OfficeMax is an office supply retailer facing challenges from the economic recession. To improve operations, the company's Supply Chain and Inventory Management teams collaborated on initiatives like optimizing delivery routes, schedules, and loads. This reduced miles driven by 24% and store inventory by 16% while maintaining availability. OfficeMax showed that internal collaboration can enable significant supply chain improvements, even during difficult economic conditions.

1. In The Real World
OfficeMax (www.OfficeMax.com) sells office supplies, office
furniture, and office technology through a network of more than
800 stores. In the face of a tough economy and the need to
improve supply chain operations, OfficeMax found that
increased collaboration between different internal groups
delivered significant benefits. Reuben Slone, Executive Vice
President of Supply Chain, and Nikhil Sagar, Vice President of
Inventory Management, describe how these improvements were
achieved.
While OfficeMax was in the midst of executing a major
turnaround plan, the onset of the “Great Recession” set a much
greater hurdle, calling for it to overcome the effects of rapidly
shrinking sales and volatile fuel costs. More than ever,
OfficeMax had to deliver greatly improved working capital
productivity and cost productivity levels while maintaining the
customer experience through strong product availability. The
case for internal collaboration was never stronger.
This was also the time that an economic value added (EVA)
mindset was being developed within the company. EVA training
was widely rolled out with the help of the University of Notre
Dame, and caused a much greater focus on asset and working
capital management.
Reuben Slone, Executive Vice President of Supply Chain, called
his team together and communicated his vision for the
transformation needed to overcome the new economic
challenge. The Supply Chain team had already established a
powerful track record of delivering strong results against the
turnaround plan, but the challenge at hand now called for the
team to reach new and higher levels of performance, and
develop and implement strategies that made conscious trade offs
between supply chain operational costs and working capital
productivity. The Supply Chain Operations and Inventory
Management groups were asked to challenge each other's

2. assumptions. This was not going to be easy—there was a lot of
high performing talent in both groups. These were people that
now had to work together on the same team.
Guidelines for the internal collaboration were established. All
parties on the project were declared equal, no existing practices
were considered sacred, and all parties were encouraged to
question everything. The project group would make fact-based
decisions, not emotional reactions, and the EVA model would
be used as an empirical framework for decision making. The
team was given a clear set of priorities—product availability,
working capital productivity, and cost productivity. And finally,
business goals were revised to reflect a broad set of shared
supply chain outcomes.
Interpersonal relationships were focused on open discussions
between the Supply Chain Operations and Inventory
Management teams to discuss past problems (perceived or real)
and close collaboration was strongly encouraged between the
two teams. For example, a territorial mindset would no longer
be tolerated, and a good idea would be a good idea, regardless
of which team it came from. A low-cost team-building event
was held to help lay the foundation for this new collaborative
working model.
These guidelines and the resulting collaboration delivered a
highly effective solution to the challenge. The team improved
the use of delivery truck storage volume (known as cube
utilization) through modification of limitations on stops per
truck. They established the optimal number of deliveries for all
stores based on the EVA model. By comparing delivery costs
with working capital, the EVA model offers a very relevant
framework for making supply chain trade-offs between
operating cost and working capital.
The model's strength lies in its ability to compare the impact of
decisions on post-tax net operating profit with the opportunity
cost of working capital invested to implement that decision. In
the delivery example, the team estimated the working capital
impact of progressively increasing delivery frequencies to a

3. store. This was done across clusters of stores grouped together
based on similar sales-velocity levels. The EVA model was then
used to identify the inflection point for each store velocity
group—essentially the point at which the trade off was EVA
positive—and this was used as the ideal delivery investment for
that store group.
Clearly, higher-velocity stores deserved higher delivery
frequencies, because they had the potential to sell more
inventory. This model, however, allowed people to make the
intuitive decision more of an exact science, allowing them to
save valuable delivery-cost dollars without hurting service
levels and minimizing the working capital impact. The
functional teams worked together to allocate delivery
frequencies down to the individual store level. In addition to
looking at quarterly store rankings based on sales, they also
incorporated unique location level constraints (such as isolated,
single-store deliveries with higher cost per delivery) through
collaborative review with the Transportation team.
The team modified delivery spacing to maximize productivity of
deliveries through more even balancing of the point of sale
(POS) capture between multiple deliveries. This ensured that for
a two-delivery-per-week store, each replenishment run should
target three or four days of sales. For a three-delivery-per-week
store, each replenishment run should have two or three days of
sales.
They next moved the creation of replenishment delivery
schedules from evening to morning. When the deliveries were
being created in the evenings, the POS capture for the current
day were not completed yet, so the delivery plan was based on
the POS movement up to the previous day only. By moving the
delivery-creation process to the following morning, an
additional day's worth of POS movement was captured, reducing
the latency of the plan, without increasing the overall lead time,
since the execution against the delivery plan was still allowed
to commence at its normal time every morning.
The team also created Opportunistic Delivery Skipping—by

