Supply Chain Principles - Case Study Example

CASE STUDY: SUPPLY CHAIN PRINCIPLES by Student’s Names Code+ Course Name Professor’s Name University/College name City, State Date Introduction Question 1 The study aims at investigating how retailers in China manage their outsourcing risks despite peculiar product requirement and market demand. Also, the study seeks to determine how CL China and TY Apparels develop specific strategies to counter these risks and if the strategies developed are linked to value protection. The last study motivator was to investigate how the Chinese method of relationship management, the Guanxi, plays a role in these strategies. The main argument put forward concerns the effects of outsourcing. The study suggests that companies outsource to countries that have lower production costs than the mother country (Leavy 2004, p.20). The company is therefore able to save on costs, ensure product quality by concentrating on the production efficiency of the hosting company, reduce the length of time it takes to respond to customer demand by ensuring fast and reliable supply to meet emerging demands, and is also able to focus on its core competencies, the latter being the main purpose for the establishment of the company (Kersten & Hasin 2010, p.144) However, not all companies that engage in outsourcing enjoy such benefits. 62 percent of the companies were contented with the performance of their vendor’s for information and technology programs outsourced (Krell 2006, p.20). According to Mattila et al. (2002, p.344), out of the products sold at marked down prices in apparel retailing, 33 percent were attributed to the failure of outsourcing. This was partially blamed on the insufficient understanding of some risks associated with outsourcing and often hidden within the outsourcing contracts. It could also be attributed to the selection of outsourcing approaches that were not appropriate. According to Bathelemy (2001, p.67), the main causes of these outsourcing failures were noted to be outsourcing the primary activities of the company; not taking into account cultural, personnel, language, custom or personnel issues; not choosing the appropriate vendor; not being in control of the outsourcing process, working with an ambiguous contract, ignoring hidden costs and not having exit strategy in place. The study also argues that risk management strategies are chosen depending on what a company sees as its value drivers (Lau & Zhang 2006, p.77). For instance, the value drivers for CL China are performance-enhancing quality products. Therefore, its main threat was the choice of a vendor who would erode its products' quality that gave it a market advantage over others in the market (Lau & Zhang 2006, p.90). On the other hand, the value drivers for TY Apparel’s were newness and variety (Lau & Zhang 2006, p.91). Therefore, its main threat came from the failure to attain speed-to-market, and this would erode its shine of newness and variety. Accordingly, the emphasis placed by each company on its production outsourcing strategy was based on technical versus non-technical features of their value drivers (Kam, Chen & Wilding 2011, p.434). Thus, apparel retailers placed emphasis on the management of their outsourcing risks based on the ratio of their technical to non-technical skills. Therefore, a retailer whose drivers have a high technical content puts much focus on managing the front end processes like process control and manufacturer selection so as to assure compliance. Conversely, a retailer whose drivers have high non-technical content would emphasize on establishing good relations with the manufacturer so as to have a higher degree of product flexibility (Kam, Chen & Wilding 2011, p. 435). Question 2 The article addresses the main reason behind risk management approaches chosen by different companies. It analyzed value drivers of two companies, CL China and TY Apparels, and established a risk management strategies that they employed (Kam, Chen & Wilding 2011, p.439). It then went ahead and tried to rationalize why these strategies were employed majorly by categorizing the two companies as technical and non-technical. The goals that each company set to achieve were then matched against their behaviors towards the manufacturers and thus the risk management strategies they employed were established (Kam, Chan & Wilding 2011, p.441). Applicability According to the study, the two companies were keen on choosing their manufacturers. They adopted rigorous screening methods for choosing their outsourcing destinations and observed set qualifications for each of the companies employed. This included checking the legal status of the companies employed in order to determine if they complied with the set regulations governing the industry. For instance, CL China made sure that the manufacturers employed complied with its Social Audit requirement that required its product manufacturer not to use methods like child labor or prisoners in their manufacturing (Kam, Chan & Wilding 