ib l4 2013
TRANSCRIPT
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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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Li & FungCoordination is the key
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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Li & FungCoordination is the key
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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Li & FungCoordination is the key
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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Disaster ManagementNokia Vs. Ericsson
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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Disaster ManagementNokia Vs. Ericsson
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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Disaster ManagementNokia Vs. Ericsson
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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Disaster ManagementNokia Vs. Ericsson
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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Building deep supplier relationships
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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Building deep supplier relationships
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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Building deep supplier relationships
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-turning the Supply Chain around
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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Whirlpool-turning the Supply Chain around
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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Whirlpool-turning the Supply Chain around
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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ZaraTurning Conventional Wisdom to its
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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ZaraTurning Conventional Wisdom to its
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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ZaraTurning Conventional Wisdom to its
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