Hudson Jewelers (A)

"Welcome to Hudson Jewelers, the Naples, Florida jewelry store attendant said with a smile. Im Bill; let me know if I can answer any questions you may have. Im browsing with my fianc, the customer responded. Oh! So, you two are getting married. Congratulations! Whats your name? as Bill extends his hand to shake hands. My name is Lilly and this is my husband to-be, Lester. Well, if you need my help, please let me know, Mr. Hudson said as he walked behind the counter at about 1:30 pm. Would you like a glass of wine while you browse? Mr. Hudson asked. No, thank you, as Lester noticed for the first time a small wine rack and comfortable leather chairs in the back corner of the store. Lilly and Lester continued looking at engagement rings, as Bill gave them space.

After about ten minutes, Lester asked Mr. Hudson, I noticed your big high-definition television with that beautiful wedding ring rotating. What is this? It is a 3D software system that allows you to co-design your own ring. You can pick out the diamond(s) and mount them on any ring you want. Once the entire ring is finalized our manufacturer will produce it.

Can we sit down and see how it works? Lilly asked Mr. Hudson. The three of them began to design a prototype ring, with Mr. Hudson answering questions. Mr. Hudson and Lilly were beginning to establish a friendly relationship based on trust. All of the ring designs could be stored on the computer for future reference.

A diamond became a symbol of social status and wealth in India about 3,000 years ago. De Beers, a diamond mining and production company, began to market diamonds in the 1900s with slogans like A diamond is a girls best friend, and A diamond is forever. De Beerss advertisements promoted the idea that those who do not buy diamond jewelry must not love their partners as much as those who do. One modern De Beers ad states, She already knows you love her. Now everyone else will, too. A century of advertising and branding, and billons of dollars in industry advertisements, has made a diamond a symbol of eternal love.

While Mr. Hudson and Lilly exchanged ideas about alternative ring designs, Lester asked Mr. Hudsons daughter, Jasime, what was the time. Its 3 pm, Jasime replied. Whew! I need a break, Lester responded as he stood up from his chair. Everyone laughed at Lesters comment as the clock kept ticking. OK, Ill hurry, Lilly said as she glanced at Lester. Lester walked around the store for a few minutes and then sat back down to reenter the design your own ring conversation.

By 4 pm everyone was exhausted after discussing an array of ring design questions, answers, and what ifs. However, Lester and Mr. Hudson now had a much better idea of what Lilly wanted in an engagement ring. Jasime had been listening to the three-way discussion but decided not to join the conversation at this time. Two ring designs were stored on the computer. Ill have my daughter Jasime work on these designs, Mr. Hudson said. I am good with the software but my daughter is the CAD expert. She will call our diamond and ring dealers and make sure what we have designed can be manufactured at your target price, Mr. Hudson continued.

Mr. Hudson, Lester asked as he was walking toward the door, Is your inventory lower because of this custom design capability? Mr. Hudson replied with a positive nod, Yes, definitely. It is a high-risk business to stock lots of diamonds and jewelry at the store. With the 3D/CAD system, I think we do a better job of matching our physical inventory to customer needs and trends. We have less security, loan, and insurance risk using CAD. We also see new trends that our customers may want using CAD. And the customers seem to enjoy designing their own unique jewelry. Exhibit 1.1 provides example customer comments during one month.

As Lilly and Lester began to leave the store, thanking Mr. Hudson and Jasime for their help, Betty, Mr. Hudsons wife entered the store and was introduced. Hudson Jewelers was a true one-store, family business. Lilly and Lester crossed 5^th Avenue to a restaurant and discussed their first computer-aided engagement ring design experience. Lilly was excited about the prospect of having a one-of-a-kind ring as they drank a glass of wine.

After three more visits to Hudsons Jewelers the final ring design was done with everyones approval. Jasime and Mr. Hudson carefully went over every aspect of the ring design to assure agreement. For example, the CAD technology allowed Lilly and Lester to see several alternative designs with gold or platinum prongs to hold a yellow diamond. Checks were written and the final ring design was electronically sent to the manufacturer.

