A Supply Chain Problem Magna is a German electronics manufacturer that designs, develops and manufactures a range of products for the entertainment and home electronics sector. Management has recently focused on two related products, Metagear and Metagear Lite. The Metagear is a video and audio player with a flash drive. The company has invested heavily in the research and development of this product, which is a small hand-held unit about the size of a credit card, and is about 50 percent thinner than its competitor's offerings. The Metagear Lite is a flash drive and MP3 player. Magna sells this product to a distributor in North America and to a major European retailer.

The market for these two products is highly competitive, and Magna relies on product differentiation as a source of competitive advantage in both Europe and North America. The retail price is the same as, or slightly higher than, its competitors. Product uniqueness is based on the size of the Metagear and the storage capacity of the Metagear Lite. The Metagear is a relatively new product on the market and was designed to meet predicted future growth in the popularity of handheld video devices. Demand is anticipated to be low to moderate for the first few years of sales, and expected to grow thereafter. The Metagear Lite has been on the market for over six years, under a different product name. The casing design was recently changed to complement the Metagear, and marketing efforts within the last few months have strived to address the fact that this is the same quality product with a new look. This product experienced healthy growth for its first four years, and has stabilized over the past two. The Metagear Lite is not a product that will contribute to significant revenue growth for Magna, although its presence in the market contributes to brand continuity and awareness in an increasingly competitive marketplace. Currently, Magna purchases components for these products from suppliers in China and has them shipped to its assembly plant in Canada. The suppliers are reliable, and do not contribute to any delays in production or assembly. The assembly process involves mounting a SMD (surface-mount device) decoder chip and a PIC controller to a circuit board, sending the assembled boards for testing and then integrating the tested boards into the product casing. Due to the recent development of the videocapable Metagear, Magna is experiencing increasing production delays, contributing to its 30 percent late delivery rate. As a result, management is considering outsourcing the assembly process to one of its suppliers. The company now needs to determine which of the two products, the Metagear or the Metagear Lite, is the best candidate for outsourcing assembly.

In Need of Advice

Magna hires the services of Johnson and Peter, a manufacturing consultant, to help determine how delivery times can be better managed and how to reduce its 30 percent late delivery rates. On-time delivery lead times from procurement, assembly and circuit board testing through to the assembly of the tested components in their casings takes approximately four weeks. There are very specific measurements for circuit board quality testing compliance, defined in terms of the solder used and the soldering process. The circuit boards for both the Metagear and the Metagear Lite must have a minimum life span of ten years. Annual demand for the Metagear in the first year of release is 300 percent over forecasted demands. Production management and the sales team cannot reasonably predict future demand. Since the Metagear Lite has experienced stability in sales over the past two years, forecasting has been accurate and the margin of error is much lower than that of the Metagear. The entire assembly process for Metagear and the Metagear Lite accounts for about 5 percent of each product's price, and is not viewed as an aspect that contributes to the product's competitive advantage. With the recent design and production of the Metagear, Magna has had to include several new stages in the assembly stage, to accommodate the video capability of the product. There is also a significant amount of proprietary information that is used during circuit board testing. Metagear Lite has a well established assembly process because of its existing presence in the market. Product testing is based on technology that is widely used and that has been around for five years.

Outsourcing Criteria

Johnson and Peter's task is to assess which product is the most suitable candidate for outsourcing assembly. A key element that needs to be taken into account is that the new supplier and assembler must commit to delivering the assembled circuit boards to meet Magna's delivery schedule. Magna has an agreement with North American distributors and European retailers that it would deliver the Metagear and Metagear Lite in the same shipment. With quality and defective rates a concern of management, the outsourced assembler must ensure Magna will maintain its market position and competitive advantage.

Delivery

As a multinational company. Magna has been using primarily EXW with all of its overseas suppliers. However, Magna is having a lot of issues in China. Firstly, the Chinese import/export regulations are not very clearly written, and sometime open to interpretation by local officials. Secondly, these regulations are changing almost every year, and they are all in Chinese. Magna is also having a hard time working with local Chinese carriers to move the cargo to the best available port and container terminal. These issues sometimes can cause extensive delays to meet the delivery deadlines.

Discussion questions

1. Based on the risk factors associated with the Metagear and the Metagear Lite, which product do you think Johnson and Peter will recommend as the best candidate for assembly outsourcing?

2. Based on Johnson and Peter's decision, what will be the benefits and disadvantages of outsourcing the assembly function?

3. If Magna can outsource the assembly of the circuit boards to an existing supplier, discuss the key contract issues Magna will need to consider with its supplier.

4. Which inventory management strategy should Johnson and Peter recommend Magna adopt to ensure efficiencies throughout its entire supply chain? Why?

5. What are the issues of using EXW? What other Incoterm would you recommend?