Operations Management: Case Study Analysis
Operations Management: Case Study Analysis
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DELIVERING NEW PRODUCTS ON TIME
The company in this case study was founded in 1880’s and is now an S&P 500 company employing 18,000 staffs worldwide and operating 130 facilities in 17 countries. The four major business segments of the company are residential furnishing, industrial furnishing, commercial fixtures, and specialised products. The company opened several offices and subsidiaries in China, including its Guangzhou (GZ) office that is responsible for sourcing the supplies of wireless power consortium (WPC), master-rack vehicle equipment, wooden chair and frames, furniture for cruise liners, and fixtures for retail stores. The team in the GZ office includes 10 full-time staffs.
In 2009, the GZ office was plagued by frequent late deliveries, particularly for new products that required development from scratch. The manager of the GZ office decided to implement some initiatives to reduce the number of late deliveries for the new products.
(Additional Note: Guangzhou (GZ) office role is to facilitate Sales to the United States. The office has no revenue and pays taxes equivalent to 4-6% of total office expenditure)
Causes of Late Deliveries
A variety of reasons involving the external customers, the GZ office, and the suppliers (the vendors) could cause the late deliveries. For example, in early 2007, the GZ office accepted an order to produce a set of furniture for a cruise liner. Four suppliers each producing one of the required furniture were involved in the development. Two months before the delivery of the prototypes, one of the furniture has not completed development. In a separate instance, the shipment of the prototype of some van equipments was delayed because the customer changed the design specification by adding a locked ladder rack. New product deliveries contributed to 60% of all late deliveries. (Additional note: the % of late deliveries for all products =28% as the table below indicates. The % of late deliveries for the New products = 60% out of the 28% total late deliveries. Thus, the new products contributed to 60%*28%= 16.8% of all late deliveries. Thus, the new products are the main reasons for delays)
| % of Occurrences of Total Deliveries | ||
| Causes of late delivery | Direct Import | Domestic Import |
| Tolerance | Less than 7 days | Less than 21 days |
| Order cancellation due to potential late delivery | 8% | – |
| Late delivery | 7% | 10% |
| Call back due to compliance | 1% | 1% |
| Call back due to other quality issues | 0.5% | 0.5% |
The shipment can be divided into two types: direct import or domestic import. Direct import goods were shipped directly to the customer and sold as soon as they arrived in the United States. Meeting the delivery deadline for direct import is critical. Domestic import goods are sent to the company’s US warehouse where they would be kept in stock until the customers need them. The delivery deadline for domestic import goods was less critical than for direct import goods.
New Products
Time-to-markets was critical for new products and any delay could result in serious financial consequences. The new product development process within the company could be broken down as follows.
| BOM, design specification |
| Quotes, samples |
| New design |
| Quotes, sample, approval |
| Quotes, sample, approval |
| External customer |
| Marketing department of the company |
| GZ Office of the company |
| Vendors |
| Quotes, sample, approval |
(Additional Note: GZ office has to be always a middle man)
- The company’s USA marketing team initiated product development and requested the design team to come up with new products or the customers contacted the marketing team to discuss the development of some potential new products.
- When the customer accepted the proposal, the USA marketing team sent a bill of materials (BOM), a list of product specifications, and the information of the contact staff (in USA responsible for the customer’s account), to the team in GZ office. These products could be completely new or modified from the existing product lines.
- The staffs in GZ office would solicit quotations from different vendors, consolidate the quotations and send them to the contact staff in the USA marketing team. In some cases, there might be only one vendor that is capable of developing the new product such as WPC.
- The USA marketing team provided the customer with quotation. If the customer accepts the quotation, the USA marketing team placed an order for the prototypes.
- The GZ office would then instruct the selected vendor to manufacture the prototype for compliance testing and the customer’s final approval.
- As soon as the prototype passed compliance testing and received the customer’s final approval on the product and package, the massive production of the products could begin.
Because of the differences in the laws and regulations in relation to intellectual property (IP), the designs of many products were developed by the USA R&D centre. If the USA design team was late in sending out information to the GZ office, it put pressures on the GZ office to complete the development and could lead to the late delivery. Designers and customers revising the design during the product development process also affected the product development schedule.
When the initial sample came out, it would be presented to the buyer who might give some new ideas or comments on the sample. Usually the packaging cannot be designed until the final product or the final sample came out. Time is a critical factor and puts pressure on both the new vendors and the development process.
Internal statistics showed that about 30% of the late delivery of new products was caused by late arrival of artwork or designs, 30% by late customer approval or the USA design team, and the rest by vendor’s delay. For example, the GZ office identified a qualified vendor to develop a new product—Gesture Chair—the first chair designed to support human interactions with today’s technologies such as smart phones. But the customer requires the cushion to be made by recyclable sponges. Ultimately, the GZ office found an existing vendor that produced the adjustable beds for the company to supply this particular raw material.
Compliance
Many countries imposed regulations (e.g., The Resource Conversation and Recovery Act (RCRA) and Dodd-Frank Precious Metal Trading Prohibition) on the use of materials in products. Overseas suppliers must comply with these regulations in addition to the specific requirements (e.g., packaging) of each customers. Late deliveries in relation to compliance problems can be divided into downstream compliance and upstream compliance issues.
