Supply Chain Management: Case Study 1Shannon Pickering

German electronics manufacturer Metrovox recently decided to focus its efforts on two related products it manufactures, which are in two very different stages of the product life cycle. The Bugabyte is a video and audio player Metrovox recently introduced to the marketplace. Demand for this product is unstable and difficult to predict, but is expected to grow in upcoming years. Metrovox has placed considerable resources into its research and development, and proprietary information is used to test its circuit boards. However, the development of the Bugabyte has led to production delays and a 30% late delivery rate, due to its video capabilities. The Terabyte Lite is a flash drive and MP3 player. It has been in the marketplace for six years, and at the maturity phase of the product life cycle. Demand for it is expected to be low to moderate, but stable. Its assembly and testing process is well known, and there are many competitors in the marketplace. Recently the Terrabyte Lite has been given a new product name, and its design changed to complement the Bugabyte. For both products, quality is a priority over cost, and product differentiation is its main competitive advantage. To reduce production delays and late shipments, Metrovox will outsource assembly of one of the products, and have hired manufacturing consulting Grunwaald and Vogal to assist them in selecting one product as the best candidate for outsourcing.

1. Based on the risk factors associated with the Bugabyte and Terrabyte Lite, the Terabyte Lite is the best candidate for outsourcing. For both products, risks commonly associated with outsourcing, such as loss of control over quality would be a concern. However, as a new product, outsourcing the Bugabyte carries additional risks. Information on testing the circuit board for the Bugabyte is proprietary. Outsourcing this product increases the chances that this proprietary information will be uncovered, and competitors will be able to emulate the process. Furthermore, the assembly process for the Bugabyte is more complex, increasing the risk of error, as well as in increased costs for establishing the production process in a new facility. Terrabyte Lite has a well-established assembly process and uses widely known product testing practices. Since the Bugabyte is expected to be a source of company growth in the near future, it would be wise to maintain control of the product.

2. By outsourcing production of the Terrabyte Lite, Metrovox will benefit in many ways. Outsourcing the Terrabyte Lite will free up capacity to manufacture the Bugabyte, allowing them to better manage the unexpectedly high demand for the Bugabyte. Furthermore, since the assembly process for the Terrabyte Lite is well-established, many competitors exist and its testing process is well- known, another organization may be able to produce the Terrabyte Lite at a lower cost through a more efficient assembly process. Having the product assembled by one of Metrovox’s suppliers in China would also result in reduced labour costs.

Since demand of the Terrabyte Lite is stable, it is easier to develop a delivery schedule for assemblers to adhere to. It reduces the risks of late shipments from the suppliers, and less excess inventory would need to be kept on hand to manage unexpected fluctuations in demand. Since demand for the Bugabyte is unstable, more inventory would need to be kept to manage demand spikes, and assemblers are more likely to produce late shipments. With the Terrabyte Lite being outsourced, Metrovox has considerably

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more control over these factors than it would if the Bugabyte was chosen for outsourcing. It better enables Metrovox allow its vendors to manage inventory, thereby creating efficiencies in the supply chain.

Another advantage to outsourcing the Terrabyte Lite is that Metrovox maintains control over production of the Bugabyte. Loss of control over product quality is a major risk in outsourcing, an important consideration since Metrovox considers high quality standards a priority. Furthermore, product differentiation is considered to be both product’s competitive advantage. Circuit board testing for the Bugabyte uses proprietary information, whereas the production process for the Terrabyte Lite is well-known. Outsourcing the Terrabyte Lite allows Metrovox to maintain control over the proprietary information associated with the Bugabyte. Since the Bugabyte is expected increase in demand over the next few years, thereby driving revenue growth for the organization, Metrovox wants to be especially diligent in ensuring quality standards are met and proprietary information is not unearthed by competitors. The failure of the Bugabyte to meet the quality levels expected by customers, or the availability of lower priced but similar products may result in serious financial consequences for Metrovox.

Metrovox has also already established the production process for the Bugabyte. Since the production process is for the Bugabyte is complex, it would be more expensive to re-establish in another location, compared to the Terrabyte Lite.

Though there are many advantages to outsourcing the Terrabyte Lite, disadvantages also exist. One major disadvantage is that Metrovox will lose some control over the quality of its product, which is an important consideration since quality is extremely important to the product’s competitive advantage. Since both products are delivered in the same shipment, will have to co-ordinate production and shipments with the supplier, and having this product outsourced may still lead to late or incomplete shipments. By having another supplier involved in manufacturing their products, there is also the risk of confidential information or trade secrets being discovered by competitors. This consideration is especially important if the supplier is located in China, as patent laws are more lenient than in other parts of the world. However, it should be noted that these risks will exist no matter which product is chosen for outsourcing.

Although outsourcing the Terrabyte Lite mitigates the risks of production delays and late shipments, it does not fully eliminate the possibility of these issues occurring. If demand for the Bugabyte continued to rise unexpectedly, Metrovox is more at risk of shipping delays than they would have been if the Bugabyte had been chosen for outsourcing. A major disadvantage of outsourcing the Terrabyte Lite instead of the Bugabyte is that Metrovox is less equipped to handle another unexpected increase in demand for the Bugabyte. Having the assembly process for the Bugabyte established in two locations would mean that there were more resources available to handle a demand spike. Metrovox may find it still does not have enough capacity to avoid shipping delays and may need to add additional capacity or outsource more of its production if demand for the Bugabyte continues to be unexpectedly high.