4. introducing a check into the delivery schedule-creation process
to eliminate extremely low cube loads. The inventory
management group developed and executed the criteria for this
check. They used criteria such as store-in-stocks measured as a
percent of SKUs within a store that had one or more units on
hand, ensuring at least one delivery a week and avoiding two
consecutive skips.
The team then implemented palletization of loads—enabling
easier loading and offloading, and allowing for reduced
handling costs at distribution center (DC) and store level. The
quicker receipt process at store level also enabled greater store
flexibility around receipt planning; weekend deliveries and a
broader receipt window being a couple of the favorable
outcomes.
Next the group worked with OfficeMax's third-party
transportation carrier, Werner, to migrate from a graduated stop
charge to a flat stop charge. And finally, they shifted the
delivery-truck trailer-storage capacity target from 1800 cubic
feet to 2500 cubic feet.
All of this work resulted in breakthrough results. The total
number of miles driven to retail stores was reduced by 24
percent, or 6.9 million miles, from 2007 to 2009. Store
inventory shrunk by 16 percent year-over-year, while
maintaining a record low number of stock outs per store.
OfficeMax proved that internal collaboration enabled
unprecedented supply chain improvements despite the
extraordinary challenges of the Great Recession.
Reuben Slone is Executive Vice President, Supply Chain for
OfficeMax. Harvard Business Review published two of his
articles: “Leading a Supply Chain Turnaround” October 2004;
and “Are You the Weakest Link in your Supply Chain?”
September 2007. In May 2010, Harvard Business Press
published his book, The New Supply Chain Agenda: The 5 Steps
that Drive Real Value.
Nikhil Sagar is Vice President, Inventory Management for
OfficeMax. He is the author of the article “CPFR At Whirlpool

5. Corporation: Two Heads and An Exception Engine” Journal of
Business Forecasting, Winter 2003–2004 and one of the authors
of the article “Forecasting and Risk Analysis in Supply Chain
Management – GARCH Proof of Concept” published in the book
Managing Supply Chain Risk and Vulnerability.
(Hugos 83-87)
Hugos, Michael H.. Essentials of Supply Chain Management,
3rd Edition, 3rd Edition. John Wiley & Sons (P&T), 2011-07-
11. <vbk:9781118279229#outline(3.5.1)>.
2B: Nanjing Chuangqi Auto Parts Company
Introduction:
In this case study, you are being asked to decide how this auto
parts firm should react to a change in international alignment.
Should they expand? How should they adjust their supply
chain? Each student will have the opportunity to consider the
effects of these policy decisions on an international supply
chain.
Tasks:
· Read the case “Nanjing Chuangqi Auto Parts Company” from
Bowon Kim: Mastering Business in Asia - Supply Chain
Management.
· Identify the situation that this business is facing.
· Consider and evaluate how this business should manage their
supply chain in the future. What decision would you make:
Should I carry on with expansion plans or should I focus on the
two current projects to gain scale economies? If I expand,
should I buy equipment or subcontract?
· Construct a final decision (proposal) utilizing elements of
supply chain management and business strategy. Comment on
the strengths and weaknesses of your decision and the
probability of success.
Deliverables and Format:
Submit your answer in a Microsoft Word document in 800-1000
words.

