Supply Chain Management

(Written case analysis )

MGT Group: Reconstructing the Supply Chain after a Cross-Border Factory Relocation

Submitted to:

Ms. Maheen Shafqat

Submitted by:

Murtaza Waheed

08U0121

BBA - IV A

Background MGT group was established in 1945 and was specialized at designing and manufacturing highprecision control systems for aviation, aerospace, medicine, electronics, transportation and energy industries. The company has its global presence and is popular at proving engineering solutions to meet the requirement of global market. Since then the company as experienced tremendous growth, have performed well and are technologically more advanced in producing different products to meet the demand of consumers. It has been the major supplier of well known companies such as Boeing, Airbus and Toyota. The company along with its core operations has also done various mergers and acquisition which has enabled them to achieve strong competitive position in the market but since the culture and management style has of these organizations different and they were adamant to follow the same style so this has affected the MGTs profitability and their return on investment has therefore declined. LSD is an example of a poorly managed company that MGT acquired in March 2005. LSD manufactured and deigned high precision valve for aviation, navigation and energy industries. This company had a well known brand image. After the acquisition however the company performance started declining and no improvement was seen and this also had a positive impact on the MGT group as it gave them an opportunity to expand to European and Asian countries. After several decades, due to market conditions such as fierce competition and low profit in Europe MGT group decided to seek new opportunities in Asia. However the company has to reduce the response time as therefore they decided to shift their LSD factory from France to china. The operations of the LSD Company would be handled in the Fuzhou Company which is a wholly owned subsidiary of the MGT group in China. This subsidiary was a manufacturing centre and was very successful venture as it experienced the fastest growth in the region; the company had best employees and had a culture of professionalism and excellence. Before 2007 the Fuzhou company business was focused on the design and production of high precision aircraft electronic systems, selling the product and providing after sale service. Later on however they add various other product lines in the company such as electronics this extension was accompanied by various changes such as the organization culture , structure and functional of employees. This was done by changing manufacturing process by witching to assembly line productions. Issues and highlights There are numerous issues and challenges that MGT has encountered in the case. The major challenge that this group faced was after the acquisition of LSD. The investment made in the company did not provided any returns to the company as LSD performed poorly and was experiencing no growth at all. The group therefore decided to shift the LSD factory from France to China. As a result of this shift the company has to bring about a complete change in the supply chain process by destroying the older one and coming up with a new one that is more effective and efficient. For this purpose Lurton formulated a team to perform this transition by reducing costs to maximum in the period of financial crisis in the country.

In shifting and transition of the supply chain however there are some other issues as well which the company had to solve. These are Time constraint as company has to close down and relocate the entire set up of France which will take long time. Instability in the original supply chain as LSD will be closed so suppliers will demand higher prices, earlier payment and even terminate the contract. complexity of the original supply chain as mentioned in the case that to manage its precision valve system the company used 4329 raw materials to manufacture 481 types of products and most of them were purchased annually so the company kept only 113 supplier to manage it production in china which led to a lower concentration of suppliers and bargaining power of buyer going down. long materials procurement cycle and high purchase cost since the company has to purchase raw material from France so this would increase the overall cost for the company high inventory pressure as company had already piled up huge inventory in the warehouse so moving that would mean huge operating expense Imperfect supply chain in Fuzhou Company as company had its own internal suppliers in France so making transition would make it difficult for Fuzhou factory to manage supply with demand. Higher risk from macro-economic fluctuation in the form of international regulations and taxes etc can also pose risk.

