CASE STUDY

JIT System in Toyota 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)

Case Study 1: JIT System in Toyota

Introduction

Ever since the company was founded in 1937, The TOYOTA MOTOR CORPORATION and

their subsidiaries (“TOYOTA”), have continuously strived to contribute to the sustainable

development of society and the earth through the manufacturing and provision of high-quality

and innovative products and services. Through these continuous efforts, they have established a

corporate philosophy that has been passed down from generation to generation throughout the

company and which has come to be known as the “Guiding Principles at Toyota” (originally

issued in 1992, revised in 1997; the “Guiding Principles”. they have also put TOYOTA’s values

and methods in written form, in the “Toyota Way” (issued in 2001). Such values and methods

must be shared globally among us to realize the “Guiding Principles” and they are seeking to

pass these on to future generations. Through these efforts and by Passing down corporate

philosophy and values and methods, they are steadfastly striving to realize the “creation of a

prosperous society by making things”. TOYOTA has long-demonstrated its dedication to

contributing to sustainable development. As their business operations have become increasingly

global, they need to reconfirm their corporate philosophy and have issued an explanatory paper

in January 2005 entitled “Contribution towards Sustainable Development”. This paper interprets

the Guiding Principles from the stand point of how TOYOTA can work toward sustainable

development in its interactions with its stakeholders. They believe that by implementing the

Guiding Principles in operation, TOYOTA will successfully fulfill its expected contribution

towards sustainable development. Therefore, as stated in the Guiding Principles and explanatory

paper, we must comply with local, national and international laws and regulations, including the

spirit thereof, and act with humility, honesty and integrity. Compared to when the “Code of

Conduct for Toyota Employees” was first issued in 1998, TOYOTA’s presence in society has

greatly increased and also new laws and regulations have been established, such as for the

protection of personal data. With this background in mind, we have revised the existing code of

conduct and created the “Toyota Code of Conduct” in order to communicate the fundamental

approach necessary to inspire continued confidence in TOYOTA, to respect and comply with the

laws, and to maintain our honesty and integrity. I would particularly like to ask each one of you,

as a person working for TOYOTA, to be aware that you are an essential contributor to the

success of TOYOTA. In this era of global competition, borderless trade, and diversification,

TOYOTA wishes to conduct business in an open and fair way. TOYOTA aims to become the

most valued, respected and trusted company in the world by its customers and society.

Accomplishing this goal requires that each one of us is aware of TOYOTA’s respected

reputation and standing in the community, the gratitude their owe to customers and society, and

the necessary respect of laws and regulations. Therefore, they must each act in a “steadfast, sure-

footed, and thorough” way, and in accordance with common sense and good judgment. I expect

and ask you to carefully read this “Toyota Code of Conduct” and to implement the spirit within

March, 2006.

After the Second World War, the distribution of World economic power was totally rearranged.

Before the war, Europe and the USA ruled the world market. The management of Western

companies was based on the "Scientific Management" by Frederick Winslow Taylor (1856-

1915) and on "Modern Sociology" by Max Weber (1864-1920). This intellectual basis

characterizes the begin of industrialization, led to mass production and to tremendous

productivity increases. Yet after the war, new players appeared on the playground, whose work

was based on a philosophy, on methods and rules unknown before. Whilst Western managers

turned to short-term thinking to satisfy shareholders and to endless restructuring, the new actors

concentrated on continual improvement in the quality of products, uniformity of processes and

qualification of employees. Toyota is one of these new players, which despite the fierce

competition due to excess production capacity in the automobile industry of around 25 %

outperforms Western competition in every aspect, in technological innovation, in customer

satisfaction, in continuous growth and in profit. In 2004 Toyota passed Ford to become he

second largest automobile producer. Before long, Toyota will overtake General Motors

becoming the biggest car company in the world probably having no less than 15% of the world

market. Toyota will prevail. Most others will have the choice between shrinking or sinking. This

paper tries to shed light on the root causes of the Toyota Phenomenon, which for some reason or

another Western companies find so hard to understand and much less on how to apply, despite

their struggle for its survival.