6. CASE STUDY: Nanjing Chuangqi Auto Parts Company
Alan (Wenchu) Yang prepared this case under the supervision
of Professor David Sharp solely to provide material for class
discussion. The authors do not intend to illustrate either
effective or ineffective handling of a managerial situation. The
authors may have disguised certain names and other identifying
information to protect confidentiality.
Ivey Management Services prohibits any form of reproduction,
storage or transmittal without its written permission. This
material is not covered under authorization from CanCopy or
any reproduction rights organization. To order copies or request
permission to reproduce materials, contact Ivey Publishing, Ivey
Management Services, c/o Richard Ivey School of Business, The
University of Western Ontario, London, Ontario, Canada, N6A
3K7; phone (519) 661-3208; fax (519) 661-3882;
[email protected].
Copyright © 2001, Ivey Management Services Version:
(A) 2002-02-12
It was nearly 11:00 p.m. on June 9, 2001. Zhu Yongjian, general
manager of Nanjing Chuangqi Auto Parts Company, had just
come home. As was his custom, he switched on his TV and was
unexpectedly drawn to an item on the CCTV evening news:
China and the United States had reached agreement on China's
joining the World Trade Organization (WTO). The news was
important for Zhu because he was in the automobile industry,
which would be significantly affected by lower vehicle import
duties. To date, Zhu had been planning to expand the company's
product line from universal joints and steering shafts to the
more sophisticated and perhaps more profitable steering column
module. However, he was not sure whether to invest in the
manufacturing equipment needed to make steering shaft
columns in-house, or to subcontract. The CCTV news forced
him to rethink his expansion plans. He knew he didn't have

7. much time to make a decision.
China's auto industry
Historical overview
Before 1950, all automobiles in China were imported. In the
early 1950s, the Soviet Union helped China set up its first
automobile plant, First Auto Works (FAW), in Changchun, to
produce trucks under the Liberation brand name. In the 1960s,
China built the Second Auto Works (SAW) in Hubei Province,
which made trucks under the East Wind brand.
In 1978, the year when China's “open policy” started, China had
only one car works, located in Shanghai, which made the
Shanghai brand sedan. The annual national output of all cars
and trucks was just under 200,000, far fewer than the average of
a single major Western automobile assembly plant.
In 1979, Volkwagon set up a joint venture (JV) in Shanghai, the
first in China's automobile industry. Peugeot followed suit,
setting up a JV in Guangzhou to make the Peugeot 505 series,
and Chrysler established a JV in Beijing to make the Cherokee
Jeep series. These “Big Three” dominated China's car market in
the late 1980s and early 1990s.
In the early 1990s, Volkwagon set up its second JV in China
with FAW. This event was the beginning of a second wave of
foreign investment in the automobile industry. From the mid-
1990s, many international automobile giants, including Honda,
Suzuki, Renault, Mercedes-Benz, Toyota, Nissan, GM, Volvo,
and Ford, set up JVs–almost the only effective way to access
the China market due to the 170-per-cent import duty. Most of
these companies made family and official cars. A few made
trucks, limos, vans, and special-purpose vehicles.
During the same period, several local automobile works
emerged. Many of them were low-volume private enterprises or
township enterprises. They made pick-up trucks, minivans and
low-capacity trucks. By 1997, China had several hundred
registered automobile works. Their production varied from less
than a hundred vehicles to over a hundred thousand vehicles
manufactured per year. The total output of non-agricultural

8. vehicles in 2000 was about 1.5 million.
The agricultural vehicle market
The Chinese vehicle market could be segmented into
agricultural and non-agricultural use. Agricultural vehicles
included tractors, harvesters, and sheltered mono-cylinder and
dual-cylinder motorcycles. However, in the late 1990s, this
rural market was moving toward light trucks and pick-up trucks.
Most of these factories were small scale, and low in technical
content and research and development capability compared to
non-agricultural vehicles manufacturers. Many were just
assemblers that bought different components from
subcontractors and piecing them together. Agricultural vehicles
were usually 20% cheaper than non-agricultural vehicles–even
when they were similar in capacity and quality. In most cases,
price was the most frequently used weapon in the agricultural
market.
Nevertheless, with their financial status improving, farmers
were becoming more demanding for quality, service, fuel
economy, safety, and driving comfort. It was widely agreed that
the boundary between two segments was becoming blurred and
the gap was likely to narrow further.
Company background
History
Zhu Yongjian had graduated with a bachelor of science degree
and worked as a journalist for over 10 years before setting up a
trading firm in Nanjing in 1993 with his own savings and money
borrowed from relatives and friends. The company was named
Chuangqi, which translated to “creating a miracle.”
Following Deng Xiao Pin's South China trip, China's market
economy reform went into high gear. He saw an opportunity to
realize his dream of owning his own business. “So I left my job
without hesitation,” he said. The company was set up in such a
rush that it had neither a target market nor a target product on
which to focus. “We traded whatever was popular and
profitable,” said Zhu. “We flirted with garments and apparel,
chemical products, industrial control appliances, computer

