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Chapter 9 Outsourcing

Problem 1: Answer the following questions about the case at the beginning of this

a) Describe Zaras current sourcing strategy. How is it a competitive advantage for

the firm?

b) What specific challenges is a result of Zaras rapid inventory turnover? What

portions ofZaras replenishment strategy make it easier to manage?

c) Will Zaras current sourcing strategy continues to be useful as it expands? How

should this strategy change? What are the risks associated with this new strategy?


a):Most other retailers (like American chain GAP and Swedish retailer H&M)
completely outsource their production to factories around the world, most of them
in low cost Asian countries. The production which is not outsourced is owned or
closely-controlled facilities-tremendous amount of flexibility and control.

Answer b):Short lead time = more fashionable clothes Lower quantities = scarce
supply More styles = more choice, more chances of hitting it rightMore designers =
rapid implementation of ideas Usually shorter routes Store receives garments within
1-2 days several times a week.

Answer c):

Concerning ZARA s impressive growth during the last years despite of their
differing strategy, itwould not make sense to expand the new strategy. Of course
for the moment they profit by the highermargins (because of the lower production
costs), but ZARA s customers set value on premium qualityand in-season fashion.
ZARA does not make brand advertising like other brands do so. Therefore the most
important about ZARA is their IMAGE.

Problem 2: Discuss the impact of the product life cycle on the buy/make
framework developed inSection 9.3

Answer: In order to assess the effect of product life cycles on the make/buy
framework developed in Section 9.3,we need to understand how product knowledge
and capacity requirements evolve over the life cycle ofa product. A typical product
life cycle has several stages:

1. The product is newly introduced, and bought initially by a relatively small number
of customers(early adopters). At this stage of the product life cycle, production level
is low and capacity is usuallynot an issue. Under these conditions, the buy/make
framework implies that anew product should not beimmediately outsourced.

2. In the rapid adoption phase, demand for the product increases at an increasing
rate. If this leads totight production capacity, and the production processes are
already stable, then outsourcing should beconsidered. It may even be the only
choice to keep up with the increasing demand.

3. When the product reaches the maturity phase, i.e., when demand stabilizes over
time, then the outsourcing decision should be re-considered under the framework
discussed in Section 9.3. For instance, if earlier an integral product was outsourced
due to capacity constraints, then the firm should consider installing additional
capacity to meet the stabilized demand, and manufacturing the product in-house.

4. When the product is approaching its end-of-life, outsourcing is a good option for
both integral andmodular products because the company should focus on new

Problem 3:Apply the hierarchical model discussed in section 9.3 to IBM decision in
the early 1980s tooutsource the production of microprocessors for its PCs to Intel.
Answer: IBM subcontracted two critical technologies, the operating
system and the micro processor,respectively, to suppliers Microsoft and Intel. In
just ten years, IBM went from dominance in the industry to a company that has
gone through dramatic downsizing. At one point in the last few years,the market
value of Microsoft, a company with 1/10 the revenue of IBM, was higher than that of
Problem 4: Consider a consumer product manufacturer such as Procter & Gamble.
Analyze whether the company should outsource the production of products such as
shampoo. Is your recommendation consistent with P&G's strategy? If not, explain
the reason for the difference between your strategy and what is done by P&G.
Answer: Yes, The impetus for P&Gs outsourcing strategy can be traced to the
formation of the companys global business services department in 1999. One
of the largest and most far-reaching shared services organization in the world
at the time, Global Business Services (GBS) consolidated more than 70services,
including facility management, real estate, accounting, information technology and
human resources

Chapter 8: Global Logistics and Risk Management

Problem 1:

Discuss situations in which each of these supply chains might be the appropriate choice for a

International distribution systems.


International suppliers.


Offshore manufacturing.


Fully integrated global supply chain.

Answer (a):

Domestic production with international distribution is typical for small businesses that
attempt to expand to serve global markets. For instance, Mavi Jeans manufactures its
products in two facilities in Istanbul, Turkey, but sells them in more than 3,000 locations
worldwide. (See Mavi Jeans(2003).)

Answer (b):

The product(s) may be so complex that the necessary expertise and resources
tomanufacture different components are spread across the world. For instance, Boeing has
more than15,000 suppliers in 81 countries. (See The Boeing Company (2003).)

Answer (c):

Typically, high labor cost in labor-intensive industries causes manufacturing operationsto

shift offshore. For instance, consider Nike, which subcontracts its manufacturing to
approximately350 factories in the Asia-Pacific region employing nearly 400,000 workers.
(See Nike (2003).)

Answer (d):

A fully integrated supply chain is crucial for companies that implement flexible globalsupply
chain strategies in a highly variable environment, e.g., for companies that intend to
shift production from country to country in order to reduce costs or risk. The PC
manufacturing industry isa good example of this.

Problem 2:

Discuss a recent example of an unknown-unknown risk that proved damaging to a

supplychain. Explain specifically how each of the following strategies might have mitigated
this risk:

Invest in redundancy.


Increase velocity in sensing and responding.


Create an adaptive supply chain community.


Problem 3.

