Solution Manual for Principles of Supply Chain Management: A Balanced Approach, 1st Edition

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Part 2Supply IssuesTeaching Note 1CJ Industries and Heavey PumpsTeaching Note 2Credit Suisse: Sourcing IT ServicesTeaching Note 3Don’t Shoot the MessengerTeaching Note 4Early Supplier Integration in the Designof the Skid-Steer LoaderTeaching Note 5John Deere and Complex Parts, Inc.Teaching Note 6Service Purchasing at the Sunny HotelTeaching Note 7Supplier Development at Deere & CompanyTeaching Note 8A Supplier Partnering Agreement at the University ofLas VegasTeaching Note 9The VW Resende Modular ConsortiumTeaching Note 10Heartland & Company1

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1CJ Industries and HeaveyPumps1Teaching NoteThis is a short and fairly straightforward case dealing with first and second-tier sup-pliers and forming alliances. Currently, CJI is buying 100–150 bilge pumps per year fromHeavey Pumps, and the new demand will be 50 pumps per month, about a fivefoldincrease, to satisfy the new contract with Great Lakes.Discussion Questions1.What are all the issues here, from both CJI’s and Heavey’s perspectives, that needto be researched by Mr. Ashby?The primary issues for CJI are:a. CJI had signed the contract with Great Lakes prior to any discussions aboutramping up production with Heavey. This needs to be addressed quickly.b. No delivery performance or quality performance history had been kept on Heavey.c. No make vs. buy analysis had been done on the bilge pump.d. CJI may need to find another supplier quickly.The primary issues for Heavey are:a. Heavey would need to look at their existing customer orders for the foreseeablefuture to see if they had enough available capacity to quadruple their output ofbilge pumps for CJI. They will be approached very soon by CJI.b. Heavey would need to assess the production, warehousing, purchase and trans-portation costs to determine a new unit price, should they decide they have theavailable capacity.c. Heavey would need to decide if they should attempt to enter into a long-termagreement with CJI, provided they want to produce bilge pumps for CJI.2.Should CJI continue to use Heavey to supply pumps, should they make themin-house, should they consider one of the other suppliers, or should they do somecombination of these alternatives? Discuss the advantages, disadvantages and risksof each of these alternatives.a. Continue to use Heavey. This would be the easiest and probably the best decision,provided Heavey is agreeable, provided their production quality can be assessed,provided the price is right, and provided they can meet the delivery timing andvolume requirements. The advantages are that Heavey has been reliable and theyare a known entity. Other suppliers might not prove to be as reliable.1. © Joel Wisner, PhD, C.P.M., University of Nevada, Las Vegas (joel.wisner@unlv.edu).3

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b. Make the pumps in-house. Evidently, CJI has decided sometime in the past not tomake the pumps in-house. They may lack the specific know-how—they need tohire 3 more people if they do this. There is going to be a learning curve associatedwith this, and 9-months may not be enough. They also have to“clear out space.”This may take a while. Advantages would be more control of quality, timing,quantity and prices.c. Use a different supplier. Talking to other suppliers to get a quote or recommen-dation probably is not a bad idea regardless. CJI has used Heavey for some time,and may not really know what the competition is or is capable of doing. With theshort time frame, though, replacing Heavey now may be asking for trouble.d. Use some combination of the above. This might also be a good idea, particularlyif Heavey is unwilling or unable to supply 50 pumps per month at a reasonableprice. Depending on the available suppliers, getting one“on-board”might be agood idea anyway (i.e., using Heavey for 40 per month and using another supplierfor 10 per month). This may spread the risk of stockouts. Or, CJI may also wantto begin producing a few, until they adequately can assess their ability to make thepumps. Adding other sources of output for an item may be a very good idea inthis case.3.How can CJI assure continued contract compliance and additional contract busi-ness from Great Lakes in the future?To assure contract compliance, CJI must develop a performance measurement systembuilt around the contract. They need to monitor delivery performance, quality per-formance and performance in the other areas negotiated in the contract. To keep thecontract and get more business from Great Lakes, CJI must be a good supplier—theymust manage their relationship well with Great Lakes—offer good customer service, acompetitive price and acceptable quality.4Part 2Supply Issues