9. software, almost anything.”
By the end of 1994, the company had three business divisions, a
turnover of RMB1.7 million, and over 14 staff. But Zhu began
to lose control. In 1995, the company's overhead was so large
that it barely broke even. “True, the trading business became
much tougher compared with 1993, entertaining customers was
important. But I totally lost control over expenditures,” said
Zhu. At the end of 1995, Zhu finally gave up trading and
summarized his lessons learned: “First, trading does create
value; second, a bad accountant can kill your business.”
Zhu decided to go into manufacturing. After careful research, he
decided that the automobile industry was attractive. “There
were only 1.2 vehicles per hundred households in China. In the
United States, it was 81.” At this point, he was introduced to Mr
Tao, who had been a chief engineer in a local state-owned
vehicle steering system factory before his retirement two years
previously. He had a big network. But what interested Zhu most
was Tao's technological know-how in making universal joints, a
basic unit in vehicle steering systems. They agreed to cooperate
with each other: Zhu offered capital investment and Tao offered
technology.
After leasing 1,100 square meters of workshop space in an
empty plant, designing a product and buying and installing the
necessary equipment, the factory began trial production of
universal joints with the so-called “one-step shaping method”
on April 18, 1996. Two months later, the company officially
produced its first universal joint. In mid-1999, Chuangqi
launched its second product: a steering shaft module. By 2000,
the revenue was over RMB3.1 million (see Table 2.1).
Table 2.1 Balance sheet December 31, 2000 (in RMB)
ASSETS
Current assets
Cash and short-term investment
384,252
Accounts receivable
1,542,124

10. Other receivables
2,210
Inventory
1,749,330
Amortization
225,286
Total current assets
3,903,202
Fixed assets
Fixed assets
1,771,784
Less: accumulated depreciation
255,650
Net fixed assets
1,516,134
Total fixed assets
1,516,134
Invisible and deferred assets
Total invisible and deferred assets
106,000
TOTAL ASSETS
5,525,336
LIABILITIES
Current liabilities
Accounts payable
578,623
Accounts prepaid
10,000
Other payables
1,185,216
Welfare payable
110,793
Tax payable
5,047
Other unpaid
21,017

11. Pre-collected
17,677
Total current liabilities
1,928,374
Long-term liabilities
Bank loan
378,925
OWNER'S EQUITY
Capital
3,080,000
Retained earnings
138,038
Total owner's equity
3,218,038
TOTAL LIABILITIES AND OWNER'S EQUITY
5,525,336
Sales
3,132,380
Less: cost of goods sold
2,188,887
Selling expenses
221,608
Sales tax and auxiliary
18,266
Sales profit
703,620
Plus: income from other activities
-
Less: administration cost
213,711
Depreciation
123,190
Interest
23,321
Income from operating activities
343,398

12. Plus: Income from financial activities
-
Other income
-
Less: Other expenses
-
Plus: Subsidy
-
Earnings before income tax
343,398
Less: Income tax
35,464
Net earning
307,934
Organization
The company had a functional organizational structure (see
Figure 2.28). Zhu was the general manager. He communicated
on a daily basis with managers from four departments:
financial, production, technical, and sales. The production
department was the largest, with three teams: two for two
product lines, and an engineering team for quality control and
maintenance. There were three people in the sales department, a
sales manager and two sales engineers. Each sales engineer was
responsible for a product line. They received a base salary plus
1.5% of sales as commission. However, the commission could
be drawn only at the end of the year. “Small as it is,” said Zhu,
“the technical department is the most valuable department of the
company. Tao produces better designs and engineering than our
competitors. We have no doubt about our quality.”
There were 26 salaried staff in the factory. The average monthly
salary was RMB1,800 for managers and RMB950 for front-line
workers. In addition, all staff could expect a year-end bonus
equivalent to two months' salary if sales and profit budgets were
met.
“For an SOE (state-owned enterprise) to achieve our efficiency
and productivity, it would need at least 10 to 15 more people.

