IB L4 2013

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The 4th test of a good strategy - FIT

Li & Fungs competitive edge

Nokias response to a disaster

Building deep supplier relationshipsToyota and

Honda in USA

Whirlpools supply chain management\ Zaraturning existing wisdom to its head

KEY LESSONS LEARNED

Bharti-Walmart case

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Li & FungCoordination is the key

The business model

Coordinate with the client and chalk up a deliveryprogram for the whole season.

For example An European retailer may like to receive10,000 polo t-shirts between November and February. Hespecifies the design, the colors, the sizes and the fabric.He may want 10 different batches of 1000 each, each

batch will have a distinct design, color combinations and afixed set of size. The batches may have to be deliveredonce in 15 days to 10 different locations in Europe.

The entire program is chalked up with Li & Fung inadvance.

Li & Fung then contacts its manufacturers across the SE-Asia and holds a meeting, specifying who will supply

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The business model

What and how the components will move around from Alocation to B location and within what time frame.

Li & Fung also specifies the price that it will pay to the

suppliers and clearly spells out the payment terms and

conditions. Considering the clients design specifications, a program

is chalked out optimizing cost and time at each step. The

zippers may come from Japan, the fabric from China, the

dyes from Malaysia, the buttons from Taiwan and finallyit may be put together in Thailand.

But the entire business model rests on Clients (Say

Adidas) ability to charge high prices to its final customers

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Salient features:-

Short batch size and low inventory

Real time manufacturing, short delivery times

Working with numerous small manufacturers to scale up

and the absence of buying power of small producers is

compensated by the coordinating mechanisms of Li &Fung.

Look at the whole value chain as a system and how to

optimize the total cost of the product moving through the

systemnot just cost at one location Li & Fung works with more than 10,000 suppliers in 30

odd countries across the globe, at any point of time It ties

up 30% to 70% of a suppliers production capacity

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Salient features:-

Upfront Li & Fung has customer divisions spread allacross Europe and USA and now Asian markets.

These divisions look after a specific product range and

contact big fashion OEM clients like NIKE, ADIDAS,

REEBOK, LEVIS, Lacoste before start of every fashionseasons, which changes 4/5 times in a year.

Once they receive an order, they contact the suppliers

directly, the budgeting and admin issues are taken care of

by the HQ. HQ acts as a coordinating hub.

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Disaster ManagementNokia Vs. Ericsson

On 17th March 2000, lightning stuck the Royal Philips

Electronics plant in AlbuquerqueNew Mexico. The lightning resulted in a fire. The fire lasted 10 minutes

and destroyed semi conductor chips on the shop floor.

But the damage was much more, the fire triggered a

automated smoke alarm and sprinklers went into action infinished goods warehouse, thus drowning more than 3

billion chips in FG inventory. Philips at this point of time

was supplying 40% of total chip requirements of Nokia

and Ericsson and was making 80 million chips a day Philips informed its two major OEM clients that it will

take more than six weeks to restore normal production as

water has sipped into its sterilized FG warehouses and will

take a long time to dry up

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Nokias response

After receiving the message, a purchase manager put up awarning flag in the ERPmaterials system

The chief purchase manager (dealing with Philips) after

noticing the flag, following an established process put up

a warning sign to the chief component manager TapioMarkki. Markki was Nokias global component manager

then.

Markki immediately started calling Philips and finally on

March 20th

received an intimation that initial estimate ofproduction stoppage is a week. Markki started tracking

Philips on a daily basis

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Nokias response

On 31st March, Markki received a communique fromPhilips stating that the damage is much worse and it will

take six weeks.

Markki now escalated the alarm and it went all the way up

to the global VP operations Pertti Korhonen andKorhonen reached out to Jorma Olila the then CEO of

Nokia

A quick calculation showed that Nokia would lose sale of

4 million setsamounting to 5% of annual sales Korhonen assembled a team of 30 managers

A chip redesign was considered first

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Nokias response

Philips supplied five components, three components wereoutsourced to alternate suppliers in Japan and a top level

meeting between the global production heads of Philips

and Nokia resulted in Philips sourcing the other two

components from its Shanghai plant. All these decisions were taken within 15 days.

