Reference no: EM132185599

End-of-Chapter Case: Stolen Tables and Nothing but Problems

Alex Gardner arrived at her office at 5:30 am. She hadn't been able to sleep and her head hurt. But she was in crisis mode. She wondered what she was going to do about Midwest's flawed outsourcing strategy.

As a new CEO, Alex hadn't expected to get a lot of sleep. But she hadn't expected so many nightmares. About a year ago, Alex had joined Midwest Table, a small Michigan table manufacturer with about 30 workers and a long tradition of manufacturing the high-quality wood tables. She had been fully aware that competition had been ratcheting up, squeezing margins. Chinese furniture manufacturers could no longer be ignored. But, Alex had a plan. She would source finished, flat-pack tables from Mexico to round out Midwest's portfolio.

Sourcing in Mexico

The Mexico-sourcing strategy had worked beautifully at first. High-quality tables arrived on time—and they sold well. Alex looked like a genius—and she was getting six hours of sleep every night. Then, quality dropped dramatically and deliveries became erratic. Sellable in-store inventories fluctuated wildly. Costs were going up. Customer satisfaction was going down. Midwest's image was being dinged. Alex had intervened, personally calling the CEO of Madera Specialties, Midwest's Mexican supplier. After all, she had been losing sleep and it was past time to fix the problem.

Then, yesterday morning, Alex almost came unhinged! She had stopped by the loading dock to personally inspect the new Mexican shipment. She wondered whether her call had made a difference. She had greeted Pete, Midwest's production supervisor, asking, "Good morning! What do you expect today? Have our long-distance quality interventions paid off?" Pete simply smiled, saying, "Let's take a look." Pete cut the seal on the doors and swung them open. Alex and Pete gasped audibly. They couldn't believe their eyes. The truck was empty!

By 5:00 pm—after some frantic phone calls—Alex and Pete had assembled most of the story. At an overnight stop just south of the U.S.-Mexico border, thieves had taken off the hinges to the trailer doors. The thieves emptied the truck before hanging the doors back in place. Alex and Pete had never heard of such a brazen—or clever—roadside hijacking. Although the driver had heard some strange noises during the night, he hadn't been too concerned. Strange things happen all the time at roadside rests on both sides of the border. When he checked the seal in the morning, everything seemed to be in order.

Time to Take the Risk Out of Outsourcing

Refocusing on this latest nightmare, Alex thought back to a year-old conversation she had had with Meghan, a friend who just happened to be a global supply chain consultant. The day before Alex flew to Mexico to sign the deal with Madera, she had met with Meghan at Café Luwak, their favorite hangout. Meghan had warned Alex to take it slowly. Alex smacked her forehead, saying, "I should have listened to Meg's advice." She picked up her phone and texted Meghan: "Can you meet for coffee this evening at Café Luwak?" Within 60 seconds, she received a reply: "Sure, I'll see you their at 5:45." Alex sighed, wondering aloud, "When does Meg sleep?"

Alex arrived at Café Luwak at 5:50. Meghan was sitting at their favorite table. A freshly brewed latte macchiato was waiting for Alex. Alex sat down. It was the first time today that she didn't feel agitated. Meghan would offer some good advice. After some brief chit chat and munching a couple of Luwak's delicious cranberry-oat cookies, Alex outlined three alternatives she had been contemplating. 1

Continue Mexican Outsourcing

Alex was convinced that sourcing from Mexico could work. Midwest's early success had made that case. If Alex pursued this strategy she could either work with Madera to fix the quality and delivery problems or look for a new supplier in Mexico. The risk profile would remain the same, but a better relationship or a better supplier could mitigate some of the costs. Of course, if she switched suppliers, it was always possible to pick a worse-performing supplier.

Begin Offshoring

Competition from China and Southeast Asia wasn't going to go away. Maybe Midwest should offshore production by investing in a Mexican maquiladora. Maquilas, as they are often called, are Mexican assembly plants close to the US border. They had become popular because of their proximity to the U.S. and their tariff-free status. Taking ownership (full or partial) would give Alex a lot more control over the production process. She could send Pete to Mexico to help the operation get up to speed.

Begin Sourcing from China

Sourcing in China would put Midwest in its rivals' backyard. But, it would involve a longer, potentially more complex supply chain (since ocean freight would be involved). Savings from lower labor rates would be offset with the more costly transportation. Alex wasn't really sure she would save much on labor. She had heard that labor rates had risen by 18% per year for the past 10 years. She was also unclear of whether she would be able to find a Chinese supplier that would meet Midwest's stringent manufacturing requirements. She knew high-quality suppliers existed. She just wasn't sure she could find one and then build a winning relationship.

Meghan had attentively listened to Alex, jotting down some notes on the back of her napkin. "These are all viable options," Meghan started. "But, now that you have experienced first-hand some of the risks, I think we should systematically brainstorm what could go wrong for each option. Having it all on paper will help you make a better decision."

Alex and Meghan ordered another round of cappuccinos—this time with soup and sandwiches. Meghan also asked the server for a notepad. He gladly obliged. Above-and-beyond service was one of the benefits of tipping well after each get-together at the Café. Meghan pulled three pages out of the notepad, one for each of the three alternatives. "Ok Alex, let's start! What could go wrong with each option?"

Questions

Help Alex and Meghan brainstorm risks for each of the three sourcing alternatives. Write down all of your risks—don't be too judgmental or selective.

Conduct an FMEA. Build a thoughtful worksheet (see Table 5.4). You'll have to make judgment calls on severity, likelihood, and detectability. Compute appropriate RPNs. What actions would you suggest to mitigate these risks?

Considering short- and long-term implications, articulate your overall risk-mitigation plan to Alex.