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THE CHINESE UNIVERSITY OF HONGKONG
Astec Business Case
A Division of Emerson Network
Jasvin Bhasin
10/14/2011
Student ID: s1155006888
Email ID: [email protected]
The following document analyses the answers to three very important questions regarding the
workings of Astec Company and also one question about Li & Fung and Luen Thai company.
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1. What is the competitive and supply chain strategy for Astec?
Answer:
Astec Power delivers power solutions for a diverse range of
applications for multiple industries. It plays against aggressive
competitors in a technologically mature market which is dictated by
cost wars. In order to sustain its competitive advantage in the power
industry Astec follows the following strategy checkpoints:
1. The Emerson Leverage Advantage: Astecs internal division
called Group Procurement (GP) engages in global sourcing, identifying
best suppliers, negotiating price and signing contracts with suppliers.
Being a part of the Emerson group helps Astec gain more purchasing
bargaining power and a pricing advantage in raw material costs while
finalising its deals. The huge volume advantage helps push the prices
down.
2.Lean Enterprise Program: Astec has tried to incorporate the lean
culture in its company processes. In procurement for instance, to
maintain better material availability, service quality level and short
lead time major suppliers are asked to join a VMI/HUB program
where in they promise to maintain agreed level of inventory to fulfil
the requirements of pull lists sent by Astec. A program from
Manugistics based on parameters such as cost is used to pick the
required component to generate the pull list which reduces the raw
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material cost significantly. Through the Design verification test (DVT)
major cost cutting is achieved by using the most cost effective
components to build prototypes.
3. Ship-to-hub & Ship-direct Logistic Approach: Astec categorizes
its customers into two categories Ship-to-hub and Ship-direct. For
Ship-direct customers products are shipped to customer sites directly
and Astec assumes minimum risk for payment. But for Ship-direct
customers Astec has to await payment till they pull the goods from the
customer hub. Astec sets up hubs close to the customers
manufacturing facilities for its major customers. It also provides one-
stop service on any order and shipment by having dedicated teams of
Inside Sales Representatives (ISR) and Customer Service personnel
who help the customers to come up with estimated forecast
information. Astecs third party logistics provider EXEL manages the
customer hubs. A transfer between warehouses is carried out in
shortage situations.
Astec also transports equipment via sea in cases where the products
air shipping cost outweighs its underlying profit. The hub planners in
HK plan the production schedules for each manufacturing location.
The bidirectional relationship between the Baoan and Luoding
facilities saves transportation costs. DHL uses an Advance Shipment
Notice (ASN) to speed up the process of customs clearance at the
Chinese customs for the shipment of overseas suppliers.
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4. Sole/Multiple Sourcing: Astec maintains long-term commitments
with its sole-sourcing suppliers receiving price-reductions in return.
Some JIT suppliers in close proximity deliver products based on
production requirements. Multi category vendor help Astec avoid
production downtime and foster competition to lower purchase price.
2. How did Astec integrate its supply chain? What can be improvedand how?
Answer:
Astecs mother company connections help it enjoy a purchasing
bargaining power to gain price advantage. The seven Rs- the Right
Goods, in the Right Quality, at the Right Time, at the Right Place,
from the Right Source, at the Right Service, and the Right Price are
integral to the daily operations at Astec.
1. Procurement: The centralized Group Procurement (GP) divisionreviews contract price to choose best suppliers. Major suppliers of
Astec are part of the VMI/HUB program and the pull list for daily
production plans helps reduce raw material cost significantly.
Astec quality inspector checks the quality of the local materials
through a pre-audit program at the supplier site.
The bi-directional relationship between the Baoan and Luoding
facilities helps save transportation costs.
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Astec maintains long term commitment with reliable sole suppliers
to gain annual price reductions. It also has a string of JIT and
multi vendor suppliers to cater to dynamic market requests.
2. Logistics and Delivery: DHL consolidates supplies from differentoverseas suppliers and cross dock to the Baoan facility within a
twenty-four hour timeframe. Astec sets up hubs close to the
customers manufacturing facilities for its major customers. When
overseas suppliers receive pull signals from the Astec Baoan
factory they ship the materials to Astec from the regional
warehouse and DHL uses an Advance Shipment Notice to speed up
the process of customs clearance. As part of the Vendor Managed
Inventory (VMI) Service DHL operates a warehouse to receive
shipments and maintain inventory from supplier based on a pull
list from Astec which is in turn based on invoices provided by
supplier. These constitute the VMI operations. Astecs third party
logistics provider EXEL manages the customer hubs. A transfer
between warehouses is carried out in shortage situations.
Scope for Improvements
1. The inventory in the customer hub is not real time visible tohub planners located in Hong Kong. The detailed quantity,
destination and time of the outbound shipment are not available
in a timely manner. The half-week long time lag on the
inventory leads to black holes which make it difficult for
planners to analyse demand patterns and predict future
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demands. This can be changed by introduce a central system
that can help in making the inventory in the customer hub
available in real time to the hub planners. This will reduce the
time lag.
