MIDWEST ELECTRONICS
OEM SUPPLY CHAIN ANALYSIS
Each month, Rick Milano and other department heads listened to the
director of OEM (original equipment manufacturer) operation at
Midwest Electronics summarize monthly financial performance
statistics. Among a number of product lines, Midwest supplied
amplifiers and speakers to major automobile companies and today,
the message was clear—although sale volume continued to grow,
profit margin needed to improve. With chart after chart illuminating
the dimly lit conference room, thoughts wandered into Rick’s mind
as he listened. “Of course the margin is under pressure, this is the
automobile business—price reduction and quality improvements are
expected. On top of that, all the recent schedule increases have
required the use of airfreight to ship raw material to the plants. Even
more important, better than twenty percent of the finished goods over
the past four months had been shipped to key customers in Japan by
air too”.
Rick knew that ocean freight was more economical, but the
lead-times were just long enough that one hundred percent on-time
delivery performances necessitated air cargo.
BACKGROUND
The OEM group was the business unit responsible for sales of
amplifiers and loudspeakers to automobile manufactures. Over the
past five years, the division had transformed from a small, but highly
creative group to one of the most strategic and growing segments of
the company’s business. The management team was comprised of a
staff that included business planning and administration, finance,
engineering, and quality. Managers understood their respective areas
well and took pride in their ability to work as a team.
Rick, who managed the logistics and transportation
organization, reported into the manufacturing division. The
manufacturing division produced the array of products that each
division sold and so the OEM group was an internal customer.
Today, Rick paid closer attention to the group of slides that
forecasted the next year of demand by customer. He knew that this
would put more pressure on his staff because adding headcount (i.e.
more people) to support incremental business would not be easily
justified. The last segment of the meeting was always most
interesting as new automotive sound systems or automobile models
were displayed. This month, examples of good work were
highlighted. Rick couldn’t help but feel a sense of pride as he was
called up to receive special recognition for ensuring one hundred
percent on-time delivery for the previous year’s shipments to Japan.
As he sat back down in his seat, he wandered back to his earlier
thoughts about the costs of ocean freight versus airfreight.
Midwest Electronics produced loudspeakers, amplifiers, and
music systems for the past forty years, Although the manufacturing
of consumer electronics in North America had all but disappeared,
Midwest Electronics had actually maintained long-term growth and
produced products in the US, later adding plants in Mexico. Strong
brand recognition helped each division sell products and a major
factor in their success was the reputation for advanced technology,
quality, and innovation. This ensured that each product line offered
high consumer value.
The array of home products was robust and ranged from small
stereo speakers that sold at modest prices to high performance
systems that included complicated electronic and amplification in
addition to the speakers. Dealers that ranged from small stereo shops
to large retail chains marketed these home type products. In fact, the
largest dealers used electronic data interchange (EDI) to exchange
product demand and orders. One dilemma was the fact that key sub-
assemblies for OEM and consumer products were run on the some
production lines. Further, recent successes in increasing business
with large retailers caused resource allocation issues, so increases in
either channel might have an effect on the other. A highly automated
plant in Kansas City, Missouri churned thousands of circuit boards
and other electronic each day. Expensive capital equipment needed to
run at high levels of output to justify both the initial fixed cost as
well as expensive technicians that kept the machinery running.
The same was true for speaker lines. In fact, capacity
management for this type of production equipment was even more
critical because the custom-built units provided competitive
advantages when the throughput and quality metrics was favorable.
Adding new lines generally involved millions of dollars in research
and production costs and often took two years to put into service.
Midwest Electronics closely guarded its machinery and went to great
lengths to ensure that no one employee understood how the whole
production line operated. This practice ensured that competition
would not be able to hire away talent and copy core technologies.
Midwest Electronics strategically located a facility near
Detroit, Michigan to demonstrate its commitment to domestic OEM
customers. These firms respected Midwest Electronics for their
proximity to the heart of their automobile manufacturing operations.
This location enabled the firm to deliver goods on time and respond
to swings in customer demand. Over the years, proven excellence in
supporting US manufacturers led to inquiries from Asian and
European automobile manufacturers. By the late eighties, Japanese
manufacturers were featuring Midwest Electronics products in key
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models. Rick personally believed that a West Coast operation would
reduce delivery times to Japan by a week, but the business volumes
did not warrant the construction of a new manufacturing facility. The
core team focused instead on how to reduce the factors of time and
space through the logistics pipeline.
With international sales a significant and important portion of
the business, prowess in this area had become a core competency
early in the company’s history. In fact, the cyclical nature of world
economies helped to smooth the ups and downs. This was not
without shortcomings; with most of manufacturing operations in
North America, deliveries to customers were an increasing challenge.
Rick believed the proper resources were in place in terms of his staff-
especially since they showed commitment and creative spirit. Even
with electronic receipt of shipment status messages that identified the
location of all in-transit shipments, managing the pipeline was time
consuming. Critical were the handoffs between modes. Any one
delay caused by a transportation provider has a subsequent effect on
the next portion of carriage. Rick’s team often worked after hours to
ensure that each milestone was met, and in cases where a connection
was missed or weather delay encountered, the staff would arrange
“plan B”—using air cargo or team operated trucks to ensure on-time
delivery. From a management perspective, the group was reacting to