Inorder to design a new supply chain, Lurton started of by first choosing a strategy that would guide the whole process of supply chain. The first and foremost focus is to analyze consumer demand. Through his findings he came to know that consumers for high precision valve mostly belong to transportation industry and they were present throughout US. They consumer wanted multiple types and valves of different specifications and also it was small market so it was difficult to predict demand for the market. However one thing that consumer wants was quick delivery of the product which could only be achieved if manufacturer had enough supply to match the demand. The second important aspect was to analyze the suppliers features, LSD factory bought all the raw materials from suppliers and assemble them in their products however there were some constraints or bottlenecks that led to a negative influence on the supply chain( exhibit 6). Since the procurement period for the raw materials was very long and minimum quantity required for order was very high so it posed a higher pressure on procurement teams. Since the supply chain at LSD faced a bullwhip effect because of complexity and uncertainty so Lurton suggested an agile strategy whose objectives are to provide fast and flexible response to consumer changing demands and uninterrupted supply of the raw materials. In order to meet the agile strategy Lurton team classified high precision value products into three basic categories those with stable orders, those with repeat orders and those with small orders. The strategy recommended for each was different and depended on the time frame in which each was ordered. For stable orders ship & assemble to order was used as though this strategy the company was able to deliever the product within four weeks by keeping half a year 3

inventory . For repeat orders assemble to order was used as this would take six weeks in total to complete the order by keeping 50 percent of inventory and for small orders make to order was recommended as this was more riskier as demand kept on changing so they did not kept any inventory at hand. for low value product and long component cycle company kept half year inventory to fulfill high response. For low value products a supply model which integrated purchase on need was used and small safe inventory was used for both high value and low value ones. Inorder to avoid the risks of carrying inventory at hand and posing risk on suppliers Lurton team worked with engineering experts and came with integration of all high value raw materials which reduced the types by 80 percent. The team therefore was able to bring agility in supply chain by negotiating with suppliers through one year policy of supplying integrated high value raw materials. By locating LSD factory to new country it was not feasible for the company keep the same suppliers as it would raise costs and would also lead a longer supply chain resulting in longer lead time and less amount of quantity ordered due to heavy freight charges. Hence the company should develop negotiations and ties with local suppliers for the provision of raw material. And they should be selected based on various factors such as speed, time and cost. Their performance should also be monitored so that best ones are selected. After formulating a strategy the company now had to decide on schedule and transfer of factory. The key tasks involves are shown in exhibit 9. The whole project was to be carried out in three phases: the evaluation and planning phase before the transference of factory, factory relocation during the transfer and operation improvement after the transfer. This could have been achieved if their would have been integration in the supply chain network. For this purpose of relocation the company set various targets one of them being the keeping inventory turnover low as this would reduce the inefficiency at LSD factory and secondly by keeping safety stocks to enhance agility when the factory is being relocated. Lurtom teamwork and effort although was planned carefully he still had to review the plan himself. Although the plan was flawless but he was faced with certain issues. Firstlly there was a diiference in culture of both factories, there were differences in structure, management styles and thought process so he has to overcome this element by integrating all members in the supply chain. Secondly he ahd the knowledge that people at Fuzhou factory are unaware of high precision valve, therefore he had to bring people to train them. Also relcation will result in employees lay off which might result in building of grudge against Mr Lurton. Thirdly suppliers will be affected in france and they might adopt abnormal practices such as the covert prices and huge demands which might hurt the operations continuity in the company. Lastly Lurton was afraid of finding suppliers who provide best quality materials in Asian market.

Analysis Agile strategy Agile strategy has been highlighted in the case that company should follow which is a strategy of being more responsive by reducing lead times and making the product available to consumers in less time by reducing supply disruptions. This has to be made possible through uninterrupted supply of raw materials, the company should look for suppliers in China who are more responsive and provide the raw materials on time. Following an agile strategy a company need to have certain capabilities such as flexibility, responsiveness and adaptability. This requires the company has strong information network, faster access to market, process integration that is the collaboration of entire supply chian network. Agile supply chain will help organization achieve following benefits that will help it achieve strong competitive position. an agile supply chain will give the organization better access to market conditions and demand pattern of consumers so it will help MGT group to bring about changes in their production process. it would further provide economies of scale by reducing costs, improving production processes and improve the profitability of organization. the disadvantage in this case would be handling and carrying cost of inventory as company had to stock excess to be more responsive. Manufacturing strategy and inventories In order to meet agile supply chain MGT will be using different strategies for manufacturing three types of product. Ship & Assemble to order is used being used for stable products. thos strategy has advantage in the form of lowest cost of carrying and holding inventory as company will keep these inventories only for a smaller time period of one week. Moreover it will result in more agile supply chain as company would get the supplies in less time and will be able to produce output in short span of time and customers lead time will reduce. Made to order would be beneficial as company will carry only high value raw material and would be able to reduce lead time further by supplying order in less time span. Since company is more responsive by integrating the types of inventory, this would result in lower cost as it had reduced the cost by 80% but since supplier demanded one year inventory for these integration so company will have to make decision of which product inventory to carry and which not. Secondly the company would have to look for suppliers who would be ready to follow this particular inventory policy, moreover they might have unnecessary demands such as higher prices, no discounts etc. During the factory relocation process the company had to manage and overcome various challenges such as carrying huge amount of inventory to have uninterrupted supply of materials so that production goes on. This is beneficial as demand of consumers will be fulfilled and also company would be able to match the supply and demand.