13. How can they compete against us on cost?” commented Zhu.
Figure 2.28 Organizational chart
Chuangqi's first product: The universal steering joint
A vehicle usually comprised several main modules such as the
chassis, steering, engine, electrical circuits, brakes, etc. Each
main module comprised several sub-assemblies.
A steering system module typically consisted of three sub-
assemblies: a steering wheel module, a steering column module,
and a steering gear module. The rotation of the steering wheel
was transmitted to the steering gear through the steering shaft.
The steering gear module then converted the rotational
movement to horizontal movement that moved the front wheels
of vehicles to the left and right through the steering lever and
steering joints.
Inside the steering column module were the upper shaft and
lower shaft. The upper shaft was attached to the steering wheel,
and the lower shaft to the steering gear. The two shafts were
connected by a universal joint.
There were two ways to make a universal joint: casting and
forging. Traditionally, almost all Chinese universal joint makers
used the casting method. “It's an easier method and the
technology requirement is low. All you need is a mould and a
miller,” explained Tao, “but forging is different. The joints
made in this way are stronger due to the internal molecular
structure of steel. Besides, you don't have to worry about
defects such as air bubbles and cracks that often occur in cast
universal joints,” said Tao. “So forged universal joints sell at a
10% to 15% premium.”
One-step shaping
Conventional forging required three or four steps in the shaping
process. However, Tao had developed a one-step shaping
method, in which the rough steel plate was punched and bent
into shape in a single step. “The advantage is that we have a
much lower reject rate and higher efficiency,” explained Zhu.
“We have a cost advantage of at least 10% over other forged

14. universal joint manufacturers.”
The production process
A large piece of raw steel plate (2 meters × 6 meters × 7
millimeters) was cut into smaller T-shaped pieces with a
punching machine. The T-shaped rough mold was then threaded
on one side, and two holes drilled on the other side. The drilled
rough mold was then pre-bent and shaped by a hydraulic press.
At this point, the shaped rough piece was called an “ear.”
Finally, two “ears” were bolted together with an outsourced
cross-bolt to make the universal joint (see Table 2.2). Punching
and drilling were currently subcontracted at about RMB1.30 per
piece.
Universal joints were primarily sold to steering shaft factories
and steering column module factories. Very few were sold
directly to automobile works. Chuangqi produced over 90,000
universal joints in 2000, about 13,000 of which were sold with
their own steering shaft sub-assemblies and the rest to external
customers. In 2000, over half of Chuangqi's total production
was sold to 11 different steering column factories.
We serve the agricultural segment. Chuangqi is a small player;
we have neither capacity nor brand image. Our advantage is low
cost. Besides, the agricultural segment grew faster than the non-
agricultural segment. We have been growing at over 20% for the
last few years. There are more than 80 steering shaft module
makers and roughly the same number of steering column module
makers in China. The number may fall as mergers and
acquisitions occur, but the overall production capacity is likely
to expand. There is the demand, after all.
Table 2.2 Cost breakdown for universal joint (in RMB/Unit)
Rent
0.90
Direct labor
2.10
Indirect labor
0.30
Insurance

15. 0.22
Third-party processing fee
2.20
Power
1.30
Light and heat
0.40
Materials
11.50
Supplies
0.90
Repairs
0.12
Total production cost
19.94
Selling expenses
1.40
General administration
1.20
Depreciation
0.70
Interest
0.30
Total cost
23.54
Chuangqi's second product: the steering shaft module
The steering shaft was the mechanism that connected the
steering wheel to the steering gear. The rotation of the steering
wheel was passed through the steering shaft to the steering gear.
The steering shaft module was the inside part of a steering
column module.
There were two types of steering shaft module: straight-shaft
and universal joint connected. The straight shaft type was a
simple steel shaft directly connecting the steering wheel to the
steering gear. With no universal joint, it was easy and cheap to
make, but it was very difficult to install and too rigid to absorb

16. the shocks from bumpy ground. Before the 1980s, almost all
Chinese agricultural vehicles used this type of shaft.
In the universal-joint type, an upper shaft and lower shaft were
screwed to a universal joint. The structure allowed the steering
shaft to move flexibly, thereby reducing the shocks of bumps.
Drivers enjoyed a higher degree of comfort, while the steering
shaft was more durable due to lower metal fatigue.
The decision to make steering shaft modules
Universal joints were described as chicken-bone products.
“Large SOEs were not interested in this kind of small business,”
commented Zhu. In 1995, there was no strong competition
among suppliers because few SOEs and private firms were in
this business, especially the agricultural segment. “We were
almost in a niche market,” said Zhu.
In the first two years, Chuangqi's universal joints were sold at
about RMB38 to RMB40 per piece. However, as private
enterprises flourished, many small family workshops began to
make cast universal joints at a lower cost. “The market price
began to plummet. By mid-1999, it had dropped to RMB30,”
said Zhu. “There were several hundred factories making
universal joints. We could survive only by increasing our
margin somehow.” At this point, an important automobile
steering column factory in the province, impressed by
Chuangqi's product quality, expressed interest in appointing
Chuangqi as a vendor of steering shaft modules if Chuangqi
could make a quality steering shaft module at a good price.
The inquiry triggered the management team to evaluate the
possibility of making steering shaft modules. They found that
the margin on steering shaft modules was much better than that
of universal joints and the company was technically qualified
for designing and making steering shaft modules. The most
exciting finding was that the up-front investment could be
limited to RMB200,000. The management team decided to go
ahead.
In October 1999, Chuangqi began to provide over 300 sets of
steering shaft modules per month to Yangzhou Zhongxin. “Once

