Metrovox is considering outsourcing the assembly of either the Bugabyte or Terabyte Lite. The Terabyte Lite is the better candidate for outsourcing for several reasons: 1) Its assembly process is well-established whereas the Bugabyte's is complex and proprietary; 2) Outsourcing the Terabyte Lite would free up capacity to focus on the unexpectedly high demand for the Bugabyte; 3) Demand for the Terabyte Lite is stable whereas demand for the Bugabyte is unpredictable. To ensure quality control and coordinate shipments, Metrovox should implement a vendor-managed inventory system with its supplier and customers to share inventory data in real-time.

1. Shannon Pickering
Supply Chain Management: Case Study 1
Shannon Pickering
GermanelectronicsmanufacturerMetrovox recentlydecidedtofocusitseffortsontworelated
productsit manufactures,whichare intwoverydifferentstagesof the productlife cycle.The Bugabyte
isa videoandaudioplayerMetrovox recentlyintroducedtothe marketplace. Demandforthisproduct
isunstable anddifficulttopredict,butisexpectedtogrow inupcomingyears.Metrovox hasplaced
considerable resourcesintoitsresearchanddevelopment,andproprietaryinformationisusedtotestits
circuitboards. However,the developmentof the Bugabyte hasledtoproductiondelaysanda30% late
deliveryrate,due toitsvideocapabilities.The Terabyte Lite isaflashdrive andMP3 player.Ithas been
inthe marketplace forsix years,andat the maturityphase of the product life cycle.Demandforitis
expectedtobe lowtomoderate,butstable. Itsassemblyandtestingprocessiswellknown,andthere
are manycompetitorsinthe marketplace. Recentlythe Terrabyte Lite hasbeengivenanew product
name,and itsdesignchangedtocomplementthe Bugabyte. Forbothproducts,qualityisapriorityover
cost, andproduct differentiationisitsmaincompetitive advantage. Toreduce productiondelaysand
late shipments,Metrovoxwilloutsource assemblyof one of the products,andhave hiredmanufacturing
consultingGrunwaaldandVogal toassisttheminselectingone productasthe bestcandidate for
outsourcing.
1. Basedon the riskfactors associated withthe Bugabyte andTerrabyte Lite,the Terabyte Lite isthe
bestcandidate foroutsourcing.Forbothproducts,riskscommonlyassociatedwith outsourcing,
such as lossof control overquality wouldbe aconcern.However,asa new product,outsourcingthe
Bugabyte carriesadditional risks.Informationontestingthe circuitboardforthe Bugabyte is
proprietary.Outsourcingthisproductincreasesthe chancesthatthisproprietaryinformationwill be
uncovered,andcompetitorswill be able toemulate the process. Furthermore,the assemblyprocess
for the Bugabyte ismore complex,increasingthe riskof error,as well asinincreasedcostsfor
establishingthe productionprocessinanew facility.Terrabyte Lite hasawell-establishedassembly
processand useswidelyknownproducttestingpractices. Since the Bugabyte isexpectedtobe a
source of companygrowthinthe nearfuture,itwouldbe wise tomaintaincontrol of the product.
2. By outsourcingproductionof the Terrabyte Lite,Metrovox willbenefitinmanyways.Outsourcing
the Terrabyte Lite will free upcapacitytomanufacture the Bugabyte, allowingthemto better
manage the unexpectedlyhighdemandfor the Bugabyte.Furthermore,since the assemblyprocess
for the Terrabyte Lite iswell-established,manycompetitorsexistanditstestingprocessiswell-
known,anotherorganizationmaybe able toproduce the Terrabyte Lite at a lowercostthrougha
more efficientassemblyprocess.Havingthe productassembled byone of Metrovox’s suppliersin
Chinawouldalsoresultinreducedlabourcosts.
Since demand of the Terrabyte Lite isstable, itiseasiertodevelop adeliveryschedule forassemblersto
adhere to.It reducesthe risksof late shipmentsfromthe suppliers,and lessexcessinventorywould
needtobe keptonhand to manage unexpectedfluctuations indemand. Since demandforthe Bugabyte
isunstable,more inventorywouldneedtobe kepttomanage demandspikes,andassemblersare more
likelytoproduce late shipments.Withthe Terrabyte Lite beingoutsourced,Metrovox hasconsiderably