You are the CEO of a small electronics manufacturing firm that is about to develop a global
strategy. Would you prefer a speculative strategy, a hedge strategy, or a flexible strategy?
Would your answer to this question change if you were the CEO of a large electronics firm?


Although the specific answer depends on the management style, resources and long-term
strategies ofthe firm, a hedge strategy seems more appropriate for a small firm. Following a

speculative strategy

may be disastrous if the company does not have the size and financial strength to absorb
potentiallosses associated with a speculative strategy. On the other hand, following a

flexible strategy

mayrequire a significant amount of additional investment in infrastructure to ensure the

necessary coordination, and for the re-design of products and processes. The resources
necessary to implement aflexible strategy successfully may not be available to a small rm.
Clearly, for a large firm, thefinancial and resource 29 constraints may be much less relevant
than for a small firm, and the globalstrategy to be employed may be any of the three
strategies mentioned above depending on thespecifics of the situation.

Problem 4:

Discuss some examples of regional products and of true global products. What is it aboutthe
products that makes them better suited to being regional or global products?

Some of the factors that affect whether a product can be

sold globally without modification

are discussed below:

1. Brand recognition.

Some brands have developed a global image of quality and desirability thatthey do not
have to be customized to regional and national tastes. This is especially true for
luxury brands, such as Ferrari that sells the same cars globally.

2. Cultural differences.

Some products reflect long-term traditions and/or a certain regional tastedeveloped over
time, and fit into the regional category. A lot of food products fall here, and it is muchharder
for these products to get accepted globally. For instance, it is hard to think of kabobs that
arevery popular in the Middle East to be sold in global chain restaurants. An exception in
this category is pizza, for instance.

3. Standardization.

In consumer electronics and computer manufacturing there are plenty ofexamples of global
products. The complexity of such products requires standardization throughout theworld,
and makes them global products. However, note that exceptions exist. For instance,
TVsystems in the US and Europe are different, and the same TV set cannot be sold in both
markets.Medical products also fit into this category as long as they satisfy differences in
health regulations indifferent countries.

Problem 5:

You are the manager of a regional bakery. Contrast the issues you would face if your firm is
located in each of the following countries:a. Belgium b. Russiac. Singapored. Canadae.
Argentinaf. Nigeria


In Belgium and Canada, the most important issue would be keeping the costs down.
Bakery production is labor-intensive and requires relatively unskilled labor. However,
unskilled labor costs inthe First World countries are typically very high compared to the rest
of the world. In the emergingnations, such as Russia, Singapore and Argentina, logistics
issues would be most important since thenecessary infrastructure may not be in place. On-
time delivery of bakery products is crucial becausethey are perishable items, and there is a
time window they need to reach the bakeries in order to besold. For instance, if the fresh
products arrive at noon, instead of early in the morning, most of theseitems may be left on
the shelves at the end of the day. In a Third World country, such as Nigeria, inaddition to the
logistics problems mentioned above for the emerging nations, environmentalconditions may
not be sufficient to ensure a healthy production of bakery products. For instance,water may
not be clean, etc.

Problem 6:

Answer these questions about the article at the beginning of this chapter:


Other than a need to expand, what other reasons would Wal-Mart have for opening stores


Why would it be beneficial for Wal-Mart to have suppliers in different countries?


Why would Wal-Mart want strong centralized control of its stores? Why would Wal-Mart
wantstrong local control of stores?


What pitfalls and opportunities, other than those mentioned in this article, will Wal-Mart face
overthe next few years?

Answer (a):

Possible reasons for Wal-Mart to start international operations include:1. Domestic revenues
do not increase at a pace Wal-Mart wants them to. Therefore, Wal-Mart intendsto achieve a
high growth rate in foreign countries to hedge against the slow business in the
domesticmarkets.2. A rival European chain, Carrefour SA, has already a strong presence in
the South American market.Wal-Mart could lose the market totally if it did not respond
quickly.3. Foreign operations would also help Wal-Mart identify potential new low-cost
suppliers fordomestic operations.

Answer (b):

Having many suppliers in different countries would enhance Wal-Marts

everyday low pricing formula by allowing it to hedge against cost increases due to economic
and/or politicalconditions in a given country.

Answer (c):

Strong centralized control is helpful for aligning local operations with the overallcorporate
objectives. Additionally, Wal-Marts years of domestic expertise in retail operations,
e.g.,distribution systems, can best be leveraged to improve distribution in South America if
strongcentralized control is implemented. On the other hand, it may be impossible to
customer preferences and understand cultural differences unless local managers control cert
ain aspects of the business.

Answer (d):

In general, political instability is a major concern in South American countries. Forinstance,

due to the recent downfall of the Argentine economy, Wal-Mart may experience difficultiesif
the Argentine government starts to employ policies that favor domestic producers rather
thanforeign companies. Also, if the dollar continues to gain in value against major South
Americancurrencies such as the Argentine Peso and Brazilian Real, American exports into
these countries will be expensive compared to their local competitors, which will negatively
impact Wal-Marts margins.

Chapter 10: Coordinated Product and Supply Chain Design

Problem 1:

List two low clock speed products, two medium clock speed products, and twofast clock
speed products.


