Question

The Somerset Furniture Company was founded in 1957 in Randolph County, Virginia. It traditionally has manufactured large, medium-priced, ornate residential wood furniture such as bedroom cabinets and chests of draws, and dining and living room cabinets, tables, and chairs, at its primary manufacturing facility in Randolph County. It employed a marketing strategy of rapidly introducing new product lines every few years. Over time it developed a reputation for high-quality, affordable furniture for a growing U.S. market of homeowners during the last half of the twentieth century. The company was generally considered to be an innovator in furniture manufacturing processes and in applying QM principles to furniture manufacturing. However, in the mid-1990s, faced with increasing foreign competition, high labor rates, and diminishing profits, the Somerset Company contracted to outsource several of its furniture product lines to manufacturers in China, simultaneously reducing the size of its own domestic manufacturing facility and labor force. This initially proved to be very successful in reducing costs and increasing profits, and by 2000 Somerset had decided to close its entire manufacturing facility in the United States and outsource all of its manufacturing to suppliers in China. The company set up a global supply chain in which it arranges for shipments of wood from the United States and South America to manufacturing plants in China where the furniture products are produced by hand by Chinese laborers. The Chinese manufacturers are very good at copying the Somerset ornate furniture designs by hand without expensive machinery. The average labor rate for furniture manufacturing in the United States is between $9 and $20 per hour, whereas the average labor rate for furniture manufacturers in China is $2 per day. Finished furniture products are shipped by container ship from Hong Kong or Shanghai to Norfolk, Virginia, where the containers are then transported by truck to Somerset warehouses in Randolph County. Somerset supplies retail furniture stores from this location. All hardware is installed on the furniture at the retail stores in order to reduce the possibility of damage during transport.

The order processing and fulfillment system for Somerset includes a great deal of variability, as do all aspects of the company's global supply chain. The company processes orders weekly and biweekly. In the United States it takes between 12 and 25 days for the company to develop a purchase order and release it to its Chinese suppliers. This process includes developing a demand forecast, which may take from one to two weeks; converting the forecast to an order fulfillment schedule; and then developing a purchase order. Once the purchase order is processed overseas by the Chinese manufacturer, which may take 10 to 20 days depending on the number of changes made, the manufacturing process requires approximately 60 days. The foreign logistics process requires finished furniture items to be transported from the manufacturing plants to the Chinese ports, which can take up to several weeks depending on trucking availability and schedules. An additional 5 to 10 days are required to arrange for shipping containers and prepare the paperwork for shipping. However, shipments can then wait from one day to a week for enough available containers. There are often too few containers at the ports because large U.S. importers, like “Big W” discount stores in the United States, reserve all the available containers for their continual stream of overseas shipments. Once enough containers are secured, it requires three to six days to optimally load the containers. The furniture pieces often have odd dimensions that result in partially filled containers. Since 9/11, random security checks of containers can delay shipment another one to three weeks, and smaller companies like Somerset are more likely to be extensively checked than larger shippers like Big W, whom the port authorities don't want upset with delays. The trip overseas to Norfolk requires 28 days. Once in port, one to two weeks are required for a shipment to clear customs and to be loaded onto trucks for transport to Somerset's warehouse in Randolph County, which takes from one to three days. When a shipment arrives, it can take from one day up to a month to unload a trailer, depending on the urgency to fill store orders from the shipment.

Because of supply chain variability, shipments can be off schedule (i.e., delayed) by as much as 40%. The company prides itself on customer service and fears that late deliveries to its customers would harm its credibility and result in cancelled orders and lost customers. At the same time, keeping excess inventories on hand in its warehouses is very costly, and since Somerset redesigns its product lines so frequently a real problem of product obsolescence arises if products remain in inventory very long. Somerset has also been experiencing quality problems. The Chinese suppliers employ quality auditors who rotate among plants every few weeks to perform quality control tests and monitor the manufacturing process for several days before visiting another plant. However, store and individual customer complaints have forced Somerset to inspect virtually every piece of furniture it receives from overseas before forwarding it to stores. In some instances, customers have complained that tables and chairs creak noisily during use. Somerset subsequently discovered that the creaking was caused by humidity differences between the locations of the Chinese plants and the geographic areas in the United States where their furniture is sold. Replacement parts (like cabinet doors or table legs) are difficult to secure because the Chinese suppliers will only agree to provide replacement parts for the product lines currently in production. However, Somerset provides a one-year warranty on its furniture, which means that they often need parts for a product no longer being produced. Even when replacement parts were available, it took too long to get them from the supplier in order to provide timely customer service.

