Supplier selection - Case study

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The launch of 000X series of personal computers is a major milestone in the history of Computron Systems Corporation (CSC). The successful launch of this product will add another feather in the cap for CSC and enhance its product portfolio. More importantly this launch marks the transition of CSC from a PC component manufacturer to an integrated PC manufacturer. This launch will not only redefine the way CSC does and conducts its business in future but will also pit CSC against some of the well entrenched competitors such as Dell, Compaq and Gateway. In order to gain a foothold and subsequently gain market share in this product segment, the company has decided to adopt an aggressive strategy of selling high quality computers at affordable cost.

Business Strategy

In order to sustain a high quality low cost product it has been decided to adopt, build to order manufacturing, JIT component inventories, direct sales, and top it off with excellent customer service and technical support. In order to implement the above the company has decided to outsource some essential product components. By outsourcing we aim to capitalize on the technological innovations and the manufacturing expertise offered by outside suppliers and incorporate them into our products to be a strong first mover in the market. Computron's build to order and sell-direct strategy, popularly coined as the Dell strategy, will lead to minimum in-house stock of completed products and inventories. JIT component inventories are very much essential to support the build to order production model being pursued by Computron. The JIT inventory practices that we want to implement at CSC for the production of 000X series will yield major cost advantages and shorten the time for CSC to get new generations of its computer models into the market place. In the same breath we would also like to caution the management of the company that the component suppliers in the PC industry are notorious for the shortages of certain key components that occur from time to time which might drive up the prices. Hence we propose to maintain some units in component inventory yet adopt the JIT component inventories strategy to save cost on manufacturing and pass on this saving to the customers in terms of low product prices.

Supplier Sourcing Strategy

Help with essay on Supplier selection - Case studyMajor emphasis was laid upon the above mentioned business strategies in qualifying the vendors for the DVD drives. This recommendation for supplier selection has taken into account the ability of the supplier to adjust and align their business strategy with that of Computron's. The on time launch of the 000X series, which will be introduced in the market, will bear the seal of Computron. These PC's will not only carry the reputation but also the credibility of CSC as a manufacturer of high quality products with on time customer delivery. Hence major emphasis were laid on factors such as

1.Product quality . Delivery performance. . Cost competitiveness.

4. Responsiveness to needs. 5. Financial condition. 6. Technical and Process capability. 6. Communication and finally long-term partnership potential. 7. Volume capacity.

In order to objectively evaluate the suppliers on the above-mentioned factors a comprehensive evaluation was performed with the help of the following tools such as.

1. Financial risk analysis.

. Total cost analysis.

. Supplier Evaluation & Selection analysis

Detailed quantitative and qualitative data and relevant discussions can be found in appendices 1 .

We have decided upon implementing a two DVD drive supplier strategy in order to offset any risks that might arise in the widely fluctuating demand and supply scenarios and to reduce overall supply base risk. The overall advantages associated with adopting multi sourcing outweigh the financial implications that CSC would bear in the long run, given our anticipated sales and profit margins. CSC being a new player in the PC industry and due to the continuous innovation and technology development that is going on in this sector, where typically a new generation of DVD drives are launched every two years the team would like to impress upon the management to assign medium term contracts for a period of years to each of the individual suppliers and impress upon them the merits of a long term contracts from CSC as long as they maintained their leadership in technology, performance, and quality. This also enables CSC to further evaluate the suppliers over a two year period before a long term contracts are awarded. We would also like to propose that a strategy of variable pricing be adopted in the contract of each of these suppliers because of the decreasing trends in the unit prices for these components depending upon the market demand and supply. For more detailed analysis of the pros and cons of single sourcing versus multi sourcing, awarding long term versus short term contracts please refer to the appendix A. The transportation costs for the finished products will be borne by CSC from the supplier site to CSCs assembly plants but CSC will not assume ownership of the inventory at the supplier's site. We recommend that this clause be added into the contract of the selected suppliers.

Supplier Qualification

Based on our qualitative and quantitative evaluation of each supplier based on the above-mentioned factors (Please refer to attached appendixes 1- & A for detailed information) we have decided to recommend two DVD drive component suppliers. We recommend qualifying and accepting TechLine as our primary DVD component supplier and D-drive as our secondary component supplier. Before going into the reasons for recommending the above two suppliers the team would like to discuss and present our case as to why the other two vendors were rejected.

