Chapter 9 - Delivery Case 9-2: Russel Wisselink "Have a plan ready for me by 9:00 a.m. tomorrow morning" was the instruction Russel Wisselink, senior buyer for Trojan Technologies in London, Ontario, Canada, received from Randy Haill, Trojan's materials manager. In the morning of March 12, Russel Wisselink had received an email from China stating that Trojan's UV4 crystal glass sleeves requirements would not be met because of a governmental ban on the use of its raw material. Russel, aware of the consequences of stockouts on this critical part, had immediately notified Randy. TROJAN TECHNOLOGIES Trojan Technologies Inc. (Trojan) was a leading water treatment technology company with the largest installed base of ultraviolet water treatment systems in operation around the world. Trojan specialized in the design, manufacture, and sale of pressurized and open-channel, ultraviolet disinfection and water treatment systems for industrial, municipal, commercial, and residential applications. Trojan's head office was in London, Ontario, Canada. The company had sales of $140 million, employed approximately 400 people in offices around the world, and served its customer base through an extensive network of dealers and representatives. Trojan was owned by Danaher Corporation (Danaher), a global multi-industry science and technology company with sales of approximately $17 billion and more than 62,000 employees. Management used the Danaher Business System (DBS) of continuous improvement to guide company culture and business improvement activities. Developed in the mid-1980s, the DBS was used to drive improvement in all parts of the company including manufacturing operations and business processes, such as new product development and global sourcing. Trojan's current product line consisted of 10 systems across its five markets: (1) residential water treatment, (2) municipal drinking water, (3) municipal wastewater, (4) environmental contaminant treatment, (5) and industrial process. Systems for commercial and government customers ranged from approximately $50,000 to more than $1 million. These systems, which typically had a product life cycle of 7 to 10 years before being replaced with a new design, were designed and manufactured at the London facility and modified to meet individual customer requirements. In a typical year, Trojan manufactured 500 to 600 systems for its commercial and government customers. LOW-COST REGION SOURCING PROJECT a Following its acquisition of Trojan, Danaher implemented several new initiatives aimed at improving corporate performance. One area targeted was low-cost region sourcing (LCR)an initiative originally championed by Russel's boss, Randy Haill. Russel had been given responsibility for the LCR sourcing project in January after his predecessor left the company. One of the products critical for Trojan's UV water treatment and purification systems was a crystal quartz sleeve that acted as an ultratransparent barrier between the water and the UV lamp. These sleeves were built to custom specifications for size and optical transparency for each of Trojan's product applications, making them very expensive and difficult to procure. Depending on the system, several crystal quartz sleeves could be required for each unit. The company had traditionally sourced its crystal quartz sleeves from Advanced Material Solutions, Inc. (AMS), located in Dearborn, Michigan, approximately 150 miles from Trojan's plant in London, Ontario. AMS produced the sleeves from various types and purities of silica sand. While there were a number of locations that could have supplied the silica sand used for manufacturing crystal quartz sleeves, China was selected as the primary location for LCR sourcing for three reasons. First, China had a good supply of both regular quartz sand for standard sleeves and uncontaminated crystal sand for UV4 sleeves. Second, Danaher already had an established sourcing group in China and as a result, Trojan would not have to do much of the work to locate suppliers. Third, Trojan had been developing plans to establish its own manufacturing operations center in China to service the region. These plans were ready for implementation but had been stalled due to slowing demand in the Asia-Pacific region. AMS's pricing for crystal quartz sleeves for Trojan's UV4 model (part number GA-311) was $51 per unit, and the delivery lead time was approximately two weeks. Trojan's annual requirement for the UV4 sleeves was about 10,000, which represented roughly 15 percent of Trojan's total sleeve orders, but approximately 30 percent of total sleeve costs. Very few places in the world had crystal sand resources of sufficient quality (e.g., very low levels of impurities) to produce sleeves with the necessary optical transparency for UV4 applications. After Trojan's careful screening of potential suppliers, Juntao was chosen in May the previous year to be the primary Chinese supplier. The net cost savings to Trojan on the sleeves would be 70 percent. However, the delivery lead time from Juntao would be extended to eight weeks due to longer lead times for production and