CASE STUDY

JIT IN THE AUTO INDUSTRY SYSTEMATIC PROBLEM SOLVING (SIX SIGMA) TO SOLVE AN ACTUAL

PROBLEM IN A CAR MANUFACTURING INDUSTRY INVENTORY MANAGEMENT AT TELESYS VENTURES INC. SUPPLY CHAIN PROCESS OF CROCS INC

NAME:

REGISTRATION NUMBER:

PROGRAM NAME: POST GRADUATE DIPLOMA IN BUSINESS ADMINISTRATION

SPECIALIZATION: OPERATION MANAGEMENT

SUBMITTED TOSYMBIOSIS CENTRE FOR DISTANCE LEARNING (SCDL)

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CASE STUDY 1: “JIT IN THE AUTO INDUSTRY”

INDIAN AUTOMOTIVE INDUSTRY TODAY

3rd largest small car manufacturer in the World

2nd Largest Two – Wheeler manufacturer in the World

World’s largest Motorcycle manufacturer is in India

2nd Largest Tractor manufacturer in the World

7th Largest Commercial vehicle manufacturer in the World

6th Largest Car manufacturer in the World

Domestic Market Share for 2009-10

Segment Percentage

Passenger 15.86

Commercial Vehicles 4.32

Three Wheelers 3.58

Two Wheelers 76.23

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AUTOMOBILE DOMESTIC SALES TRENDS

Category 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10Passenger Vehicles 902096 1061572 1143076 1379979 1549882 1552703 1949776Commercial Vehicles 260114 318430 351041 467765 490494 384194 531395Three Wheelers 284078 307862 359920 403910 364781 349727 440368Two Wheelers 5364249 6209765 7052391 7872334 7249278 7437619 9371231Grand Total 6810537 7897629 8906428 10123988 9654435 9724243 12292770

JUST-IN-TIME (JIT)

“It is a manufacturing philosophy that attempts to produce with the shortest possible lead time, the lowest possible level of inventory and lowest possible waste.”

JIT refers to zero inventory (means not zero days but two days inventory) operation. It is continuous process it seeks eliminating raw material stock and finished goods stock.

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JUST IN TIME IN INDIAN COMPANIES

The Indian automotive component industry has shown tremendous growth over the last decade. Today it has 480 companies, employees more than 2, 50,000 people and has an estimated turnover of approximately Rs. 50,000 crore (US$ 10 billion). Just-in-Time has been widely adopted in the Indian companies especially in Indian automobile and manufacturing industry.

List of Indian companies using Just in Time:

Lucas-TVS

Tata Motors

Volkswagen India

Maruti

Hero Honda

Bajaj Auto

Kirloskar – Toyota

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General Motors

SUPPLY CHAIN MANAGEMENT

“Supply chain is defined as the network of organizations that are involved, through upstream and downstream linkages, in the different process and activities that produce value in the form of products and services delivered to the ultimate consumer”.

“Supply chain management is defined as management of a network of retailers, distributers, transporters, storage facilities and suppliers that participate in the sale, delivery and production of a particular product”.

There are four major decision areas in supply chain management:

1) Location,

2) Production,

3) Inventory, and

4) Transportation (distribution)

WHAT CASE STUDY SAYS…

Delivery schedule hampered:5

In the year 2004, Hyundai Motor Company production affected by 10-15 % due to heavy rainfall and transporter strike

In the year 2005, General Motors production affected by 15-20 % due heavy rains in Maharashtra and Gujarat

In the year 2006, Hero Honda Motor production affected due labor strike for five days. Maruti Suzuki`s production affected in the year 2005 because of heavy rainfall

Auto manufacturers are looking for complementary techniques and processes (Comprehensive SCM) that can enable JIT to work more efficient manner.

Using Information technology RFID (Radio Frequency Identification) / EDI (Electronic Data Interchange)

QUESTION#1

In their zeal to implement new concepts like TQM and JIT, auto companies in India have overlooked the importance of viewing the supply chain as a whole. Most of the auto manufacturers focused on implementing JIT from an interfirm production perspective. What do you understand by JIT interfirm production? What are the inevitable limitations of this approach to production?

Solution:

Yes. Indian automobile manufacturer's using JIT & TQM technique from last few years.

Manufacturing

JIT interfirm ProductionExample: Bajaj Auto & Maruti Suzuki Limitations of interfirm production

JIT interfirm Production

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A formal or informal agreement between organizations to collaborate in achieving common or new goals more efficiently or effectively. Interfirm cooperation usually takes the form of a joint venture, strategic alliance, or strategic partnering arrangement.

Example: Bajaj Auto

Plant: Waluj Plant, Auranagabad.

Capacity: 18, 60,000

Suppliers:

JBM - FramesMRF & Dunlop – tiresMinda - locks & ignition systemReinder – headlamps & lightsEndurance – brakes, clutch & Cast wheelVarroc – Plastic parts & Digital MeterMax auto components – ignition system and switchesSilco cable – wires and cablesMakino industry – Brake shoes, Brake lining, clutch center

EXAMPLE: MARUTI SUZUKI

The Company has adopted the Japanese System, JIT to achieve higher operational efficiencies and reduce inventory carrying cost.

JIT improves the return on investment of a business by reducing in-process inventory and its associated carrying costs.

To achieve JIT material supplies, the company gives preference to locally based suppliers and

encourages far distance suppliers to set up base close to Maruti Suzuki`s facilities. Over 76% of the company's 246 suppliers are located within 100 kms of radius. Have

strategically located the suppliers of bulky components such as instrument panels, fuel tanks, bumpers, seats, etc. adjacent to the company's manufacturing facilities in the Suppliers' Park?

The JIT system has evolved over the last 25 years in the company from monthly scheduling to daily scheduling of parts orders and finally, in 2003, to e-nagare system i.e. the release of schedules on hourly systems, a practice that aids in maintaining less than two hours inventory of components within the company.

The e-nagare system is successfully running today at the company and helps in maintaining the right material inventory, at the right time, at the right place and in the exact amount without the safety net of excess inventory, thus reducing high inventory carrying cost.

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Maruti Suzuki is governed by the manufacturing excellence principles of reducing wastages, inconvenience and inconsistency, which are imbibed from its parent company SMC, Japan.

Maruti Suzuki using best practices such as Just in Time (JIT), Kaizen (continuous improvements), Pika Pika and Poka Yoke (mistake proof operations). The best practices are replicated in the business process of business partners to make their operations lean and error free.

The company is efficiently interfaced with the dealers through Dealer Management System (DMS), annual dealer interactions and reviews which help the dealers in cost savings and customer convenience.

Optimum levels of inventory are maintained to reduce the burden of inventory carrying cost. Higher inventory levels are corrected whenever required to them financially viable. This results in multiplicity of efficiency across the value chain.

LIMITATIONS OF INTERFIRM PRODUCTION

Culture Differences: The organizational cultures vary from firm to firm. There are some cultures that tie to JIT in inter-firm success but it is difficult for an organization to change its cultures within a short time.

Time frame: Production is very reliant on suppliers and if stock is not delivered on time, the whole production schedule can be delayed.

Crunch on delivery: Today many tier1, tier2 and tier 3 suppliers are struggling financially to meet their customer demands for lower cost, higher quality and time deliverables.

Loss of team autonomy: This is the result of decreasing buffer inventories which lead to a lower flexibility of the workers to solve problem individually.

Loss of method autonomy: It means the workers must act some way when problems occur, this does not allow them to have their own method to solve a problem.

Responsive method: There is no spare finished product available to meet unexpected orders, because all products are made to meet actual orders – however, JIT is a very responsive method of production.

QUESTION#2

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‘JIT is certainly one of the best practices in any production system but you need to have supply chains streamlined for it.' What in your view can be done to streamline the supply chain in order to achieve greater efficacy of JIT?

Solution:

Yes. JIT and SCM need to implemented jointly by the automobile manufacturer`s.

JIT & Supply chain management Example: Ashok Leyland

TO STREMALINE

Linkage of JIT with SCM is being enabled by computerized information systems and electronic data interchange (EDI) with suppliers, dealers, warehouses and customers alike.