17. again, we proved our technical competence,” said Tao.
The production process
First, the raw steel shaft was machined by a lathe. Then the
machined steel shaft was milled by a thread miller on both ends
and its surface coated with nylon. The shafts were screwed to
each side of the universal joint. A sealed rubber anti-dust cover
was finally put on the shaft (see Table 2.3).
Currently, shaft milling and nylon coating were subcontracted at
RMB25 per piece. The rest was done in-house.
Table 2.3 Cost breakdown of steering shaft module (in
RMB/Unit)
Rent
1.20
Direct labor
6.30
Indirect labor
2.70
Insurance
0.89
Third-party processing fee
25.00
Power
4.30
Light and heat
2.10
Materials
42.00
Supplies
6.10
Repairs
0.25
Total production cost
90.84
Selling expenses
3.50
General administration

18. 3.30
Depreciation
2.20
Interest
0.70
Total cost
100.54
Market
Most steering shafts were sold to steering column module
factories and the rest to automobile works. By 2001, Chuangqi
produced over 13,000 sets of steering shaft modules for three
steering column module factories. Zhu was optimistic that they
could increase the figure by 30% in 2001 if conditions were
favorable.
The market price of a steering shaft had remained relatively
stable at RMB130 to RMB150 per unit. Usually a 10% to 15%
discount was granted to customers.
A steering column module, the next move?
A steering column module consisted of a steering shaft, a steel
column, a forged aluminum cover and some standard bolts and
bearings. A conventional steering column served merely as a
platform for attaching the steering system to the automobile
body. However, the steering column had become more
sophisticated both in style and function. For example, the new
generation of steering columns was integrated with not only the
automobile body, but also the instrument panel and ignition
switch. Its height and angle were also adjustable.
Production
There were several steps to the production of steering column
modules: die development, material cutting, welding, assembly,
and inspection.
Because different models of automobiles had totally different
steering system designs, the specifications of columns varied
from model to model. For each model, a die was needed.
The outsourced steel plate was cut to size, put into a die and
pressed by a hydraulic press into a semi-column shape. Two

19. semi-columns were welded to form a full column. A steering
shaft was then put into the column. Each opening of the column
was sealed with an aluminum cover made with powder metal
technology. Finally, components such as supporting stands were
welded to the column (see Figure 2.29).
Figure 2.29 Product Diagrams
Source: Company files
Incentives to make the steering column module
Cash flow and bad debts
Receivables were a headache for many Chinese firms. As the
market economy matured in the 1990s, credit sales became an
important competitive issue. However, the practice was very
risky, because it usually took a seller several months or even
years to receive payment–if it was received at all. The
receivable turnover cycle depended on the industry structure,
product, competition, and relationship with the customer.
Generally, it was easier and faster to collect payments from
financially strong, established companies.
“Another characteristic was that the further you are away from
the end-user, the longer you wait to be paid,” said Zhu. “You
don't get paid until your customer gets paid. It's like a chain
reaction, you can't blame them.” As a result, receivables for
universal joints took about four months, and for steering shafts,
three months. A level of bad debts between 10% and 15% of
receivables was considered reasonable in the industry.
“But steering column module factories were fortunate. They
sold directly to the automobile works. They don't hold the
payment on small stuff like steering column modules for very
long,” said Zhu.
Competition
Zhu had heard that one universal joint competitor was making
steering shaft modules. “As margins keep shrinking, it's hard to
make a living with only universal joints. People are likely to
take the next step and make steering shafts,” said Zhu. “I could
smell the competition just around the corner.”

