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supply chain and logistics- case study 1
- 1. Shannon Pickering Supply ChainManagement: 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 controloverthese 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 wouldwanttooutlinethe 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 wouldhavetoinclude 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 togivemore 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.