The key role of a supply chain is to assist in the production, consumption, and distribution of goods and services.

This means that goods must be produced and delivered to the market (or customer) in the right quantity, of the required quality (i.e., without defect), and at a competitive price.

Integrated and seamless logistics systems can play an important role in facilitating global supply chain processes.

In a nutshell, change in supply chain management practices effects a wider, more than expected on spectrum of operations ranging from –

Layout engineering, Operations flow planning and control, Material planning, Storage and delivery and also quality assurance till the finished goods are transported to

warehouses, distribution / retailing centers and finally customers.

SUCCESS STORY – ASHOK LEYLAND

Ashok Leyland, one of the largest private companies in the country, had sales over Rs. 6,000 crore in 2005-06. Ashok Leyland is a part of Hinduja Group. It is also one of the largest automobile and auto component companies in India.

The company offers a world-class range of trucks, buses, special application vehicles and engines, crossing millions more than 40 countries in the world. During 2005-06, the company produced total 65,085 vehicles out of which it has exported 4,879 units. In the domestic market, the company has sold total 56,776 units.

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The SCM project ‘Oscars Inbound’ included supplier partnership, vendor base rationalisation, tiering of suppliers and cluster information, inventory optimization through JIT and LCL, total cost management, logistics initiatives, e-sourcing and global sourcing. The gains from ‘Oscars Inbound’ are given below:

Supplier partnership covers engineering and technical support, global market leader, and global availability of spares, testing capabilities, improved field performance, system supplier, JIT supplies and world-class technology.

Partnership gains include vendor consolidation under Tier-I, continuous technological upgradation of products without in-house investment, shorter development lead time, value engineering and cost reduction, improved field performance, inventory efficiency through JIT supplies and human power rationalisation.

Status 2001-02 2002-03 2003-04 2004-05 2005-06Vendor Base 1017 950 738 612 400ISO/QS certified

245 281 364 382 400

Self certified vendors

210 240 260 290 350

JIT% of PO Value

69 72 74 77 82

Gains from source reduction includes pricing on volumes, improvement in quality and reliability, vendor improvement program for continuous improvement, tiering for ease of fitment- system buying and reduction in paper work.

Vendor base rationalisation Vendor tierisation included economies of scale, system buying, rationalization of supplier

base, while cluster formation included 5S adherence-mistake proofing, process improvements leading to self certification.

Inventory level has reduced from 23 days to 18 days. Total cost management included various cost management initiatives such as daily

management, process control, design, technology and capacity. Total savings was 3% on total operating cost.

Logistics initiative included transporter-based rationalisation, Kanban pull from satellite warehouses, enhancement of truck turn around, load, space and route optimisation benefiting entire logistics process, which has benefited the company by saving over Rs1.25 crore per annum.

REFERENCE

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Society of Indian Automobile Manufacturers (SIAM), India

B. Mahadevan, “Are Indian Companies Ready For Just in Time,” Management Review, April-June, July-September, 1997

KPMG report on Indian Auto Industry

"Benchmarking for SCM in Indian Auto Industry" - Sunil Sharma, Reader, Faculty of Management Studies, University of Delhi,

Background note on Supply Chain management In Automotive Industry - Auto SCMIndia 2006, Chennai

www.wikipedia.org

ACMA, India

Case Study 2: SYSTEMATIC PROBLEM SOLVING (SIX SIGMA) TO SOLVE AN ACTUAL PROBLEM IN A CAR MANUFACTURING INDUSTRY

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Introduction:

The great pioneer companies like GE, Motorola, American express, are just some of the successful companies which have taken benefits of six sigma in recent years that brings them incredible increase in profits and market share

Industries in our country special car manufacturing industry are passing critical era. They must prepare themselves as soon as possible to enter world of competitive market. So they have to increase quality to worldwide level and decrease the costs to reach economical scale in production. They can use six sigma tools as a key to reach these targets. This can be done by defining improvement projects with a very systematic phase through problem solving (as we have six sigma).

1. Define Phase:

In order to clarify present situation, complete information about noise of cars has been gathered by gemba investigations and measurements, which became the basis of project definition.

In define phase, team working scope, team members and champions, targets and CTQ is defined. In Fig.1 the main charter of project, which included mentioned information, has been shown.

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Fig.1

The main controllable characteristic of this project (y) is the negative score of whole defects are regarding to noise of vehicle, which is measured by third level auditor (IDRO).

2. Measurement phase:

Regarding to final audits’ information (the audit which represents customer view and is done after commercialization of car. this process is doing in car manufacturing of Iran officially by IDRO ), it is shown that level of internal and external noise of car is above Iran Khodro’s standard limits.

Based on present information, it is clear that the sigma level of process is ZERO.

In early analysis, three modules which are noise source in cars, has been distinguished:

1. Internal noise of car

2. External noise of car

3. under body noise

Because of numerous sources of causing noise in cars, 32 subprojects have been defined to decrease and control the noise problems in 405. For this aim all projects must have been started and improved simultaneously.

The start date of projects is mid September and the predicted duration was 6 month.

The most important sources of noise in 405 cars can be narrowed down to:

1. Fuel tank’s door

2. Side windows

3. Parcel shelf

4. Dashboard

5. Driver’s seat

6. Trunk door13

3. Analyse phase:

For analyzing each important source of defect, which mentioned before (7 items), has been analyzed separately and using brain storming and gemba investigation. 5M of defect have been drawn. (One sample has been presented in Fig.2 for noise of front driver’s seat).

Fig.2

After investigating potential causes of the most repetitive defects, repetitive root causes are known and related corrective action has been considered to be followed up in next phases.

4. Improvement phase:

Knowing potential and practical root causes based on brainstorming, fish bone diagrams, and also gemba investigations, Leaded us to real repetitive causes which need to be corrected and solved. So related corrective action has been defined

Sample of action plans for noise of front seat has been presented in Fig.3

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SEAT ACTION PLAN

1 Decreasing the loosing tolerance in recliner of seat SAPCO

2 Adding a specific tat around the foam of seat to decrease the rubbing noise

SAPCO

3. Defining and applying proper welding point in joint venture of two parts ofseat for decreasing metal parts contacts

SAPCO

4. Define and apply proper gap between seat cover and its structure SAPCO

5 Cutting down the stopper slider of seat R&D

6 Decreasing noise of fuel regulator (CNG) SAPCO

Fig. 3

5. Control phase:

In the beginning of this project the negative score (based on defect per unit) was 1.053, the target of noise in 405 cars was 0.2, but using systematic problem solving with support of managers reached us to 0.15 DPU.

C onclusion

In this paper application of a systematic problem solving has briefly explained which resulted in noticeable improvement of a defect situation (noise of 405 cars). This has been done with the help of “DMAIC” tools.

The sigma level of this defect has increased wonderfully from zero to 2.175 and so the negative score from 1.053 has been decreased to 0.15 (below the target of 0.2 of project). In summary, it can be claimed that application of six sigma can help us to reach enormous redaction in cost (based on redaction of level of reworks and scrubs which is the logical result of a decreasing defects). Improvement in product and process quality level and so sup rising improvement in profit making and share of markets. These are essential items for companies’ survival in present competitive world.

Beside standardization and publication of case studies can help trainings and spreading the six sigma knowledge application in” learning organization “.

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References:

1-Hidetoshi Shibata (2003) "ProblemSolving: Definition, terminology, and patterns"

2- Raskin, Andy, “A Higher Plane of Problem Solving”. TRIZ Journal, June 2003, Vol. 4, Issue 5, p. 54

3- Darrell L., Mann, "Better technology forecasting using systematic innovation methods",

Technological Forecasting & Social Change Journal, Vol. 70, pp 779- 795. 2003.

4-Kane,V.E(1986)"Process Capability Index"Journal of Quality Technology,Vol,18.

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Case Study 3: INVENTORY MANAGEMENT AT AMAZON

Amazon has grown admirably from its initial beginnings as a small online bookseller to a giant superstore company. During this process of rapid growth, it has incurred significant losses and it becomes more expose to a greater competition and threats. Cutting costs and achieving profitability remain Amazon’s greatest challenges. However, there are key factors such as a strong brand, providing customers with outstanding value and a superior shopping experience, massive sales volume and realizing economies of scale which contribute a lot to the success of this company.

