HKU918 Asia Case Research Centre POON THE UNIVERSITY OF HONG KON Poon Kam Kai Seis NEALE O'CONNOR ANNE WU SHANNON ANDERSON PQI: MANAGEMENT OF SUPPLIERS ‘Taiwan-based memory manufacturer Power Quotient Intemational Co. Ltd (“PQI") had an established system for selecting, assessing and managing suppliers. A scoring system that assessed suppliers im areas ranging from technical expertise to service quality and responsiveness made it easy for the management to spot suppliers’ strengths and weaknesses and to decide whether to Keep a supplier at arm's length or to cultivate a strong relationship ‘with the supplier. PQT had just completed its biannual evaluation of suppliers, several of which required further investigation. These suppliers received only average scores despite strong performance both technically and commercially. Meanwhile, PQM’s management ‘wondered whether sharing its assessment results openly with suppliers might help to improve its relationships with them, The Memory Industry Memory in electronic devices stored dala on integrated circuits using semiconductor technology. Different types of memory were used for different applications. Random access memory ("RAM") was a type of volatile memory, meaning that data, stored on RAM would be lost after the power to a device was switched off, and was used mostly in computing applications. The two types of RAM were static RAM ("SRAM") and dynamic RAM DRAM"), SRAM was commonly used for cache memory, while DRAM was used in computing applications. Flash memory was used mostly in communication and consumer devices such as mobile phones, digital cameras, media players and digital video cameras because of its ability to retain data even when the device was powered off. Within the category of flash memory, NOR memory, which was named after the data mapping technology (Not OR),was used mostly for storing small amounts of executable code for computing devices; and NAND memory, which was named after the data mapping technology (Not AND), was used for bulk storage of data in portable USB flash drives, ‘memory cards and solid-state drives. Advances in technology and increased competition had led to increased commoditisation of ‘memory products, and memory was one of the most volatile segments in the semiconductor “Grace lo prepared thi car mdr the rpervison of Prono Nese O Comer for clas dscason Ths case nt bk {oso fine or nefctive handing of sono ute procs, 1© 2011 by Th Aria Cae Reeorch Contre, The Univer of Horg Kang. No pr of th publication maybe veprodeced or ‘ronemiaed in any form oF 9 ony mean—lecam, mechanical, photcapng. rear, ar there (cng he Srtrnet)—vithout th persion of The Onareof Hone Kong. Ref 10A81C10481 ax: Management of Supple industry, subject to wild swings in demand and price. Between 2005 and 2007, increasing demand led memory manufacturers to expand production capacity, but the ripple effect of the US mortgage crisis had fed to @ drop in consumer demand and a dramatic fall in the price of DRAM by 2008. One billion unsold DRAM chips translated to a loss of almost US$10 billion for the industry worldwide, and many producers sold them below cost in order to survive. Nonetheless, the memory industry was expected to rebound in 2010 with the increasing popularity of wireless communications devices and with continuous demand for consumer and computing devices driving its growth.' Apple was one of the largest consumers of flash ‘memory in the world,* and the popularity of its iPods and iPhones was expected to continue to the demand for flash memory, compounded by increased adoption of other smartphones. Research analysts predicted global revenues for the memory industry in 2010 to grow to USSS7 billion, up 28% from the previous year? Company Background Established in 1997, PQ was a Taiwan-based electronics company that had begun as a memory module manufacturer and eventually expanded into other product lines, including flash memory cards, USB flash drives, solid-state disks, DRAM modules, disk on modules, Portable hard drives and portable multimedia players. In 2003, it was listed on the Taiwan Stock Exchange. In 2008, it was ranked the tenth-largest supplier in DRAM modules, flash cards and USB flash drives in the world, PQI had its own manufacturing plants in Taiwan and Suzhou in China. With subsidiaries in the US, the Netherlands, Japan, Korea, Hong Kong and China, it iad more than 900 employees around the world. PQL used an assemble-to-order manufacturing model without keeping a large inventory of its products. It kept a steady inventory of structural components that made up the skeletons of its products, such as housing, and accessories. When key components such as flash, DRAM or integrated circuits (“ICs”) came in, it would assemble the orders