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2Credit Suisse: SourcingIT Services1Teaching NoteCase SynopsisDecember 16, 2003, Daniel Parker had left a meeting with the third party that pro-vided end-user hardware services for the Credit Suisse Group. Daniel was responsiblefor strategic sourcing Information Technology (IT) at major Swiss financial servicescompany Credit Suisse. His project was part of an effort to improve the bottom line ofthe Group by reducing IT costs. However, the provider was not able to satisfy the newquality and cost requirements of the Credit Suisse, and as a result Daniel had to cancelthe contract for the upcoming year.The day after, Daniel discussed the next steps with his boss, Michael Swan, head ofsupply management.“We have to find an IT provider that can offer the services at acompetitive price and that fits our internal demand and process requirements.”Onlythen, Michael knew, could they improve service quality and cut IT costs. Daniel swunginto action.Teaching ObjectivesThe case studyCredit Suisse: Sourcing IT Serviceswas written for an introductorycourse in purchasing and supply management or supply chain management. The casestudy shows students the development of analytical and decision making skills on a“supplier switching”management decision.The case study should motivate students to think about the important dimensions ofsourcing information technology (IT) and the necessary requirements of a supplier eval-uation system in a multinational company. They should be able to relate to the threebasic steps of supplier selection/switching:•Internal need analysis to identify the internal requirements for end user•Request for proposal (RFP) and provider selection•Implementation phase: integration of new supplier and the phase-outof the incumbent provider1. This teaching note was written by Gerhard Trautmann and Dr. Roger Moser, Supply ManagementInstitute SMI™, ebs European Business School, with the support of Dr. Martin Lockström and under thesupervision of Prof. Dr. Christopher Jahns. It was prepared solely to provide material for class discussionand does not intend to illustrate either effective or ineffective handling of a managerial situation. Theauthor may have disguised certain names and other identifying information to protect confidentialdata.5

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Discussion Questions1.Analyze the events and the consequences that lead to the described situation inthe bank sector and Credit Suisse Group in particular in the’90s.a. The stock market crash (burst of the bubble) in 2001 hit the banks hard:transactions fell, assets shrunk, interests rates fell and investment bankingrevenue collapsed.b. Cost structures were inefficient, cost/income ratios stood at around 70–80percent and customers mistrusted the financial markets and institutions.c. Increased transparency on pricing and the emergence of new non-bankcompetitors created additional pressure.d. The bottom line, controlling costs and cutting them further, had becomeincreasingly important. IT costs had grown and made up a major stake in theoverall purchasing volume and had a significant influence on the cost base ofthe banks.e. Improving service levels and offering new customer-orientated solutions wereessential to regain trust from customers, they expected higher service levels soprofessional risk management procedures were needed and they became moreand more price sensitive.f.IT costs had grown substantially since the mid-’90s due to the increasingimportance of IT for the knowledge- and technology-driven banking sector.g. Increasing process automation, the development of alternative sales channelsand the need for efficient IT solutions had increased the pressure on theIT departments of the banks.h. Independent IT providers could provide the same services more cheaplythanks to economies of scale.i.With the outsourcing of many non-core activities, in particular IT services, atthe turn of the millennium, the purchasing volume under the supply manage-ment departments had increased strongly.2.Which general problems with the old provider can you identify?a. Provider was not able to satisfy the new quality requirements.b. The provider’s costs were higher than the market average.c. All services were chargeable on a time and material basis rather than at fixedrates. The old service level agreement (SLA) specifications don’t give the pro-vider any incentive to identify significant cost reduction possibilities.d. The provider was facing a continuous volume decline: since 2001 the SLAvolume had plummeted substantially and by the beginning of 2003 was onlyat 50 percent of its original volume.e. Missing structure and lack of transparency of the previous outsourcing dealhad led to very inefficient and costly processes.f.The service level agreement (SLA) was cost insensitive. As a result, the pricerange of, for example, installing a particular unit could vary from CHF 150 to1500, making budgeting very difficult. This cost variability occurred due to alack of transparency on service quality and time requirements.g. There were critical high system/database dependencies between the providerand Credit Suisse. Many important tools, such as inventory management or6Part 2Supply Issues