2. While the ISRs are evaluated on sales, the production people areevaluated on inventory returns causing a conflict of objectives.
The ISRs inflate sales forecasts to make sure that there will be
sufficient goods to meet the customer needs. Hence, the actual
sales and the sales forecasts in the Presidents Operating Report
show stark differences. The ISRs and the production people
should be brought on the same page to resolve their differences
at a common meeting so that the ISRs should make realistic
sales forecasts in sync with the production people.
3.The production planners at the Baoan factory are responsiblefor master production scheduling based on production
requirements committed to the customers. The master
production schedule is done on a rolling 13 weeks horizon with
the scope of change only present after the first three months.
However, the process to incorporate change is complicated due
to lack of material visibility in suppliers and logistics hubs. This
causes a two day delay in effecting the change, increasing cost
and reducing responsiveness to customers. To counter this
problem a system needs to be established which will allow
access to visibility of parts and raw materials so as to simulate
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schedule changes and confirm change requests in short time
periods.
4. The suppliers who send materials to the DHL hub provideinventory information to Astec in XML format and this to
automate the link between Astecs ERP and Advanced planning
system - Manugistics. But this link has not been built yet. The
information in XML file has discrepancies with the actual
inventory at the DHL hub. This leads the planners at the Baoan
facility to not trust the information system data and hence
refuse to have direct data interface with the VMI system. This
can lead to material shortages which can lead to delays and
production line stoppages. The link between Astecs ERP and
Manugistics should be built so that the planners at the Baoan
facility can use the information system data to plan the logistics
and inventory in a better way.
5. The Astec and the DHL hub heavily rely on e-mail but theinformation provided by DHL is not that reliable. Astec does not
monitor the actual inventory of goods supplied by the VMI
suppliers. Also, there should be an allocation mechanism to
split the quantity to support Baoan and Cavite factories both of
which use common parts. This can help counter the case of
insufficient inventories. Traditional e-mails should be replaced
with a more dependable central system that tracks orders and
customer requests.
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3. How do power, trust and relationship commitment influencesupply chain integration?
Answer:
All three factors or power, trust and relationship commitment are vital
for supply chain integration. Supply chain integration is the level to
which a business strategically collaborates with its partners and
manages intra and inter-organization processes to achieve efficient
and effective flows of products, information, service, decisions and
money for the maximum benefit of its customers. This entails treating
the supply chain as a single system rather than stand-alone
fragmented entities.
French and Raven(1959) classified power into five types which can be
used to classify customer power into the following categories:
Expert
Referent
Legitimate
Non-Mediated
Sources Of
Power
Reward
CoerciveMediated
Sources Of
Power
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Non Mediated Sources of Power: These types of power are not
wielded by the customer but are more or less perceived in the eyes of
the supplier.
1. Expert Power: In this case the supplier values the customer due toits expertise, knowledge and skills and how it can train the
supplier with all this wisdom and hence is ready to position itself
according to the customers wishes. For example: Cummins Engine
is valued by all its suppliers due to its Six Sigma expertise.
2. Referent Power: In this case the supplier values being identified orassociated with the customer. For example being the supplier of a
prestigious company such as Ford can vouch for the credibility and
capability of the supplier.
3. Legitimate Power: This is natural power where the supplier thinksthat certain customers have a natural right to influence its actions.
For example since Ford was Navistars only customer, Navistar
would have been expected to be willing to conform to Fords every
wish.
Mediated Sources Of Power: These are known to the customer and
are readily exercised with the explicit intent of influencing a supplier.
1. Reward Power: The customer provides attractive rewards to thesupplier by increasing the the frequency or quantity of its
purchases.
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2. Coercive Power: The customer has the power to punish thesupplier in times to cause it harmful damage. For example, Ford
tried to use its power to coerce Navistar to lower its engine prices.
From a relationship standpoint there are two types of relationship
commitments that can be talked about:
1. Normative Relationship commitment: This is an ongoingrelationship over an extended period of time, based on mutual
commitment and sharing. It takes longer to establish such a
relationship and demands greater investment of resources. But the
payoff of such a relationship is great in the long term.
2. Instrumental Relationship commitment: This exists when asupplier accepts the influence of a customer in the hope of
receiving a favourable reaction. This might be beneficial to one or
both parties in the short term but fades away when new partner
opportunities appear.
The relationship between power, relationship commitment and supply
chain integration in the context of China can be discussed as follows:
Both expert and referent power seems to have a positive impact on
normative relationship commitment, but legitimate power does not.
The non mediated types of power do not relate to the instrumental
relationship commitment.