Founded as Cadabra.com by Jeff Bezos in 1994, Amazon.com was launched in 1995. It is an American electronic commerce company based in Seattle, Washington. It is one of the first major companies to sell goods over the Internet and one of the most recognized and respected online businesses. It has become the number one online retailer by steadily building its reputation and brand, beginning its operation in July of 1995.

Moreover, it has expanded from its existing business of selling books to selling a wide variety of products such as DVDs, music CDs, computer software, video games, electronics, apparel, furniture, food and more (Wikipedia 2006). Similarly, Amazon aside from its domestically shared market also set up four other separate online stores in the United Kingdom, France and Japan, thus shipping globally on selected products.

Analysis

Swot Analysis

Strengths:

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1. Customer Relationship Management (CRM) and Information Technology (IT) support Amazon's business strategy. The company carefully records data on customer buyer behavior. This enables them to offer to individual specific items, or bundles of items, based upon preferences demonstrated through purchases or items visited.

2. Amazon is a huge global brand. It is recognizable for two main reasons. It was one of the original dotcoms, and over the last decade it has developed a customer base of around 30 million people. It was an early exploiter of online technologies for e-commerce, which made it one of the first online retailers. It has built on nits early successes with books, and now has product categories that include electronics, toys and games, DIY and more.

3. Product diversification from books and CD/DVD markets has provided additional customers in other product areas and indicates strategic movement to grow the business through new customer bases

4. Strong distribution channel

5. Negative cash cycle

6. Low prices

Weakness:

1. Amazon are dependent on external delivery companies to carry out the delivery function of the interface with the customer which can lead to uncontrollable service level problems and potential cost increases in line with the wider transportation industry such as rising fuel and increased vehicle taxation. If these costs are not absorbed they are passed back to the consumer both with potential negative effects.

2. As Amazon adds new categories to its business, it risks damaging its brand. Amazon is the number one retailer for books; diversification may lead to losses and decrease in brand value.

3. The company may at some point need to reconsider its strategy of offering free shipping to customers. It is a fair strategy since one could visit a more local retailer, and pay no costs. However the shipping costs could be up to $500m, and such a high figure would undoubtedly erode profits.

4. No region based sites.

Opportunities:

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1. Online retailing is still not matured in India, it can tap the market.

2. There are also opportunities for Amazon to build collaborations with the public sector. For example the company announced a deal with the British Library, London, in 2004. The benefit is that customer’s can search for rare or antique books. The library's catalogue of published works is now on the Amazon website, meaning it has details of more than 2.5m books on the site.

3. Growth of internet users in the next five years, predominantly in the international market.

4. E-commerce expansion in Asia and the Pacific

Threats:

1. Increasing transportation costs will directly impact delivery charges to customers - as these costs are not absorbed into the direct business but paid to a third party it is assumed these will be directly passed onto the consumer which can have a negative impact to brand perception from the consumer viewpoint.

2. Competition will increase due to the low barriers to entry in the market: offline companies are coming online

3. Low economic performance of world economy

4. The products that Amazon sells tend to be bought as gifts, especially at Christmas. This means that there is an element of seasonality to the business. However, by trading in overseas markets in different cultures such seasonality may not be enduring.

5. Hacker’s problem

Industrial Analysis

Five forces model which was proposed by Michael Porter, provides a robust and time-tested framework for analyzing any industry, reflected in the strength of the five forces (industry competitors, potential entrants, and threat of substitutes, power of buyers and power of suppliers). The collective strength of the five forces determines the ultimate profit potential in an industry.

Barriers to Entry

Threat of entry is considered medium to low.  Being the first mover in online bookstore industry, Amazon would be the best example of what amateur firms would be faced.  The factor that separates Amazon from the inexperienced firms is its 8-year capital intensive and continuous

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upgrade of services through acquisitions and alliances, nurturing the commission-based associate websites, and endless technology development and innovation.  Imitating such would also require relationship building which is difficult when relationship is already established by the first mover, or in the case of untapped technology partners, requires significant capital and strategic plan proposals to move the other party.  In both cases, known industry players would be the benchmark requiring the deal a considerable amount of time and money impractical for the new player.  

The book retail industry has very high barriers to entry. The capital requirements necessary to establish a bricks and mortar bookstore would be virtually impossible for a newcomer. Consumers know the big name players. High product awareness and large marketing budgets make it very difficult for new entrants to enter into this industry.

Inter firm Rivalry

Competitive rivalry is medium to high.  There are numerous industry players; however, they can be considered niche (eBay) and overly diversified (Yahoo!) competitors of a diversified industry firm like Amazon.  As a result, a head-to-head competition exists against Barneys (who is backed by retail stores) and Price line (who has the highest employee per revenue contribution in the industry) created strategic group together with Amazon.  Adding the flame of intensified rivalry is the high fixed and storage costs of the industry since firms needed to stock inventory in their warehouses for ready delivery of an order.  Competitors also have little product differentiation, except for auctioned product maybe and other exclusive rights of players to sell supplier’s products, making customer switching costs low.

Looking at the entire book retail industry, competition is quite diverse. A consumer could purchase books from a bricks and mortar store, which could be a large chain, a non-book retail store, or a small independent store. A consumer could also choose to buy their books on-line. With the onset of Internet bookstores, price is even more of a factor in consumer book purchasing.

Buyer power

Buyer power is higher when buyers have more choices. Businesses are forced to add value to their products and services to get loyalty. Many loyalty programs include excellent services that customers demand on-line. Customers want to solve their problems and many times they are more successful on-line than on-phone. Also, we see internet savvy businesses springing up offering more valuable goods and services at lower costs. Now with the advent of eBay, many people are assuming roles as drop shippers. Individuals can have a thriving business selling goods of larger companies without having to carry inventory.

Supplier power

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Supplier power is higher when buyers have fewer choices from whom to buy. As mentioned earlier, drop shipping has increased the amount of suppliers available. All an individual has to do is form an agreement to sell products for the company. The company takes care of all the logistics. The same is true of associates programs that amazon.com and google.com offer. Associates allow a webmaster to earn money by recommending products from others. This increases supplier offerings.

Threat of substitute

Threat of substitute products or services is high when there are many product alternatives. This is different than having many suppliers. Examples of alternatives are exchanging brand names, substituting credit card capabilities, and looking at better values from cheaper sources. The internet allows this with the "global economy". We can substitute product by purchasing from companies overseas where labor, services and products are cheaper, but of comparable quality.

Online Marketing

Competition today in the online retail business is fierce, and Amazon.com has some of the toughest competition in the World. Among the most prominent competition are Barnes & Noble and Time Warner publishing which although is new to the scene, has an abundance of capital to back its venture into the online retail book business. "Independent bookstores are rapidly disappearing amid the dominance of superstores such as Borders and Barnes & Noble.”. As recent as five years ago, there were over 5,500 independent bookstores in the United States. Presently, there are only approximately 3,300 according to a Book Industry Study Group Inc. report.

Online marketing domains

The four major online marketing domains are shown in figure given below

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Targeted to consumers

Targeted to businesses

Initiated by business

Business to consumer (B2C)

It is selling goods and services to final consumers. Today’s consumers can buy almost anything online from- clothing, kitchen gadgets and airline tickets to computers and cars. According to the Associated Chambers of Commerce and Industry of India (Assocham), Delhi e-shoppers Population was 20 percent in 2006-07, in Mumbai it was 24 percent with maximum e-shopping taking place in electronic gadgets, apparel and design purchases, railways, and air and movie tickets. As more and more people find their way onto the web.

The population of online consumers is becoming more main stream and diverse. The web now offers marketers a palette of different kind of consumers seeking different kinds of consumers seeking different kinds of online experience. Internet consumers differ from traditional offline consumers in their approaches in buying and in their response in marketing. In the internet exchange process customers initiate and control the contact. Consumers compare prices, visits different sites and then do purchasing.

