Pacific Systems Corporation

Case Study
SCM 406
Taryn Weaver

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I. Objective

The objective of this report is to analyze and recommend a sourcing strategy for

DVD drives for Pacific Systems Corporation (PSC). A conclusion will be drawn after

extensive analysis of suppliers’ capabilities and finances.

II. Executive Summary

Pacific Systems Corporation is a medium-sized company specializing in

technology and located north of San Francisco. In the past, the company has

manufactured subsystems, but recently, PSC has added a product line of fully

assembled personal computers. PSC is known for producing high quality products

and its strategy is to sell these products at affordable prices. The personal

computers will be assembled at PSC’s facilities, but many of the product components

and subassemblies will be outsourced. This case is focused on selecting a supplier to

outsource the DVD drive. PSC is looking to start production at 500,000 disk drives in

the first year.

After the purchasing team at PSC visited suppliers, they narrowed it down to

four choices: Elecom, SureTech, E-Drive Systems and Park Technologies. Each

company has advantages and disadvantages. Elecom is located in Japan and is the

largest supplier. They have the lowest quoted price, but the contract is in Yen and

the large size of the company was a turnoff for PSC’s team. SureTech is a small

company in Colorado. They specialize in disk drives, but have just over a year of

experience, so it is hard to tell what their future holds. E-drive Systems is located

just ten miles from PSC, allowing for the most flexible delivery, but they are

currently experiencing a quality issue. Park Technologies is in Korea and had the

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most in-depth quality testing. The only draw back is that PSC would be their first

larger North American customer. An analysis must be done to decide which of the 4

suppliers will get PSC’s contract.

III. Introduction

Pacific Systems Corporation needs a DVD drive in the unit price range of

$125-$150. It is currently January of 2003, and the inventory needs to be available

to start production in June, because the computers need to be available for sale by

August for back to school. Appendix I outlines the ramp-up time and lead-time of the

four possible suppliers, at this time, E-drive is the only company to meet the needs

of PSC. Responsiveness and quality of suppliers is critical. PSC is known for their

quality and every item that is not up to par is estimated to cost the company $300 in

addition to word of mouth and loss of customer faith. The company selected to

source must also have the capacity to support PSC and be in good financial standing.

IV. Recommended Sourcing Strategy

I recommend that PSC use E-Drive Systems as their supplier of the DVD disk

drives. While E-Drive Systems does not fall in the total price requirement of $125-

$150 (appendix II), neither do the other companies and E-Drive has the second

lowest price. It makes up for the price, however, with the just in time delivery option

due to it’s close proximity to PSC (the company is willing to deliver every other day).

They are also available to have the production lines up and running by June, which

is a major requirement of PSC. While E-Drive is the second largest producer of the

DVD drives worldwide, they still had an attitude that could lead to a great supplier

relationship, unlike some of the other larger suppliers. While their financials were

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not necessarily the best of the four companies (appendix III), there are no red flags

and they show signs of future growth and are willing to work with companies such

as PSC on future product development. This will allow PSC to be long time

customers and still be able to keep up with the ever-changing technologies in the

industry.

The only risk that E-Drive has is a quality issue of a “clicking” sound made

when the drive is engaging the disk. The quality manager assured PSC that this

would be fixed before PSC would even be placing orders. In order to mitigate this

risk, due to the close proximity of the supplier, PSC will send an engineer of their

own to check in on E-Drive’s engineers as they work on this issue. There should be

detailed weekly reports on fixing the problem as well as ten free drives that PSC can

use as prototypes and test in their own facilities before entering a long-term

contract. This will ensure that the problem is fixed, as the manager promised.

Overall, the supplier responsiveness, close proximity to the PSC facility and promise

for future growth makes E-Drive the most attractive of the four candidates.

V. Obtaining Financial Data

This case study provided the information necessary to perform a financial

analysis (appendix III), although this is not always the case for purchasers. If a

supplier is a public company, financial data is readily available on resources such as

Hoover’s database. However, it can be more substantially more difficult if the

company is private. In this case, a purchasing company can attempt to privately seek

financial data on potential suppliers. In this case, the supplier may not want to

readily supply this information, especially if it is against company policy, or if it is

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not information that will make the company look attractive. Purchasers can ask

other companies that source with the supplying company if they are well connected

in the industry. There are also business-to-business agencies that have financial

reports. In this case, however, multiple sources should be used and cross-referenced

in order to get the most accurate analysis possible.

VI. Sourcing Decisions

While the sourcing decision outlined in this case required ample resources

and time, other sourcing decisions may not. The disk drive in this case is an “A” item.