The Key the company had a practice of allowing its

middle level managers to take ground level decisions and

escalate the matter quickly to reach the top most levels, bypassing all hierarchy if necessary.

This allowed Nokia to respond to the situation within a

month and firm up its supplies. There were no loss of

sales.

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Ericssons response

The message from Philips on March 17th was received bya low level technician in the chip assembly factory, whowas in charge of mobile assembly. It was his duty toinform the purchase department. He did nothing for week.

On 31st March, Philips informed Ericsson that it will take

six weeks to restore production. It took another one weekbefore any senior manager in Ericsson came to knowabout the fire.

Ericsson couldnt locate alternate suppliers, as the design

of the chip was proprietary to Philips and Philips was thesole supplier.

It had to postpone its new mobile launch, lost 10% marketto Nokia and the loss was $ 1.68 billion at the end of theyear, including obsolete inventory.

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Building deep supplier relationships

A) Conduct joint improvement activities

i) transfer best practices (Target and Kaizen methods) tosuppliers. Train suppliers engineers

ii) assign an engineer and initiate kaizen projects

iii) set up supplier study groups

B) share information

i) use clearly define formats for information sharing and

data collection

Ii) set up specific time and date for meetings

iii) clearly specify, where and how the information is to be

used

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C) Develop the Suppliers technological capabilities:-

i) develop a common lexicon to be used by both

ii) develop his problem solving skills

iii) assist him in building his R&D capabilities, if possible

with financial assistance

D) Supervise them:-

i) Sent monthly report cards

ii) provide instant feedback through SQR reports

iii) assign senior managers to solve problems at supplier

end on a dedicated basis

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E) Turn Supplier rivalry into opportunity:-

i) Source the same component from 2/3 vendors

ii) Create uniform production systems and manuals

iii) Enter into a JV agreement with select big suppliers to

develop parts and improve designs on a continuous basis

F) Understand how your suppliers work:-

i) Set cost reduction targets after studying suppliers

capabilities

ii) Spend time on his shop floor

iii) Commit to share prosperity and profits

iv) Ink a long term relationship agreement

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A lot of time is spent by the Japanese auto giants inunderstanding how suppliers work, what are their

problems and capabilities and what kind of work culture

they follow

This is done by assigning a middle or even a seniorengineer, who stays with the supplier for more than a year.

The Japanese work backwards into component costs using

target costing. Which starts right from the expected overall

price of the car that the customer is willing to pay. Then they take their own time to build an extended lean

enterprise and a knowledge sharing web.

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Whirlpool-turning the Supply Chain around

The Supply Chain organization of Whirlpool in 2000 wasknown as SalesDisablers.

The product availability on time at dealers end was

around 80%, resulting in loss of sales.

Whirlpool like Panasonic, has a diverse product rangecomprising Washing machines, dishwashers, refrigerators,

kitchen appliances and made products in 15 countries.

Hence putting the right product at the right place and at

the right time was a herculean task, when these appliancesare sold in 100 countries.

The turnaround plan involved new IT applications,

processes, manuals and new recruits

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Whirlpool and Sears at first jointly commissioned BCG tostudy customer needs and reactions

The initial finding was the date when Whirlpool

commits a dateIT SHOULD BE ADHERED TO

Next, Whirlpool went onto build deep OEM relationshipswith Sears, Wal-Mart, Best-Buy and Lowesthe retailers

who sell their products

Direct interviews revealed that the company is all the time

being judged on 27 different dimensions Next Whirlpool went onto collect CI on GE their main

rival from AMR, Gartner and Forrester Research

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Then they mapped out on all 27 dimensions to what theyconsidered worldclass. This required an investment of $

85 million dollars at 2000 levelsnot a feasible option

The head of new Supply Chain Organizationgiven with

the task of turnaround went around building a consensuswithin the organization this took quite a few months

before the board meeting took place

Next a Sales and Operation planning process was

launchedlinking sales to production using SAP Next a system called CPFR was launched the acronym

stands for Collaborative Planning Forecasting and

Replenishment

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CPFR allowed the OEM retailers to track inventory andorders on a real time basis. CPFR linked the retailers

shelves with the manufacturing shop floor on a real time

basis.