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ordering tools, fell under the provider’s responsibility. The interfaces had notbeen defined clearly and the provider was often interfering in Credit Suisse’ssystem. Data ownership in many areas had to be transferred completely toCredit Suisse as it was too sensitive to be in the hand of a third-party.Additionally, the provider controlled facility management and network designof the Credit Suisse without accessible documentation of this knowledge.h. The Credit Suisse Group made up nearly 80 percent of the provider’s revenues.Due to the high dependency on the Credit Suisse this meant that the providercould go bankrupt and be unable to provide the services at all.3.What are the advantages of Credit Suisse’s new supplier management/evaluationsystem?a. The different orders/services are categorized into service packages, each with afixed price. This new pricing structure sustained the change towards a processoutput-based view, where the output of the service was defined, measured andcompared. The definition of clear time horizons was then used as the basis forpayment. This new procedure cut the total time needed for fulfilling the ser-vices and increased the predictability and transparency of costs for CreditSuisse.b. The new Service Level Agreement (SLA) was more efficient and cost effective.The SLA specifications give the provider some incentive to identify significantcost reduction possibilities and to optimize processes. These improvementinitiatives also benefit his business and increase his competitiveness.c. To ensure that the provider adheres to the SLA, Daniel Parker had introduceda system whereby whenever the provider failed to meet its obligations, itincurred a penalty. Key performance indicators (KPIs) were then defined fordifferent information purposes. For example, reportings measured the provi-der’s performance on measures such as internal customer satisfaction andincident cause reportings generated information on particular problems thatoccurred regularly. Finally, for each KPI the frequency and format of report-ing, the service level to which it was assigned, and the receiver and its rele-vance for the bonus/penalty system was determined.d. Eighty percent of the total cost could be attributed to services with a pre-defined output through the development of standard service packages.e. Improvement of Credit Suisse’s internal end-user platform processes. A holis-tic view on the processes had been developed and the transparency andpredictability about the processes and the prices increased.f.The new outsourcing set-up allowed them to switch providers more easily,should that be required, and reduced the dependencies that had evolved withthe old provider. Clear interfaces and internal entry points were created, whichprevent the provider from having access to Credit Suisse’s critical knowledge.g. Availability and quality of the service improved. System downtime wasreduced by the more frequent exchange of defective equipment. The availabil-ity of distributed IT services as well as the immediate, customer friendly exe-cution of support and IMAC (Installation, Move, Add, Change) ordersremained unchanged and guaranteed.Teaching Note 2Credit Suisse: Sourcing IT Services7

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4.If you were in the position of Daniel Parker, which other preventive measures doyou have to consider by managing the transition process as smoothly as possibleconcerning the incumbent provider and your own supply management team?a. The Credit Suisse Group made up nearly 80 percent of the provider’s revenues.Due to the high dependency on the Credit Suisse, this meant that the providercould go bankrupt and be unable to provide the services at all. Daniel Parkerhad to ensure that the incumbent provider would provide the services until theend of 2004. Together with the Credit Suisse’s HR department he developed abackup plan for identified key employees of the current provider—enough toprovide the minimum service level—and prepared special contracts. In case ofbankruptcy these employees would receive an offer to continue with the samejob but working for Credit Suisse.b. The last challenge for Daniel was to enable a smooth phase-out of his ownteam and the transition of the open tasks. The supply management team triedto identify open topics, themes and projects related to the phase-out that stillhad to be resolved. These were then assigned to the corresponding line func-tions and a plan for the deliverables set up.5.Write down the most important steps of the IT-Provider-Switching managementactivities.The precise preparation of the transformation process is the most important task inorder to realize the benefits of the concept development work.IT-Provider-Switching management activities:a. Internal problem diagnosis to identify the inefficiencies with the incumbentprovider and development of solution proposals for improving them:•Process adjustment needs: the goal was to redefine and optimize processes sothat the working relationship with the provider could be designed moreefficiently and both parties would benefit more from their relationship.•Service level adjustment needs: the goal was to implement changes in priceand service level structure to reduce costs.b. Analyze where the cost saving potential was still large.c. Negotiations with the incumbent provider to impose the necessary changesand solve these problems→dissatisfactory negotiations.d. Analyze business model of IT providers to get a deep understanding.e. Definition of main hypothesis and internal requirements:•Development of concrete demand specifications•RFP should enable“switch ability”of service providersf.Fine tuning of hypothesis and internal requirements and formulation in con-tractual terms→Request for Proposal (RFP).g. New provider selection and evaluation procedure with the help of categoriza-tions, comparison dimensions with weighing and hurdle rates.h. Sending out the Request for Proposal (RFP) to the selected vendors.i.New provider identification with a detailed evaluation and comparison acrossquantitative and qualitative criteria.8Part 2Supply Issues

