FitCo's Hong Kong factory sources components from over 5,000 suppliers globally to manufacture electronic sport devices that are sold to business customers including fitness organisations and health insurance companies. The tier 1 suppliers are manufacturers of complex electronic components, whereby these components are made using small-scale electronic elements (e.g., microprocessors) sourced from FitCo's tier 2 suppliers. Tier 3 suppliers are the companies that make the inputs for the small-scale electronic elements, Tier 4 and Tier 5 suppliers include the mining companies and processing companies that create metallic products.

FitCo creates high quality sport devices, which means that the quality of inputs from the Tier 1 to Tier 5 suppliers must also be of high quality. FitCo therefore requires good performance by Tier 1 suppliers in areas including quality, longevity, reliability, profitability and CSR. Currently, staff use FitCo's ERP system to create reports on supplier performance, and then follow the rules stated in the supplier contracts to:

• Apply penalties to suppliers by sending them a template letter stating the rule in the contract that that supplier has not met and stating the financial penalty or payment the supplier must pay.
• Apply rewards to suppliers by sending them a template letter stating the performance criteria in the contract that the supplier has exceeded and stating the financial reward or payment from FitCo.

FitCo management are concerned about the manual work involved in handling supplier penalties and rewards and are interested in digital transformation solutions to reduce that manual work. Managers also want to predict which suppliers will exist in the future (i.e., longevity), which will help them identify which suppliers to terminate, and are seeking digital transformation solutions to help in that process.

FitCo aims to provide high quality after-sales service to all of its business customers. An important aspect of this service includes offering these customers a flexible returns policy. This means that customers can return sport devices for many different reasons including change of mind, exchange for an alternative model of sport device, when they no longer need the sport device for recycling, etc. For this reason, FitCo's customers are prepared to pay a premium for the high-quality sport devices.

FitCo also aims to respond quickly if there are any product recalls needed for any of the sport devices. Customers will often report concerns with the devices directly to FitCo staff. FitCo staff investigate the problems immediately and contact other customers with the same devices to check if there are problems. Staff use this information to understand the fault and diagnose the cause. If a fault is confirmed, then FitCo contacts all customers who purchased the device and recalls them.

If the cause was due to FitCo's manufacturing, then the issue is fixed, and customers are given new devices to replace the faulty ones or are given a refund. Often, however, the cause was a fault in the complex components made by suppliers. In these instances, a major challenge for FitCo staff is to identify the particular supplier that made the faulty component, because there can be as many as 15 different suppliers of that component.

FitCo uses a cloud-based ERP system to manage its enterprise, including sourcing, production, sales/distribution and reverse logistics. FitCo executives are seeking your advice on potential AI and related digital transformation solutions to determine if they should invest in staff training in this area. FitCo executives employ and train skilled staff, and use technology, to improve FitCo's success. FitCo staff are willing to learn various new technology solutions.

1a) Suggest an AI-enabled solution that might help FitCo to automate supplier contract management. Discuss how it works and explain the main concerns and limitations of the suggested AI-enabled solution. (20 marks)