“A” items are of utmost importance and the suppliers who source them should be

analyzed as if a partnership is being formed. The relationship and communication

between the sourcing company and the purchaser must be strong. “B” and “C” items

do not always require extensive research. While quality inspection for all parts of

the supply chain is key to a quality product, many times “B” and “C” items can be

sourced by multiple reputable suppliers or even with a blanket purchase order. This

does not require the same amount of research or communication as “A” items.

In this particular case, supplier capacity was important, but not the most

important element. While PSC is looking for 20% growth in the next year and will

need a supplier to support this, none of the 4 companies included in the study had a

capacity issue. When making a sourcing decision, capacity is important. It should be

one of the first things viewed by a purchasing company because if a supplier cannot

meet capacity, they either need to be overlooked, or multiple sourcing needs to be

analyzed. If a supplier cannot reach capacity requirements, many times their price

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and other elements do not matter because a company that can meet capacity must

be used anyway.

When deciding which supplier to choose, there may be an option of multiple

sourcing rather than just using one supplier. The advantages of multiple sourcing

include assurance of supply and creating a competitive market to drive down prices.

However, multiple sourcing can be a disadvantage because having fewer suppliers is

often more efficient and it gives the purchasing company less control over the

product. There also may be less knowledge of each supplier if a purchaser chooses

to multiple source rather than single source. The advantages of single sourcing

include having more leverage and power over the supplier and an advantage of

having a stronger relationship with that supplier. However, single sourcing could

cause reduced flexibility of shipments and offer less innovation of product. If a

company single sources, they feel the repercussions of mistakes or production

stoppages by the supplier.

VII. Conclusion

The conclusion of having PSC source their DVD disk drives from E-Drive

Systems was based on supplier responsiveness, supplier visits, financial

information, and opportunity for future growth. In my opinion, E-Drive Systems is

the best overall choice taking these requirements into account. In order to make this

decision process shorter in the future, PSC may want to consider attempting to get a

small sample of an item made during the ramp-up time so that they can prototype

while the supplier is ramping up for mass production of the item. This would have

opened the door to other suppliers that were being considered but had longer lead

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times than E-Drive Systems. Another suggestion would be to have the cross-

functional teamwork remotely by sending separate members of the team to

separate locations instead of everyone. Especially because some of the suppliers in

this case were in Asia, this would save time in visits and they can take notes and

remotely compare the suppliers in a shorter amount of time instead of taking weeks.

VIII. Appendixes

I. Lead Time

Company Elecom SureTech E-Drive Park

Ramp up 4 months 5 months 4 months 4 months
Lead Time 8 weeks 3 weeks 2 weeks 10 weeks
Every Other
Delivery Monthly Weekly Day Monthly

II. Total Cost Analysis

Cost Category Elecom SureTech

Quoted Unit Price $127.00 $144.00
Transportation (per unit) $18.00 $6.00
Tooling (total) $3,000,000.00 $3,500,000.00
Quality Non-Conformance (per year) $1,425,000.00 $1,575,000.00
Duties/Customs, Insurance, Tarriffs (per unit) $11.50 $1.50
Ordering, Inbound Receiving and Inspection Costs (per
unit) $4.50 $4.00
Estimated Per Unit Total Cost $161.00 $155.50

**based on 500,000 units in year one

Continued:

E-Drive Park
$140.00 $132.00
$14.00 $18.00
$3,250,000.00 $2,750,000.00
$1,125,000.00 $600,000.00
$3.00 $13.00
$3.25 $2.25

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 $160.25 $165.25

III. Financial Analysis

Ratio Elecom SureTech E-Drive Park

Asset Turnover 1.32 1.57 1.64 0.05
Inventory Turnover 5.93 6.46 12.91 9.26
Receivable Days 0.0004 0.0002 0.0005 0.0004
Payable Days 0.0002 0.0004 0.0003 0.0003

Leverage 2.58 2.03 2.28 2.09

ROE 6.53% 21.74% 16.86% 9.94%
Long term D/E 0.6497 0.3188 0.3925 0.3527
Long term D/A 0.2518 0.1571 0.1721 0.1684
Current Ratio 1.22 1.34 1.35 1.13
Quick Ratio 1.15 1.27 1.16 1.05
EBIT Coverage 1.75 6.46 3.62 2.85

Profit Margin 1.92% 6.82% 4.50% 3.43%

IX. Table of Contents

I. Objective pg 2

II. Executive Summary pgs 2-3

III. Introduction pg 3

IV. Recommended Sourcing Strategy pgs 3-4

V. Obtaining Financial Data pgs 4-5

VI. Sourcing Decisions pgs 5-6

VII. Conclusion pgs 6-7

VIII.Appendixes pgs 7-8