This type is used by many online companies like- Amazon.com, GAP.

Business to Business (B2B)

B2B marketers use B2b web sites, e-mail, online product catalogue, online trading networks, and other online resources to reach new business customers, serve current customers more effectively and obtain buying efficiencies and better prices.

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B2C(business to Consumer)

B2B(business to

business)C2C

(consumer to Consumer

C2B(consumer to

business)

Initiated by consumers

Most major B2B marketers now offer product information, customer purchasing and customer support services online. For example- corporate buyers can visit sun Microsystems web site (www.sun.com), select detailed descriptions of sun’s products and solutions request sales and service information. Another example is of CISCO it takes 80% of its order online.

Consumer to Consumers (C2C)

Much consumer to consumer online marketing and communication occurs on the web between interested parties over a wide range of products and subjects. In some cases the internet provider the internet provides an excellent means by which consumers can buy or exchange goods or information directly with one another. For example- Amazon.com auctions, e-bay.

Consumers to Business (C2B)

The final online marketing domain is consumer to business online marketing. With the help of internet consumers find it easier to communicate with the companies. Most companies now invite prospects and customers to send in suggestions and questions via company websites. Beyond this rather than waiting for invitation consumers can search out sellers on the web learn about their offers, initiate purchase and give feedback.

Types of online marketing

Companies of all types are now marketing online. Two types of online marketers are there:-

1. Click only companies

2. Click and mortar companies

Click only companies

Click only companies come in many shapes and sizes. They include e -tailors, dot- comes that sell products and services directly to final buyers via the internet. Examples- Amazon.com. The click only companies also include search engines and portals such as yahoo and Google, which started as search engines and later added services such as news, weather forecast, stock reports, entertainment etc. The hype surrounding such click-only web business reached astronomical levels during the “dot-com gold rush” of the late 1990s, when avid investors drove dot-com stock prices to dizzying heights. However the investing frenzies collapsed in the year2000, and many high- flying, overvalued dot –coms came crashing back to the earth.

Click –and- mortar companies

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As the internet grew established bricks- and-mortar companies realized that to compete effectively with online competitors they had to online themselves. Thus, many one-time brick-and –mortar companies are now prospering as click-and-mortar companies. For example-office depot’s more than 1,000 office- supply superstores rack up annual sales of $13.5 billion in more than 23 countries but you might be surprised to learn that office depot’s fastest recent growth has come not from its traditional “brick-and –mortar” channels ,but from the internet.

Inventory management

When Bezos started his venture, he aimed at hassle free operations. He wanted to offer his customers a wide selection of books, but did not want to spend time and money on opening stores and warehouses and in dealing with the inventory. He however realized that the only way to satisfy customers and at the same time make sure that Amazon enjoyed the benefits of time and cost efficiency was to maintain its own warehouse. Building warehouses and operating them was a very tough decision for Bezos. Each warehouse cost him around $ 50 million and in order to get the money, Amazon issued $ 2 billion as bonds.

In 1999, Amazon added six warehouses in Fernley, Nevada, Coffeyville, Kansas, Campbellsville/ Kentucky, Lexington, Kentucky, McDonough, Georgia and Grand Forks, North Dakota. On the whole Amazon had ten warehouses. In the same year Amazon increased its worldwide warehousing capacity from 300,000 square feet to over five million square feet. Since Amazon ordered books and other products from warehouses only after the customers had agreed to buy them the return rate was only 0.25 percent compared to the return rate of 30 percent in many segments of the online retail industry.

Amazon’s warehouses which was a quarter-mile long yards wide stored millions of books, CDs, toys and hardware. They were very well maintained and completely computerized. In fact the number of lines of code used by Amazon’s warehouses was the same as the number used by its website. Whenever a customer placed an order a series of automated events followed which made inventory management easier.

When a customer ordered a book from Amazon his invoice mentioned the title of the book followed by a barcode. This was a code of numbers such as 6-5-4 which indicated the book’s location in the warehouse. Computers sent signals to the workers wireless receivers telling those items had to be picked off the shelves. The workers decided the order in which the items had to be picked and then verified the weight of each product.

These products were kept in a green crate which contained orders of different customers, when this got filled they were placed on conveyor belt and sent to central point. Here the barcodes were matched with the order numbers to find out who would receive each item. Then they were

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packed and parceled. Most of the orders were shipped either through the United States postal service or United States parcel service whichever is located nearer.

In the holiday season of 1999, Amazon was determined not to disappoint any customer who visited its site for his holiday shopping. Accordingly Bezos decided to stock the stores with every possible item that customers were likely to buy. Although this strategy was appreciated’ but Bezos faced a lot of problems.

It was then Bezos realized the importance of Inventory Management and decided to reduce the size of inventories, this was made possible by managing the warehouses efficiently. Amazon made careful decisions about which products to buy from where. Then the company decided to manage distributing channels. An important decision was taken was buying of books, CDs videos etc. directly from publishers rather than from distributors. They upgraded the software and also tried split shipments.

Amazon also tried to cut down its expenses. It decided to outsource some of its routine activities so that it could concentrate better on its core activities. It partnered with other companies for shipping the inventory. So, while the partners shipped the items, Amazon leveraged on its e-commerce expertise. It revamped the layout of its warehouses making it easier for the company to locate and sort customers. By doing this it managed to save all the expenses related to filling and shipping orders. Improved inventory management helped Amazon to get net profit of $ 5 million in the fourth quarter of 2001 after accumulating a deficit of $2.86 billion in seven years since its launch in 1995.

Inventory outsourcing

Outsourcing is subcontracting a service such as product design or manufacturing, to a third-party company. The decision to outsource is often made in the interest of lowering cost or making better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, (information) technology and resources. Outsourcing became part of the business lexicon during the 1980s. It is essentially a division of labour. Outsourcing in the information technology field has two meanings. One is to commission the development of an application to another organization, usually a company that specializes in the development of this type of application. The other is to hire the services of another company to manage all or parts of the services that otherwise would be rendered by an IT unit of the organization. The latter concept might not include development of new applications.

Drop shipment model

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Drop shipping is a supply chain management technique in which the retailer does not keep goods in stock, but instead transfers customer orders and shipment details to either the manufacturer or a wholesaler, who then ships the goods directly to the customer. As in all retail businesses, the retailers make their profit on the difference between the wholesale and retail price.

In 2001 Amazon decided to outsource its inventory though it knew that it was a huge risk. When Amazon managed its own inventory it had earned the reputation of providing superior customer service, which was its biggest strength.

Amazon did not stock every offered on its site. It stocked only those items that were popular and frequently purchased. If a book that is not so popular is ordered Amazon requested that item from its distributor who then shipped it to the company. In the company, the items the items were unpacked and then shipped to the respective customers. So basically, Amazon acted as a trans-shipment centre and ensured that the entire process of shipping from the distributor to customer was done very efficiently.

The main distributors of Amazon included Ingram Micro and Cell Star handled cell phone sales while Ingram Micro, a whole sale distributor, handled computers and books. Amazon had external distributors for most of its products except the bestsellers. Further Amazon entered into contract with Ingram Micro Inc. for distribution of desktops, laptops and other computer accessories. Drop shipment model was very successful so Amazon decided to extend this model to all categories too. The major disadvantage of this model was if the customers ordered only a single item at a time the drop shipment model was extremely helpful, but if a single ordered had several items such as a book stocked by Ingram and a game stocked by Amazon, then the following procedure was adopted: Ingram sent book to Amazon, Amazon added the game then forwarded the whole box to the customer. Since almost 35 percent of orders placed at Amazon were of different categories the drop shipment model was not very effective.

In 2001, Bezos came up with the idea of including the products of competing retailers and some used items on their website. Amazon earned almost the same profit selling on commission as it earned on retail. An advantage of this feature was customers could now verify the prices of Amazon’s products vis a vis those of other retailers. So the company did not need to advertise its low price.