Guiding Principles at Toyota

1. Honor the language and spirit of the law of every nation and undertake open and fair

corporate activities to be a good corporate citizen of the world.

2. Respect the culture and customs of every nation and contribute to economic and social

development through corporate activities in the communities.

3. Dedicate ourselves to providing clean and safe products and to enhancing the quality of

life everywhere through all our activities.

4. Create and develop advanced technologies and provide outstanding products and services

that fulfill the needs of customers worldwide.

5. Foster a corporate culture that enhances individual creativity and teamwork value, while

6. Honoring mutual trust and respect between labor and management.

7. Pursue growth in harmony with the global community through innovative management.

8. Work with business partners in research and creation to achieve stable, long-term growth

and mutual benefits, while keeping ourselves open to new partnerships.

9. The Toyota Way includes a set of tools that are designed to support people continuously

improving and continuously developing. For example, one-piece flow is a very

demanding process that quickly surfaces problems that demand fast solutions, or else

production will stop. This suits Toyota’s employee development goals perfectly because

it gives people the sense of urgency needed to confront business problems. The view of

management at Toyota is that they build people, not just cars.

Toyota Production System (TPS)

First, of course, it taught the modern car industry how to make cars properly. Few had heard of

the Toyota Production System (TPS) until three academics in the car industry study programme

run by Massachusetts Institute of Technology (MIT) wrote a book in 1991 called “The Machine

that Changed the World”. It described the principles and practices behind the “just-in-time”

manufacturing system developed at Toyota by Taiichi Ohno. He in turn had drawn inspiration

from W. Edwards Deming, an influential statistician and quality-control expert who had played a

big part in developing the rapid-manufacturing processes used by America during the Second

World War. At the core of TPS is elimination of waste and absolute concentration on consistent

high quality by a process of continuous improvement (kaizen). The catchy just-in time aspect of

bringing parts together just as they are needed on the line is only the clearest manifestation of the

relentless drive to eliminate mud waste) from the manufacturing process. The world's motor

industry, and many other branches of manufacturing, rushed to embrace and adopt the principles

of TPS. Toyota's success starts with its brilliant production engineering, which puts quality

control in the hands of the line workers who have the power to stop the line or summon help the

moment something goes wrong. Walk into a Toyota factory in Japan or America, Derby in

Britain or Valentines in France and you will see the same visual displays telling you everything

that is going on. You will also hear the same jingles at the various work stations telling you a

model is being changed, an operation have been completed or a brief halt called. Everything is

minutely synchronized; the work goes at the same steady cadence of one car a minute rolling off

the final assembly line. Each operation along the way takes that time. No one ushers and there

are cute slings and swiveling loaders to take the heavy lifting out of the work. But there is much

more to the soul of the Toyota machine than a dour, relentless pursuit of perfection in its car

factories. Another triumph is the slick product-development process that can roll out new models

in barely two years. As rival Carlos Ghosn, chief executive of Nissan, notes in his book “Shift”

(about how he turned around the weakest of Japan's big three), as soon as Toyota bosses spot a

gap in the market or a smart new product from a rival, they swiftly move in with their own

version.

The result is a bewildering array of over 60 models in Japan and loads of different versions in big

overseas markets such as Europe and America. Of course, under the skin, these share many

common parts. Toyota has long been the champion of putting old wine in new bottles: over two-

thirds of a new vehicle will contain the unseen parts of a previous model. But TPS alone would

not justify the extraordinary success of the company in the world market.

World Class Manufacturing

Many firms have tried to install the Toyota Production system TPS. They set up the Kanban

system, which is a tool for managing the flow and production of materials in a Toyota-style

“pull” production system. They plug in the andon, which is a visual control device in a

production area that alerts workers to defects, equipment abnormalities or other problems using

signals such as lights, audible alarms, etc. Finally, with all these devices the workplace looks like

a Toyota plant. Yet over time the workplace reverts to operating like it did before. And this is

exactly what many Western organizations have experienced. With the set up of TPS, the real

work of implementing TPS has just begun. In the Toyota Way, it’s the people who bring the

system to life by working, communicating, resolving issues and growing together. The Toyota

Way encourages, supports and in fact demands employee involvement. The Toyota Way is much

more than a set of improvement and efficiency techniques. It’s a culture depending on worker

attitude to reduce inventory, identify hidden problems and to fix them with a sense of urgency,

purpose and team work. The Toyota Production System can be copied, the Toyota Way cannot.