2011, p.436). Similarly, TY Apparels made certain that their customers were holders of legal operating licenses, owners of their respective production facilities and had adequate production facilities and technology (Kam, Chan & Wilding, p.437). The strict screening employed by the two companies was mainly geared towards maintaining their reputation in the market, quality of their products and to enable them pick manufacturers with whom they could have a long-term mutual production relationship (Kam, Chan & Wilding 2011, p.439). According to Kam, Chan & Wilding (2011, pp. 434-438), the companies worked on building trust with the manufacturers before offering them long-term contracts. Thereafter, the manufacturers were put on a trial period with a limited amount of orders at a fixed price. They then evaluated the performance of the manufacturers before deciding on whether to increase the size of the batch to be allocated to each for production. Additionally, the two companies deliberately engaged a large number of companies in their manufacturing process and thus encouraged competition among them. This competition enabled optimal production among the companies and order reevaluation was done depending on the performance of the manufacturer. Therefore, a company that decides to diversify its outsourcing activities among several clients stands to gain more on product quality on top of an assured back-up in case of production failure on the part of some producers (Kam, Chan & Wilding 2011, p.440). Nurturing long-term relationships with the manufacturers was also a major goal of the companies (Kam, Chan & Wilding 2011, p.439). This was necessitated by the difficulty in acquiring services of companies that met the exact product specifications of the two companies. For instance, CL China faced the risk of technological blackmail by manufacturing companies while TY Apparels that heavily relied on speed-to-market to achieve their market goals, faced the risk of production delays (Kam, Chan & Wilding, p.438). However, depending on their value drivers, the two companies adopted different strategies to do this. CL China, emphasizing on product quality, considered long term contracts to be essential in its working relationship. This was because of the fear of its technology being used in the production of a competitor’s products or the acquisition of its production methods by competitors. In retrospect, TY Apparel relied on the Guanxi system to establish long term relationships. This system was based on trust and not formal contracts, to establish relationships (Lee & Humphreys 2007, p.451). The company believed that the trust developed with their partners would allow fairness in their business dealings and would also help secure their loyalty, despite the manufacturers having to work also for the opponents. The use of contracts was thus viewed as a sign of distrust and in times of need, did not assure the company of unwavering support from manufacturers (Lee & Humphreys 2007, p.457). Therefore, it proves more efficient for fast-fashion retailers to engage with manufacturers that would ensure more speed-market-production of their products. This is helpful due to fast changing pace of fashion items thereby helping to capture market demand before it wanes. Hence, product flexibility and supply chain agility should be the main focus of such companies when selecting their manufacturers (Chopra & Meindl 2013, p.215). Due to the non-technical demands of TY Apparel’s products, the best strategy to be utilized by similar companies especially in China would be the Guanxi way of cultivating relationships, which is also widespread in China (Chopra & Meindl 2013, p.215). However, companies whose products demand technical precisions such as CL China need to employ the use of contracts when selecting their manufacturers. This helps to safeguard the company line and prevent erosion of the company’s standards of quality through means such as safeguarding design requirements and technical specifications presented to the outsourced manufacturers, compelling outsourced manufacturers to take full responsibility for a product’s quality, and direct the means of product transportation and distribution, including ways to deal with product damage while on transit (Coyle et al. 2008, p.405) Question 3. The stances taken by the two companies to mitigate the risks of outsourcing are mainly driven by the fear of failure to deliver to their customers (Rushton & Walker 2007, p.228). For instance, CL China tried to mitigate against the erosion of its product quality that has given it a competitive edge over the years. This involved minimizing risks that included technical blackmail by the manufacturing outsourcing company. Also, there was the fear that the outsourced manufacturers may use the technology and the production details availed to them to develop competitor’s products. Therefore, this called for a thorough screening of the outsourced manufacturers. After passing a number of rigorous legal and social