Q. By its very nature, vendor-managed inventory requires cooperation between manufacturers and suppliers. Have you utilized it at Nortel, and how is it working out?
A. I would rather look at it as a collaborative effort with our suppliers rather than just VMI. I mean VMI is a tool or step toward a collaborative relationship with our suppliers. What I would rather do is develop a collaborative supply with them so there is a lot of shared information and planning so everybody is winning at this. We're not just taking lumps of inventory and shoving it back down the supply chain.
The real value of working closely with our suppliers is that they get fully integrated with our programs and processes so they understand our demand changes and requirements, and they react to those faster. That's the golden chalice, right? Rather than us calling and saying we need a 100 widgets, let them tell us we need 100 widgets and let them plan accordingly.

Q. Do you use Collaborative Planning, Forecasting and Replenishment, then, as one of those tools to foster the kind of cooperation you're striving for?
A. We do. I don't know that we are directly doing CPFR, but we certainly are doing a lot of electronic connection and planning with our supply base. We do aspects of CPFR. We don't necessarily use their templates and formatting. There's a whole lot of collaborating going on with our suppliers already.

Because we have such dynamic changes in our business - we're literally working at web speed; meaning that a web-year to us is three months, now; and we have so many changes going with our customer base, plus our technology, plus we've extended our supply chain so much with the outsourcing of our manufacturing to contract manufacturers - what we really need is a supply chain that is phenomenally agile. So VMI is one of the solutions that helps you get there, but what I'm interested in working on with our suppliers - the end result is that we need to supply our customers with a product the way they want it, when they want and where they want it. We're entering a lot of discussion with our suppliers that help us design our supply chain. How do we do direct-ship to our customer base? How do we make better decisions in terms of how we flow the product? When I talk about collaboration, it's not just how do we reduce inventory at the back end of our plants, it's how do we best deliver the product to our customers?

Q. So, what are you doing to bring this about?
A. Several ways. We are looking at vendor-managed type inventory solutions. We're also working on joint programs with our suppliers on some e-logistics solutions to provide greater visibility on the front end.

Over the next three months, we're going to make a whole lot of investment, in terms of how do we put web feet, if you will, on the visibility on the front end, so that everybody can see what's needed, were it's going, etc. And I think that visibility is going to create a lot of change for us. Also we're starting to get some three-way partnerships between our suppliers, our third-party logistics companies and ourselves to see how best we can leverage across the supply chain.

As an example, one of our logistics suppliers does a lot of business already with one of our contract manufacturers. So, I've gone back to them and said, 'Look, you understand their business, and you understand our business; what's the best way to get out of the box and look at the logistics flow for our products, knowing what you know about our custom manufacturers and ourselves?' So, we've actually gone to our third parties and asked them to give us such solutions.

Q. If the game plan is to create collaboration where you can, the best that you can, what is the greatest hurdle to bringing that about?
A. Probably three things: information, trust, and the ability to do it fast.
From an information perspective, we need to be able to share information in the way that everybody needs in order to make better business decisions. So, if they need information in terms of our planning cycles better than we give it to them today, then we need to devise a program that allows us to do that so that they have better information to plan their business.

Also, there needs to be full visibility of when orders are placed, when things get processed, when things get moved ... all the way down to our customers. So there needs to be transactional information available at a click.

And then trust. We need to make sure we have extreme trust in our partners, both our logistics partners as well as our suppliers.

If I had to paint 'success' for you, there's two things that I'm after in all this: One is how do we increase the efficiency of our supply chain, which will drive cost out of our business. But also, I want to get so fully integrated with our customer's supply chain [that] the logistics at that point is seen as an advantage. In order to do that, I need to build the tools and capability on the front end.

Q. The supply chain, particularly for a company like Nortel, is global, and everything you've said applies to a global chain, one presumes. Are there any particular challenges internationally that you don't have on the domestic front?
A. Well, there are several issues. One is there are really very few global players in terms of logistics that can do all the things that we need. But with the consolidation that's going on, and the 'gorillas' growing like the UPSes of the world, that landscape is changing really rapidly. In the past you really haven't had the logistics suppliers that could truly operate across the globe. There are niches, right? They're really good in certain areas, but nobody can really cross all the regions. So that needs to change, and I think over the next 12 months we going to see a major consolidation.

The second thing is because we have such an extended enterprise with our contract manufacturing on a global basis, not everybody is at the same level of capability that we need. And that's talking about our sources of material and finished goods. So that needs to be worked on.

The third piece, obviously, is even though there are a lot of regional trade agreements that are set - NAFTA, the EC, the Asia pact - it's still not as easy to cross borders as everybody thinks it is. There's still a lot of complexity across the border. We need to build in a very good international trade competency to this. We see that as one of the knowledge bases that we operate very well within Nortel. That gives us one of the tools to give us competitive advantage.

