astec business case

8/3/2019 Astec Business Case

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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.

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