3. In order to mitigate the risks associated with outsourcing, and establish the foundation required to develop a strategic supplier relationship Metrovox would need to address the following contractual issues with its supplier:

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Services Provided

Metrovox would want to outline the services that are to be performed by the supplier and assembler. For this particular case, assembly, testing, hiring and training, procurement of raw materials and shipping are examples of services that would be provided by a supplier.

Quality Assurance

Metrovox would want to ensure the quality of their product did not deteriorate as a result of outsourcing its assembly. It would be important to include product specifications in the contract. This aspect of the contract would include materials used and any processes important to the quality of the product, such as the solder and soldering process used. They would also need to include length the product is expected to last, in this case 10 years, and may want to consider asking the supplier to provide a warranty. Testing requirements would also need to be included in the contract, as well as acceptable defective rates. Since product quality is so important to maintaining Metrovox’s competitive advantage, it would also need to include fines or other repercussions for failing to adhere to the expected quality standard.

Shipping and Logistics

An important consideration in outsourcing the Terrabyte Lite is that it still has to be in the same shipment as the Bugabyte in order to satisfy the needs of the distributors and retailers receiving the shipments. In order to achieve this objective, it is important that any supplier adhere to the delivery schedule Metrovox provides. The contract would need to include deadlines and consequences for late shipments. The process for unifying the shipment of these two products would need to be outlined including, INCO terms, methods of transportation used, and delivery points. Furthermore, since the circuit boards are fragile, Metrovox may want to specify the packaging used to protect the product from damage while in transit.

Confidentiality

Although the production process of the Terrabyte Lite is well-known, Metrovox may still have trade secrets they would like to protect. A confidentiality clause in the contract would prohibit suppliers from sharing any confidential information Metrovox provides with outside sources.

Payment Terms

Metrovox and the supplier would need to negotiate a price for manufacturing the Terrabyte lite. They would also need to negotiate where, when and how payments are made, the currency to be used, and how payments were calculated. Payment terms would also include items that were included and excluded in the payment. A payment schedule, including payment due dates, would also need to be included in the contract. Discounts are another consideration which may be included in the contract.

Length of contract

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Metrovox would have to include the dates for which the contract took effect and was completed. Metrovox would also want to include events or activities that could result in the termination of the contract and renewal procedures.

Ordering procedures and Inventory Management

The contract would have to outline ordering procedures and inventory management procedures. It would want to include the size of orders, the inventory levels that would warrant a replenishment of stock, procedures for placing orders, and how inventory information and order placement would be communicated. The supplier’s role in inventory management would need to be defined, for example whether a vendor managed inventory system would be used, or if Metrovox would place orders as needed.

Standards

Metrovox would want to include safety standards and working standards the assembler and supplier are expected to adhere to, including labour conditions, wages, machinery maintenance and building maintenance.

Assembly procedures

The contract would need to include assembly procedures, including equipment and components used, testing requirements and an acceptable skill level for employees. It would also need to include benchmarks for measuring performance.

4. In order to ensure quality and coordinate shipments, Metrovox needs to develop strategic sourcing strategy. In this situation, vendor managed inventory would be beneficial to ensure efficiencies in the supply chain. A system where its supplier had access to Metrovox’s inventory management system and Metrovox had access to the distributors and retailers inventory management system would be most beneficial, because of the geographic distance between Metrovox, its suppliers, and the retailers and distributors it sells its product to. Having a vendor physically show up and review inventory may be impractical because of the distance that would need to be travelled to do so. Furthermore, it allows information to be shared in real-time. Retailers and distributors would provide Metrovox with real-time information on inventory levels for the Bugabyte and the Terrabyte Lite, and Metrovox would provide its supplier with its real-time inventory levels for the Terrabyte Lite. Metrovox and its supplier would both send replenishment orders of a certain quantity once inventory levels were at certain level, with the supplier sending orders to Metrovox, and Metrovox sending orders to the distributors and retailers. This system is based on Metrovox maintaining a certain level of Terrabyte Lite inventory to meet retailer and distributor requirements for both products to be delivered in the same shipment.

Since demand for the Bugabyte is unpredictable, and Metrovox is more knowledgeable about lead times and the production process then the retailers and distributors it sells to, it is logical for it to manage the inventory for retailers and distributors. Demand is relatively stable for the Terrabyte Lite, which reduces the risks of receiving late shipments from its suppliers, and makes it easier to establish a shipment schedule with its chosen assembler. As a result of these considerations, Metrovox would be

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better positioned to give more control over inventory management to suppliers then it may if demand was unstable.

Vendor Managed inventory is a good choice because Metrovox has established relationships with the retailers and distributors it supplies to, as well as the suppliers it is considering outsourcing the manufacturing process to. Furthermore, it reduces costs by eliminating the need for Metrovox, as well as its distributors and retailers to place orders, and reduces the risk of stock running out. A vendor managed inventory system would require Metrovox, it suppliers, and the retailers and distributors who purchase the product to have the same IT system, to facilitate sharing of inventory related information. Metrovox could monitor its distributors and retailers inventory levels, and provide inventory as needed. Metrovox’s suppliers would monitor Metrovox’s inventory levels for the Terrabyte Lite, ensuring that the product was available for shipping at the same time as the Bugabyte. This inventory management system has the potential to reduce costs, decrease inventory levels, and avoid delays across the supply chain.

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