It has to be built, maintained and refined over decades. The roots of the Toyota Way go back to

1926, when Sakichi Toyoda (1867 – 1930), a brilliant engineer, later referred to as Japan’s “King

of Inventors”, founded Toyoda Automatic Loom Works. His work ethics was significantly

influenced by the book of Samuel Smiles, “Self- Help”, first published in England in 1859. The

book grew out of the devotion, to help young man in difficult economic circumstances by

improving themselves. The book chronicles inventors whose natural drive and inquisitiveness led

to great inventions that changed the course of humanity. When looking for instance at the

success and impact of James Watt, Smiles concluded, that both were not the result of natural

endowment but rather trough hard work, perseverance and discipline. These few words

summarize the spirit, which Sakichi Toyoda handed over to his son Kiichiro Toyoda (1894-

1952), the founder of Toyota Motor Company, his son Shoichiro Toyoda, Honorary Chairman

and director of Toyota Motor Corp., and on to his nephew Eiji Toyoda (*1913), President of

Toyota from 1967 to 1994. Spend some time with Toyota people and after a time you realize

there is something different about them. The rest of the car industry raves about engines,

gearboxes, acceleration, fuel economy, handling, ride quality and sexy design. Toyota's people

talk about “The Toyota Way” and about customers. In truth, when it is written down the Toyota

creed reads much like any corporate mission statement. But it seems to have been absorbed by

Japanese, European and American employees alike. Mr. Cho thinks that something of the unique

Toyota culture comes from the fact that the company grew up in one place, Toyota City, 30

minutes drive from Nagoya in central Japan, where the company has four assembly plants

surrounded by the factories of suppliers. In this provincial, originally rural setting, Toyota

workers in the early days would often have small plots of land that they tended after their shift.

Mr. Cho, who made his career in the company by being a pupil of Mr. Ohno and becoming a

master of production control, thinks that the fact that Toyota managers and their suppliers see

each other every day makes for a sort of hothouse culture— rather like Silicon Valley in its early

days. Jim Press is boss of Toyota's sales in North America. He left Ford in frustration 35 years

ago, because he did not think it handled customer relations properly and he suspected that the

upstart Japanese company making its way in the American market might do better. He was right.

Toyota shares a production plant in California with GM. Identical cars come off the line, some

badged as GM, the rest atlas: after five years, according to one study by Boston Consulting

Group, the trade- in value of the Toyota was much higher than that of the American model,

thanks to the greater confidence people had in the Toyota dealer and service network. Mr. Press

talks with a quiet, almost religious, fervor about Toyota, without mentioning cars as such. “The

Toyota culture is inside all of us. Toyota is a customer's company,” he says. “Mrs. Jones is our

customer; she is my boss. Everything is done to make Mrs. Jones's life better. We all work for

Mrs. Jones.” But not even the combination of its world leading manufacturing, rapid product

development and obsess ional devotion to customer satisfaction is enough to explain Toyota's

enduring success. There is one more ingredient that adds zest to all these. Tetsuo Agata doubles

as general manager of Toyota's Honsha plant in Toyota City and as the company's overall

manufacturing guru. The magic of Toyota's winning culture was summed up for him by an

American friend who observed that Toyota people always put themselves “outside the comfort

zone”: whenever they hit one target, they set another, more demanding one. That relentless

pursuit of excellence certainly explains much of what has been happening to the company in

recent years, at home and abroad.