2. Shannon Pickering
more control overthese factorsthan it wouldif the Bugabyte waschosenforoutsourcing. Itbetter
enablesMetrovox allowitsvendorstomanage inventory,therebycreatingefficienciesinthe supply
chain.
Anotheradvantage to outsourcingthe Terrabyte Lite isthat Metrovox maintainscontrol overproduction
of the Bugabyte.Lossof control overproduct qualityisa majorriskin outsourcing,animportant
considerationsince Metrovoxconsidershighqualitystandardsapriority. Furthermore,product
differentiationisconsideredtobe bothproduct’scompetitiveadvantage. Circuitboardtestingforthe
Bugabyte uses proprietary information,whereas the productionprocessforthe Terrabyte Lite iswell-
known.Outsourcingthe Terrabyte Lite allowsMetrovox tomaintaincontrol overthe proprietary
informationassociatedwiththe Bugabyte.Since the Bugabyte isexpectedincrease indemandoverthe
nextfewyears,therebydrivingrevenue growthforthe organization,Metrovox wantstobe especially
diligentinensuringqualitystandardsare met andproprietaryinformationisnotunearthedby
competitors.The failure of the Bugabyte tomeetthe qualitylevelsexpectedbycustomers, orthe
availabilityof lowerpricedbutsimilarproducts mayresultin serious financial consequencesfor
Metrovox.
Metrovox has also alreadyestablishedthe productionprocessforthe Bugabyte.Sincethe production
processisfor the Bugabyte iscomplex,itwouldbe more expensive tore-establishinanotherlocation,
comparedto the Terrabyte Lite.
Thoughthere are manyadvantagestooutsourcingthe Terrabyte Lite,disadvantagesalsoexist. One
majordisadvantage isthatMetrovox will lose some control overthe qualityof itsproduct,whichisan
importantconsiderationsince qualityisextremelyimportanttothe product’scompetitive advantage.
Since bothproductsare deliveredinthe same shipment,will have toco-ordinateproduction and
shipmentswiththe supplier,andhavingthisproductoutsourced maystill leadto late orincomplete
shipments. Byhavinganothersupplierinvolvedinmanufacturingtheirproducts,there isalsothe riskof
confidentialinformationortrade secretsbeingdiscoveredbycompetitors. Thisconsiderationis
especiallyimportantif the supplierislocatedinChina, aspatentlawsare more lenientthaninother
parts of the world. However,itshouldbe notedthatthese riskswill existnomatterwhich productis
chosenforoutsourcing.
Althoughoutsourcingthe Terrabyte Lite mitigatesthe risksof productiondelaysandlate shipments,it
doesnotfullyeliminate the possibilityof these issuesoccurring. If demandforthe Bugabyte continued
to rise unexpectedly,Metrovox ismore atrisk of shippingdelays thantheywouldhave beenif the
Bugabyte hadbeenchosenforoutsourcing.A majordisadvantage of outsourcingthe Terrabyte Lite
insteadof the Bugabyte isthat Metrovox isless equippedtohandle anotherunexpectedincrease in
demandforthe Bugabyte.Havingthe assemblyprocessforthe Bugabyte establishedintwolocations
wouldmeanthatthere were more resourcesavailable tohandle ademandspike.Metrovox mayfindit
still doesnothave enoughcapacitytoavoidshippingdelays andmayneedto addadditional capacity
or outsource more of its production if demandforthe Bugabyte continuestobe unexpectedlyhigh.
3. In orderto mitigate the risksassociatedwithoutsourcing, andestablishthe foundationrequiredto
developastrategicsupplierrelationship Metrovox wouldneedtoaddressthe following contractual
issueswithitssupplier:

3. Shannon Pickering
ServicesProvided
Metrovox wouldwanttooutline the servicesthatare tobe performedby the supplierandassembler.
For thisparticularcase,assembly,testing,hiringandtraining,procurementof raw materialsand
shippingare examplesof servicesthatwouldbe providedbyasupplier.
QualityAssurance
Metrovox wouldwanttoensure the qualityof theirproductdidnotdeteriorate asa resultof
outsourcingitsassembly.Itwouldbe important toinclude productspecificationsinthe contract. This
aspectof the contract wouldinclude materialsusedandanyprocesses importanttothe quality of the
product,such as the solderandsolderingprocessused.Theywouldalsoneedtoincludelengththe
productis expectedtolast,inthiscase 10 years,and maywant to consider askingthe supplierto
provide awarranty.Testingrequirementswouldalsoneedtobe includedinthe contract,aswell as
acceptable defective rates.SinceproductqualityissoimportanttomaintainingMetrovox’s
competitiveadvantage,itwould alsoneedtoinclude finesorotherrepercussions forfailingtoadhere
to the expectedqualitystandard.
ShippingandLogistics
An importantconsiderationinoutsourcing the Terrabyte Lite isthatitstill hasto be inthe same
shipmentasthe Bugabyte inorderto satisfythe needsof the distributorsandretailersreceivingthe
shipments. Inordertoachieve thisobjective,itisimportantthatany supplieradheretothe delivery
schedule Metrovox provides.The contract wouldneedtoinclude deadlines andconsequencesforlate
shipments.The processforunifyingthe shipmentof these twoproductswouldneedtobe outlined
including,INCOterms,methodsof transportationused,anddeliverypoints.Furthermore,since the
circuitboards are fragile,Metrovox maywantto specify the packagingusedtoprotectthe productfrom
damage while intransit.
Confidentiality
Althoughthe productionprocessof the Terrabyte Lite iswell-known,Metrovox maystill have trade
secretstheywouldlike toprotect.A confidentialityclauseinthe contractwouldprohibitsuppliers
fromsharingany confidential informationMetrovox provides withoutsidesources.
PaymentTerms
Metrovox andthe supplierwouldneed tonegotiateaprice formanufacturingthe Terrabyte lite.They
wouldalsoneedtonegotiate where,whenandhow paymentsare made,the currency tobe used,and
howpaymentswere calculated.Paymenttermswouldalsoincludeitems thatwere includedand
excludedinthe payment.A paymentschedule,includingpaymentdue dates, wouldalsoneedtobe
includedinthe contract.Discountsare anotherconsiderationwhichmaybe includedinthe contract.
Lengthof contract