shipping. Once the sourcing relationship was established, it took approximately six months for Juntao to begin accepting orders from Trojan because of communication problems, which Russel found particularly frustrating. The first shipment of sleeves from Juntao arrived at Trojan in February. DELIVERY PROBLEMS The original procurement plan developed by Russel's predecessor was to use an 80/20 production ratio with Juntao and AMS respectively. However, when AMS became aware that Trojan was going to source from China, they issued an ultimatum: "Keep 100 percent of the business with us or the pricing for sleeves will increase to $77 per sleeve. Furthermore, delivery lead time will be extended to 12 weeks because we will no longer stock sleeves for Trojan." This development led Trojan to decide to source 100 percent of the sleeves from Juntao. Russel felt that AMS believed that they would ultimately lose all of Trojan's business to off-shore suppliers, and thus they wanted to extract a premium price from Trojan. On March 12, Russel received an email stating that new regulations imposed by the Chinese government temporarily banned all uncontaminated crystal sand mining because government officials wanted to establish regulations for usage of natural resources. According to the email, it was uncertain how long the ban would be in place and what the new regulations would entail. Trojan had not received any warning or indication regarding the change in government regulations. However, this new development meant that Juntao would be unable to provide the crystal sleeves for Trojan once their existing supply of crystal sand was depleted. Because Trojan did not stock the crystal sleeves, any disruption in supply would rapidly lead to negative impacts on customer orders and projects. IDENTIFYING OPTIONS As soon as Russel received the email, he informed Randy, who asked him to put together a list of viable options and to make a recommendation. Top among Randy's concerns was to minimize the financial impact while ensuring no disruptions to Tojan's customers. Juntao only had a small supply of the crystal sand on hand, which meant that Trojan would face a sleeve shortage in approximately 30 days. Juntao had offered to import crystal sand for use in sleeve production; however, this alternative would require time to run tests to ensure that the new crystal sand would meet the purity requirements for making UV4 sleeves. It was unlikely that the samples using the new imported sand would be available within the next month. Furthermore, importing raw material would add to Juntao's costs, which would represent doubling of its prices, increasing to approximately $28 per sleeve. Russel felt he could order just the crystal sleeves on an as-needed basis from AMS and keep all other sleeve production with Juntao, but the downside to this option would be the premium cost of $77 per sleeve and the extended lead times. Alternatively, Russel had an option to sign a one-year contract with AMS at $51 per sleeve on the condition that AMS provided 100 percent of Trojan's UV4 sleeve requirements. Another option was to investigate alternative suppliers of crystal quartz sleeves in China who might have raw material stockpiles in reserve. Russel felt that dual sourcing would help reduce Trojan's risk exposure, provided supply from China eventually returned to normal. Russel knew that a plan needed to be put in place quickly to ensure continuous supply. However, Randy was expecting that Russel would address both the long-term sourcing strategy for crystal quartz sleeves as well as the short-term supply issue. IMMEDIATE ISSUE As Russel Wisselink, you need to prepare a plan to address the delivery problem and pending shortage to Randy Haill. o What is your assessment of the options available to you regarding the pending shortage of UV4 quartz sleeves from Juntao? What is the potential cost impact of the option(s)? o Are there other options not considered so far that could be assessed? Which option would you recommend to Randy concerning the delivery problem? Would this recommendation be consistent with your thoughts on the longer-term global sourcing strategy for Trojan? Why or why not? . O Thought Starters 1. Are you prepared to sign a one-year contract with AMS? Is the cost compared to sourcing from Juntao competitive? 2. How can we prevent this problem from occurring again with other products? 3. Is it reasonable to expect Trojan's North American suppliers to come to their rescue when they have problems with suppliers from China? 4. Are the savings through global sourcing worth the risks? What can Russel do differently to reduce the company's risk exposure while still benefiting from global sourcing? 5. Would you continue to do business with Juntao? Do you think they knew about the change in government policy in advance? Could they have provided more warning? 6. How long you prepared to wait to see how long the government ban lasts before sourcing sleeves in North America? Study Objectives 1. Global sourcing 2. Strategic sourcing 3. Supplier management 4. Cost analysis 5. Supplier relations 6. Risk management