Methods Used In Controlling Waste

The purpose of TPS is to minimize time spent on non-value adding activities by positioning the

materials and tools as close as possible to the point of assembly. The major types of non-value

adding waste in business or production process are overproduction, waiting or time on hand,

unnecessary transport or conveyance, over processing or incorrect processing, excess inventory,

unnecessary movement, defects and unused employee creativity. The driving force behind the

Japanese system of production is eliminating waste, thereby maximizing process efficiency and

the returns on resources. A wide number of principles and practices can be employed to achieve

this goal. As Shingo once noted, people instinctively know to eliminate waste once it is

identified as such, so the task of reducing waste often centers first around identifying

unnecessary uses of human, capital, or physical resources. After waste is targeted, new processes

or practices can be devised to deal with it.

Just-In-Time (Jit)

Just-in-time (JIT) production or so-called lean manufacturing. The pioneers of these methods

were Taiichi Ohno, a former Toyota executive, and Shigeo Shingo, an eminent engineer and

consultant. In his 1989 book The Study of the Toyota Production System from an Industrial

Engineering Perspective, Shingo identified these basic features of TPS:

1. It achieves cost reductions by eliminating waste, be it staff time, materials, or other

resources.

2. It reduces the likelihood of overproduction by maintaining low inventories ("nonstock")

and keeps labor costs low by using minimal manpower.

3. It reduces production cycle time drastically with innovations like the Single-Minute

Exchange of Die (SMED) system, which cuts downtime and enables small-lot

production.

4. It emphasizes that product orders should guide production decisions and processes, a

practice known as order-based production.

Process Improvement

An important aspect of eliminating waste is designing efficiency into production processes and

methods. For example, in the Toyota system heavy emphasis was placed on lowering the time

and complexity required to change a die in a manufacturing process. A time-consuming die-

changing process is wasteful in two ways. First, while it is happening production is often at a

standstill, increasing cycle times and all the costs associated with longer cycle times. (However,

it is important to note that idle time for individual machines in a system is not always viewed as

wasteful under the TPS philosophy.) Second, workers' time and effort are spent on activities that

aren't directly related to production (i.e., no value is being added by changing a die). As a result

of such concerns, the push at Toyota was to reduce significantly the time it took to change dies.

VALUE ADDED

TPS and similar Japanese manufacturing techniques distinguish between activities that add value

to a product and those that are logistical but add no value. The primary—even the sole—value-

added activity in manufacturing is the production process itself, where materials are being

transformed into progressively functional work pieces. Most other activities, such as transporting

materials, inspecting finished work, and most of all, idle time and delays, add no value and must

be minimized. When processes are examined for potential improvements and cost cutting,

reducing non-value-added activities is often the highest priority. Conversely, processes that add

the most value, even if they are expensive, will usually not be compromised to achieve lower

costs at the expense of quality.

Quality by Design

Another feature thought to be defining in Japanese manufacturing is a marked attention to quality

throughout the production process. Specifically, under the influence of such luminaries as W.

Edwards Deming and Joseph M. Juran, Japanese manufacturers have sought to achieve quality

by designing it into the production process rather than simply trying to catch all the errors at the

end. As noted, poka-yokes can serve this function either by halting/correcting a faulty process or

by alerting a worker to a problem as it occurs. While plenty of traditional, defect-monitoring

sorts of quality controls are still used, philosophies such as TPS hold that the results of quality

inspections should be used to inform—and improve—the manufacturing process, not just to

describe it. This means the feedback from a quality inspection is expected to be immediate and,

often, to result in some change in the process so that the likelihood of similar problems in the

future is reduced.

Order-Based Production

A natural and necessary extension of the non-stock goal is that manufacturers need specific

customer information to drive their production decisions. Obtaining this information necessitates

effective market research/forecasting and communication with customers. As much as possible,

production under the Japanese system is guided by actual orders, rather than anticipated demand

based on less reliable information such as past sales. The order-based system is said to provide

production "pull" from the actual market, as opposed to "push" that stems only from the

manufacturer's conjecture.

Transportation

The Toyota Production System also recognizes waste in the excess movement of items or

materials. In general, the more transportation required, the less efficient the process, since

moving goods back and forth is normally not a value-adding procedure. Transport waste is

usually addressed by changing the layout of a factory, its geographic location relative to its

customers, and so forth. While sometimes transportation problems can be mitigated through

automation, the ideal under the Japanese system is to minimize it altogether. Cell and flexible

manufacturing layouts are one approach to controlling transport waste.

