Cantech Appliance Inc. (CAI) is a global apparel supplier. The company is headquartered in Toronto, Canada, but does business principally through retailers in North America, Europe, and Australia. In addition, the company has established itself as a well-known internet retailer of its full product line. Overall, the company is viewed as a trend-setter and is one of the most profitable firms in the industry.

Current Status Of The Supply Chain

At the present time, almost all of the products involve labour intensive operations, are produced by contract manufacturers in Asia, such as China, Taiwan, Indonesia and Vietnam. Typical manufacturing lead times are anywhere from 4 to 12 months, depending on the type product being manufactured and the complexity and range of materials needed to manufacture individual items. Sea freight is normally used for shipments to destination countries. Air freight is only used in case of emergency.

The company typically use a Firm-Fixed-Price (FFP) contract model with the Asian manufacturers, the price is usually fixed over the life cycle (typically 1 to 2 years) of each product line, but there are few exceptions like the line Acenes which has been a popular casual wear item and is forecasted to continue its strong sales in the next 10 years.

Currently, almost 80% of the products are produced in China. CAI's executives are increasing uncomfortable with the recent business trends in China. In the last 2 years, labour rate in China has been going up on average 10% per year, and the Chinese currency Yuan, is appreciating against the US dollar, on average about 5% per year.

For example, the line Acenes, the landed cost of the product which was about $250 per unit 2 years ago, is now $350 per unit, and the trend is likely to continue.

Production planning for ALL products is done centrally in head office with sales forecasts provided by Marketing. Since fashion trend is difficult to predict, it is not surprising that historically marketing forecasts accuracy has been very poor. This results in either excess inventory of slow moving inventory and stockouts for some hot items. In this case, supply chain has to use a local contract manufacturer in McAllen (a city in Texas on the border with Mexico) to cover the stockout. The Texas supplier can supply with a much shorter lead time, usually 4 to 6 weeks, but at a much higher price, which essentially wipe out all profits. Even though this is not the ideal solution, it is the only alternative to protect the brand name and company image.

Marketing forecast in CAI has consistently been a major issue for being highly unreliable. For example, in 2019, the market demand was extremely strong, and was estimated to be 20% higher than the marketing forecasts. This resulted in losing revenue and market share to the competitors.

However, the situation was reversed in 2020, when the pandemic hit. Market demand was estimated to be at least 10% lower than the forecast. This results in CAI holding massive amount of obsolete inventory that they have to liquidate through discount retailers for a loss of over $2 million.

CAI is reluctant to increase the order quantities to the manufacturers out of concern of potential risks of excess inventory. Under existing FFP contract with the manufacturer, excess inventory cannot be returned. The alternative is to sell excess inventory through discount retailers at a loss.

At the moment, CAI management is taking a conservative approach - they would rather take the risk of stockout (and lost sales) than to dispose of excess inventory.

CAI's manufacturer has also raised concerns about the FFP contract. The inability to increase selling prices even though the labour and material market are getting more and more volatile put them into a very unfavorable position. They resort to reject new increased orders from CAI to limit their exposure to the supply risks.

A few contract manufacturers from Bangladesh, Cambodia, and Philippines has approached you, the Chief Supply Chain Officer, for business and offer extremely attractive terms.

1. For example, the Bangladesh company offered you a landed cost of $300 per unit for Acenes. The price is very attractive, but you are concerned that the recent fire accident in a garment factory in the country that has killed hundreds of workers. The accident revealed the poor labour practice and lack of enforcement in that country. You are sure that using this supplier will cause negative publicity among consumers. The Bangladesh supplier has invited you to travel to Bangladesh to inspect his factory. The trip will be fully paid for by the supplier, with a stopover at a luxury resort in Thailand for a week. You are concerned that the quality and service of these new suppliers are not proven. According to other companies that has used these new suppliers, the lead time is 2 - 4 weeks longer, and the general comment was their quality and service are below that of the current Chinese supplier. However, you believe that with proper supplier development effort, these new suppliers can improve.
2. The local manufacturer based in McAllen, Texas which you use as a backup supplier also approached you recently for additional business, including the Acenes line. The main advantage of the local supplier is its short lead time which is less than 1 month, for example, its landed costs per unit for Acenes is close to $500. They are willing to lower their price to $400 for half of the business. However, you have been made aware that this supplier has been found guilty recently of employing illegal immigrants, and violating the Employee Health and Safety Act in its factories.

Suspicion that some of the contract manufacturers employed are also manufacturing illegal, knock-off merchandise that is being sold through "gray market" channels. This has particularly hurt the High Fashion division.

- How would you handle the invitation from the Bangladesh supplier for a site visit with a side trip to Thailand? Explain your decision.

- What smart contract options would you propose to CAI's management, that will encourage both CAI and their suppliers to increase their revenue and reducing their risks? Explain your decision.

- How would you handle the offer from the McAllen supplier? Explain your decision.