One month later Hudson Jewelers called Lilly and Lester, and they went to the store to pick up their engagement ring. As they entered the store Betty and Bill Hudson and Jasime greeted Lilly and Lester by name. Are you ready to see your ring? Jasime asked in a joyful voice. Yes, we are so excited, Lilly responded. Mr. Hudson asked Lester to come to the backroom safe. He unlocked the safe and gave the ring to Lester. Can we put it in a box? Lester asked. Sure. Lester took the box and ring and walked into the storefront and gave Lilly the ring with a kiss on the cheek. Lilly opened the box and the ring sparkled under the high intensity lights of the store. Oh! It is so perfect, Lilly said as she hugged Lester.

Mr. Hudson then said, We have some presents for you, as he handed Lester a bottle of champagne and Lilly a small picture album that summarized how the ring was designed and manufactured step by step. It showed a 3D line drawing of the ring, a wax model of the ring that was used in production, the raw casting with platinum and gold prongs without the diamonds, and finally the completed ring from several viewpoints. The couple thanked everyone and walked across the street to their favorite restaurant to celebrate this memorable experience.

Hudson Jewelers is open from 10 am to 5 pm Monday through Saturday and closed Sunday. Two nights per week (usually Tuesday and Friday) they stay open until 8 pm. Also, customer appointments are made at any time the customer wants. Customer visits, as documented in Exhibit 1.2, are seasonal; the hot summer months being the lowest demand and the winter months the highest. Customers (called snowbirds) from northern countries or states move to the southern tip of Florida to avoid harsh winters. Snowbirds begin to arrive in October, followed by a pause during the holiday season of November and December. Peak season is January to April when the population of Lee and Collier counties almost doubles.

Mr. and Mrs. Hudson, their daughter Jasime, and sometimes her husband, Thomas Navey, work in the store. Mr. Hudson and Jasime Navey are the expert jewelers with Mrs. Hudson and her son-in-law filling in with friendly service but no particular jewelry expertise. Thomas Navey works full-time for the Collier County government. A typical staffing schedule for Tuesday is shown in Exhibit 1.3. The current store staffing schedule is based on two criteria. The first criterion is that either Bill or Jasime must be on duty at the store so an expert jeweler is always available for customers. Second, Hudson Jewelers is a family-owned business with no other hired staff.

Store inventory follows demand, with an average inventory in low season of $1 to $3 million, and in high season, $3 to $6 million. During some weeks in peak season jewelry inventory can peak at $15 to $20 million for short periods, due to customer special orders. Store display space is limited with the CAD system taking up floor space. Mr. Hudson would like to have more jewelry display space to show more moderate priced jewelry. Insurance rates are high and dependent on store security arrangements and inventory levels. The store has two fireproof safes bolted to the floor that weight over 8,000 pounds each. Security cameras are numerous and directly tied into a 24-hour security firm.

Computer-Aided Design

Since the 1970s, computer-aided design (CAD), computer-aided-engineering (CAE) and computer-aided-manufacturing (CAM) enable corporations to design and/or manufacture a wide variety of items such as industrial parts, buildings, furniture, airplanes, landscapes, and kitchens. Today, many firms have achieved complete integration of their design and production functions into what we now call computer-integrated systems. Designers can design, analyze, test, and simulate product design options before products physically exist, and then actually produce them, such as with Boeings 777 Dreamliner airplanes. Also, 3D/CAD and 3D printing are expanding the frontier of designing parts almost instantaneously such as gears, toys, heart values, and even building materials.

Today CAD technology has made its way into the design of custom jewelry either on-line or in-the-store. The customer and/or in-store CAD expert go through a step-by-step computer led process to co-design the jewelry. For a diamond wedding ring, for example, the size, clarity, color, cut, price, and shape of the diamond are first selected; followed by choosing the setting, such as a single gold band of a certain thickness with matching prongs to hold the diamond. Once the virtually designed ring is created, it can be rotated to any angle and even placed on a virtual male or female hand. This ring design can be stored as design option 1, followed by other design options; and then portrayed side-by-side on the high-definition television screen. And of course, alternative ring designs can be e-mailed to friends and family worldwide. Once the ring design is finalized, the customer provides a deposit before Hudson Jewelers sends it to the manufacturer.