Market-Driven Pricing

In contrast to the traditional practice of setting prices by marking up some percentage over the

cost of manufacturing, the Japanese system attempts to identify the market-determined price for

a good and then engineer the manufacturing process to produce at this price profitably. Under

this principle, increases in costs are not passed on to the consumer in the form of higher prices.

As a corollary, the only way for a firm to increase profitability is by lowering costs; lower costs

may also allow the company to be profitable yet deliver products at the low end of the pricing

spectrum, a practice central to the rise of the Japanese auto manufacturers in the U.S. market.

Worker Flexibility

Maximizing returns on human capital is another goal of Japanese manufacturing practices.

Driven by the theory that human time is more valuable than machine time, the Japanese system

attempts to optimize labor efficiency by deploying workers in different ways as order-based

production requirements fluctuate. The main two dimensions of this flexibility are skills and

scheduling.

Lean Principles

Precisely define value by specific product.

Identify the value stream for each product.

Make the value flow without interruptions.

Let the customer pull value from the producer.

Pursue perfection

Principles Adopted By Toyota to Achieve Their Goals

Toyota’s business practices differ from those of Western automobile manufacturers in

a number of aspects:

Operations are strictly governed by a sustainable business policy, which is passed on

from one generation to the other and not by short-term decision making or by the

attitudes of changing management teams and variable customer tastes.

Growth comes from the inside out and not through mergers and acquisitions, in other

words, growth through continual improvement of products and services and not through

continued restructuring.

Production is controlled by customer demand (“pull” system) not by production capacity

(“push” system).

Qualified employees are attracted with the possibility to participate in the company’s

striving to meet and exceed customer expectations with products of unparalleled quality

and not with compensation schemes. Toyota employees work for a winner. Who wants to

work for an employer, whose products have to be forced onto the customers with

discounts and incentives? Who wants to work for a looser?

No unions are admitted which force both management and employees to defend their

own interests and by so doing distract from the shared responsibility to satisfy customers.

For more than 50 years, Toyota experienced an extraordinary history of continuous

growth without major layoffs

Base your management decisions on a long-term philosophy, even at the expense of

Short-term financial goals.

Create continuous process flow to bring problems to the surface.

Build a culture of stopping to fix problems, to get the quality right the first time.

Standardised tasks are the foundation for continuous improvement and employee

Empowerment.

Use visual control so no problems are hidden.

Use only a reliable, thoroughly tested technology that serves your people and

Processes.

Grow leaders who thoroughly understand the work, live the philosophy, and teach it to

others.

Develop exceptional people and teams who follow your company’s philosophy.

Respect your extended network of partners and suppliers by challenging them and

helping them improve.

Go and see for yourself to thoroughly understand the situation (genchi genbutsu).

Make decisions slowly by consensus, thoroughly considering all options; implement

decisions rapidly.

Become a learning organisation through relentless reflection (hansei) and continuous

Improvement (kaizen)

Conclusion

As one of the leading automobile manufacturers in the world, Toyota ranks within the top three

worldwide. Due to their unique business model, they are now having a market share of 14% in

the first four months of this year. That is an astonishing 2.3% jump from the previous year.

According to Autodata.com, the Toyota City based automaker ranks fourth in United States

sales.

We have determined that their business model is an Integrated Low Cost? Differentiated

Strategy. It involves finding the lowest operational cost along with a unique niche or strategy that

separates them from the competition. Toyota’s new statement? Moving Forward? Reflects their

plans and expectations for the future. This includes the known and the unknown factors that a

business must face. In 2000, Toyota launched a new cost effective strategy called CCC21

(Construction of Cost Competitiveness for the 21st century), for Low Cost operational expenses.

With this aspect Toyota plans to advance such initiatives globally, based on its policy of

purchasing the world’s best parts at the lowest cost with the shortest lead times.