By 2003Amazon, s warehouse could handle thrice the volume they used to handle in 1999, while the cost of operating them decreased from 20 percent of Amazons revenue to less than 10 percent. In 2003 Amazon decided to slash down its shipping charges. Customers who visited the site were greeted with a pop up window announcing the company’s decision to provide free shipping for those who bought two or more items in any combination from the sites books, music, or video stores. The company also decided to reduce shipping charges.

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Though Amazon spent millions of rupees in marketing in order to get new customers it managed to leverage the amount spent because of its lower capital costs. Generally physical bookstores having a wide range of books needed to stock about 160 days worth of inventory. The distributors and publishers had to be paid 45-90 days after the books were bought from them, in this way Amazon used to get a month’s of interest free money.

Conclusion

Amazon has grown admirably from its initial beginnings as a small online bookseller to a giant superstore company. During this process of rapid growth, it has incurred significant losses and it becomes more expose to a greater competition and threats. Cutting costs and achieving profitability remain Amazon’s greatest challenges. However, there are key factors such as a strong brand, providing customers with outstanding value and a superior shopping experience, massive sales volume and realizing economies of scale which contribute a lot to the success of this company. These factors and the people around the company help Amazon.com to face the threats pose by other online bookstores. Essentially, the company should aim to maintain its gross margins in its existing business and in future product lines such as music CDs and videos. In order to do this, Amazon.com should develop strategic partnerships with all of its main suppliers

Although online shopping has become popular over the years, Amazon had to struggle to make profits. One of the reasons was variable costs incurred by multiple delivery attempts and reverse logistics- the return of products by the customers. Despite all difficulties Amazon maintained its large inventory in a very efficient way. In the late 90s, 12% of the inventory at Amazon was stored at wrong places leading to delayed orders and lost time; by 2002 this was reduced to 4 percent because of better software and storage facilities.

Despite all measures that Amazon took to manage its inventory more efficiently, logistics experts still opinioned that Amazon’s warehouses were working less than 40 percent capacity. According to experts Amazon should either reduce the number of warehouses or increase their sales. With so much of competition and problems one thing is for sure that Amazon is truly an example of how to manage inventories effectively.

Issues

Question 1

Amazon planned to do things differently for the 2000 holiday season. What were the reasons that led to the revamping of inventory management methods? How was inventory made more effective at Amazon?

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Answer

In the holiday season of 1999, Amazon was determined not to disappoint any customer who visited its site for holiday shopping. So, Bezos decided to stock the stores with every possible item that customers were likely to buy. Right from the latest novel to the chartbuster movie of the season, he wanted everything to be stored to ensure that none of the customers logged out of the site, disappointed. In 1999, Amazon added six warehouses. On the whole Amazon had ten warehouses. Although the strategy adopted by him was appreciated Bezos had to face a lot of problems too while trying to manage his large inventory.

Building warehouses and operating them was a very tough decision for Bezos. Each warehouse cost him around $50 million. Amazon’s warehouses were a quarter-mile long and 200 yards wide stored millions of books. Bezos realized the importance of managing inventory in his company. He knew that a large number of piled up goods represented unutilized cash which could be used elsewhere in his business. However if fewer goods were stocked, it meant that some of the customers were bound to be disappointed. In order to overcome this tedious task of inventory management, the company decided to do things differently in the holiday season of 2000.

Amazon managed to reduce the size of inventories even as the company offered more products on its site. This was made possible by managing the warehouse efficiently. Amazon made careful decisions about which the products to buy and where to buy them from. The company then had to decide which of the distribution centre it would send its products to and then know how to receive and track the product once it was in the warehouse. Amazon also decided to by its books, CDs , videos etc directly from the publishers instead of buying them from distributors. Amazon also maintained a good relationship with its vendors so that it could extract best deal from them.

In order to the inventory, Amazon refined its software. The new software helped the company accommodate inventory as per the demand in different regions.

Amazon also tried to cut down its expenses. It decided to outsource some of its routine activities so that it could concentrate better on its core activities. It partnered with other companies for shipping the inventory. So while the partners shipped the items, Amazon leveraged on its e-commerce expertise. It revamped the layout of its warehouses making it easier for the company to locate and sort customer orders. By doing this, it managed to save all expenses related to filling and shipping orders.

Improved inventory management helped Amazon record its first ever profits in the fourth quarter of 2001. After accumulating a deficit of $5 millions in the fourth quarter of 2001. This profit was mainly attributed to its ability to reduce costs in stocking and shipping goods. Amazon had sales record 0f $1.1 billion in the fourth quarter of 2001 which was a 15% increases over the

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sales recorded during the same period the previous year. In 2002 Amazon recorded sales of $3.93 billion which was 26% higher than the sales of 2001($ 3.12billion).

Question 2

Why was Amazon apprehensive about outsourcing inventory management? Do you think it was a wise on its part to go ahead with its decision to outsource inventory management? Also comment on the company’s idea of selling other retailer’s products on Amazon.com.

Answer

Amazon was apprehensive about outsourcing inventory management because maintaining large inventories for satisfying all customers was a costly affair; moreover a huge amount of capital was locked in the form of inventory which can be used for other purpose such as increasing distribution channel. Outsourcing inventory was a risky affair as when Amazon managed its own inventory; it had earned the reputation of providing superior customer service, which was its biggest strength.

According to our point of view it was a right decision to outsource inventory as maintaining a huge inventory was harming Amazon. Maintaining inventory at the cost of profit cutting was not a good decision. As we can see in the case Amazon did not fully outsourced the inventories it keeps things which were popular. It was a very good way to cut down its expenses and concentrate on core activities. For outsourcing it used drop- shipping model, though it faced a lot of problems like reverse logistics and multiple delivery then also it was profitable.

The idea of selling other retailers products on Amazon.com was very profitable according to case. When in early 2001, Bezos came up with the idea of including the products of competing retailers and some used items on their websites. Amazon earned almost the same profit selling on commission as it earned selling on retail. An advantage of these features was that the customer could now verify the prices of Amazon’s products vis-à-vis those of the other retailers. So the company did not need to advertise its low prices. Said Bezos, “giving people the choice to buy new and used side by side is the good for the customers. Give them the choice. They are not going to hurt themselves with that choice. The data we have tell us that customers who buy used books from us go on to buy more new books than they have ever bought before. They may not want to plunk down $25 for a brand new author they’ve never tried. This lets them experiments.” By 2003, Amazon only handled the net orders, the companies handled the inventory. This service proved to be immensely profitable for Amazon.

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Case Study 4: SUPPLY CHAIN PROCESS OF CROCS INC

INTRODUCTION

Crocs, Inc. was established in 2002 in Colorado, USA and is today amongst the fastest growing brands and companies in the world. The company started designing and manufacturing footwear for all age groups under the Crocs brand, which are now sold in over 100 countries around the world. The Crocs brand shoes feature the proprietary closed-cell resin, Croslite, a special kind of plastic that softens up due to the body heat of the wearer resulting in a perfect fit and a high degree of comfort. The innovative, „trade secreted‟ material has been considered as significantly original in the footwear industry and the shoes‟ unique looks and range of brightly coloured designs have made Crocs highly favoured by people who are looking for comfortable, lightweight, slip-resistant, and odour-free footwear. The phenomenal success of Crocs in a short span of less than 10 years has been discussed widely, and besides the skyrocketing popularity of the shoes, one of the main reasons behind this mindboggling growth has been the company’s efficient supply chain management. Until 2006, Crocs, Inc. had the highest gross profit margin in the footwear industry at 56.5 % as compared to 43.7 % and 47.3 % by the giants of footwear, Nike and Timberland respectively, and the sales revenues of the company are very likely to cross the US $ 0.5 Billion.

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The case study (Hoyt, D. and Silverman, A.) has discussed the astounding growth of Crocs, Inc. and provides information on its highly flexible supply chain. Crocs showed that by being more agile and by digressing from the traditional industry norms they could be more successful and profitable than any other competitor (Hoyt, D. and Silverman, A., Exhibit 4, p.18). Their efficient supply chain was an outcome of their CEO, Ronald Snyder‟s, vision of meeting customers‟ demands by creating a hyper-efficient production and supply chain process that would enable the company to produce and supply at short notices and thereby create a market leading advantage in the industry. The text also mentions how the firm moved from contract manufacturing to developing a more vertically integrated organisation and expansion through building infrastructure and become a truly global company. It seemed that through vertical integration (Harrigan, K. R.) Crocs had developed a perfect strategy to achieve cost leadership and differentiation (Porter, M. E., 1998) and at the same time gain a high degree of control over their entire value chain. Not only this, but with unimaginable growth Crocs was able to create different market segments and also take a chance to foray into more traditional materials in footwear and increasing their competitiveness in the industry.