However to manage the CPFR system, Whirlpoolrecruited a host of people with a diverse set of skills in

purchasing, planning, IT and HR

Three years onto the IT project, Whirlpool introduced an

Event Management feature into the systemwhich trackseach action within the 15 country supply chain network

like loading, cargo, freight etc.

By end of 2003, the product availability had reached 95%

from 80% in 2000.

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ZaraTurning Conventional Wisdom to its

head

When a German wholesaler suddenly cancelled a bigorder in 1975, Mr. Amancio Ortega sat on the road to sell

his stock, under the bannerZARA

Today there are nearly 1000 ZARA stores in over 50

countries. ZARA can design, produce, deliver to its retail chain

stores in 15 dayssomething no other fashion retailer has

done so far

The common wisdom in retail industry is to o/s, where asZARA has more than 50% of its production in house

Instead of utilizing full capacity, ZARA leaves some spare

capacity all the time

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head Instead of attaining EOS, ZARA produces in small

batches Instead of relying on partners, ZARA does all the

distribution and warehousing itself.

It puts price tags on clothes when they are shipped, rather

than at retailers end It leaves large areas empty in its expensive retail shops

and occasionally encourages stock-outs

ZARA operates on 3 principles:-

i) Closed and rapid communication loop across its retailersto factories

ii) A penny foolish-pound wise approach, where speed

is given utmost importance across the chain

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head iii) ZARA spends large sums of money to make the value

chain fast and responsive Major investments have been made to make the

production and distribution chain highly responsive and

fast

In ZARAs stores a customer can always find a new andexclusive design but limited in numbers. This induces him

to think that unless I buy it I may lose the chance

ZARAs designers create 40,000 designs every year and

many of them resembles the big names in fashion.However ZARA beats the big names to the market with

speed and half the price using a less expensive fabric and

dye

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head This super responsive system requires a rapid and

unhindered flow of information from retailers to marketersand designers to production staff to buyers to suppliers

and sub contractors. ZARA has a flat organization design

and its offices and all operational procedures are designed

to keep the flow of information really quick

ZARA maintains a strict discipline in replenishment of

orders. Every week by a certain time every retailer will

have to give his order to the marketing team.

Together these three principles reinforce each other and

maximize speed.

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Key lessons

Li & Fung A web of coordination and an optimized

value chain, an ability to produce variety at a short noticeon a reasonable cost.

Nokia ability of its management to move together and

fast Unity of purpose and freedom of junior

management to escalate a problem fast Toyota and Honda building long term relationships

beneficial to each other and building a knowledge sharing

network

WhirlpoolMaking IT work for you, combining IT withtalent

ZARA Choosing the trade off speed at the cost of

money

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Wal-Mart in India

Made a loss of Rs. 278 crores last year and 372 crores this

year Bharti-Wal-Mart has 20 cash and carry whole sale stores

in India

CEO Raj Jain resigns amidst probe and allegations of

Forex violations by Wal-Mart in India It appears that a friction between the partners have

developed and Bharti wants to come out of the venture

As per new rules, cash and carry stores cant sell more

than 25% of its merchandise to group companies. BWs85% of sales were to its retail outlet EASY DAY. Now

BW has to look out for new buyers

Wal-Mart caught up in a web of corruption, lobbying and

bribery charges

Documents

IB L4 2013