Supply Chain Impact of this New Opportunity by Identifying Potential Changes

QUESTION

 

Provide a discrete answer for each of the questions. Please make sure to identify which question you are answering. There are no guidelines for page length for your responses. I will not be grading by the number of words you produce.  I will be grading by how well you demonstrate your ability to apply the course concepts relative to your classmates.

1) Saint Gobain High Performance Plastics produces architectural plastics for projects such as radar domes and large pavilion-style architecture.  They also produce robust industrial plastics for applications such as conveyer belts in ‘hostile’ environments such as extreme temperatures, extreme temperature changes or constant exposure to various kinds of radiation.  Saint Gobain offers a portfolio of standard products to the marketplace to support customer projects that are built on a make-to-order basis with an average lead time of three weeks.   Saint Gobain also has the capability to design one-off products to customer specifications.

Their manufacturing process is highly capital-intensive consisting of two types of equipment that require long setup times for each run:

• industrial looms for weaving the substrate for their products out of various types of thread
• ‘Towers’ – five-story high, purpose built machines that are used to apply coatings to the substrate weave and then bake the coatings to create the plastic. These machines produce thousands of yards of product per run which are stored in rolls.  The rolls are then cut to customer specifications provided at time of order.

Saint Gobain has a new opportunity.  McDonald’s has invited Saint Gobain to bid on the manufacture of the “grill sheets” that are used in cooking the hamburgers in every McDonald’s restaurant worldwide.  Grill sheets are reusable non-stick cooking surfaces that prevent the hamburger patty from sticking to the grill during cooking.

One key requirement of the McDonald’s bid would be that Saint Gobain would commit to same day shipment for McDonald’s orders.

Evaluate the supply chain impact of this new opportunity by identifying potential changes to the the PLAN, SOURCE, MAKE, and DELIVER processes that would be required in order to execute on this opportunity.

 

2) Discuss at least three key decision points an enterprise must address in choosing its role in the value chain in which it participates and how it partners with other enterprises to deliver customer value.  Illustrate your discussion with examples from the Apple Inc. case study discussed in class

 

3) The Gazinta Company purchases one of the key components of its products from an offshore supplier.  Annual usage of the component is 430,000 units.  Gazinta pays the offshore supplier $9.00 per unit.  With the significant transportation cost included the ordering cost for these units is $300.00 per order. The inventory carrying cost at Gazinta is 25%.

The manufacturing engineers at Gazinta estimate that if the product is brought back on-shore and in-house to an automated production line the ordering cost can be reduced to $1.00.  Cost of the in-house produced units would be $9.05.

Assuming optimal lot sizes in both cases:

1. a) What is the difference in total cost between these two alternatives?
2. b) Which option would you recommend and why would you recommend it?

 

 

ANSWER

 

Solution 1

The partnership with McDonald is a good opportunity for Saint Gobain and the same will help it expand its sales by a lot as it would be getting the worldwide orders of grill sheets. The requirement is very much within the expertise range of the company and they can easily produce the sheets. The only hurdle which the company faces currently is the requirement of same day shipment. The current lead time average for Saint Gobain is nearly three weeks and reducing that down to one day will require a massive overhaul of the supply chain process of the company. The following are the changes that the company will need to make to implement the same.

Plan

As the lead time allowance for the company is almost negligible, there is no room for the company to wait for the orders from McDonald before it starts production of the sheets. As Saint Gobain will have exclusive rights to sell the sheets, it is safe from the risk of unsold inventory. The company will have to forecast the sheet requirements of McDonald’s in advance and have the product ready so that it can ship as soon as the orders arrive. For this the company will have to work closely with McDonald’s and share relevant data which will aid in the forecasting process.

Source

The process of making the sheets will be a standardized process and thus the raw material requirements for the products will be known accurately assuming the company is able to forecast the sheet demand correctly. It can negotiate contracts with its supplier to have their production facilities near the Saint Gobain plants which will help reduce the sourcing times in case of forecasts being lower than actual demands.