Supplier localization Since keeping European supplier will lead to a decrease in response time as raw materials will have to be hanged and production might stop so company decided to use domestic supplier. This is advantageous as the same suppliers currently used for Fuzhou company can be used and costs can be saved. This would lead to more responsive supply chain. Secondly the freight charges of transporting the raw material from those suppliers will be saved by using domestic suppliers. The only disadvantage is the lengthy process of evaluating suppliers and negotiating with them as every subsidiary would have different requirements for selecting a particular supplier. Also using domestic suppliers for the producing the product might lower the quality of the products and deteriorate the companys image and profitability. During the factory relocation process the company had to manage and overcome various challenges such as carrying huge amount of inventory to have uninterrupted supply of materials so that production goes on. This is beneficial as demand of consumers will be fulfilled and also company would be able to match the supply and demand. Operation strategy The LSD product line performance targets set up by the MGT group have been set up without market research. The company had used the information of Fuzhou factory to present the performance indicators, as the targets set are very high which might not be easier to achieve. The targets are shown in exhibit 10. Factory relocation in china will lead to a new market and new customers, this can be profitable and also feasible as company would offer a new product line to consumers who might not have used them so far. This would lead to expanded customer base, increase in revenue and increase in overall growth of the MGT group. Merging it with Fuzhou factory although would give the group an option to use the same location and would save the company time and cost of looking up for a new location but a major restructuring in machinery and equipment and the overall management style will be required which can be risky because employees may not accept the change and may resist from following the new operations and management style. Management Since closing factory in France would lead to a higher number of employees lay off and loss of the regular suppliers, this would mean company would have to again go through the tedious task of hiring workers. Although to the development of human capital but they old employees might keep grudge against the company and therefore can tarnish the image of the company globally.

Recommendations: Gaining ownership of suppliers Since the MGT group has been successful so far in acquisitions and megers so the LSD factory should opt for backward integration of their suppliers. As this would help the company setting interests and policies according to their own methods so they will able to achieve responsiveness by managing the supply of the raw material and help them balancing with demand.

Quality control department One of the major issue that company had while opening up a factory in China was to have contracts with suppliers who can provide them with best quality high value raw material, this was being done in order to reduce the cycle lead time and achieve responsiveness. Hence in order to overcome this issue of maintaining quality LSD should open up a quality control department , whose primary responsibility would be to ensure quality standards are being met. For setting up this particular department MGT company need funds to invest . This could be made possible by selling the inefficient huge inventory that LSD factory had but it need to have a buffer inventory to meet its demand when relocating. Instead of keeping inventory worth $ 4.6 million as mentioned in the case, they should keep inventory of worth $1.5 million only and sell the rest and use the profit to set up a quality control department at factory in China. Setting up a separate factory for LSD Instead of using the same factory set up that Fuzhou factory had and teaching these employees on how the high precision valve will be manufactured, they should set up a different location and different set up for this particular factory. Since they belong to different product lines as well so choosing a separate set up is required. Also this would help the company retain the employees of LSD France as the can transfer them to China by giving them more benefits in the form of high wages.

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