References

www.toyota.co.uk

http://www.strategosinc.com/just_in_time.htm

http://en.wikipedia.org/wiki/The_Toyota_Way

http://www.springerlink.com/content/f432382q8x486312/

http://www2.toyota.co.jp/en/vision/production_system/index.html

http://www.1000ventures.com/business_guide/cs_efficiency_toyota_ps.html

http://www.vorne.com/learning-center/tps.htm

http://www.swmas.co.uk/info/index.php/Toyota-Production-System ?

http://www.toyoland.com/history.html

http://www.toyota-europe.com/experience/the_company/index.aspx

http://homepages.ius.edu/GCENTER/Toyota%20Project.htm

http://www2.toyota.co.jp/en/vision/index.html

http://wapedia.mobi/en/The_Toyota_Way

http://www.toyota.co.jp/en/csr/principle/policy.html

http://www.toyota.co.jp/en/environment/communication/glossary/glossary_02.html

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

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.

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 door

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

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 “.

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.

Case Study 3: Inventory Management at Telesys Ventures Inc.

Objective:

The Case Study helps to understand the requirement of inventory management The various constraints encountered during inventory management The different approaches utilized to overcome the above said constraints Evaluation of different proposed changes Optimization and implementation of Solution Measurement of Effectiveness of the changes.

Telesys Inc. is a leading manufacturer of Laptops & desktop in India. It imports Monitors from China. Earlier the company was performing very well but now the situation has changed. There is a reduction in the gross profit. There are various reasons like changing suppliers, complicated customs procedures, entry of new competitors, the resurfacing of high sea piracy and economic slowdown. On the other hand most of the company cash is blocked in inventory. This has led to a situation of the cash crunch and Management is seeking for a mean to overcome from this problem.

Lead time also fluctuates at around an average of 21 working days. To facilitate a desired service level of 95% and avoiding lockout condition / late delivery penalty, company spends Rs 150000 per year in administering a perpetual review system (Fixed Quantity interval system).

To avoid the high monitoring costs for the perpetual system, Rohit, a young Industrial Engineer, has proposed to change to a Periodic Review system (Fixed order Interval system). Without any additional investment, Rohit found that administrative costs would drop by 75% approximately. But management was in a dilemma whether to implement the proposed solution or not. The review period for the system was one month.

A local supplier promises to deliver any order within 7 working days. It reduces the Order cost to Rs 25000 per order, but the unit price increases by 2%.

The Information provided by purchase department is written below.

1. Per unit price for monitor is Rs.42002. Ordering & Shipping cost is Rs. 65000 per shipment.3. Inventory holding costs are 20% p.a. of average inventory4. Forecasted Daily demand is normally distributed and averages 100 units5. The minimum Lot size ordered is 15,006. The maximum lot size per shipment is 40,007. As per company policy five days demand to be kept for safety stock.

The questions before management are:

Deciding appropriate amount of order for the monitorsTo procure from local vendor or kept outsourcing through China

Solution:

Rohit checked for scientific inventory control method. The excess inventory is already eating up the company liquidity. The expenses are in the form of raw material cost ,in process work ,finished goods ready to sale .It also include the expenses incurring to meet storage, transportation, approximation for losses arising out of pilferage insurance and damages. He wanted to minimise this cost (holding cost or carrying cost).

On the other hand, if he thoughts for opting very less or no inventory then company face lockout situation. In that case with addition to late delivery Penalty Company may suffer from the important order /customer losing and the company reputation is also on the stack in the market.

He analyses the requirement of inventory based on below written parameters:

Priority to customer Effective Capital utilization Economy in buying

The different methodology adopted is

(a) Fixed Order Quantity system.(b) Fixed Order Interval System.

In each methodology again evaluation is done for both Local supplier and manufacturer (from china) for the feasibility. The results are tabulated below after the calculations.

