The international outsourcing of manufacturing is a growing phenomenon today. A UK based company called Fallowfield Cabinets Ltd., located in Manchester, UK was established in 1980 and makes high quality wooden cabinets and dressers. It only uses European wood in the production and now ensures that this comes from sustainable sources. It is a growing and profitable company.
Downstream, it sells to up-market furniture stores throughout Europe. It arranges delivery to the retailer. The retailer is responsible for delivery to end-users themselves. 85% of the turnover is generated in the UK. Germany accounts for 10% France 3% and Italy 2%. Its manufacturing plant employs a total of 135 people. 70 in the carpentry unit. 20 in the finishing department 30 in the assembly and packing department. 15 in the metal working unit.
The metal working unit makes all the hinges, handles, doorknobs and other metal parts. The production director has recently estimated that he can make annual savings of UKP 165.000 (€186.000) if the company outsources the production of the metal components to a production company in China. He is keen to go ahead with this and is preparing to present his plans to the CEO and the rest of the board.
a) What hidden costs may arise affecting the economic attractiveness of this proposal?
b) What supply chain problems and risks are or could be involved in outsourcing this production to China and how could such risks be mitigated?
2. A Dutch based company called Jacobs Pet Foods BV, located in Rosmalen in the south of the country was established in 2009 and sells high quality dog and cat food. The dog food itself is manufactured to Jacob’s own recipe in Prague in the Czech Republic. It is packed in 15 kg bags designed by Jacobs and manufactured in Germany.
It is then shipped to a central warehouse close to Rosmalen. Jacobs Pet Foods BV is a fast growing and profitable company. Downstream, it sells to specialized pet shops in the Netherlands and Belgium. It uses a local transporter to delivery to the retailers. The retailers are responsible for the direct sales to endusers who come into the shops. Approximately 85% of the turnover is generated in the Netherlands. Belgium which the company entered in 2019 is growing and now accounts for 15%. The Commercial Director of Jacobs Pet Foods, Ms. Yvonne Jaspers, has noted the rise in internet sales and the decline in the number of retail outlets in towns.
The number of specialty pet shops shows a continuous decline; from 1600 in 2010 to less than 1200 in 2019. Corona restrictions in 2020 and 2021 are expected to accelerate this trend. She now wants to adopt an on-line selling strategy and turn the company into a web-based company. The CEO Pete van den Berg who is also the founder of the company, is dubious. He points out that most of their retail customers have been with the company for many years and will be bitterly opposed to the same products being available online which could affect their sales. If the Commercial Director is able to persuade the board to adopt her proposal,
a) What will be the effect on the downstream supply chain? What will the new downstream supply chain look like?
b) What risks will the company be taking?
c) What internal changes will the company need to make?
d) How should export sales, to Belgium which account for 15% of the turnover, be dealt with? Should the company re-structure the supply chain to ensure that the export customers are effectively served and if so how?
3. A Belgium based company called Lavaerts Furniture pvba, located in Mortsel, a suburb of Antwerp was established in 1980 and makes high quality wooden furniture such as tables, chairs, cabinets and dressers. It only uses European wood in the production and now ensures that this comes from sustainable sources. It is a growing and profitable company.
The Purchasing Manager, Mr. Michael Claerx, has been looking at the upstream supply chain. The wood is still purchased from the same local wholesaler as when the company started some 40 years ago. Then Lavaerts Furniture was a small company only employing 4 people. Today it is much larger, employs over 200 people and purchases large amounts of raw materials. The relationship with the wholesaler is good; there are few quality problems and any that have occurred in the past have always been amicably resolved. Lavaerts Furniture has stocks of wood approximately equal to 3.5 weeks demand.
Due to the growth of the company warehouse space is at a premium and any further expansion will mean that measures will have to be taken. The Purchasing Manager knows that the origins of the wood are: – Oak France. Beach, Ash & Elm Poland. Pine Sweden. Paint, Glue and varnish account for 12% of all raw material purchases by value. They are purchased from a wholesaler based in Antwerp.
The wholesaler offers a quick delivery service and very flexible order quantities even being prepared to supply single cans of product where necessary which means that Lavaerts Furniture has an average of only 5 days of stocks for these products. Last year a further price reduction of 4.5% was negotiated based on the increasing volumes used.
The Purchasing Manager is considering shortening the supply chain and buying wood directly from exporters in the countries where it originates. He is also considering purchasing the paint, glue and varnishes directly from the manufacturers who are all UK based. Paint comes from two different manufacturers, glue from one and varnishes from two different companies.
a) Draw the current up-stream supply chains.
b) What will be the advantages of sourcing the wood from the countries of origins?
c) What extra risks will the company face?
d) What extra costs could be involved by doing this?
e) Should the company purchase the paint, glue and varnishes directly? What are the advantages and what are the disadvantages? f) Create and draw your new proposed supply chain.
4. One of the characteristics of the modern economy is long, often very complex, international supply chains. For example, last year the European non-food retail group Action sourced over 50% of its products in China. The Dutch based retail group Hema generated 42% of its revenue from products originating in China (NRC 15-02-2020).
The recent outbreak of the Covid-19 virus has shown how vulnerable these extended supply chains are and whilst not being the reason, it is certainly acting as a catalysator in causing many multi-national concerns to reconsider onshoring (some of) their activities.
a) What other factors are causing multi-national companies to onshore some of their activities?
b) What are the positive effects of these international extended supply chains on the world we live in?
c) What are the negative effects of these international extended supply chains on the world we live in?
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