a short-term need. However, everyone recognized that long-term
operation with long hours could cause employee turnover.
THE BUSINESS
Demand for automotive systems destined for Japan was
approximately 172,800 systems annually. Systems consist of one
amplifier and four speakers-each packed in quantities of 144 units per
pallet (Table 1). If one hundred percent ocean freight were used, the
quantity would equate to approximately three 40’ containers per
week. Containers of this size carried 40 pallets. When 20’ containers
were used, a maximum of 18 pallets could be loaded. The plant in
Kansas City ran five days a week and normally operated with two
shifts per day. Shipping operations operated seven days a week—a
factor that was helpful when expediting cargo by air. During peak
demand periods, a third shift could be added; however, this option
worked best when utilized for extended periods since recruiting and
operator training impacted costs- in addition to stability within the
workforce.
Generally, production for all customers (including the Japan
business) ran any of the five days weekly. To produce the quantities
required for the Japan market, four shifts of production per week
were scheduled out of the possible ten shifts. Process quality was
stable, so production managers were comfortable in running the
production on either first or second shift. Lastly, with quick line
changes, there was a lot of flexibility shifting production from one
product to another.
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 Customers supplied demand data in three time horizons.
Annual demand information provided insight so that manufacturing
capacity could be allocated across all programs. In addition, this
information helped in predicting revenue and profit. Rolling three-
month demand supplied the necessary information to order raw
materials and to pre-allocate production schedules. One-month firm
orders represented the final commitments from the customer. This set
of demand was received during the third calendar week each month
and specified the daily numbers of systems required for the
subsequent month.
In Japan, daily shipments were made from Midwest’s finished
goods warehouse in Yokohama, which was located within hours of
each automobile plant that it services. With an average of 34 days of
in-transit material in the pipeline, the monthly firm orders were used
to prepare air shipments when final demand exceeded the previous
forecast or to reduce current production should customer demand run
at lower levels than forecasted in the rolling three month forecast.
In this model, there were several challenges. First, a target
inventory of seven weeks (of which five weeks was in-transit) was
established. With an average transit time of 34 days and firm orders
of 30 days from the customer, any ocean freight shipments were done
based on forecast and “gut feel”. In other words, should an ocean
shipment be made upon receipt of the firm order, the delivery of that
material would occur after the close of the month. Therefore, lots of
airfreight was used to cover increases.
Also, end-of-product life activities required close
management of finished goods inventory since model changes
rendered inventory obsolete. Since each system was configured to a
specific model and could not be fit into generic applications, excess
inventory could not be sold in other channels. This phenomenon
required not only the close monitoring of finished goods, but also any
unique raw material or components used in the system.
Further, though the assembly plant was flexible, swings in
production requirements during the current month were somewhat
restricted by other customer requirements (i.e. production schedules)
and raw material inventories. When required, raw materials that were
supplied from domestic, Asian, and European sources could be
expedited; however, a few critical materials were on allocation by
vendors. With tight margins on the OEM business, premium freight
expenses on raw materials rolled into increased cost-of-goods-sold,
a detracting effect on the balance sheet.
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TRANSPORTATION PIPELINE
The use of intermodal transportation blended repeatable
performance with reasonable cost. Shipments were loaded in full
containers, trucked to the rail ramp- a location where the container
was taken off a road-going chassis and loaded onto a flatcar. Double
stack unit trains were assembled from the many flat cars and operated
with high reliability and speed to the West Coast where they would
be unloaded at the port and queued for loading a minimum of two
days before sailing to allow ample loading time. The vessels sailed
weekly to the port of Yokohama where the cargo would be unloaded
and held at a container yard while the customs clearance and trucking
to the finished goods warehouse were arranged. Although the process
resulted in a mean performance of 34 days, a couple of shipments
caught the right connections and were delivered in 21 days and two
shipments took 41 days (Table 2). As a result, a 35-day transit
standard was adopted for use in the production planning process.
THE SOLUTION
Rick left the OEM operations review meeting with three key points.
First, even though he received accolades for excellent support, he felt
that more could be done- especially in the area of improving the
profit margin. Freight costs were a relatively small relative to the
invoice value of the product, but over $875,000 was spent on
airfreight over the past year compared to $492,000 on ocean freight
(Table 3).
Second, Rick thought about the amount of money tied up in
the logistics pipeline. Lastly, with a five to ten percent growth in the
number of systems forecasted, he was concerned that the short-term
work in expediting shipments through the pipeline would result in
staffing problems—either more people would be required, or
turnover may occur. Both prospects were troubling to him. Further,
the current mode of operation placed a great deal of stress on the
factory. Last minute production changes resulted in expedited
shipments of raw material followed by urgent shipments to the
customer.
Rick wondered if he was worrying needlessly. Maybe he
should leave things the way they were.
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Questions for class discussion:
1) What obstacles impede one hundred percent on-time
delivery of ocean shipments to these Japanese
customers?
2) Describe your approach in analyzing the data
provided in this case. In your answer, identify and
list the specific questions you would ask his logistics
organization if you were Rick Milano.
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 Packing Information – Table 1
Length (in.) 40.00 Units per Carton 8.00
Width (in.) 48.00 Cartons per Pallet 18.00
Height (in.) 44.00 Units per Pallet 144.00
Ft.3 per Pallet 48.89

