THE CHINESE UNIVERSITY OF HONGKONG

Astec Business Case

A Division of Emerson Network
Jasvin Bhasin 10/14/2011 Student ID: s1155006888 Email ID: jasvin.bhasin@cuhk.edu.hk

The following document analyses the answers to three very important questions regarding the workings of Astec Company and also one question about Li & Fung and Luen Thai company.

1. What is the competitive and supply chain strategy for Astec?

Answer: Astec Power delivers power solutions for a diverse range of

applications for multiple industries. It plays against aggressive competitors in a technologically mature market which is dictated by cost wars. In order to sustain its competitive advantage in the power industry Astec follows the following strategy checkpoints: 1. The Emerson Leverage Advantage: Astecs internal division called Group Procurement (GP) engages in global sourcing, identifying best suppliers, negotiating price and signing contracts with suppliers. Being a part of the Emerson group helps Astec gain more purchasing bargaining power and a pricing advantage in raw material costs while finalising its deals. The huge volume advantage helps push the prices down. 2. Lean Enterprise Program: Astec has tried to incorporate the lean culture in its company processes. In procurement for instance, to maintain better material availability, service quality level and short lead time major suppliers are asked to join a VMI/HUB program where in they promise to maintain agreed level of inventory to fulfil the requirements of pull lists sent by Astec. A program from Manugistics based on parameters such as cost is used to pick the required component to generate the pull list which reduces the raw

material cost significantly. Through the Design verification test (DVT) major cost cutting is achieved by using the most cost effective components to build prototypes. 3. Ship-to-hub & Ship-direct Logistic Approach: Astec categorizes its customers into two categories Ship-to-hub and Ship-direct. For Ship-direct customers products are shipped to customer sites directly and Astec assumes minimum risk for payment. But for Ship-direct customers Astec has to await payment till they pull the goods from the customer hub. Astec sets up hubs close to the customers

manufacturing facilities for its major customers. It also provides onestop service on any order and shipment by having dedicated teams of Inside Sales Representatives (ISR) and Customer Service personnel who help the customers to come up with estimated forecast information. Astecs third party logistics provider EXEL manages the customer hubs. A transfer between warehouses is carried out in shortage situations. Astec also transports equipment via sea in cases where the products air shipping cost outweighs its underlying profit. The hub planners in HK plan the production schedules for each manufacturing location. The bidirectional relationship between the Baoan and Luoding facilities saves transportation costs. DHL uses an Advance Shipment Notice (ASN) to speed up the process of customs clearance at the Chinese customs for the shipment of overseas suppliers.

4. Sole/Multiple Sourcing: Astec maintains long-term commitments with its sole-sourcing suppliers receiving price-reductions in return. Some JIT suppliers in close proximity deliver products based on production requirements. Multi category vendor help Astec avoid production downtime and foster competition to lower purchase price.

2. How did Astec integrate its supply chain? What can be improved and how?

Answer: Astecs mother company connections help it enjoy a purchasing bargaining power to gain price advantage. The seven Rs- the Right Goods, in the Right Quality, at the Right Time, at the Right Place, from the Right Source, at the Right Service, and the Right Price are integral to the daily operations at Astec. 1. Procurement: The centralized Group Procurement (GP) division reviews contract price to choose best suppliers. Major suppliers of Astec are part of the VMI/HUB program and the pull list for daily production plans helps reduce raw material cost significantly. Astec quality inspector checks the quality of the local materials through a pre-audit program at the supplier site. The bi-directional relationship between the Baoan and Luoding facilities helps save transportation costs.

Astec maintains long term commitment with reliable sole suppliers to gain annual price reductions. It also has a string of JIT and multi vendor suppliers to cater to dynamic market requests. 2. Logistics and Delivery: DHL consolidates supplies from different overseas suppliers and cross dock to the Baoan facility within a twenty-four hour timeframe. Astec sets up hubs close to the customers manufacturing facilities for its major customers. When overseas suppliers receive pull signals from the Astec Baoan factory they ship the materials to Astec from the regional warehouse and DHL uses an Advance Shipment Notice to speed up the process of customs clearance. As part of the Vendor Managed Inventory (VMI) Service DHL operates a warehouse to receive shipments and maintain inventory from supplier based on a pull list from Astec which is in turn based on invoices provided by supplier. These constitute the VMI operations. Astecs third party logistics provider EXEL manages the customer hubs. A transfer between warehouses is carried out in shortage situations. Scope for Improvements 1. The inventory in the customer hub is not real time visible to hub planners located in Hong Kong. The detailed quantity, destination and time of the outbound shipment are not available in a timely manner. The half-week long time lag on the inventory leads to black holes which make it difficult for planners to analyse demand patterns and predict future