Provide a clear flowchart of all activities included in one complete purchase
“cycle”. The graphical representation must be self-explanatory. In other words, you
must use symbols and their labels/identification in the flowchart, so that NO
ADDITIONAL wording/explanations be necessary outside the flowchart. The time
or time-range for each step of the purchase cycle must also be found on the
flowchart.
2. Calculate the range of days (minimum to maximum) of the variable timeline for
product lead time in this case. Start with the initiation and development of the
purchase order and end when the product is received and warehoused. Itemize
activities with their variable times, and provide the range for the total lead time.
3. Out of the activities identified above, mark with an asterisk, or by using special font
(e.g., bold) those activities whose durations might be reduced with help from
international trade specialists, or trade logistics companies (please do not use any
coloured highlights)
4. Pinpoint at least 7 problems that are prevalent (typical, characteristic) when
manufacturing is outsourced to other countries and appear to be present in this
company’s global supply chain.
5. Highlight two issues that you found of special interest in this case and are not
directly related to the discussion questions above. In other words, DO NOT just
repeat a “problem” stated in the mini-case, but share the “insights” that you may
have gained from examining this real business story.

Answer 1

Ques 1. Following is the flow chart of major activities that occur

Ques 2- Finding the lead times-

Calculating minimum lead times - Minimum lead times are found when every activity occurs in BEST EXPECTED TIME AND THERE ARE NO DEALAYS AT ALL

Developing purchase order in the US - 12 days

Processing Purchase Order in China - 10 days

Manufacturing of the products -60 days

Taking products from manufacturing plant to the ports 14 days (assumed as not given in the case)

Arranging the containers for shipment and doing paper work 5 days+ no delay occurs

Loading the containers on the port 3 days

Random ship check - 0 days, does not occur

Shipping to Norfolk (28 days)

Customs’ clearance 7 days

Transporting to the warehouse 1 day

Unloading in the warehouse 15 days – not given in the case, the data is assumed again

Total minimum lead time - 155 days

Finding max lead time -MAX LEAD TIME OCCURS WHEN ALL ACTIVITIES OCCUR IN MAX TIME AND ALL THE DELAYS ALSO OCCUR

Developing purchase order in the US - 25 days

Processing Purchase Order in China - 20 days

Manufacturing of the products - 60 days

Taking products from manufacturing plant to the ports -28 days (assumed as not given in the case)

Arranging the containers for shipment and doing paper work 10 days +7 days of delay in arrangment

Loading the containers on the port 6 days

Random ship check (occurs) - 21 days

Shipping to Norfolk (28 days)

Customs’ clearance 14 days

Transporting to the warehouse - 3 days

Unloading in the warehouse 30 days –(upto a month- given in the case)

Total lead time - 252 days

Range of lead time - 155-252 days

Ques 3.

Activities that might be reduced with the help of international trade specialists or trade logistics companies

1. Taking the products from the manufacturing plant to the ports

2. Arranging of the shipment and doing the paperwork

3. Reducing any delay in the shipment arrangement

4. Removal of random ship checks

5. Customs clearance

6. Transportation to the warehouse from norfolk

Ques 4- Troubles when ever the manufacturing is outsourced

1. Processing of order takes time, more-over when ever there are certain changes in order processing, it takes time for both the parties to correct their databases

2. Work culture and timing differences make it difficult to bring in operational changes

3. Shipping is a major difficulty, and usually delays are unavoidable

4. Legal issues are always problematic, specially if two governments are not in a good political relationship

5. Customer Service is a problem, when customers return a faulty order, they have to be taken back to the plant, which takes up a huge amount of time.

6. The changes in the outsourced country's economy can lead to change of manufaturing rates, labour price changes etc. all of a sudden, for eg- if chinese currency gains against US dollar, manufacturing would all of a sudden cost much more

7. Inventory holding, inventory damage, pilferage etc. costs can be huge, due to large amount of time spent in transportation.

Ques 5

Issue 1- Political Condition of the countries

Political relations between two countries put a great impact on businesses. Eg- Shipment delay was caused due to random check by US parties because of unstable political condition in the US caused by terrorist attacks.

Issue 2-

Customer Service should always be priority - If you choose to manufacture outside the country, make sure that your customers in your own country are getting what they want within their suitable time limits. If you choose to reduce costs by manufacturing outside, but then compensate too much on the lead times, it can lead to-

1. Loss of customers

2. Competitors taking over easily

3. Reputation damage