Low clock speed products would include diamond mining and electricity.Medium clock speed
products would include automobiles and computer operating systems.High clock speed
products would include and cosmetics and games and toys.

Problem 2:

How does a low clock speed impact the product design strategy? How about afast clock


Low clock speed affects the product design strategy in that the focus is less on speeding
up product development or postponing differentiation and modularity as it is not that import
antfor more functional products.

High clock speed affects product design in that the focus is on modular product
architecturesince it allows independent development of product subcomponents. There is
also greaterweight placed on postponement of product differentiation, sometimes until
demand isrealized.

Problem 3:

Give an example of a product appropriate for each of the boxes in Figure 11.3.


Box A-RiceBox B- InfotainmentBox C-Semi-conductorsBox D- Jewellery

Problem 4:

Discuss some examples of products that are designed to lower shipping andstorage costs.


Some of the items that are designed to reduce shipping and transportation costs are
productsthat can be packed compactly and can be packed in great quantities without the
transportationmode reaching weight carrying capacity. These would include fashion items,
such as clothes,shoes and bags. Also included would be products that can be boxed or
placed in containerssuch as consumer goods such as canned food or other such groceries.
Also included would plastic products that can be easily packaged such as Tupperware.


IKEA Furniture


Floor lamps

Tupperware made by Rubbermaid


Collapsible chairs


Fedex package box

Problem 5:

How does the proliferation of products, models, and options make the supplychain more
difficult to manage?


The proliferation of products, models and options make the supply chain more difficult
tomanage in that the great variety of products as they are produced in sequence cause
longerlead times. This means that concurrent and parallel processing is necessary. This then
meansthat the manufacturing process itself has to be modified to be conducive to such
processingand manufacture. Another difficulty may arise in that for each product or module,
differentlevels of inventory may be necessary and these have to be integrated into the
manufacturing process for each product or model.Offering more products, models, and
options requires more customization and morecomplicated production scheduling.Product
proliferation makes it difficult for manufacturers to take advantage of economyof scale,
because products are processed in small batches.Offering more products adds difficulty to
inventory tracing. Non-aggregate demand usually has higher variability than aggregate

Great demand variability makes forecast inaccurate.When demand variability is high, a firm
needs to prepare more stock to maintain the sameservice level than when demand
variability is little.
Problem 6:

What are the advantages of downward substitution? What are the disadvantages?


Some of the advantages for downward substitution include being able to make use
ofaggregate forecast for products, which means the forecasts would be more accurate as
theywould be aggregated over a larger number of products that would then be
differentiatedfurther downstream, or those products which are already of slight difference.
Anotheradvantage would be that components can be made ready for the consumer when
demandarises but no stock is kept for a specific end product, which means the available
componentscan be used thus capitalizing on downward substitution, and thus loss due to
obsolescence isless likely to occur.Disadvantages of downward substitution include that fact
that certain products may requiremodules that are not of the same quality as the standard
modules provide. This can lead tolower quality products because one of the components was
not of the correct quality. Anotherdisadvantage is that if the components had an error at
manufacturing all the products cannot be assembled thus resulting in a loss of customer

Problem 7:

What are some products or industries that have been damaged by excessive


One of these industries is the personal computer industry. Standardization must be a

positiveforce to eliminate the cost and inconvenience caused by the possible incompatibility
between products offered by different vendors, and still allows competition
and innovation. Excessivestandardization could reduce design options and affects the
development of a product orindustry. Microsoft windows is an example of excessive
standardization. The
large population of MS windows users and the wide acceptance of this operating system am
ongvarious software vendors make many MS window technologies industrial
standards.Microsoft takes advantage of this to block competition and manipulate market
rather thanimprove the performance of its products.
Problem 8:

Discuss some examples of modular and non-modular products and processes.


A modular product would be a cell phone, a television or a watch. Non-modular products

include remote controls or rice products.A modular process would include the assembly of an
automobileAnon-modular process would include the making of chocolate or ice cream.

Problem 9:

How do standardization strategies help managers deal with demand variabilityand the
difficulty of making accurate forecasts?


Standardization strategies help managers deal with demand variability and accurate
forecasts in that by standardizing, the organization can reduce the uncertainty of forecasts
by using aggregate forecasting across all the products thereby getting a more accurate
forecast. Standardization helps managers deal with variability in demand in that the
products can be differentiated according to demand at the point of demand by the customer.
In this way, the products that are wanted by customers are the ones assembled using the
component parts which can be used for other products as well.

Problem 10:

What are the advantages and disadvantages of integrating suppliers into the product
development process?


One of the advantages is that the organization may not have the expertise to develop those
new products and in involving suppliers who do, the organization can still continue with the
introduction of the new product but without going through the process of trial and error that
would incur costs. Another advantage is that the suppliers can gain experience with the new
product while the organization continues with its core competencies. The fact that costs and
risk could be separated between the organization and suppliers is also an advantage. A
disadvantage could be that the organization may lose out on being credited for the idea
alone but also faces the possibility of the innovation getting out too early. Another
disadvantage would be that the organization may not be learning everything about the
product and could thus lose out on further opportunities to innovate