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j.Management and supervision of transition process from the incumbent to thenew service provider:•Implementing of demand adjustment initiatives.•Coordinating all the affected IT-systems and setting up new interfaces.•Coordinating and supervision of the smooth phasing in of the new providerand the phasing out of the incumbent.k. Establishment of adequate control and reporting systems to manage your pro-vider→preventing future dependencies.l.Improvement of service quality.6.Daniel’s team had to analyze the last two vendors across four categories. Whichbasic characteristic groups of the potential providers are important to find thesupplier that best matches the internal requirements of the Credit Suisse Group?# 1: Basic Offers of ProvidersFirstly, the basic offers were compared, including such criteria as regional presence,service partnerships and assignment of subcontractors.# 2: Improvement Potential of ProvidersSecondly, the potential for further optimization was analyzed, encompassing criteriasuch as future savings potential and the impetus for further innovation.# 3: Transition/Daily Business Excellence (Project Management Skills)Thirdly, Daniel told his team to hold workshops with the two candidates and toorganize on-site visits. At the workshops the vendors were compared on their abilityto deliver both in the transition phase and in daily business, employees were inter-viewed and the overall impressions of the processes and of the site visit wereevaluated.# 4: Gut Feeling of SM Team towards ProvidersThe fourth category on which vendors were assessed was simply the gut feeling of theteam as to the potential fit of the provider with Credit Suisse in the long term; andthe ability to bear losses—especially important in light of the incumbent provider’sbankruptcy risk. In particular, the team wanted any future provider to have otherlarge accounts besides Credit Suisse.Based on this analysis, the team aggregated their findings into a strength and weak-nesses profile for each vendor. Finally, the steering committee decided that in prin-ciple, both were able to provide the services and that both management teams werecommitted. Although there was a slight preference for one of the providers becauseof major quality and minor price advantages, two contracts were negotiated. Daniel’steam negotiated that they could enter into the transition process with the preferredprovider, but in case of problems during the implementation phase, they had theright to quit the contract and continue with the other provider. This approach hadthe advantage of having a very good backup solution, in case of major implementa-tion problems with the first vendor.7.Daniel’s team had to implement the new service level agreement with the newprovider. Try to work out the three key areas of managing the transition process.Although a new provider had been found, the risk of the incumbent going bankruptin 2004 was still acute and Daniel had to come up with a solution. Following longTeaching Note 2Credit Suisse: Sourcing IT Services9

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conversations with Credit Suisse’s HR department, they settled on a backup planshould the worst happen. Key provider employees—enough to provide the minimumservice level—were identified and special contracts prepared. Now, if the incumbentdeclared bankruptcy, these employees would receive an offer to continue with thesame job but working for Credit Suisse.In the actual transition process the role of Daniel’s team changed strongly fromimplementation towards supervision of the relevant change processes. The teamturned its attention towards three key areas.Firstly, at the process level the team had to ensure the target processes were imple-mented by the responsible line functions.“It is fundamental for the success of thewhole project that the demand adjustment initiatives are implemented as plannedand that we can guide the organization through the necessary adjustments,”Danielsaid.Secondly, the team’s focus had been on coordinating all the affected IT systems andsetting up new interfaces to certify the best match with the provider. It also had to beverified that the most suitable system would be implemented for each service neededfrom the provider, to optimize communication.The third and most challenging goal was to coordinate and supervise the smoothphasing-in of the new provider, as well as the phasing-out of the incumbent (Figure 1).Daniel’s team had to ensure that critical knowledge was transferred from the old to thenew provider.Besides the supervision functions, the supply management team also had to ensurethat the targeted employees received adequate training and were informed about therelevant changes.Figure 1Coordination of Phase-In and Phase-Out Process of TransitionMarch 05November 04• Centralisation of stock and inventory• Transfer of stock (first portion)• Decoupling of locations (net and phone)• Hand-over of rented CS-facilities• Professional disposal of CS-documentation• Suspension of access and admission rights• Return of used CS-assets• Survey infrastructure of usage servers• Final works• Set-up of technical infrastructure andimplementation of interfaces• Set-up of organisational infrastructureand implementation of processes• Training, on-site visits, issuing of accessrights as well as move into CS-facilitiesNew ProviderOperationalResponsibilityIncumbent providerSource: Credit Suisse10Part 2Supply Issues