orassemble to maintain its inventory level.. Purchases for structural components were made every three months to allow PQL to adjust its inventory according to the market situation. Supplier Management PQI's purchasing activities were handled by its purchasing department, which resided within the production and material management division, a sub-division of the logistics division. The purchasing department had two teams of purchasers: general purchasers and strategic purchasers. PQ had about 70 general suppliers. General purchasers dealt with standard components and accessories, deciding which supplier to use for each order with the approval of the purchasing manager. Strategic purchasers handled the purchase of non-standardised parts. Decisions regarding which supplier to use were made by the purchasing manager with the approval of the manager of the product and material management division and the product marketing manager. Between its Taiwan and Suzhou plants, PQ! had about 20 strategic purchasers " KPMG (December 2008 "The Rood to Recovery ia the OlablSeniconduce nda: A Survey of indy Executives Fourth Quarter 2000" oem om seubialion/LOD, JCE-SemicanorShrveyRenor pi accesed 19 Febuary 2009) * Dates, S. (Api 2008) “Apple Sneees, FLASH Industy Get Sik", Becvonle Design Soeey News, ups sdo convaril/<72596-Arnle sce lsh industry gets sicko acesed 12 June 2010), * Datbeas, ne 2010) 2010 Memon”. plik someon 1227.20 Osman (accessed 22 February 2010) 2sonic. Management of Supliers aug ba Management of ups, Geographic Spread Among PQI’s 100 or so suppliers, about 30 of them were located in mainland China, out of which about 10 were mainland manufacturers, five were Taiwanese manufacturers, and the rest were joint ventures between Taiwanese and mainland Chinese businessmen. The five Taiwanese manufacturers mainly supplied structural components while the rest were carton or packaging factories. PQI preferred to work with Taiwanese manufacturers even on the ‘mainland because it had more confidence in them. Mainland Chinese manufactures do not purchase or use the same wpe of equipment as Taiwanese ones because their investment level is different. The Taiwanese businessmen also have a better grasp on the capability of ‘machineries than mainland ones. Financial investment isa big consideration for mainland businessmen and they tend not 10 buy the very expensive egutipment even though they have a good mastery of the technology, The precision level of te [equipment they bis) is different. Henry Wang, POIs vice-president of logistics Another reason why PQI preferred to work with Taiwanese manufacturers was because the ‘management felt that Taiwanese manufacturers had a better grasp of quality control and were ‘more efficient, giving PQT mote confidence in placing orders with them Classific ation of Suppliers In the mid-1990s, PQI set up a supplier management system in order to satisfy the audit requirements of one of its customers, an original design manufacturer. Under this system, PQL had to categorise its suppliers and assess them on a regular basis. PQI categorised its suppliers into three groups: + Tier 1 suppliers were international, high-power suppliers that could supply goods globally. They generally had strong technological and production capability, and tended to be dominant players in the market. © Ticr 2 suppliers were suppliers that supplied regionally, for example to Asia or Europe. Tier 2 suppliers supplied mostly standard products, such as resistors or capacitors. © Tier 3 suppliers were local suppliers whose products were frequently designed by their customers, such as supplicrs manufacturing the housing for PQY's USB thumb drives or portable hard drives designed by PQI. Selection of New Suppliers ‘The purchasing department was responsible for sourcing new suppliers and collecting, basic information about them. Purchasers also used their own industry networks to find out about the capability and credibility of potential suppliers. Once this was done, tier 1 and tier 3 suppliers would be assessed not only by the purchasing department but also by the research and development division and the product planning division, For tier 3 suppliers, PQI would also conduct onsite inspections to assess their machineries and production capacity during the selection process, Assessment of new suppliers was based on six broad areas (see Exhibits 1, 2 and 3} * Commercial performance: the general financial status of the supplier as well as its payment and delivery tenns ‘© Supplying capability: aspects such as the supplier’s position in the market, the scope of its service and its flexibility in responding to customers’ needs © Technical performance: the supplier's engineering capability and technical sophistication Sanne eee