obligations that included not using child laborers or prisoners in their production process, the companies were then offered short term contracts, and their performances were analyzed before they were considered for long-term contracts depending on their performance (Kam, Chen & Wilding 2011, p. 435). TY Apparel, on the contrary, feared the failure of not achieving speed-to-market in its production and thus losing out on the fast changing fashion market. Therefore, the apparel retailer whose value driver emphasizes on the technical content of a product pays more attention to the products’ quality at the end of the production process. Conversely, a retailer whose main focus is not as per the technical details of a product will be more interested in production flexibility and how new the product is in the market (Coyle et al. 2008, p.498). This is because of the ever changing market that requires a quick response in terms of production in order to capture the emerging market. The company, therefore, relied on the trust established with the manufacturing companies in order to meet its supply target. This method is known as the Guanxi and is the most prevalent in China among retail companies (Lee & Humphreys 2007, p.450). The method involves companies and their outsourced manufacturers working on a basis of trust without the employment of formal contracts. This method was based on voluntary exchange of favors among the different partners and the obligation each company owed to the other was based on a system of mutual benefit (Rushton & Walker 2007, p.220). Global application of outsourcing can be derived from this study in several ways. First, companies whose products require huge technical inputs need a careful evaluation of their outsourcing manufacturers. Since the major competitive edge of such companies is the quality of their outputs, it is imperative that the manufacturers be able to match the required standard of quality. Also, with an increase in competition for larger market shares among companies, there is need for trust between companies and their manufacturers. This ensures that details concerning methods of production, ingredient mix and products manufactured are not revealed to rivals. This can also be implemented through contractual agreements where both parties are legally obliged to abide by the set terms and conditions (Leavey 2004, p.23). Likewise, companies that rely on the speed-to-market form of production need to identify manufacturing companies that satisfy the quality levels demanded. Their main focus, however, should be on the manufacturing speed and flexibility of the targeted company since their products rely on a speed-to-market basis of production. For such companies to achieve this, trust between them and the manufacturers is paramount which is best established in a Guanxi-like arrangement where the relationship between the companies and their manufacturer is of mutual benefit (Lee & Humphrey 2007, p.454)? Lastly, the use of multi-sourcing is widely encouraged in the study. This involves assigning the same product to be produced by different producers. This encourages competition among the manufacturers of technical products, therefore, enhancing products' standards and quality company outputs. In addition, it also aids in the protection of the exclusivity of a brand of a given technology since one manufacturer does not have the full suite of the technology in case it is leaked (Choi 2012, p119). Companies whose products are non-technological reliant, multi-sourcing helps in diversification of production. Therefore, such companies can have an improved market for their products. Reference List Top of Form Barthelemy, J 2001, “The hidden costs of IT outsourcing”, Sloan Management Review, vol. 42, no. 3, pp. 60-69. Choi, TM 2012, Fashion supply chain management: Industry and business analysis, Business Science Reference, Hershey PA. Chopra, S & Meindl, P 2013, Supply chain management: strategy, planning, and operation, 5th edn, Pearson, Boston. Bottom of Form Coyle, JJ, Langley, CJ, Gibson, B, Novack, RA & Bardi, EJ 2008, Supply chain management: a logistics perspective, 8th edn, South-Western Cengage Learning, Mason OH. Kersten, W & Hasin, AA 2010, Pioneering solutions in supply chain management: a comprehensive insight into current management approaches, Erich Schmidt, Berlin. Krell, E 2006, “What is wrong with outsourcing?” Business Finance, vol. 12, no. 8, pp.18-24. Lau, KH & Zhang, JM 2006, “Drivers and obstacles of outsourcing practices in China”, International Journal of Physical Distribution and Logistics Management, vol. 36, no. 10, pp.776-792. Leavy, B 2004, “Outsourcing strategies: opportunities and risks”, Strategy and Leadership, vol. 32, no. 6, pp.20-25. Lee, PKC & Humphreys, PK 2007, “The role of Guanxi in supply management practices”, International Journal of Production Economics, vol. 106, pp.450-467. Rushton, A., & Walker, S 2007. International logistics supply chain outsourcing: from local to global. London, Kogan. Read More