Nagachi technologies and Park technologies both located in Asia are two large and reputable manufacturers of the DVD drives though both offered competitive prices and carry a reputation for high quality products they were side stepped in favor of the two selected customers because of such findings of the team.

Nagachi Tech already is running at near full capacity and also the team observed that Nagachi is a big player in the DVD drive market and caters to most of CSC's competition and market leaders in the PC industry. The team had doubts about how Nagachi would align itself to the business strategies and requirements of a newcomer such as CSC. According to current market trends and forecasts, CSC's requirements for DVD drives is typically around 500,000 units for the first year and a marginal growth there after, amounting to $75 million which seemed very unattractive to Nagachi Tech because of its business model suited to being a high volume supplier. The financial health of the company with respect to the other suppliers also caused some concerns among us. (Appendix1). On the other hand Park Technologies was rejected due to higher total cost (Appendix) and longer lead times when compared to the suppliers in the group.

The physical location of the manufacturing sites of both the above mentioned companies and other barriers such as communication which will come into play when CSC will require technical support especially in a built to order strategy being implemented at CSC weighed heavily against both these companies.

We evaluated all the DVD drive suppliers under the assumption that a long term strategic partnership can be developed between CSC and them, under current circumstances and situations mentioned above we believe that the above two suppliers will not add any strategic value to CSC's launch and success of the 000X series of PC's.

We very strongly believe that the two selected suppliers D-Drive and Techline will add value to the lean supply chain system being implemented at CSC and recommends that these companies be pursued by CSC to build a long term strategic partnership as CSC's DVD drive suppliers as long as they maintain their market leadership, quality, invest in R&D and deliver on costs. One on the main reasons for both these companies, Techline and D-Drive being selected is their physical proximity to the manufacturing plants of CSC. This heavily favored into their side because this would enable CSC to implement its JIT component inventories and build to order strategy. Also the physical proximity and the absence of any language issue will help us in providing and getting greater technical assistance and support from both these companies and help CSC better serve its customers. Over all the management and personnel of both these companies impressed upon us that they were willing to align themselves according to CSCs business strategy in launching the 000x series. The team was impressed by the quality of the products and their leadership in innovation and their commitment to technology development in the DVD drive industry. The team was also impressed on evaluation of the fiscal health (Appendix1) and the manufacturing capabilities of both these companies. The lower total cost being offered by both these companies favored them in being selected as CSC's suppliers. The high volume ramp up time and product lead time for both these suppliers are in line for the time period at which CSC plans to introduce the 000X series of PCs into the market.

We intend to offset risk of maintaining low inventories and a lean supply chain by having supplier contracts with two reliable component suppliers. By giving a percentage of CSCs DVD drive requirements to both the suppliers, CSC will be assured of getting the volume of components it needs on a timely basis even when the overall market demand for a particular component temporarily exceeds the overall market supply. On the assumptions based on the projected sale of 1.1 million PC units at an average cost of $1500 and an industry profit margin of 5% the team estimates the a profit of $80 million. The approximate cost for two suppliers is estimated at an additional $4 million, which includes tooling, quality non-conformance, volume-price adjustment and vendor management costs. We believe that these costs incurred by CSC are reasonable for given sales & profit margins and are essential to offset the risk for the supply chain strategy that CSC intends to employ at the launch of 000X series of PCs.

We intend to buy the volumes of first two months completely from Techline and then phase in D-drive gradually after that considering the ramp up and lead time requirements at D-Drive. This will allow the launch of the 000X series without a hitch. We believe that a 70% of our inventory order be given to TechLine systems because of their proven track record in on time delivery product quality and their efforts to implement a JIT production system. On the same note we also propose that the remaining proportion of inventory order be given to D-Drive to get this company onboard as one of the suppliers. The team has been impressed by the product quality, technological innovations, their R&D efforts and their management's commitment to align themselves with CSCs strategy. Yet D drive is small company and we believe that this company might still have to fine-tune their manufacturing abilities to meet the demands of the CSCs order. The team believes that by striking a strategic partnership with D drive in terms of improving their production capabilities and product quality CSC might benefit in the long run. We believe that by investing in a strategic partnership with D drive and using them as a second source of DVD drives CSC can micro manage the risk of having a JIT inventory and lean supply chain. The threat of second supplier will also check the actions of Techline and keep them from making any business decision such as costs that might adversely affect CSC.

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