Q. Are those gaps on the international scene the weakest link in the supply chain, or is it something wholly different?
A. It's certainly one of the weaker ones, but I would say having very good information to share is probably the weakest link. I mean there is a lot of data that we could share, but to really have good information is probably difficult. And then the other thing that happens with us is that we need to have the capability to change very fast, and that's something that we're learning how to do as well.

Q. Let me ask you about the perception enterprise-wide of the logistics and supply-chain departments and their personnel. Are they seen as contributors or simply as a mechanism to cut costs?
A. We see our supply chain as probably the competitive advantage for the company. To enable that, we're establishing really strong leadership in providing supply-chain services across the globe. There's a lot of value and benefits being seen from the supply chain into the boardroom at Nortel today. It has very, very high visibility today, and logistics is seen as one of the core competencies that drives and executes that.

Q. Are you saying the battle to convince the boardroom has been won?
A. I would say it's a continual conversation, but there is a whole lot of visibility at this point. I think they understand the value.

Q. In that regard, how do you quantify the value of logistics and supply-chain operations? How do you present it to the board?
A. There are several different ways that we do that. In the logistics world, we are now driving contribution for earnings per share. We actually can show them where we are contributing at that level, at that granularity. We actually have shown - since 1997, logistics itself, as a process, has driven 5 cents per earnings per share cost reduction. We've made that kind of contribution. That sort of statement is very strong at the board level. We've also shown where we drive the improvements in the cash-to-cash cycle, which obviously is very desirable at the board level. And probably the third major level is how we're driving customer loyalty by providing best in class supply-chain services. We probably have the best global logistics network in existence today. And that is driving such competitive value right now, it's amazing actually.

Q. That must be in some way attributable to particular partners that you have? Who are they?
A. There are companies like FedEx, Emery and UPS. USCO is a major warehouse supplier. Kuehne & Nagel is another major player for us. I would say those are our critical players today - DHL, we have a program with them as well. So, there is about five or six major players in our business today, on a global basis, and we're going to try to globalize it as much as we can.
About three or four years ago, we embarked on this lead logistics supplier strategy. When I started with the company about 7 years ago, we paid something like over 1,700 different companies [for] logistics services...

Q.. ... 1,700?
A. Yep. It's a very complex business, right? So we are now at the point that over 90 percent of our logistics spend is with less than 20 companies globally. And we want to continue to keep driving that lower - and the capability is there.

Q. Has somebody come up with a figure on what you've saved by so dramatically reducing the number of providers?
A. I would say that's at about 5 cents per share. I would say that we've saved somewhere in the neighborhood between $50 and $60 million - with that program alone - over the last few years.
I want to get to the point where we are no longer in the RFQ business. I don't want to bid our business in the near future. It gets to the point where we have the logistics providers positioned in every one of our major processes, and we just extend the business to them within that process.

Q. How do you work with your 3PLs and other suppliers?
A. We have a very sophisticated metric program with our suppliers, what we call a Global Logistics Alliance Program. It's actually pretty interesting. Once a year, we bring
all our major partners together in one room, and we spend two days on strategy and setting what our metrics are going to be for the following year and then we measure ourselves against that for the next year.

We are developing a standard metrics set for all our third-party providers; so we're all going to use the same reporting mechanism starting Jan. 1 [2001]. We're going to have standard metrics across our logistics alliance.

So instead of asking them for input. We're going to hold their feet to the fire in terms of the standard performance measurement, and they're going to be expected to give us reporting on that on a monthly basis. We've now set a standard in terms of how we want to measure ourselves. And it's a two-way measurement. It's not just how they're performing, but how we're performing as a partner as well. It's critical that that's understood.

Q. As you say, you've been a logistician all of your business life. What's the most important thing you've learned, as it pertains to logistics and supply-chain management?
A. Hands down, without any question, it's relationship management. You can put any kind of systems or process in place, but it's really the people, in my opinion, that carry the business on their back, on both sides of the fence. You need to be extremely adept at how to develop very strong relationships and how to manage that both internally and externally. That's the single key to the whole success.

Q. Tell us more about managing relationships and people.
A. From a Nortel perspective, I can honestly say we are a full global organization in process. We operate in every country and region in the world basically, and have built a knowledge base of people across the globe ... to make sure that we offer a consistent service on a global basis. So, one of the biggest challenges in logistics is that we don't want to be seen as a corporate function. Rather we are a service provider, and that's a major mindset change for our people, and that's a huge evolution.

We've gone in the last three years from people understanding their customer set and requirements to serving them on a global basis. We're no longer a corporate function; rather we're a service function that gets integrated across the whole enterprise, and to me that's the real value we bring to Nortel.

So, rather than us coming into an operation with, 'I'm here from corporate, I'm here to help you', we say, 'what are your issues and requirements?' We come back to them with a logistics solution. We do that for internal and external clients. That's a really very powerful provision we do on a global basis.

It's very difficult to understand how fast we move. We ask for forgiveness more than permission at this point. But we are fully empowering the people across our organization to go and do logistics solutions, and we trust them to do that.

Our customers are changing so rapidly, we've got to be that agile.