Making Phones in China Tibo Inc. is an American consumer electronics company. Its most popular and flagship product is the V10 smartphone. The first generation Tibo V10 was introduced in 2007, and the company will be launching a new generation of the V10 soon. In 2016 alone, Tibo sold more than 140 million V10 smartphones and the model has easily become the most popular smartphone in the world. Tibo became the world's largest technology company as a result of a strong network of suppliers. For ten years, Tibo has been using China-based company Wolftan, the world's largest contract manufacturer, to assemble almost all its V10 smartphones. None of the 140 million V10 smartphones sold in 2016 were manufactured in the U.S., while 85 percent were assembled in China. The relationship between both companies has been mutually beneficial, until recently. China has long been a popular choice for many companies outsourcing their manufacturing. Goods can usually be assembled or completely built for a relatively low cost. Wolftan employs over 120,000 factory workers to make Tibo's new phones at its factory in Songxia, China. Wolftan has been in the world news lately after several incidents of dangerous and unethical labour practices were reported. The company has been accused of low wages, excessive overtime, and dangerous and unsanitary working conditions for its workers. Wolftan has repeatedly denied the allegations. Although Wolftan also manufactures electronic products for other consumer brands, as a high-profile technology giant, Tibo has received the most attention. The alleged negligent labour practices at Wolftan have led news reporters to bring to the public's attention to other practices by Tibo, and now the entire company faces a public relations and supplier relations crisis.

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2017 FITT, All Rights Reserved Page 2 of 7 The Media Reports Tibo CEO Chez Goodman has assembled a team of executives to discuss the strategies for responding to the press reports and alleviating the challenges now being felt by Tibo. He has asked for the input of several executives, including Virginia Chin, a spokeswoman for Tibo, and Terry Valdez, Tibo's chief procurement officer. The highlights of the media reports on Tibo included the following points: Tibo outsourced over 800,000 jobs in 2016, taking jobs away from thousands of Americans. Tibo's aggressive supply chain practices have forced Chinese suppliers to find cheaper ways to do things and push their workers to work faster and longer. Although Tibo has implemented a supplier code of conduct, there have been several violations by Chinese suppliers like Wolftan, and Tibo has been slow in responding. Wolftan has been disputing the allegations, but photographs and videos have been surfacing on social media worldwide. The team discussed each point during the meeting and decided that they mostly reflected the truth, but only in a negative way. At the next press conference, Virginia would be responsible for turning these points into a positive outlook for consumers around the world. Virginia needed more background information to prepare for the press conference. The team discussed the background for each point and brought up the following facts. Bring Back the Jobs to the U.S. Chez advised that he was speaking to someone at a private dinner function and someone else overheard him say, "The factories in China produce our phones really quickly and on a much larger scale. It just makes sense for us, as not only do we source most of our assembly jobs from China, but most of the parts needed to make the V10 are from China. The jobs won't be coming back to America any time soon." This statement was later reported to the media. The decision-making process used a few years ago to outsource the manufacturing and assembling of Tibo's products to suppliers in China was justified. Tibo saves over USD 20 billion a year in labour costs by going to China. The average daily manufacturing wage in the U.S. is USD 39, whereas in China it is USD 3. Terry purchases high-quality products for 10 percent of what he would have to pay for these products in the U.S. There is little to no issue with finding labour in China, as many people are looking for work. Moreover, there is a good and large supply of the raw materials needed to make the V10 already in China. Practically, all the factories that make different components for the phones are located close to each other. Supply Chain Practices The allegations in the media that Tibo has been putting suppliers through rigorous selection methods may be attributed to suppliers needing to be specific and detailed in their price quotes to Tibo. All suppliers must state how the manufacturer came up with the quote. For example, for part suppliers, each manufacturer must specify how much every part costs to assemble, how many workers are needed to make the parts, and how much the estimated labour costs are. Tibo's finance and procurement team then calculates how much Tibo will pay the supplier for each part. Also, Terry only institutes long-term contracts with parts suppliers to reduce costs. He has many suppliers lined up and can switch between them as needed.

Supplier Code of Conduct

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2017 FITT, All Rights Reserved Page 3 of 7 The press reports of labour issues at Wolftan are damaging, but to date, the sales of the V10 have not significantly declined. If the allegations are true, Wolftan is going against the established supplier code of conduct, which was developed to ensure compliance with acceptable worker conditions at supplier facilities. Each supplier must agree to meet the standards established in the Supplier Code of Conduct & Responsibility Standards. Audits of suppliers are done continually. Chez has been thinking of ways to manage the complaints but has not yet developed an acceptable course of action. There has been a lot of tension in the company, as other members of the executive team want to see the factory conditions improved for the workers, but do not want to jeopardize the relationship Tibo has with its suppliers. The Decision After all the background information was discussed, Chez and Terry decided to continue operations with Wolftan for the next few months. To diversify Tibo's supply chain risk, Terry planned to start new contracts with two other manufacturers to make and assemble several versions of the V10. Chez was concerned about finding new suppliers, especially with the launch of the new generation of V10 coming up. This could turn out to be expensive and difficult. He instead wanted Terry to reduce the number of Tibo's key suppliers from a hundred to twenty-four to force them to offer better prices to remain on Tibo's supplier list. Chez also decided Tibo should continue to find its parts rather than use another company to source them. The process they had in place was working and would not change. Terry thought he already had tight control over the suppliers and, even though Tibo is committed to ethical manufacturing practices, the company's bottom line is still important.

Case Study Questions 1. Terry considered adding two new contract manufacturers to Tibo's supply chain. a) What are the benefits and costs of having new suppliers at Tibo? (3 Marks) b) What steps would Chez and Terry have to take to ensure Tibo exercised due diligence before contracting these two new international manufacturers? (3 Marks) 2. According to the Nine Supplier Interaction Model, which two groups of suppliers could Wolftan fit into best? Give at least two reasons for your answer. (6 Marks) 3. Chez wants to reduce the number of Tibo's key suppliers. What are the advantages and disadvantages of reducing the number of Tibo's key suppliers? (6 Marks) 4. Members of Tibo's executive are hesitant to respond to the allegations of labour abuse in the Chinese factories as they do not want to jeopardize the relationship with the suppliers. What could happen if Tibo takes a more active stance to compel companies like Wolftan to improve working conditions and reduce overtime for factory workers? (6 Marks) 5. What is your recommendation for Tibo's Global Supply Chain Practices? (6 Marks)