In China, the legitimate power of the customer to influence the
supplier is universally accepted. Also, Guanxi networks and Chinas
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collective culture causes the power base to shift to the extended
guanxi network. Also, the use of the reward power by the customer to
respond to suppliers expectation is perceived to improve the
normative relationship commitment.
By research it has been found that normative relationship
commitment had a positive impact on supply chain integration by
helping to achieve competitive advantage and enhancing performance
while instrumental relationship commitment did not help much.
Hence, suppliers should cultivate normative relationship commitment
with their customers making it easier for the involved parties to
cooperate with each other, sharing information and integrating inter-
organizational processes based on an intrinsic desire to continue a
relationship. Instrumental relationship cultivation is has no effect on
the supply chain integration and in the long run may well damage
shared values and norms.
This is reflected very well by the Ford-Navistar case where the lack of
mutual trust, extreme exercise of power by Ford and a short term
relationship investment turned into an ugly scheme of events where
both parties were harmed by negative cross-attacks.
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4. How did Luen Thai and Li & Fung manage relationships andintegrate their supply chains?
Answer:
Luen Thai (LT) and Li & Fung (LF) are two companies engaged in very
similar businesses with customer focus and cost optimization as their
primary targets. However, the two companies are very different in
terms of their strategies and supply chain models. Hence, the two
companies also managed their relationships differently.
The Luen Thai Company and its relationships:
Luen Thai has a concentrated approach of supply chain city where a
centralized supply chain model ensures that most of the service
providers and suppliers are located in close proximity. This is done to
save travel time and cost and make the supply chain system more
efficient. There is an extensive centrally controlled IT infrastructure
that makes sure that there is seamless coordination and optimal
utilization of production lines.
Better concentrated control helps Luen Thai to manage its working
effectively, make swift decisions reducing scope of error and mis-
management. But it also has to take more accountability for the
success of the overall supply chain and maintain customer trust.
Hence, this requires Luen Thai to maintain long term normative
relationships with its customers based on mutual trust and
cooperation. Luen Thai has maintained a deep Chinese identity setting
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up supply chain cities in the heart of China. This is largely due to the
fact that Luen Thai maintains strong control over its centralized
supply chain model. Hence, it would not be wrong to say that The
Chinese business practice of Guanxi would be really important in the
relationship between Luen Thai and its Chinese suppliers. Hence, the
natural or legitimate right to power would be more acknowledged in
this typical Chinese set up, and so will be the need to reciprocate the
suppliers expectation by using reward power. Also, given the quota
system that was in place in the past, it would have been imperative for
Luen Thai to have engaged in acts of Guanxi with the state officials
from time to time to get benefits on quotas and relaxed norms.
Luen Thai has established a Social Accountability Management (SAM)
System to maintain the health, safety and compensation of its
employees. All these efforts go a long way in enhancing productivity
and motivating employees to perform well in the supply chain process.
The Li & Fung Company and its relationships:
Li & Fung believes in the concept of dispersed manufacturing where
the pieces of the supply chain are evaluated individually for best
solutions to each step. For example looking for the best possible
optimal supplier of raw materials, logistics or packaging suppliers
irrespective of where in the world they are located. Li & Fungs
relationship with its customers is a very normative one which has
been forged over years with trust, dedication, unparalleled service and
mutual cooperation.
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Li & Fungs approach helps it to create customized value chain for
every customer making it a customer favourite but the managerial
effort involved in coordinating such a dispersed model can be huge.
Hence, Li & Fung might be more interested in developing instrumental
relationships for the short term with these suppliers which gives it
flexibility to shift across multiple suppliers in times of need. In the
dynamic textile industry where trends change so often Li & Fung can
shift between suppliers easily since it does not have permanent
commitments to its partners.
Li & Fung has always been concerned with projecting itself as a
multinational company with diverse roots. This stems from its
dispersed manufacturing model and its need to manage geographically
distributed entities. A multinational tag probably benefits Li & Fung in
striking the right relationship with its global customers, employees,
suppliers and partners and maintaining a global mindset. Given all
these facts about its global identity and global partners it can be said
that the very integral Chinese business practice of Guanxi might not
be as integral to the workings of Li & Fung in the current time as it
would have been years before when it developed very traditional
Chinese products and had very traditional Chinese partnerships.
In todays modern world, Li & Fung would have to maintain different
relationships with its global partners to support this global supply
chain. It can be seen that Li & Fung exercises reward power over some
of its suppliers, especially the dedicated small units where in it ties
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the compensation directly to the units bottom line and keeping no cap
on the bonuses.
Given its long and high standing in the industry Li & Fung tries to
maintain the same close attention to detail with customers as it used
to do in the past. The current leadership still tries to maintain its
heritage of customer service. Even in the company there is less regard
for titles and hierarchy to the extent that the employees have tea with
the owners family often on. Li & Fung still tries to preserve intimacies
at the heart of its most successful relationships.