental Technologies (E&ET) ONG Supply Chain Activities Global Purchasing Organization (GPO) WNG Supply Chain Activities CMOChief Mfg Officer Org. • Before: • Suppliers were managed independently by individual facilities and corporate groups • After: • Single Lucent supply chain organization implementing a One Lucent virtual supply chain model Creating a Single Lucent Supply Chain

5. Supply Chain Network Team - Supplier Management Group • The Supplier Management Group is Lucent’s key owner of all procurement related activities, including Source Selection, Deal-Making, and Supplier Performance Management, specifically: • Commodity Sourcing Strategies- Sourcing Strategies ownership and management • Supplier Selection - Primary accountability in supplier selection and awarding of business- Leveraging EMS Sourcing Strategies • Global Procurement Compliance- Gatekeeper of all purchasing contracts and processes, being the single channel for all contractual agreements related to purchasing, worldwide • Net Income Improvements- Through negotiating material costs, as well as, analyzing spend trends on indirect material and services on total Lucent spend - $4B+. • Global Supplier Relationship Management- Management of all Lucent suppliers around the world (contracting and performance management) - Tightly manage # of suppliers in certain technologies while managing a growth in OEM/ODM • Regional Supplier Development- Leverage of Cost Competitive Suppliers capabilities along with Localization initiatives

6. Outsourcing Model

7. Before Beginning, Determine Strategy By Asking and Answering Questions… • (A) Identify transactional work vs. strategic level responsibilities along the value chain. • The purpose of this exercise is to explore which potential functions should remain internal to Lucent and what could potentially be outsourced. • (B) Evaluate all areas for ability to be incrementally increased/grown with chosen supplier(s). • What criteria do we want to apply to potential partners that will identify those who we will recognize as being able to support us as we move up the value chain?

8. Questions (continued) … • (C) Determine what approach should be taken to outsourcing – selective, best-in-breed, or bundled BPO; global vs. regional. • What is currently outsourced-to whom and why? What has been our approach to outsourcing thus far-think along the continuum of selective tactical activities to full scale bundled BPO? Strategic considerations and appetite for outsourcing should determine strategy. • (D) Identify the majority stakeholders whose understanding/approval/consent would be necessary to move this forward. • Whose organizations would this effect and what organizational changes would need to precede or succeed this effort?

9. Example #1: Lucent Indirectoutsourcing process • Create Advantage • Leverage spend with key suppliers across Lucent categories to build scale (e.g. Oracle) and drive advantage • Innovate • Continue to maintain control • Partner with best-in-class global suppliers • Joint product/process improvement • Supplier innovation High IT Hardware Impact on Lucent Competitive Differentiation IT Software • Leverage Advantage • Strategically source to leverage buying power • Outsource • Outsource • Use strategic sourcing strategies to drive additional cost reductions Telecommunications Professional Services Capital Equipment IT Managed Services Advertising, Print & Marketing Indus. Supplies & Equipment Leasing Travel Non-Employee Workers Area to left of blue oval indicates prime area for outsourcing Admin. Supplies & Equipment HR & Benefits Property Services Low Small Large Scale of Lucent Purchases versus Other Large Buyers

10. Example #2: What Type Of HR Transactions are typically outsourced? Companies tend to outsource more transactional type work than strategic.

11. Proprietary EMS Collaboration EMS Leverage Outsource Example #3: Direct Purchasing outsourcing process Sourcing Cells Active Optical PWBs High End Semis RF Modules BMPs Passive Optical Tactical Strategic Applications Low End Semis/Passive C&W, Connectors & Assy. Stable Emerging Commodities/Technologies

12. Information lags Information lags Delivery lags Delivery lags Over Over - - and and underordering underordering Misperceptions of feedback Misperceptions of feedback Chain accumulations Chain accumulations Supply Chain Systems Re-architecture • Where we ARE… • Supply Chain Portal - real time web-based connectivity between LU and suppliers, resulting in FY02 savings of $163M • Enabled B2B and web-based visibility with Tradestream, Lucent’s 1st global architecture • Data aggregation from 18 international LU locations, 48 global EMS partners, and 11 broker & distributor locations • Product collaboration between Lucent and global EMS partners through Genesis/Agile • Where we WERE… • Bullwhip effect on demand • Order visibility was difficult to achieve • Lack of centralized global inventory system • Collaboration architecture needed to be globally deployed • Database fragmentation and redundancy CUSTOMER INFRASTRUCTURE PRODUCTS and SERVICES SYSTEM PEOPLE REVENUE MARGIN CASH “The Bullwhip Effect” SP SP LU Sales LU Sales LU DP LU DP SIC / EMS SIC / EMS Suppliers Suppliers End Customer