4. Shannon Pickering
Metrovox wouldhave toinclude the datesforwhichthe contract tookeffectandwascompleted.
Metrovox wouldalsowantto include eventsoractivities thatcouldresultin the terminationof the
contract and renewal procedures.
Orderingprocedures andInventoryManagement
The contract wouldhave tooutline orderingproceduresandinventorymanagementprocedures. It
wouldwantto include the size of orders,the inventorylevelsthatwouldwarrantareplenishmentof
stock,proceduresforplacingorders,andhow inventoryinformationandorderplacementwouldbe
communicated. The supplier’srolein inventorymanagement wouldneedtobe defined,forexample
whetheravendormanagedinventorysystemwouldbe used, orif Metrovox wouldplace orders as
needed.
Standards
Metrovox wouldwanttoinclude safetystandards andworkingstandards the assemblerandsupplier
are expectedtoadhere to,includinglabourconditions,wages,machinery maintenanceandbuilding
maintenance.
Assemblyprocedures
The contract wouldneedtoinclude assemblyprocedures,includingequipmentand componentsused,
testingrequirements andanacceptable skill level foremployees.Itwouldalsoneedtoinclude
benchmarksformeasuringperformance.
4. In orderto ensure qualityandcoordinate shipments,Metrovox needstodevelop strategicsourcing
strategy.Inthissituation,vendormanagedinventorywouldbe beneficialtoensure efficienciesinthe
supplychain. A systemwhere itssupplierhadaccessto Metrovox’sinventorymanagementsystem
and Metrovox hadaccess to the distributorsandretailersinventorymanagementsystemwouldbe
mostbeneficial,because of the geographicdistance betweenMetrovox,itssuppliers,andthe retailers
and distributorsitsellsitsproductto. Havinga vendorphysicallyshow upandreview inventorymaybe
impractical because of the distance thatwouldneedtobe travelledtodoso. Furthermore,itallows
informationtobe sharedinreal-time. RetailersanddistributorswouldprovideMetrovox withreal-
time informationoninventorylevelsforthe Bugabyte andthe Terrabyte Lite,and Metrovox would
provide itssupplierwith itsreal-time inventorylevelsforthe Terrabyte Lite. Metrovox anditssupplier
wouldbothsendreplenishmentordersof acertainquantityonce inventorylevelswereatcertain
level,withthe suppliersendingorderstoMetrovox,andMetrovox sendingorderstothe distributors
and retailers. ThissystemisbasedonMetrovox maintainingacertainlevelof Terrabyte Lite inventory
to meetretaileranddistributorrequirementsforbothproductstobe deliveredinthe same shipment.
Since demandforthe Bugabyte isunpredictable,andMetrovox ismore knowledgeable aboutlead
timesandthe productionprocessthenthe retailersanddistributorsitsellsto,itislogical foritto
manage the inventoryforretailersanddistributors. Demandisrelativelystable forthe Terrabyte Lite,
whichreducesthe risksof receivinglate shipmentsfromitssuppliers, andmakesiteasiertoestablisha
shipmentschedule withitschosenassembler. Asa resultof these considerations, Metrovoxwouldbe

5. Shannon Pickering
betterpositioned togive more control overinventorymanagementtosuppliersthen itmayif demand
was unstable.
VendorManagedinventoryisagoodchoice because Metrovox has established relationshipswiththe
retailersanddistributorsitsuppliesto,aswell asthe suppliersitisconsideringoutsourcing the
manufacturingprocessto. Furthermore,itreducescostsbyeliminatingthe needforMetrovox,aswell
as itsdistributors andretailerstoplace orders,andreducesthe riskof stock runningout. A vendor
managedinventorysystemwouldrequire Metrovox,it suppliers,andthe retailersanddistributors
whopurchase the product to have the same IT system, tofacilitate sharingof inventoryrelated
information.Metrovox couldmonitoritsdistributorsandretailers inventorylevels,andprovide
inventoryasneeded. Metrovox’ssupplierswouldmonitorMetrovox’sinventory levelsforthe
Terrabyte Lite, ensuringthatthe productwasavailable forshippingatthe same time as the Bugabyte.
Thisinventorymanagementsystemhasthe potential toreduce costs,decrease inventorylevels, and
avoiddelaysacrossthe supplychain.