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With the training modules complete, the next goal was to test extensively the sys-tem’s functionality. An analysis was done to determine whether the provider couldexecute all the services requested by Credit Suisse; whether the IT applications beingintroduced were supporting the processes optimally; and whether the provider’scharges were consistent with Credit Suisse guidelines.Finally, the team had to consider the point in time when the actual transition wouldtake place, without disturbing the operative business. This was also the point of noreturn concerning the vendor choice. Once the system of the vendor had beenconnected and interlinked with the CS, they continued the implementation withthe respective vendor. They decided to make the switch on the last weekend inFebruary 2005, activating the necessary applications and setting up the relevant por-tals and interfaces. On Sunday, the team made final tests with the system to ensurethat all the necessary functionalities had been installed and, finally, in the afternoon,the provider phase-in was finalized.The last challenge for Daniel was to enable a smooth phase-out of his own team andthe transition of the open tasks. The supply management team tried to identify opentopics, themes and projects related to the phase-out that still had to be resolved.These were then assigned to the corresponding line functions and a plan for thedeliverables set up.8.Which quantitative and qualitative results and benefits from the transition to thenew provider can you identify?a. Quantitative Benefits—The benefits of the change in provider for Credit Suissewere impressive. Daniel’s team had reduced the total expenditure for IT enduser services by nearly 40 percent from its historical value. The NPV of theproject was way higher than expected, so that from a financial perspective theproject had met its goals and could be regarded as a tremendous success.b. Qualitative Benefits—A major benefit for the supply management departmentwas that the success of the project could be communicated across the organi-zation. The role of the supply management team as initiator of a successfulcross-functional cooperation lead to an increased acceptance by internal cus-tomers. The supply management team was able to show to the rest of the staffthat“supply management matters.”One of the most important benefits of the project was that 80 percent of the totalcost could be attributed to services with a pre-defined output through the develop-ment of standard service packages. This increased transparency and resolved theproblem of lopsided information between Credit Suisse and the provider. The qualitylevel of the service was location independent and could be measured clearly throughoutput-oriented KPIs. As a result, the costs for provider services fell as there was anincentive for the provider’s technicians to work as fast as possible and performancecould be tracked.The second main benefit was the improvement of Credit Suisse’s internal end-userplatform processes. A holistic view on the processes had been developed and thetransparency and predictability about the processes and the prices increased. Thislead to billing that could be easily audited, and the service quality could be controlledthrough monthly KPI reporting.The third main benefit for Credit Suisse was that the new outsourcing set-up allowedthem to switch providers more easily, should that be required, and reduced thedependencies that had evolved with the old provider. Clear interfaces and internalTeaching Note 2Credit Suisse: Sourcing IT Services11

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entry points were created, which prevent the provider from having access to CreditSuisse’s critical knowledge. Primary data sources were internalized and provideraccess was limited. The increased ease of switching also kept the provider on its toes.The fourth benefit was that the availability and quality of the service improved.System downtime was reduced by the more frequent exchange of defective equip-ment. The availability of distributed IT services as well as the immediate, customerfriendly execution of support and IMAC orders remained unchanged and guaranteed.Additionally, since the provider was only entitled to provide services based onexplicit tickets authorized by the support staff, a technician could no longer handlecustomer requests“along the way,”9.Which important lessons have you learned from this case study?a. Specify clearly your internal requirements before setting up an RFP.b. Analyze your provider’s business to design a win-win situation.c. Keep the market pressure on your provider by preventing dependencies.d. Establish adequate control and reporting systems to manage your provider.e. Find out all information you can get about your internal customers andexternal suppliers.f.The knowledge about your provider’s business is very important.g. Don’t stop to think about cost savings potentials in the organization.h. Every far-reaching decision has consequences that have to be consideredamong the internal and external customers.12Part 2Supply Issues