(A) FIXED ORDER QUANTITY SYSTEM WHEN SUPPLY IS FROM CHINA

D (Daily Demand) = 100 unitS (Ordering & shipment cost IN Rs.) = 65000C (Unit Cost in Rs.) = 4200I (Average inventory holding cost) = 20% of average inventory investmentP (Annual consumption in units) =Daily demand x No. Of days in year

= 100 x 365

= 36500

Q (Economic Order Quantity in units) =Sqrt ((2 x S x P)/(C x I))

= 2377

Annual Total Cost: = Basic cost + Procurement cost + Carrying cost

Basic cost (Rs.) = Unit cost x Annual consumption = 4200 x 3650 = 153300000

Procurement Cost (Rs.) = (Ordering cost per order x Annual consumption)

Ordered quantity

= (65000 x 36500)

2377

= 998223

Carrying Cost (Rs.) = (Inventory carrying cost in decimal x Unit cost x Order quantity)

2

= (0.2 x 4200 x 2377)

2

= 998223

Annual Total Cost (Rs.) =153300000 +998223 + 998223 =155296447'm (minimum stock in units) = 5 day demand

= 5 x 100 = 500

L (Lead time in days) = 21

C (Daily consumption in units) = 100

Re-Order Level (Units) = m + LC

= 500+21 x 100

=2700

M (Maximum stock in Units) = minimum stock + economic order quantity

= 500+ 2377

= 2877

(A) FIXED ORDER QUANTITY SYSTEM WHEN SUPPLY IS FROM LOCAL SUPPLIER

D (Daily Demand in Units) = 100

S (Ordering & shipment cost in Rs.) = 250000

C (Unit Cost in Rs.) = 4200 x 1.02 = 4284

I (Average inventory holding cost) = 20% of average inventory investment

P (Annual consumption in Units) =Daily demand x No. Of days in year

= 100 x 365

= 36500

Q (Economic Order Quantity in Units) =Sqrt ((2 x S x P)/(C x I))

= 1459

Annual Total Cost: = Basic cost + Procurement cost + Carrying cost

Basic cost (Rs.) = Unit cost x Annual consumption = 4284 x 36500 = 156366000

Procurement Cost (Rs.) = (Ordering cost per order x Annual consumption) Ordered quantity

= (250000 x 365000)

14595

= 625232

Carrying Cost (Rs.) = (Inventory carrying cost in decimal x Unit cost x Order quantity)

2

= (0.2 x 4284 x 14595)

2

= 625232

Annual Total Cost (Rs.) =156366000+ 625232+625232 =157616464

'm (minimum stock in units) = 5 day demand

= 5 x 100

= 500

L (Lead time in days) = 7

C (Daily consumption in units) = 100

R (Review time Days) = 30

Re-Order Level (Units) = m + LC

= 500+7 x 100=1200

M (Maximum stock in Units) = minimum stock (Units) + economic order quantity\

= 500+ 1459

= 1959

(B) FIXED ORDER INTERVAL SYSTEM WHEN SUPPLY IS FROM CHINA

Review Period (Days) = 30

Lead Time (Days) = 21

Average monthly consumption (Units) = 30 x 100 = 3000

(m) Minimum Stock =Safety Stock (Units) = 5 days demand

=5 x 100 = 500

(M) Maximum Stock = minimum stock +review time stock + Lead time stock

(R) Review Stock (Units) = 30 x 100 = 3000

(L) Lead Time Stock (Units) = 21 x 100 = 2100

(P) Stock at the time of review (Units) = 500

M=m+R+L

M = 500 +3000+2100 = 5600

Re Order quantity (Units) = Maximum stock – Stock held at the time of review

= 5600-500 = 5100

Average Inventory (Units) =0.5 x (minimum stock + maximum stock)

= 0.5 x (500+5600) = 3050

Annual Inventory cost (Rs.) =0.2 x 3050 x 4200 = 2562000

Annual Ordering Cost (Rs.) = 150000

Annual Procurement cost (Rs.) = (0.25 x 65000 x 365)/30

= 197708

Annual Total Cost: = Basic cost + Procurement cost + Carrying cost

Annual Basic cost (Rs.) = Unit cost x Annual consumption

= Rs.4200 x 36500 = 15330000

Procurement Cost per review (Rs.) = 25 % of procurement cost

= 0.25 x 650000 = 16250

Annual procurement cost = (Procurement cost per review x No. of days in Year)

