Case Study; Pure Vision Manufacturing’s Sourcing vs. Inventory Challenge
It is no secret; the economy has been pretty tough in the last few years. Pure Vision Manufacturing produces vision systems used in a variety of industrial manufacturing applications. These systems help manufacturers check for quality specifications on high speed manufacturing lines. Even though Pure Vision Manufacturing was the first to market with their vision systems and still maintains the largest market share many overseas electronics companies are entering the market with newer versions of ABC Manufacturer’s technology. In order to compete in the changing global competitive environment the company has realized that the only way to revamp the company’s competitiveness is to invest in the supply chain organization. As a result, the company’s President has decided to hire a group of recent GGU gradates with graduate degrees to pioneer the new Strategic Sourcing Program reporting directly to the Procurement Manager. The President hopes that establishing a strong Strategic Sourcing Program that the company can reduce their cost of goods sold resulting in increased profit margins while holding prices stable for their customers.
The supply chain is fairly stable and contains many legacy suppliers that have become accustomed to consistent blanket purchase orders, getting little push back on price increases as long as they could explain the increase effectively and not having to manage their outbound logistics to Pure Vision Manufacturing’s facility in Livermore, California. As the Strategic Sourcing Team it is your task to find a new source for a component the company has been buying for years. The current supplier is going out of business, so the decision to re-source this product needs to happen as soon as possible. The following provides more detail that will help you answer the questions in the case study.
The component you are trying to source is an electrical connector that connects the vision system camera to the display used by the operator. It’s fairly simple connector with a two pin connection with a two wires wrapped in conduit to protect from them from the elements. The Harmonized Tariff Schedule used to classify this product is 8536.90.8085.
The annual usage for this component is 30,000 units. They are used on first fit applications (complete new systems), in replacement kits and in warranty repairs. Due the high demand for this component Pure Vision Manufacturing holds at least two weeks supply of inventory on hand at all times.
One of your teammates has worked industrial manufacturing prior to being hired at Pure Vision Manufacturing and has a few sourcing options your group can consider; two domestic suppliers, one German supplier and one supplier in Japan. Depending on the transit mode and time inventory may need to be added/subtracted from the current inventory stocking level.
In your first week on the job the Materials Manager asked the team to come out to the Component Warehouse for a tour. You found that the warehouse was packed out with component inventory. The Material Manager also showed the team this year’s inventory reduction goals. It is clear that holding anymore inventory could present it challenge for the materials team.
Supplier 1 –
Reno, Nevada
A well known distributor with multiple distribution locations
Stocks many different types of connectors, ranging in price and complexity from all over the globe
Local representative available to work on new projects and issues
Willing to do consignment/vendor managed inventory
Supplier 2 –
Charleston, S. Carolina
Experienced electronics company with primary US location in Charleston
Major customers are from the automotive industry
Non-union workforce
Recently received their ISO9001:TS16949 Certification
Various models already on the shelf
Global engineering team located in Germany, with domestic account representatives
Supplier 3 –
Taiwan
Relatively new company (within the last 5 years)
Customers in the medical industry
Specializing in simple connectors and electrical components (sensors)
English speaking
Labor costs are the lowest and raw materials sourced from China
State of the art engineering programs with quick prototyping capabilities
Supplier 4 –
Frankfurt, Germany
Well established company with a reputation for quality and efficiency
Primary customers are some of the worlds top high performance car manufacturers
English speaking Customer Service and Engineering teams
High labor costs and raw materials sourced from India
Quick Engineering turn-around time for new projects
Questions;
What are the landed cost versus inventory holding cost trade-offs for each of the sourcing options?
Based on your analysis, which supplier should Pure Vision Manufacturing choose for this component? Justify your choice.
Notes;
Total Supply Chain Costs = Raw material+ Initial Production of basic components + Manufacture + Distribution + Retailers
Landed Costs = Total cost of goods + total shipping costs + total taxes and duties
Inventory Carrying Costs = Capital +Taxes + Insu rance + Obsolescence + Storage