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3Don’t S hoot the Messenger1Teaching NoteOn July 5, 2000, the unit general manager of Billings Equipment, Inc. instructed thesupply management team to renegotiate existing agreements for a 10 percent reductionwith major suppliers due to target costs exceeding expectations. Jeff Martin, a supplymanagement engineer, was instructed along with the entire purchasing staff to contacthis suppliers immediately with what they would view as very bad news. Jeff had to facehis suppliers with this demand.Teaching ObjectiveThis case was written for an introductory course in purchasing and supply-chainmanagement. It provides the student an opportunity to develop analytical and decision-making skills involving ethics and supplier relationships.Immediate Issues•The general manager’s demand to solicit further price reduction.•Ethical issues that inhibit additional demands from suppliers, that are not cost-based.Basic Issues•Treating suppliers in an ethical manner.•Long-term development of supplier relationships.•Aggressive timelines that lock in design before cost-reduction is complete.Other Discussion and Evaluation Elements•Early Supplier Involvement (ESI)•Investment of time and effort to meet deadlines and control costs.•Level of obligation to supplier•Negotiation Vs competitive bids following ESI1. Reprinted with permission from the publisher, the Institute for Supply Management™“Don’t Shoot theMessenger”by Donald R. Jackson, PhD, C.P.M., Ferris State University, 2001 Case Writing Workshop.13

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•Level of supplier relationships: Short-term and long-term•Transactional—Arm’s-length relationship•Collaborative—An awareness of the interdependence and necessity of coop-eration. Trust building, communications, joint efforts and planning.•Alliance—In addition to collaborative characteristics, the development of“institutional trust”that includes upper management of buyer and supplierorganizations to promote a shared vision of future business. Key componentis TRUST and long term concern over the well-being of the other party.•Price analysis vs. Cost Analysis•Sharing of cost data.•Purchase decisions based on sharing cost reductions vs. target price levels.•Business Ethics•Negotiating in-good-faith.•Enforceable contracts.•Trust—Who is trustworthy, the buyer or the buying organization?•Short- and long-term impact of ethical/unethical behavior.•Business relationships vs. personal relationships with suppliers that impactbusiness decisions.•Human Resources•Ethical differences with supervision.•When do personal values come in conflict with job conditions that impactthe ability to do what’s ethical?14Part 2Supply Issues

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4Early S upplier Integration inthe Design of the Skid-SteerLoader1Teaching NoteScott has been offered a new position as supply management manager for a newDeere & Company manufacturing facility of a yet-to-be-designed product (i.e., skid-steer loader). As part of his new job, he must make a proposal to identify specificsuppliers to integrate into skid-steer loader development process and specific ways toeffectively integrate these suppliers in order to meet aggressive target costs.Immediate Issues•To identify and define criteria for integrating suppliers into the early phases ofthe skid-steer loader development process.•To identify and specify critical principles, practices and techniques for integratingsuppliers effectively into the early phases of the skid-steer loader development process.Basic Issues•Why is supplier involvement important?•Why should certain suppliers be integrated into the product development pro-cess, particularly in the early phases?•How should suppliers be integrated into the product development process?•What structural and infrastructure support should be provided to ensure effec-tive integration of suppliers into the product development process?Teaching Objectives•To understand the meaning and significance of supplier integration.•To learn the criteria and potential tradeoffs for integrating suppliers into theproduct development process.•To recognize contextual factors that would increase or decrease the effectivenessof early supplier integration in the product design process.•To specify critical principles, practices and techniques for successful early sup-plier integration into the product design process.1. Reprinted with permission from the publisher, the Institute for Supply Management™“Early SupplierInvolvement in the Design of the Skid-Steer Loader”by Manus Rungtusanathem, PhD and FabrizioSalvador, PhD, Arizona State University, 2001 Case Writing Workshop.15

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