20. Market
Although some steering column modules were sold to steering
gear factories, most were sold directly to automobile works.
Chuangqi was targeting over 20 pick-up truck factories. All of
them already had reasonably stable steering column module
vendors. As pick-up trucks were premium products in the
agricultural vehicle segment, their factories had much more
formal management. It was difficult for those factories to shift
to other vendors unless they offered substantial economic value.
Zhu hoped to produce 10,000 sets during the first year of
production. He hoped to achieve the sales volume with one
large customer instead of several small ones due to the die
development cost. He also estimated at least RMB150,000
would be needed to launch the new product.
The current market price for a pick-up steering column module
was about RMB350. Customers could usually expect a 10% to
20% discount from vendors. Most factories used a direct sales
approach instead of distributors. Unlike universal joint
customers, steering column module customers were more
interested in quality and delivery, and were less price-sensitive.
Up-front investment
Some equipment and production preparation was necessary if
Chuangqi were to make steering column modules (see Table
2.4). According to Zhu, preproduction investment was a “hard
area”–investment was absolutely essential for manufacturing.
Production equipment itself was less urgent: Chuangqi could
subcontract pressing and welding. Zhu estimated it would cost
at least RMB33 to subcontract the processing of one piece of
steering column module given a volume of about 1,000 pieces
per month. “But you lose control over delivery time and
quality,” added Zhu.
Zhu decided to lease at least another 500 square meters of
workshop space for pressing and welding. He was quoted
RMB0.35 per square meter per day, RMB0.10 higher than what
he had paid when he had first leased the current workshop five
years before.

21. He planned to employ at least six more front-line workers: two
for pressing and welding and four in assembly. One more sales
engineer for the new products would be hired. “I would
probably spend more time on the steering column module
product launch,” said Zhu. “The up-front marketing campaign,
including advertising in trade magazines, networking with
potential customers, and participating in trade shows would cost
at least RMB60,000.”
Material costs included steering shaft costs and extra material
costs. Zhu estimated that extra material would cost
approximately RMB20. The new production would also mean
considerably more maintenance, supplies, and power, about
three times more than was used in manufacturing universal
joints and steering shafts (see Table 2.5).
Table 2.4 Up-front investment involved with in-house
manufacturing (in RMB)
Manufacturing equipment
200t hydraulic press
112,000
60/80t hydraulic press
86,000
Electric welding machine
17,600
Arc-welding machine
23,000
Production preparation
Tools and jigs
37,000
Die development
81,000
Research and development
98,000
Staff training
38,000
Assembly workshop renovation
56,000

22. Table 2.5 Projected variable costs (in RMB)
Manufacturing in-house
Subcontracting
Direct labor
6.30
4.00
Power
11.00
7.00
Direct material
137.00
137.00
Indirect material
20.00
20.00
Supplies
8.00
1.10
Repairs
1.10
0.20
Subcontractor fee
33.00
Incremental fixed cost
Equipment
238,600
-
Production-preparation cost
310,000
310,000
Rental for larger space
63,000
-
Marketing expense
60,000
60,000

23. Other A&M cost
15,000
10,000
Commercial risk
The move would definitely hurt Chuangqi's other products
because almost all steering shafts and half of universal joints
were sold to steering column module factories. Making steering
column modules would turn Chuangqi into a competitor to those
customers. “How would they react?” wondered Zhu. “Is it worth
losing, say, half of my existing universal joint and steering
shaft business?”
Besides, Zhu knew it was no easy job to persuade a pick-up
truck factory to change vendors. “I don't think we could win a
customer unless we offered a 20% price advantage. But could
we stand any retaliation?” he asked himself.
Decision
The CCTV news added to Zhu's concerns. After joining WTO,
import duties would ultimately fall from 170% to 25% over five
years. Although agricultural vehicles were not likely to be
influenced overnight, the pressure for cost reduction would soon
emerge. “Should I carry on with expansion plans or should I
focus on the two current products to gain scale economies? If I
expand, should I buy equipment or subcontract?”
(Kim 107-122)
Kim, Bowon. Supply Chain Management in the Mastering
Business in Asia series. John Wiley & Sons (P&T), 10/21/05.
<vbk:9780470826089#outline(2.3.2)>.
Read “In the Real World” in Michael Hugos: Essentials of
Supply Chain Management, answer the following questions:
• Comment on the indicators that this executive has chosen to
monitor. Do they provide information about the entire supply
chain's performance?
• What metrics would you consider to improve the
identification of supply chain performance? Why?

24. 2-3 pages in length. APA citations with 2 or more references.