Make

The setup time for the manufacturing equipment and highly capital intensive as well. The company needs to build buffer capacity so that the setup-time is not a reason for the delay in the delivery of the sheets. There can be provision for dedicated capacity for grill sheets as they will form a large percentage of sales and can be treated as standard products.

Deliver

The company can also negotiate delivery contracts with logistics companies for both domestic and international delivery. Like in case of plan they will need data from McDonald’s in case of delivery; they will have to share data with the delivery company to allow them to be prepared to ship the products at short notices. This will also decrease the inventory cost for Saint Gobain which will increase the profitability of the company. This is needed as the company need to build buffer capacity at previous levels to maintain the requirement of same day delivery.

 

Solution 2

The products of a company are their responsibility to their customers. However, there are phases of the value chain which are essential for the company and the company should be very methodical in choosing its input in these phases. The decisions a company makes have a large impact on the overall cost and quality of the product. They also determine the agility and the adaptability of the company to the customer demands. The alignment of the company resources is determined by the vision of the company for its products and customers. A few of those are listed below:

Procurement

Probably the most important aspect of the value chain. If a company is able to procure quality raw material, quickly and cheaply then it would be able to deliver a good product at a reasonable cost, still keeping high margins. In case of Apple, it goes ahead to purchase the capacity of the suppliers themselves which guarantees that it will have supply of raw material uninterrupted and at a low cost. It also shares its forecast data so that the suppliers can also produce the raw materials according to the forecasts. The company also places its engineers and designers with the suppliers which help them streamline the process and ensure that Apple receives high quality products from its suppliers.

Assembly

Another important aspect of the supply chain is the product assembly. In this era of globalization the supply chain of the company also spans over multiple nations. Apple, for example, has its Research and Development based out of United States of America, but its production lines are places in China and different companies are in charge of overlooking the process of assembly. Another aspect which outsourcing of assembly solves is the requirement of temporary workers during times of peak demand.  At this juncture, it is important for the companies to make sure that the labor workers are treated properly and all their reasonable demands are met. Another aspect to be looked at is that the work secrets of assembly and new products are not leaked from the assembly line.

Logistics

The process which links all the supply chain operations is logistics. From bringing the raw materials to delivering the finished products, good logistics form a key component of the supply chain. The use of information technology, to send data to downstream to logistic partners, can easy the work of the company to a great extent. Having a dedicated logistic partner which can fulfill all the needs of the company also reduces the cost. In case of Apple the company also uses the warehouse facility of the logistic partners like FedEx which reduces the inventory cost for Apple.

Solution 3

Annual Usage = 430,000

EOQ = SQRT(2*Annual Usage*Order Cost/ Holding Cost per Unit)

Total Cost = Annual Usage * Unit Cost

+ Number of Orders * Order Cost

+ Annual Usage * Inventory Cost / 2

For Option 1

Order Cost = $300

Unit Cost = $9

Holding Cost per Unit = 0.25*9 = $2.25

EOQ = SQRT(2*430000*300/2.25) = 10,708.25 = 10,708

Number of Orders = 430000/10708= 41

Total Cost = 430000*9 + 41*300 + 430000*2.25/2  = $(3870000 + 12300 + 483750)

= $4,366,050

 

For Option 2

Order Cost = $1

Unit Cost = 9.05

Holding Cost per Unit = 9.05*0.25 = $2.2625

EOQ = SQRT(2*430000*1/2.225) = 616.53 = 617

Number of Orders = 430000/617 = 697

Total Cost = 430000*9.05 + 697*1 + 430000*2.2625/2 = $(3891500 + 697 + 486437.5)

= $4,378,634.5

 

Difference = $12,584.5

Having the production in-house will increase to total cost be $12,584.5

Ideally none of the two options is recommended alone. If a strict decision is to be made then it is recommended that the production is kept outside with the supplier, but the cost if not a reason as the difference is very small when compared to the total cost of material. The supplier specializes in producing the equipment and that expertise will not be present if the company starts producing the equipment itself. It would be suggested that is the supplier itself can move the production in the factory of the company then that would be the best possible outcome as that way the company will have proximity to the production and the supplier will be the one in charge. The company should also share the forecast data with the supplier.