At the downstream, the importing countries and individual customers had become increasingly stringent on the use of potentially harmful materials in the products because of the environmental concerns. For instance, packaging for Wal-Mart products or fixtures of retail stores cannot contain more than 100ppm of mercury, lead, cadmium and hexavalent chromium. All suppliers must provide a test report prepared by a certified lab for their shipments and the absence of such a certificate could result in the return of the shipment.
At the upstream, many customers required a supplier (or vendor) audit and certification before they would contract with a factory as a new supplier. This process could be costly and time-consuming. Wal-Mart, for instance, used a “red, orange, and green light” system in its vendor audit for new suppliers.
- Factories that received a “red light” on the audit must submit an improvement proposal within two weeks and pay the fee for a re-audit by Wal-Mart that could take place within 90 days of the first audit. Vendors that failed to pass the second audit would not receive a third chance.
- Vendors that received an “orange light” have 120 days to improve their factories for a re-audit.
- Vendors that received a “green light” could be immediately put on the supplier list of Wal-Mart and would be re-audited every year after the first certification.
The “green light” requirements covered working hour restrictions, working environment standard, and quality assurance. The buyer would check the records for the required safety and security in the working area. Regarding quality assurance, if the factory was certified by ISO 9000 and if it followed the ISO standard for the security, the auditor would still check, for example, whether the fire exit was blocked and whether the fire extinguisher was placed properly. The working area should be separated with highly visible marking from other areas. The working hours of workers should not be longer than local requirements and payment to workers should comply with the local standard such as minimum wage and over-time pay.
Although vendors are able to meet the stringent product requirement of USA customers, they are reluctant to spend money on improving the factory to meet the social responsibility audit requirements. Many USA customers engaged only with suppliers that could comply with the social and ethical standards in areas such as working conditions, health and safety, working hours, and disciplinary practices.
QC Rejections
Quality control (OC) inspection was a standard procedure before any goods were to be shipped. Most of the QC inspections were carried out by the staffs of the GZ office. However, for major buyers such as JC Penny or Wal-Mart, the QC inspection was to be conducted by a certified third-party lab or agent. Deliveries could be delayed if the goods were found defective or improperly packaged. Costly corrections must be made timely. There are many local labs that can perform the tests but their reports are generally not acceptable by the major buyer. And some times, the few certified labs sent the products to these local labs for testing.
Labour Shortage / Supplier Turnover
Some vendors suffered the shortage of city-migrant workers or could not hire enough skilful workers after the ice storm during the spring festival of 2007. As a result of the labour shortage, vendors could not deliver the products on time. Some suppliers are not intended to cooperate with the company for an extended period of time. As soon as they received the supplier certification by some major buyers, they suspend the cooperation and use the certification to lure the business of other small and medium foreign buyers. The supplier turnover rate in the past 5 years was average 15% each year. The number of new suppliers that require audit or their audit expired remained at 10-15 each year.
Inevitably, the GZ office deals with new suppliers either because of supplier turnover or the development of brand new products.
Communication Problems
In the GZ office, there is no Project Management software to keep track every new product development. The staffs of the GZ office used emails, faxes, phones, skypes, and video conferences to communicate with the USA marketing team R&D team during the product development process. The time zone difference was factored in but still posted a challenge because many vendors that located in the sub-urban areas of China are not available during the USA regular office hours.
The staffs in the GZ office have various years of experiences. Only two of them had extensive experiences in both furnishing designs and mechanical engineering. The staffs usually took videos of the samples that were under development by the vendors and sent the video to the USA marketing team for comments.
Questions for the case study
The manager of the GZ office decided to implement some initiatives to reduce the number of late deliveries. Can you recommend five initiatives to improve on-time deliveries? For each initiative that you recommend, identify the person who might be responsible for implementation, the time frame to implement, the detailed measures to implement, and the relevant performance indicator to measure the success.
Additional instructor’s note:
- The structure of the GZ office includes the manager and at least 2-3 employees work on shipping and 6 employees work on procurement and deals with all suppliers and products types.
- The office annual budget is around 3-5 million Chinese Yuan.
- The legal department in the U.S.A is the one who should be responsible about legal issues.
- The images in the last page give hints about the solution. The images show different products, some of them are complex, some of them requires suppliers form one industry and others require suppliers from another industry…etc.
Additional Requirements:
- You are required to answer the questions for the case study (illustrated at the end of the case) by writing 1500 words (qualitative) in the form of business e-mail or business memorandum directed to the manager of the GZ office.
- You should justify each initiative you choose.
- The initiatives should be relevant to the role of the GZ office’s manger. In other words, you should not suggest initiatives that can only implemented by the board of directors approval.
- You are not required to use external resources such as books and academic journals. However, if you needs to use academic journals or books, you must reference your work using Harvard in-text referencing and provide a referencing list. I think it is better if you use at least 3-5 references.
- Please see the Appendix in the next page.
Appendix: Some products of the company