Weight per Carton (lbs.) 30 Value per Unit $ 70.00

Weight per Pallet (lbs.) 570.00 Value per Pallet $10,080.00
Volume Weight per Pallet (lbs.) 508.92 Inventory Cost per Pallet per Day $5.52

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 Ocean Transit Performance Table 2

45
Average Transit = 34 Days

40

35

30
Number of Days

25

20

15

10

0
15

19

23

25

37

39

43

47
1

13

17

21

27

29

31

33

35

41

45

49
11

Plant Delivery to Rail Time on Rail Time to Load at Port

Ocean Transport Time at Destination Port Time to Deliver NOTE: Containers sail from the West Coast each Thursday

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 Shipping Information – Table 3
Value per Pallet # of Inventory Inventory Cost
Pallets Value per Day
Individual Pallet $ 10,080.00 1 $10,080.00 $5.52
20’ Container $ 10,080.00 18 $181,440.00 $99.42
40’ Container $ 10,080.00 40 $403200.00 $220.93

Mode Freight Transit Inventory Total Pallets Total Freight Annualized

Cost per Time Cost Freight & per Cost Total Freight
Pallet Inventory Year & Inventory
Cost Cost
Air $570.00 4 $22.09 $592.09 360 $205,200.00 $213,153.53
(Consolidated)
Air (Direct) $800.00 2 $11.05 $811.05 840 $672,000.00 $681,27912
Ocean (20’) $170.00 34 $187.79 $357.79 480 $81,600.00 $171,740.05
Ocean (40’) $95.00 34 $187.79 $282.79 4,320 $410,400.00 $1,221,660.49
Totals 6,000 $1,369,200.0 $2,287,833.21
0

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 Supplemental Information
1. Inventory in the Japanese warehouse is planned at two weeks of coverage. In other words, the
facility holds sufficient quantities of inventory (i.e. protection stock) to cover two weeks of daily
shipments to the various automobile plants. This target quantity has been set by policy, therefore
increases or decreases of transit time do not affect the policy to maintain the inventory.

2. Time at the destination port in Japan is comprised of vessel unloading and customs clearance time.
The process is capable of a two-day, repeatable standard for these activities.

3. Sales terms to automotive companies are CIF (Cost, Insurance and Freight). Under this term, the
sale price to the customer includes the price of the product, insurance, freight cost as well as import
fees. Further, title and ownership is transferred from Midwest Electronics to the automobile
manufacturer upon delivery to the car plant. This means that the inventory holding cost (from
production in the US through delivery to the car plant) remains with Midwest Electronics. Also,
liability for airfreight expense remains at with Midwest. Due to the fact that the CIF price is static,
any variation in delivery cost occurs at the seller’s expense/benefit.

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