However, I would like to mention that there is always scope for improvement and no strategy is sacrosanct with the situation being faced in today’s dynamic market conditions. The Crocs supply chain has indeed been revolutionary in the footwear industry but it needs to evolve in terms of the changes in the industry environment worldwide. The traditional and idealistic thinking organisations have a lesser chance of survival in the long run. Changes in technology, production and delivery processes, consumer demands, and even government policies require that organisations focus on their core competencies rather than having a finger in every pie.

This paper has been structured to critically evaluate the footwear industry in generally and the supply chain of Crocs Inc. (Appendix A) in particular and provides insights into possible drawbacks and improvement areas in the strategy adopted by the organisation in the years leading up to its present position. In the latter half, the paper describes my views on how Crocs, Inc. can better their position in the footwear industry and become a more stable competitor to its major challenges in the environment. I have used a number of theories and models, both in analysing the system prevalent at Crocs, Inc. and in providing insights into how they can build up on their successes and create a more stable and extended future for the company. Of course, it cannot be claimed that this paper will provide a foolproof solution to the issues of today’s footwear industry and Crocs Inc in particular, but it does portray a different perspective especially by providing arguments against vertical integration as a means to achieve competitive advantage.

This paper contradicts the theoretically sound and widely accepted principle of vertical integration to achieve competitive advantage. The paper highlights the probable drawbacks and bottlenecks plaguing the supply chain of Crocs Inc. The paper begins with a brief overview the footwear industry based on Porter’s Five Forces model (Porter, M.E., 1980) and introduces the

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Crocs‟ supply chain process. It explains how Crocs suffers from the Forrester Effect (Forrester, J.W.) and using the 3PL (Christopher, M.) description the paper conducts a critical analysis of the highly agile and vertically integrated supply chain environment of Crocs. Using the Fisher and Kraljic models, I have demonstrated how the company can needs to revise its foundation in developing a strategically sound supply chain process. Furthermore, the Japanese philosophy of Kaizen (Imai, M.) and Kanban have been uniquely combined and later superimposed on the Kraljic model to create an interestingly different perception of the supply chain integration. The paper ends with recommendations adequately supported by the above theories/models and indicates the existence of the possibility that vertical integration may not be the best approach towards achieving competitive advantage in a highly dynamic industry.

INDUSTRY ANALYSIS

Using the concept of Product Life Cycle (PLC) (Wasson, C.R.) (Appendix C), it could be said that the footwear industry as a whole is at the „saturation/maturity‟ stage and is likely to continue at this stage. Of course, it is unlikely that the demand for footwear will fall considerably; there are chances that with the development of more durable and cheaper products, the profitability of the industry will decline over the years. I have used the Five Forces Model (Porter, M. E., 1980) to conduct an analysis of the global footwear market

Entry Barriers: The footwear industry seems to provide relatively easy entry for new players. The cost advantages are low with a large number of players globally as well as locally. However, the manufacturers have reasonably easy access to raw materials and have been able to achieve economies of scale through outsourcing of production. Capital requirements are not too demanding and so are the general governmental policies. Companies have been able to achieve propriety over designs and styles and are in a position to consolidate their gains from the industry.

Supplier Power: Most shoes are made from similar material with Crocs being the exception of having propriety on the Croslite material with which its shoes are made. Due to wide availability of raw material and a large number of suppliers, larger producers have been able to get better prices as compared to smaller players. At the same time, switching costs for the firms are low and as a result, the supplier power is not considerable.

Threat of Substitutes: Since entry barriers are low and switching cost are low substitutes are a constant threat in the footwear industry. Moreover, the intense competition leads to lower prices, which affects consumer choice. Companies have to continuously bare a trade-off between price and performance. However, large players are in a position to achieve a higher MES (Minimum Economic Scale), which might act as a barrier for substitutes.

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Buyer Power: Customers are the most powerful in this highly competitive industry. Success is dependent on the extent of penetration in to the market and achieving a balance between price and quality. Moreover, footwear would be termed as innovative products and are subject to frequent changes in trends and therefore, demands of the consumers. Once again, large players are the ones to benefit due to availability of capital and resources to respond to market conditions. Since buyers are likely to develop brand identity and loyalty, differentiation is very important.

Rivalry: With easy entry and exit from the industry, a large number of players in the footwear industry are intensely competing against each other to gain maximum market share and increase their returns. However, industry growth is low and there is constant pressure on the firms to lower prices. Differentiation is hard to achieve and low switching costs mean that the consumer power is high and substitutes and knock-offs might eat into market share. The most important aspect is of efficiency in supply chain and the delivery of products to the right place at the right time. Most large companies have been successful due to superior supply chain processes.

The above five forces reflect that competition in the footwear industry is not related only to the larger players. They jointly determine the industry competition and profitability and with many commonalities amongst the players, there are very few crucial aspects that govern the strategy formulation of these companies. Creating and developing an efficient and responsive supply chain aimed at reducing costs seems to be one of the most vital components in the industry.

Comparing the PLC Curve of Crocs with the industry curve, it would be wise to put Crocs at the stage of „competitive turbulence‟ as suggested by Wasson (Appendix C). The uniqueness of the Crocs clogs and the overwhelming popularity of the products indicate that there is quite some time for Crocs to reach the maturity stage, even when the industry in general is not performing so well. Crocs Inc.‟s main focus has always been better supply chain coordination and to garner opportunities to differentiate its products from those already available in the market. Crocs seemed to have adopted a global logistics strategy (Christopher, M.) in that it had focused factories manufacturing shoes to cater for certain markets; its inventories were centralised and it followed a system of localisation, generic levels of semi-finished inventories and small orders from suppliers/distributors. In order to supplement this system, Crocs had in place capacity and capability to meet changing market demands at short notice. In general, Crocs had a very agile supply chain process in place and that the firm understood the customers‟ needs and changes in the market trends. Crocs clearly understood the dynamic nature of the footwear industry where a product might no longer be in fashion the following year, and developed the ability to produce additional stocks in the same season, thereby creating a competitive advantage through a more agile and market responsive supply chain (Fisher, M., 1997). The company had maintained cordial working relations with its retailers and distributors and they worked with stores and retailers for promotion of their products at trades shows and public events. Ronald Snyder, the President and CEO had aimed to achieve a simultaneous global launch of all its products right

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from the beginning and had structured the organisation of the company to be sustainable in such conditions and be able to thwart the competition before they got a chance to react. In view of this expansion and with the aim of meeting the customers‟ needs, Crocs decided to move away from contract manufacturing (3PL) to a more vertically integrated organisation where they had better control over their activities.

DISCUSSION

At this point it would be interesting to explain the situation faced by Crocs using the Forrester (Bullwhip) Effect (Appendix D). Crocs has historically chased demand since its inception and hence felt the need for excess capacity to react quickly to market demands. They obviously considered its supply chain to be highly effective and in fact they did prove themselves to be correct for a few years. Theoretically Crocs could have continued to achieve success at this had they been able to meet all customer orders in every season.

What they failed to realise was that customer demand is rarely perfectly stable and it becomes essential for every business to come up with accurate demand forecasts. As mentioned earlier in the industry analysis, the “customer power” is very strong and it was necessary for Crocs to stretch its perception of customer demand as far as possible. Usually, companies resort to holding reserve stocks due to overcome forecasting errors but that is not the case with Crocs. They believe in holding excess capacity and their ability to produce the required stock as and when required. In my opinion they were not entirely correct! Misperceptions of the stakeholders‟ risk and time delays caused panic ordering by suppliers due to unfulfilled market demand. Forecasting errors and constantly changing inventory control strictures created variations in lead time and replenishment of stocks.