demands. This can be changed by introduce a central system that can help in making the inventory in the customer hub available in real time to the hub planners. This will reduce the time lag. 2. While the ISRs are evaluated on sales, the production people are evaluated on inventory returns causing a conflict of objectives. The ISRs inflate sales forecasts to make sure that there will be sufficient goods to meet the customer needs. Hence, the actual sales and the sales forecasts in the Presidents Operating Report show stark differences. The ISRs and the production people should be brought on the same page to resolve their differences at a common meeting so that the ISRs should make realistic sales forecasts in sync with the production people. 3. The production planners at the Baoan factory are responsible for master production committed scheduling to the based on production The master

requirements

customers.

production schedule is done on a rolling 13 weeks horizon with the scope of change only present after the first three months. However, the process to incorporate change is complicated due to lack of material visibility in suppliers and logistics hubs. This causes a two day delay in effecting the change, increasing cost and reducing responsiveness to customers. To counter this problem a system needs to be established which will allow access to visibility of parts and raw materials so as to simulate

schedule changes and confirm change requests in short time periods. 4. The suppliers who send materials to the DHL hub provide inventory information to Astec in XML format and this to automate the link between Astecs ERP and Advanced planning system - Manugistics. But this link has not been built yet. The information in XML file has discrepancies with the actual inventory at the DHL hub. This leads the planners at the Baoan facility to not trust the information system data and hence refuse to have direct data interface with the VMI system. This can lead to material shortages which can lead to delays and production line stoppages. The link between Astecs ERP and Manugistics should be built so that the planners at the Baoan facility can use the information system data to plan the logistics and inventory in a better way. 5. The Astec and the DHL hub heavily rely on e-mail but the information provided by DHL is not that reliable. Astec does not monitor the actual inventory of goods supplied by the VMI suppliers. Also, there should be an allocation mechanism to split the quantity to support Baoan and Cavite factories both of which use common parts. This can help counter the case of insufficient inventories. Traditional e-mails should be replaced with a more dependable central system that tracks orders and customer requests.

3. How do power, trust and relationship commitment influence supply chain integration?

Answer: All three factors or power, trust and relationship commitment are vital for supply chain integration. Supply chain integration is the level to which a business strategically collaborates with its partners and manages intra and inter-organization processes to achieve efficient and effective flows of products, information, service, decisions and money for the maximum benefit of its customers. This entails treating the supply chain as a single system rather than stand-alone fragmented entities. French and Raven(1959) classified power into five types which can be used to classify customer power into the following categories:

Non-Mediated Expert Sources Of Referent Power Legitimate Mediated Sources Of Power

Reward Coercive

Non Mediated Sources of Power: These types of power are not wielded by the customer but are more or less perceived in the eyes of the supplier. 1. Expert Power: In this case the supplier values the customer due to its expertise, knowledge and skills and how it can train the supplier with all this wisdom and hence is ready to position itself according to the customers wishes. For example: Cummins Engine is valued by all its suppliers due to its Six Sigma expertise. 2. Referent Power: In this case the supplier values being identified or associated with the customer. For example being the supplier of a prestigious company such as Ford can vouch for the credibility and capability of the supplier. 3. Legitimate Power: This is natural power where the supplier thinks that certain customers have a natural right to influence its actions. For example since Ford was Navistars only customer, Navistar would have been expected to be willing to conform to Fords every wish. Mediated Sources Of Power: These are known to the customer and are readily exercised with the explicit intent of influencing a supplier. 1. Reward Power: The customer provides attractive rewards to the supplier by increasing the the frequency or quantity of its purchases.

2. Coercive Power: The customer has the power to punish the supplier in times to cause it harmful damage. For example, Ford tried to use its power to coerce Navistar to lower its engine prices. From a relationship standpoint there are two types of relationship commitments that can be talked about: 1. Normative Relationship commitment: This is an ongoing

relationship over an extended period of time, based on mutual commitment and sharing. It takes longer to establish such a relationship and demands greater investment of resources. But the payoff of such a relationship is great in the long term. 2. Instrumental Relationship commitment: This exists when a supplier accepts the influence of a customer in the hope of receiving a favourable reaction. This might be beneficial to one or both parties in the short term but fades away when new partner opportunities appear. The relationship between power, relationship commitment and supply chain integration in the context of China can be discussed as follows: Both expert and referent power seems to have a positive impact on normative relationship commitment, but legitimate power does not. The non mediated types of power do not relate to the instrumental relationship commitment. In China, the legitimate power of the customer to influence the supplier is universally accepted. Also, Guanxi networks and Chinas