13. Lucent Blanchardstown Continued Investment in the Supply Chain • Bell Labs Ireland is focused on Supply Chain Technologies (SCT) Innovations • SCT Strategic Vision • “Provide the technical innovations that will allow SCN and the Lucent Product Units to reduce development costs through highly flexible product realization options resulting in a leaner, more cost effective product development process, termed the “New Business Model.” • 24 Bell Labs Researchers in Ireland funded • 12 SCN associates for In-Kind Matching • 100 academics funded by grants to conduct Bell Labs-specified work program. This is known as Center for Telecommunications Value-Chain Driven Research (CTVR) • Many opportunities for academic collaborations

14. BPO Project Approach – At A Glance Overall Approach (7 - 10 months) Key Success Factors Feasibility: Assess possible suppliers and deal types, rate suppliers on cost, service, quality, culture, global fit, & appetite for deal • Active sponsorship from Stakeholder and Supplier Mgt. throughout each phase of the project. • Clear definition of the goals of the project, which usually include: • Breakthrough service delivery models • Technology improvement, efficiency • Cost reduction • Scalable services • Clear definition of scope, including functions and geographies. • Project management approach, including cross-functional team membership from Supplier Mgt. and other key stakeholders. • Adequate time to complete the project • 7 months - 10 months 4 – 6 wks Preliminary Supplier Selection: Give top 4 BPO Partners Lucent’s business needs including key T&Cs, Partners present solutions to Selection team and Stakeholder 6 – 8 wks Final Supplier Selection: Complete Phase I Due Diligence to finalize proposals, give top Partners a list of Lucent requirements beyond the bid request (“Ask List”), negotiate face-to-face, select 1 supplier, draft term sheet or MOU 6 – 8 wks Commercial Agreement: Complete Phase II Due Diligence, negotiate final T&Cs, sign agreement 6 – 8 wks

15. Project Resource Requirements Key Success Factors Core Team Members • Project management should come from Stakeholder organization and Supplier Mgt. with a high degree of collaboration expected and built into the project plan. • Project Resource Requirements will vary throughout the project. • More Stakeholder involvement will be needed during: • Preliminary Supplier Selection (moderate) • Phase I Due Diligence (high) • Phase II Due Diligence (moderate to high) • When new team members are added during subsequent phases, time is allotted to bring them up to speed.

16. Managing the Performance of your supplier

17. Lucent’s Supplier Relationship Program • The Supplier Relationship Program (SRP) is a process for building “extraordinary” relationships with suppliers to achieve extraordinary results. • Determining the appropriate relationship level that will drive the extent and scope of supplier engagement • An Annual Process of planning, measurement, and feedback • Additional Relationship-building tools and activities • Aligns cross-enterprise supplier management activity to present one face to suppliers. The SRP is the vehicle for creating and improving supplier relationships that promote Lucent’s supply chain vision, mission, and strategy.

18. SRP Program Overview • The SRP provides guidelines for assigning a Relationship Category to a supplier: •  Strategic  Key Preferred  Preferred  Select • The SRP provides an “End-to-End Management” view of suppliers • Suppliers are engaged in an Annual Process: • Annual Planning • Executive Sponsorship & Review • Finalize Annual Plan • Quarterly Reviews and Feedback • Occurring in parallel with the Annual Process: • Relationship Affirmation (Strategic suppliers) • Relationships Management Program • Rewards & Recognition

19. Sample Scorecard

20. Winning Environment/Winning Team Purchasing Magazine – 2003 Medal of Professional Excellence APICS - The Association for Operations Management - APICS Innovation Award (December 2004) Managing Automation Magazine – 2005 Progressive Manufacturer of the Year (Finalist as of March 2005) National Minority Supplier Development Council – 2005 Minority Business Leader Award (January 2005) Supply and Demand Chain Executive Magazine – Pros to Know (Steve Sherman, VP SCN Strategy March 2005) Lucent Supply Chain engineer with over 300 patents (#4 patent holder in the world) Patents Awarded 20 Patents Filed by the People of SCN in FY2005