Outcome of the Forrester Effect

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It seems that there was a misalignment in the corporate strategy and the supply chain strategy adopted by Crocs. In 2002, when the company was established it was obvious that it had centralised operations since its market was limited. As it began to grow the firm expanded globally and chose to enter contract manufacturing and be able to make the products available faster and economically. However, the company found that the 3PL system was not effective and so it began to consolidate its assets and create a closely integrated organisation. In doing so Crocs got too involved in managing the external resources and process and lost focus on its key areas of operation and as a result this affected its competitive advantage. At this rate Crocs is well on its way to moving into the „Stuck in the Middle‟ position (see diagram on this page) with reduced profitability and limited alternatives for growth and survival in a highly competitive industry. Mentioned below are some of the points that explain how Crocs‟ competitive advantage was affected and why it makes more sense for Crocs to implement a 3PL system rather than focus only on a vertically integrated firm.

Adopting a 3PL system: The 3PL is ideal for companies like Crocs that have wide and complex distribution networks. It would be agreed that the distribution network and the supply chain network of Crocs, although revolutionary in its own sense, was considerably complex and stretched a bit too much. Their Denver facility, for example, was highly underutilised as it catered to only the smaller retailers in the Americas and shoes were sent there from

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manufacturing plants that were in Italy and China. Until recently, their compounding activities were concentrated in Italy and that again was a highly centralised and uneconomical.

Porter’s Competitive Advantage Matrix

Free up resources: Crocs had a large sum of money tied up in its assets. The high ROA of the company in 2007 at 34 % (Hoyt, D. and Silverman, A., Exhibit 4, p.18) will most likely see a dip as the company acquires more assets in its quest to centralise its operations. Moreover, relative to the amazing figures shown by the growth in revenue, the returns on assets are modest. In order to meet demand at short notice, Crocs had created excess capacity of one million pairs of shoes and that would have held up valuable financial resources of firm. Shifting of moulds and equipment from one factory location to another was also not very cost-effective. Moreover, with changing trends and frequent new designs the costs and delays of developing moulds were significant. Through outsourcing, Crocs will be able to reduce capital expenditure and the same could be put to better use in product development, customer relationships and marketing. Even if Crocs had excess capacity, then it could easily least it out for its own production requirements if the same was not being utilised optimally.

Cost advantage: In my opinion, Crocs lost its cost advantage by reverting back from contract manufacturing to owned-manufacturing. The emergence of knock-offs in large numbers may be reasoned as an outcome of this move. Crocs had outsourced its manufacturing to China and Mexico and after a few years they had their own manufacturing facilities. However, it seems probable to argue that in trying to achieve higher profit margins and creating a better supply chain model, they overlooked the important facts of creating entry barriers and maintaining their cost advantage. It can be said that the large number of knock-offs (Oakland Tribune) have dented the uniqueness of Crocs and in spite the difference in quality the lower price of the Crocs-

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duplicates have made a large number of customers switch brands. As discussed earlier, customer power is very strong in the footwear industry and as a result, Crocs shoes have come to be considered as a commodity rather than a differentiated product.

Core competencies: The main advantage of adopting a 3PL system is that the firm is able to concentrate on its core competencies. Although Crocs‟ supply chain model is considered to be revolutionary, it does not help the company in improving and maintaining its core competencies. It is a plausible argument that had Crocs not been involved in owned-manufacturing, it could have utilised the same resources for better development of its products and ensuring that cheap knock-offs do not harm its market share. Although there has not been any significant change in the market share of the inventory turnover of the company’s products is lower than the industry average and its stock prices have taken a hard beating on the stock market.

Inventory management: The inventory turnover ratio of Crocs has been considerably below the industry average in spite of high profit margins (Hoyt, D. and Silverman, A., Exhibit 2, p.16 and Exhibit 4, p.18). Moreover, there has been a steady rise in the levels of inventory, which were nearly three times the total fixed assets of the company (Hoyt, D. and Silverman, A., Exhibit 2, p.16) Although termed as highly flexible and revolutionary, the Crocs‟ production model and inventory management have not been able to keep up with the market demands in recent times. It seems that the Crocs management is unwilling to adopt a more supplier friendly system of inventory management, one that is being followed by others in the industry. As a result, it has been facing difficulties with supplies in Europe and the US. It was recently reported that Crocs‟ inventory levels are well above the appropriate levels and that this has become an issue of concern for the company (www.ap.org). It could also be said that the Crocs supply chain, in trying to be agile was not able to be maintain its lean profile, which led to high fixed costs and low inventory.

Another drawback that could be attributed to the supply chain model was that Crocs might be considered as conservative to some extent. In view of the fundamental basis of being flexible and highly responsive to market demands, Crocs was not willing to change its supply chain model as per the requirements of the suppliers or even as per the changes in its organisational structure. In this sense, it is comparable to the traditional approach adopted by Marks and Spencer (Harrison, A. and Pavitt, J.).

In view of the issues that have been brought to light in the existing supply chain of Crocs Inc., it may be suggested that Crocs carry out an internal alignment of its system and then move towards creating better integration between the internal and the external systems.

RECOMMENDATIONS

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In my opinion, what is required to be done is to achieve better integration of the supply chain at Crocs Inc. On applying the Kraljic Model, I observed that Crocs needs to have a balance between vertical and horizontal integration rather than being on a single extreme. Assuming that the production process and the raw material required by Crocs to produce its clogs are relatively simple.

Of course, this is only an illustration and this is what my seriously limited knowledge in shoe making could conjure in terms of the Kraljic matrix for Crocs. Notwithstanding this ignorance, it can be noted that the Leverage Items and the Strategic items are likely to affect Crocs Inc. more than the items on the bottom row. Consequently, it may be recommended that Crocs strives to achieve vertical integration on the items on the top row and similarly, it may outsource/contract-out the Non-critical and Bottleneck items. In doing so, Crocs should be careful in selecting the suppliers for its raw materials and be able to achieve competitive pricing. As for the machinery and equipment, the firm might find it more suitable to procure it on behalf of the contract manufacturer rather than relying on the latter. Strategically, it should try and find suppliers for leverage items that are closer to the manufacturing facilities otherwise, the transportation costs of raw materials might outweigh the benefits of the same. On the other hand, Strategic items should be kept under the direct control of the Crocs management as the moulds and compounding are the two key advantages that Crocs has over its competitors. Non-critical items like colours and replacement parts should be given to 3PL organisations and so should the bottle neck items. Point to be noted here is that since the actual production of the products can be outsourced to countries with low labour costs, the labour is termed as a bottleneck item. Similarly, warehousing would become the contract manufacturer’s worry and Crocs need keep only limited warehousing facilities under its direct control.

Other improvements in the supply chain could be brought about by adopting the Kaizen and Kanban system in conjunction. This is not to say that these could act as replacements or alternatives to the Kraljic model. Where the Kraljic model shows us an approach to supply chain integration, Kaizen and Kanban (HBR on Supply Chain Management) provide us the means to maintain and continuously improve the supply chain process. Kaizen (Imai, M.) is based on five basic elements (Teamwork, self-discipline, high morale, quality and suggestions for improvement), and provides three key factors that will help Crocs achieve reduced wastage and inefficiency, improved internal working environment and standardisation across the whole organisation. On the other hand, there is a need to establish a demand-driven supply chain capable of reacting to actual customer requirements, which can be met through the concept of Kanban. Considering the successful implementation of this model by Wal-Mart, Crocs can establish an EPOS system to regulate replenishment and delivery from the distribution centres to the stores and from the suppliers to the Crocs‟ distribution centres. This creates a more accurate and clear picture of customer demand and inventory management throughout the supply chain.

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This can create better inventory positioning at lower costs and an IT based infrastructure providing flexibility and higher value for the customers. These two methods offers the right solution for Crocs to work towards a supply chain system that is agile as well as lean, which is a better balance than the current system that is highly agile and less lean. GE had a similar process in place which was known as the Quick Response Program (Bartlett, C.A. and Wozny, M.), and it helped GE cut down production cycle in half and reduce inventory costs by more than 20%. The financial implications for Crocs by implementing the prescribed system are evident.