collective culture causes the power base to shift to the extended guanxi network. Also, the use of the reward power by the customer to respond to suppliers expectation is perceived to improve the normative relationship commitment. By research it has been found that normative relationship

commitment had a positive impact on supply chain integration by helping to achieve competitive advantage and enhancing performance while instrumental relationship commitment did not help much. Hence, suppliers should cultivate normative relationship commitment with their customers making it easier for the involved parties to cooperate with each other, sharing information and integrating interorganizational processes based on an intrinsic desire to continue a relationship. Instrumental relationship cultivation is has no effect on the supply chain integration and in the long run may well damage shared values and norms. This is reflected very well by the Ford-Navistar case where the lack of mutual trust, extreme exercise of power by Ford and a short term relationship investment turned into an ugly scheme of events where both parties were harmed by negative cross-attacks.

4. How did Luen Thai and Li & Fung manage relationships and integrate their supply chains?

Answer: Luen Thai (LT) and Li & Fung (LF) are two companies engaged in very similar businesses with customer focus and cost optimization as their primary targets. However, the two companies are very different in terms of their strategies and supply chain models. Hence, the two companies also managed their relationships differently. The Luen Thai Company and its relationships: Luen Thai has a concentrated approach of supply chain city where a centralized supply chain model ensures that most of the service providers and suppliers are located in close proximity. This is done to save travel time and cost and make the supply chain system more efficient. There is an extensive centrally controlled IT infrastructure that makes sure that there is seamless coordination and optimal utilization of production lines. Better concentrated control helps Luen Thai to manage its working effectively, make swift decisions reducing scope of error and mismanagement. But it also has to take more accountability for the success of the overall supply chain and maintain customer trust. Hence, this requires Luen Thai to maintain long term normative relationships with its customers based on mutual trust and cooperation. Luen Thai has maintained a deep Chinese identity setting

up supply chain cities in the heart of China. This is largely due to the fact that Luen Thai maintains strong control over its centralized supply chain model. Hence, it would not be wrong to say that The Chinese business practice of Guanxi would be really important in the relationship between Luen Thai and its Chinese suppliers. Hence, the natural or legitimate right to power would be more acknowledged in this typical Chinese set up, and so will be the need to reciprocate the suppliers expectation by using reward power. Also, given the quota system that was in place in the past, it would have been imperative for Luen Thai to have engaged in acts of Guanxi with the state officials from time to time to get benefits on quotas and relaxed norms. Luen Thai has established a Social Accountability Management (SAM) System to maintain the health, safety and compensation of its employees. All these efforts go a long way in enhancing productivity and motivating employees to perform well in the supply chain process. The Li & Fung Company and its relationships: Li & Fung believes in the concept of dispersed manufacturing where the pieces of the supply chain are evaluated individually for best solutions to each step. For example looking for the best possible optimal supplier of raw materials, logistics or packaging suppliers irrespective of where in the world they are located. Li & Fungs relationship with its customers is a very normative one which has been forged over years with trust, dedication, unparalleled service and mutual cooperation.

Li & Fungs approach helps it to create customized value chain for every customer making it a customer favourite but the managerial effort involved in coordinating such a dispersed model can be huge. Hence, Li & Fung might be more interested in developing instrumental relationships for the short term with these suppliers which gives it flexibility to shift across multiple suppliers in times of need. In the dynamic textile industry where trends change so often Li & Fung can shift between suppliers easily since it does not have permanent commitments to its partners. Li & Fung has always been concerned with projecting itself as a multinational company with diverse roots. This stems from its dispersed manufacturing model and its need to manage geographically distributed entities. A multinational tag probably benefits Li & Fung in striking the right relationship with its global customers, employees, suppliers and partners and maintaining a global mindset. Given all these facts about its global identity and global partners it can be said that the very integral Chinese business practice of Guanxi might not be as integral to the workings of Li & Fung in the current time as it would have been years before when it developed very traditional Chinese products and had very traditional Chinese partnerships. In todays modern world, Li & Fung would have to maintain different relationships with its global partners to support this global supply chain. It can be seen that Li & Fung exercises reward power over some of its suppliers, especially the dedicated small units where in it ties

the compensation directly to the units bottom line and keeping no cap on the bonuses. Given its long and high standing in the industry Li & Fung tries to maintain the same close attention to detail with customers as it used to do in the past. The current leadership still tries to maintain its heritage of customer service. Even in the company there is less regard for titles and hierarchy to the extent that the employees have tea with the owners family often on. Li & Fung still tries to preserve intimacies at the heart of its most successful relationships.