The Global Value Chain for Diamonds

A simple way to view the major stages of the diamond value chain is exploration, mining, rough diamonds, polished diamonds, and customer jewelry. It is normally 18 to 36 months from the time a diamond is mined until it reaches a retail store. Rare or large stones often reduce this processing time by one-half. The supply chain is global since no one country or company performs all the work required to bring a diamond to its final resting place customer jewelry. About one-half of rough diamonds are used in industrial applications such as oil and gas drilling equipment and metal cutting tools. The major stages of the global value chain for diamonds can be defined in numerous ways but usually consists of the following stages.

Exploration

A diamond is a unique pyramidal structure of carbon atoms. Billions of years ago heat and pressure deep inside the earth created natural diamonds. The ancient Greek word for diamond means unbreakable. Historically, much of the diamond industry involves African countries and sometimes the exploitation of native people. Russia and Africa account for 70 percent of the worlds diamond reserves.

Major corporations that focus on diamond mining, production, and sales include DeBeers, with about 37% market share. DeBeers is a Kimberley, South Africa based corporation with mines and facilities in South Africa, Tanzania, Botswana, and Namibia. ALROSA is a Russian state-owned corporation with about 30% market share, and with mines and facilities in Russia and Angola. Rio Tinto is an Australian corporation that mines diamonds, iron, copper, uranium, aluminum, gold, and coal, with about a 5% global market share in diamonds. Its mines and facilities are in Australia, Zimbabwe, Africa, and Canada. Other firms such as Aber, BHP Billiton, and Leviev compete in the diamond industry.

Mining

The two major ways to mine rough diamonds are an open-pit method, where rock and soil at the surface are excavated; and underground mining. First-level sorting is done at this stage, to separate gem-quality stones from obvious industrial grade stones.

The controversies begin at this stage of the diamond value chain. The 2006 movie Blood Diamond, for example, starring Leonardo DiCaprio, Jennifer Connelly, and Djimon Hounsou, highlighted militant groups and corrupt governments trying to get their share of blood diamond revenues to fund revolutions and wars. Conflict-free diamonds are supposed to be free of other injustices such as child labor, smuggling, worker exploitation, and sexual violence. And, of course, ethical supply chains try to prevent all of the previous cited issues, plus worker accidents, environmental pollution, deceitful grading of diamonds, deforestation, poverty, low wages, and so on.

Sorting and Grading

The basic criteria for grading diamonds include size (carats), color, shape, and quality. At this stage second-level sorting and grading begins at separate locations from the mines. About 20-25 percent of rough diamonds are used in the retail value chain while the rest are used for industrial proposes. Human eyes, hands, and expertise assess the quality and value of most diamonds. Advanced machines do some of the sorting and grading process for smaller stones. But sorting and grading diamonds is not an exact science even with current industry regulations and quality standards.

Cutting and Polishing Centers

The Four Cs Cut, Color, Clarity, and Carat weight are used to further classify diamonds at a production facility, located in cities like Dubai, New York, Johannesburg, Hong Kong, London, Tel Aviv, Antwerp, and Mumbai. Diamond defects and errors can take many forms in this industry: impurities, optical flaws, mixed colors, crystal flaws, cutting mistakes, and non-ethical diamonds. The cutter must decide how best to cut the rough diamond to remove defects, keep the most carat weight possible, and make the diamond as perfect as possible.

Normally, by the end of this stage one-half to two-thirds of the rough diamond is waste. For example, a ten-carat rough diamond might result in a three- to five-carat diamond that can be set in customer jewelry. Much of the waste is used in industrial diamond applications or by the cutters themselves for cutting and polishing.

During the Great Recession smaller diamond cutters and polishers went out of business while larger firms gained market share. Cutting and polishing costs-per-carat range from about $100 in Antwerp, New York, and Tel Aviv; to $10 to $50 in India, China, and Thailand. The quality of a rough diamond can be enhanced or hindered by the way the rough diamond is cut and polished. High-quality rough diamonds of over 20 carats almost always go to the worlds best cutters and polishers.