Furthermore, I can superimpose the Kaizen-Kanban combine on to the Karljic matrix and it may be inferred that Crocs needs to be lean for the processes it controls itself (Leverage and Strategic items) and be agile for the items that are being outsourced (Non-critical and bottleneck items). Besides the above, rather than depending on its own estimates of stocks, Crocs can use the Kanban system to provide a more accurate and real-time information about replenishment schedules, which will improve the efficiency of the production and inventory management processes.

Another important area where I feel Crocs Inc. could have faltered is in their ability to distinguish their products as either „innovative‟ or „functional‟ (Fisher, M.) (Appendix E). According to Fisher, it is very important to match the supply chain with the type of product that the company has. And based on this type, the supply chain of the firm will be efficient or responsive. This is similar to what I have mentioned earlier in relation to the Kaizen and Kanban system and their correlation to the Lean and Agile supply chain systems. However, the underlying area according to Fisher‟s model is the classification of the product. I would like to agree with Fisher here and elaborate this more specifically concerning the Crocs supply chain process. As recommended earlier, Crocs should aim to achieve a combined vertical and horizontal integration; vertically integrated for the critical and strategic processes and horizontally integrated for the non-critical and bottleneck processes. Similarly, Fisher’s model applies here in that the final product of Crocs Inc., their shoes, will be the innovative product, characterised by changing fashion trends, consumer demands, and new designs and therefore, Crocs should adopt a more responsive supply chain (may also be termed as Agile). On the other hand, the critical and strategic processes involving the procurement of its secret raw materials and moulds would be mentioned under functional products. As a result, Crocs should develop a more efficient supply chain for these products.

In relating this to the changes required in Crocs‟ supply chain management it can be termed as the need for incremental change rather than undertaking transformational change. It is, after all, a change in the work culture of Crocs that is being suggested here and the aspect of change management cannot be overlooked at this point. If Ron Snyder is himself not convinced about this need for change he will not be able to implement the same through the organisation. It makes me consider that applying the Eight Steps of Leading Change (Kotter, J.P.) would bring about a

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wonderfully methodical implementation plan of the proposed incremental change in the supply chain process at Crocs Inc.

CONCLUSION

As seen from the above discussion, Crocs‟ „revolutionary‟ supply chain might have been so only for a short period of time. The current strategy at Crocs Inc. has led to inefficient production and excessive inventory due to inaccurate forecasts of customer demand. To add to this, the Forrester effect explained above leads to stock-outs, sub-optimal utilisation of resources, poor customer service and financial costs all along the supply chain. To stretch this a bit further, the damage to the stakeholder image and loss of loyalty can lead to greater losses for the organisation.

Of course, the company has continued to show increasing profit quarter after quarter but it has lost the faith of the stockholders in the market and with increasing competition, Crocs needs to alter its stance. The focus on core competencies, demand-driven supply chain and adding value to the end user is what Crocs needs to work at to improve its market position. Taking cues from Porter, it would be wise for Ron Snyder to rework Crocs‟ approach towards gaining a competitive advantage through a Hybrid supply chain process combining both agility and leanness. Although Crocs did eventually shift to an IT based inventory management and planning process, it could have performed much better had it implemented this earlier. Moreover, referring back to Kotter, the change in corporate culture is also an area which Crocs could benefit from by being more flexible and reactive to market trends and consumer/supplier requirements.

Finally, it may seem like a wild jumble of words in explaining the complex structure of the supply chain process. But this is the reality. It must be appreciated that supply chains cover multifarious activities and processes and with ever increasing developments in technology and methodologies, it is more likely to get even more challenging in the days ahead. From the above discussion, I would sound wise in admitting that there cannot be a one single solution to all the supply chain worries at Crocs Inc. or for any organisation for that matter, especially in a dynamic industry like footwear. It is also easy to argue that the prevailing supply chain of Crocs is successful, merely based on the fact that Crocs Inc. is still performing better than its competitors and has shown consistent growth in the last few years. The bottom line here is to be able to understand the unpredictable nature of the industrial environment and how important it becomes for every firm to strike a balance between all internal and external processes. There is little doubt that most managers around the world are continuously trying to improve their supply chain efficiencies and controlling costs. However, the question remains as to how many of these

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managers are taking into consideration the end user; the consumer, and actually attempting to arrive at more accurate forecasts?

The following extract throws light on the importance of forecasting in inventory management and supply chain efficiency for Crocs and explains why the contents of the preceding pages makes sense.

The 10Q Detective questions the ability of management to calculate sufficient inventory levels, as the company failed to anticipate the higher-than-expected demand for the Mammoth (new fleece-lined Crocs) during the holidays (and had to air freight in a good deal of products, resulting in some gross margin pressure).

However, should Crocs miscalculate demand for its footwear, the carrying costs of bloated inventory levels-warehousing, distribution, work-in-progress and finished goods-will come back to haunt management, especially if prices start to fall (customer discounts or forced liquidation of excess inventories) for some of its ‘fad footwear’.

Source: http://seekingalpha.com, David J. Phillips, Crocs: Bloated Inventory Caused Stock Slide, 10Q Detective.

Appendix A

Supply Chain of Crocs Inc. (recreated)

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Adapted from Hoyt, D. And Silverman, A. (2007), Crocs: Revolutionizing an Industry’s Supply Chain Model for Competitive Advantage, Stanford Graduate School of Business, and Case GS-57.

Appendix B

Porter’s Five Forces Framework for Industry Analysis42

Source: www.valuebasedmanagement.net

Appendix C

Product Life Cycle Stages (Wasson)

Source: www.altera.com

References:

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1. Christopher, M. (2005) Logistics and Supply Chain Management-Creating Value-Adding Networks, 3rd edition, Pearson Education.

2. Forrester, J. W. (1961) Industrial Dynamics, MIT Press.

3. Harrigan, K. R. (2003) Vertical Integration, Outsourcing and Corporate Strategy, Beard Books.

4. Harrison, A. and Pavitt, J., New Supply Chain Strategies at Old M & S, Cases in Operations Management, 3rd Edition (2002), FT Prentice Hall, pp. 64-68.

5. Imai, M. (1986) Kaizen: The key to Japan’s competitive success, 1st edition, McGraw-Hill, NY.

6. Kotter, J. P. (1996) Leading Change, 1st edition, Harvard Business School Press.

7. Porter, M. E. (1980) Competitive Strategy, The Free Press, New York

8. Porter, M. E. (1998) Competitive Advantage-Creating and sustaining superior performance, The Free Press New York.

9. Wasson, C. R. (1974) Dynamic competitive strategy and product life cycles, Challenge Books. Journals and Articles:

10. Bartlett, C. A. and Wozny, M. (2005) GE’s Two-Decade Transformation: Jack Welch’s Leadership, Harvard Business Review, 9-399-150, May 3, 2005.

11. Fisher, M. (1997) What is the right Supply Chain for your product? Harvard Business Review, Mar/Apr 97.

12. Hoyt, D. And Silverman, A. (2007) Crocs: Revolutionizing an Industry’s Supply Chain Model for Competitive Advantage, Stanford Graduate School of Business, Case GS-57.

13. Kraljic, P. (1983) Purchasing must become Supply Management, Harvard Business Review, Sep/Oct 83, Vol. 61 Issue 5, pp 109-117.

Internet Sources:

14. http://articles.moneycentral.msn.com

15. http://money.aol.com

16. www.crocs.com

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Other References:

17. Harrison, A. and New, C. (2002) The role of coherent supply chain strategy and performance management in achieving competitive advantage: an international survey, Journal of the Operational Research Society, Vol. 53, No. 3, pp. 263-271.

18. Harvard Business Review on Supply Chain Management (2006), Harvard Business School Press.

19. Johnson, E. M. And Pyke D. F., Integration and Globalization in the Age of e-Business, 21st Century Management: A Reference Handbook (2008), Sage Publications.

20. Taylor, D. (1997) Global Cases in Logistics and Supply Chain Management, Thomson.

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