Review period

= (16250 x365)/30 =197708

Annual Ordering Cost (Rs.) = 150000

Total Annual Ordering & Procurement cost (Rs.) = 197708 + 150000 = 347708

Carrying Cost (Rs.) = Inventory carrying cost in decimal x Unit cost x Avg. Inventory

= (0.2 x 4200 x 3050) = 2562000

Annual Total Cost (Rs.) =153300000 +347708 + 25 62000=156209708

(B) FIXED ORDER INTERVAL SYSTEM WHEN SUPPLY IS FROM LOCAL SUPPLIER

Review Period (Days) = 30

Lead Time (Days) = 7

Average monthly consumption (Units) = 30 x 100 = 3000

Minimum Stock =Safety Stock (Units) = 5 days demand

=5 x 100 = 500

Maximum Stock = minimum stock +review time stock + Lead time stock

M = m + R + L

(R) Review Stock (Units) = 30 x 100 = 3000(L) Lead Time Stock (Units) = 7 x 100 = 700

(P) Stock at the time of first review (Units) = 500

M = 500 +3000+700 = 4200

Re Order quantity (Units) = Maximum stock – Stock held at the time of interview

= 4200-500 = 3700

Average Inventory (Units) =0.5 x (minimum stock + maximum stock)

= 0.5 x (500+4200) = 2350

Administrative Cost per review (Rs.) = 25 % of initial cost

=0.25 x 25000 = 6250

Annual Administrative cost (Rs.) = (6250 x 365)/30 = 76042

Additional Monitoring cost (Rs.) = 150000

Annual Total Cost (Rs.) = Basic cost + Procurement cost + Carrying cost

Basic cost (Rs.) = Unit cost x Annual consumption

=.4284 x 36500 = 157616464

Annual Total ordering & Procurement Cost (Rs.) = 150000 + 76042 =226042

Carrying Cost (Rs.) = Inventory carrying cost in decimal x Unit cost x Avg. Inventory

= (0.2 x 4284 x 2350) = 2013480

Annual Total Cost =156366000+226042+2013480=158605522

FIXED ORDER QUANTITY SYSTEMDESCRIPTION CHINASUPPLIER LOCAL SUPPLIERUnit cost (Rs.) 4200 4284Daily Demand (Units) 100 100Annual Consumption (Units) 36500 36500Ordering cost & Procurement cost per order (Rs.)

65000 25000

Lead Time ( Days) 21 7Lead time stock (Units) 2100 700Minimum stock (Days) 5 5Minimum stock (Units) 500 500Economic Order Quantity (Units)

2377 1459

Annual Basic cost (Rs.) 153300000 156366000

Annual Procurement cost (Rs.) 998223 625232Annual carrying cost (Rs.) 998223 625232Annual total cost (Rs) 155296447 157616464Minimum stock (Rs) 500 500Lead stock (Units) 2100 700Reorder level (units) 2600 1200Maximum Stock (Units) 2877 1959

FIXED ORDER INTERVAL SYSTEMDESCRIPTION CHINASUPPLIER LOCAL SUPPLIERMinimum stock (Units) 500 500Review stock (Units) 3000 3000Lead stock (Units) 2100 700Stock at review (Units) 500 500Minimum stock (Units) 5600 4200Average Inventory (Units) 3050 2350Reorder Quantity (Units) 5100 3700Additional Monitoring cost (Rs.)

150000 150000

Procurement cost per review (Rs.)

16250 6250

Annual procurement cost (Rs.) 197708 76042Total ordering & procurement cost (Rs.)

347708 226042

Annual basic cost (Rs.) 153300000 156366000carrying cost (Rs.) 2562000 2013480Other cost (Rs.) 2909708 2239522Annual total cost (Rs.) 156209708 158605522

On comparison of the Total annual cost Rohit present the procurement by Fixed Order Quantity System from the china Supplier and Management approved the same.

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.

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 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.

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 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

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 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-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

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. 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 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

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)

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 Analysis

Source: www.valuebasedmanagement.net

Appendix C

Product Life Cycle Stages (Wasson)

Source: www.altera.com

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Internet Sources:

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

15. http://money.aol.com

16. www.crocs.com