Case Study: The Unsafe Supplier Imagine you are the Presiden…
Case Study: The Unsafe Supplier Imagine you are the President of a small manufacturing firm which produces a water-proof child/object proximity detector for use on motor homes (if there is an object behind you when you are backing up, an alarm goes off). Your detector was highly profitable for many years, because it utilized a patented methodology to operate in virtually any environmental condition without failing. Your competitors’ products required internal mounting and wiring to deliver equivalent effectiveness, but at a higher cost with associated wiring problems affecting the motor home owner. Unfortunately, your patent runs out in 6 months, and the manufacturers of similar devices are poised to enter this market and try to wipe you out. Word is they are prepared to introduce their external detectors in the $175.00-$275.00 range (depending on the number and sophistication of the features offered on each model); your detectors currently sell for $325.00-$480.00. In order to keep your business open, you need to find a way to match the new price of your competitors. You’ve asked your team to come up with solutions. The major problem you have, and the reason that your larger competitors can produce relatively equivalent quality, reliability, and features in their products at a much lower price, relates to the main sensor used in all detectors of this type. This primary sensor is manufactured by a single supplier in the U.S., the Acme Company, who has been your supplier since you opened your doors. This single component, which you do not have the capability to manufacture yourself (the start-up costs were too high when you founded your company, and now you still have neither the cash or technical know-how to make this component yourself), is the single most expensive contributor to the cost of manufacturing your products, at $95.00. Worse, all of the larger proximity detector manufacturers who are soon to become your competitors have their own manufacturing facilities, and manufacture this component themselves, so they are not saddled with the $95.00/sensor cost component that you are faced with. You recently had a meeting with your supplier at their headquarters in Lincoln, Nebraska. During the tour you took of their manufacturing facility prior to the meeting, you were once again impressed with the cleanliness of their facility, the friendliness of the workers, and the obvious attention that Acme’s management team pays to Safety, Quality, and the overall quality of the work life of their employees. The main wall in the Board Room at Acme is lined with plaques and awards for Safety and Accident-Free performance from the local community, the State of Nebraska, and various professional associations. During the meeting with the management team, you and your key staff presented your dilemma to Acme’s Lead Team, and asked for a reduction in the price per sensor unit you have been paying. Acme’s president indicated that there would be no reduction in price, now or in the future. In fact, she explained, they made the sensor for you almost as a favor due to your long relationship, and basically at slightly above break-even for them. Acme makes a varied line of products, and your sensor is only one of them – and a minor part of their product portfolio at that. After all, you’re the only one buying them. Bottom line – there will be no price reduction, and if they stopped making it tomorrow, they’d be fine. At your Lead Team meeting where you have a single item on the agenda: ‘Contingency Plans for Downsizing’, your Procurement Manager announces that he has “saved the day!”. He has found a new supplier! The new supplier is FBN, Ltd., and is located in another country. According to his discussions to date, FBN will sell you the exact same sensor now purchased from Acme for $45.00 U.S. After weeks worth of testing the new manufacturing facility, the on-site inspection and testing reveals the following: FBN has the facilities required to provide 100% of all sensors you currently need, and on-time; fact, FBN has excess capacity on their sensor line and could even supply more product should your demand increase; FBN’s components are equal in quality to Acme’s components, and slightly superior to those of your soon-to-be-competitors; and FBN’s components are slightly superior in reliability and durability to Acme’s components, and more than slightly superior to those of your soon-to-be-competitors. A member of your team brings up one issue: FBN maintains a working environment which, were it in this country, would be considered to be unsafe. Their working environment, furthermore, is distressingly similar to most working conditions in equivalent manufacturing facilities throughout their entire country. Were it to be located in the U.S., she continued, “it would certainly have been shut down due to Federal and private litigation years ago”. Further, the management team at FBN couldn’t care less about this issue. When she raised her concern during the on-site inspection, your entire site evaluation team was basically told that this was not one of your plants – it was theirs. Their company was located in their country, not yours. They weren’t trying to sell you a safety program, they were proposing to sell you sensors, and they did not appreciate being lectured about their management style, views, or how they managed their facility. As long as they delivered the required product on-time, at the correct quantity, and at the quality, reliability, and durability levels necessary and ordered, then how they ran their operation was their business – not yours. They added that they were inspected and licensed by the necessary agencies in their country regularly, which in their view meant they were fine now and for the foreseeable future. An inspection of their Safety records revealed that an average of 3 FBN workers were killed each year in the facility producing this component; the Serious Injury rate was 2.6 serious injuries causing lost workdays & hospitalization per 1000 workers per month; and the Major Injury (less severe than ‘Serious’) rate in this facility was 15 major injuries per 1000 workers per month. You must choose between Action A and Action B: Action A: Do not purchase products from the new FBN supplier. Start thinking about having a final ‘going out of business’ sale, with a plan to close your business with 18-24 months. Action B: Purchase products from the new FBN supplier.