Trading Centers

A current industry trend is the consolidation of cutting and polishing with trading centers into a diamond hub in cities like New York, Tel Aviv, Antwerp, Dubai, and Mumbai. Major producers like DeBeers sell most of their diamonds based on long-term contracts to a select group of buyers and sellers. Long-term contracts provide price and demand stability, predictable buyers and sellers, and large sales volumes. Trading centers and producers are sometimes accused of forming price-controlled cartels by holding back diamond stocks (reserves) to maintain retail prices. Another way to limit supply in the global diamond market is for major producers to sell diamonds only to their site holders. A site holder can be a company or individual who can only buy direct from major producers. If all reserves of diamonds were released, supply would greatly exceed demand, and diamond prices would plummet.

However, new sales channels are emerging that take advantage of Internet capabilities such as on line auctions and virtual sales platforms. Sales take many forms such as face-to-face negotiations, take-it-or-leave it on line offers at fixed prices, live on line auctions with multiple bidding rounds, and time limited on line auctions. In addition, physical diamond auctions take place at Sothebys and Christies.

Jewelry Manufacturing

Manufacturing transforms cut, polished, and graded diamonds into customer jewelry. Often a custom setting for the stones includes pouring hot metal into a ring or jewelry mold; and/or metal machine fabrication, milling, and polishing. Standard diamond ring production exhibits both job and flow shop characteristics while custom jewelry is a job shop. Diamond defects can be hidden by the clever design of customer jewelry. Here the jewelry artist or customer designs how the finished diamond will be displayed. Over $50 billion in value is added at the jewelry manufacturing and retail store stages.

Retailing

In the diamond value chain, Tiffany & Company and Cartier are two examples of luxury goods retailers that enjoy high margins. The price per carat (value) of a typical diamond usually increases eight to ten times from mining to retail store as each stage of the value chain adds its profit margin. After the original sale, most diamonds dont wear out so they are resold (recycled) many times within the value chain. The diamond is forever slogan also applies to generating repeat sale profits.

To further complicate customer- and trading-center buying decisions, diamond buyers must cope with whether the diamond is synthetic. In one audit by the International Gemological Institute with a sample of 1,000 stones over one-half were found to be synthetic diamonds. Moreover, the synthetic diamonds had human-engineered flaws to make them appear as natural stones. Only expert gemologists with special equipment can tell the difference between a natural and synthetic stone.

From the viewpoint of natural diamond producers, synthetic diamond pollution is an ever-increasing industry problem. A four-carat synthetic diamond might sell for a few hundred dollars. In addition, synthetic diamond producers argue their diamonds are brighter and clearer than natural stones, and the only true ethical diamonds.

The Kimberley Process Certification Scheme (KPCS)

A multitude of industry-related associations, governments, and corporations have adopted quality and sustainability standards, trade regulations and laws, and certification programs to ensure no conflict or blood diamonds enter their value chain. But diamond traceability along the value chain is very poor. Few diamond producers or retailers actually investigate the route their diamonds take along the supply chain. Diamond smugglers and corrupt governments often certify diamonds without complete investigations while worker exploitation and environmental pollution continues.

In 2003 in Kimberly, South Africa the KPCS was designed to certify rough diamond shipments as conflict-free and prevent conflict diamonds from entering the value chain. This initiative has been somewhat successful but fake KPCS certification documents have been found throughout the value chain. A recent initiative is to etch a serial number on each non-conflict diamond with a laser that is not visible to the human eye. The KPCS process is criticized for focusing on front-room customer perceptions, not back-room supply chain practices.

1) Explain whether the global diamond supply chain a push or pull system, and whether the global diamond supply chain is an efficient or responsive system for make-to-order and make-to-stock jewelry. Provide some example to justify your reasoning.

2) Research the extent of vertical integration in the global (seven-stage) diamond supply chain? Provide examples of forward and backward integration and the extant to witch this this practiced in todays value chain. In this industry, what is the impact of vertical integration?