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Lucent Technologies

( LU) is preparing to end its manufacturing agreement with

Jabil Circuit


, according to people close to Lucent.

The move is part of a bigger supply-chain realignment as the telecom equipment giant puts together plans to start next year with only two contract manufacturers, according to one source familiar with the strategy.

During Lucent's lengthy restructuring, which started after the industry's near collapse at the turn of the century, the company shifted nearly all its product manufacturing to outside contractors. In 2004, Lucent split its manufacturing duties between five outsourcing outfits.

A Lucent representative said it was too early to comment. But the rep added that the company was exploring its contract manufacturing options. "We are always looking to streamline our supply base," she said, but "we have not made any final decisions." Jabil wasn't immediately reachable for comment.

Analysts say the move isn't all that surprising, given CEO Pat Russo's push to reap greater savings through the consolidation of suppliers. By promising more business in exchange for lower charges, Lucent can presumably cut expenses by shifting manufacturing to fewer players.

There are some risks to this approach, of course. With so much production riding on two manufacturers, Lucent becomes increasingly exposed to glitches in assembly and delivery that could jeopardize sales of network equipment.

But Lucent faces few alternatives. Consolidation among phone companies will likely lead to greater pressure on gearmakers like Lucent,

Nortel Networks

( NT) and


( TLAB) to sell goods at lower prices. The squeeze from above leads to a corresponding crunch on prices at the supplier level.

Lucent spent $1.63 billion on contract manufacturing last year. The largest manufacturing partner --



-- received $750 million. Four other contractors, including


( SLR), Jabil and



, split $880 million in payments last year.

It's not clear which two contractors will emerge as winners in the Lucent lottery, but some industry observers said they were fairly confident that Celestica would retain its strong position.

Jabil is in the second year of a three-year contract with Lucent. The St. Petersburg, Fla., electronics manufacturer also counts

Cisco Systems








among its top customers. Jabil makes optical networking gear for Lucent.

Jabil shares rose 32 cents to $29.92, and Lucent was up 5 cents to $2.85 in late-day trading Monday.