Supplier Evaluation and Selection Case

TabletCO is a growing computer company located north of Dallas, TX. In its early years, TabletCO produced personal computers and engineering workstations. Recently, the company decided to expand its product line to include tablets. The company, recognized as a well-established computer manufacturer, has grown from a single product manufacturer with annual sales of $100 million, to a multi-product $1 billion firm in 10 years. Tablets are projected to make up about 50% of TabletCOs overall sales within 3 years. Sales of TabletCOs tablet will be focused on the education market for K-12 with a focus on large volume, standardized units.

TabletCO based its decision to enter the tablet market based on forecasts that suggest that this sector will grow faster than any other computer related sector. In particular, the marketing department has decided to focus on the education market. Although TabletCO is a small player in this market, the company has decided to pursue an aggressive strategy of taking market share from established companies by providing stocked units already in inventory to meet the immediate needs of a school system. The new line of tablets, called the TAB series, are about 6.5 inches tall, 9.3 inches wide, and 0.46 inch thick. Weighing about 1.2 pounds, it is comfortable to hold with two hands and it can fit easily in a small shoulder bag or backpack. ComputerDigest has declared TabletCOs prototype tablet a best buy for its durable design and low cost.

The company plans to offer three models in the TAB series and will manufacture to stock. Based on this strategy, they are looking for suppliers to be low cost with high capacity to expand meet demand as it grows. The company is concerned about inventory because component lifecycles are typically 4-5 months. Any components left in inventory will leave them with tablets that have old technology which they will likely need to deeply discount. With intense competition, a single product defect can wipe out the profit from the sale. Poor quality will also adversely affect market reputation and future sales.

TabletCO will assemble the tablets in its own highly automated facilities, however intends to buy many of the tablet components and subassemblies, including the liquid-crystal display (LCD), a feature that will be standard on each TabletCO tablet. The LCD allows the user to navigate easily and type with a virtual keyboard on the screen or press other icons on the screen to open apps or files. Marketing estimates that first year demand for the new TAB tablets, and therefore the LCDs, would be approximately 1,000,000 units. Growth is expected to be 30% per year.

TabletCO is targeting the price of its tablets from $100-$110, depending on the model and configuration. This means that the LCDs total cost of ownership (TCO) would need to be in the $10-$15 range.

The company plans to introduce the new line of tablets directly to the marketplace July 1, 2020 to beat a major competitors release by one month and in time for the graduating seniors from college starting their first jobs. TabletCO must have inventory by May 1, 2020 to begin process proving and pilot production. It is now February 1, 2020 and the soonest the contract for LCDs could close is March 1, 2020.

TabletCO relies on cross-functional (including purchasing, logistics, engineering, cost accounting) category teams to develop sourcing strategies for key purchased items and management views the LCD supplier selection decision as a critical part of the TAB series development. The category team has spent the last several weeks visiting four LCD suppliers and is currently evaluating various supply options. The team expects to begin negotiation with one supplier within the next week given the time constraints facing the product launch. The following section presents information regarding the suppliers under consideration.

The Supply Alternatives

Seven suppliers responded to the category teams request for quote (RFQ), which the category team forwarded to them eight weeks previously. Although other LCD suppliers exist, these were the only seven that showed an interest in TabletCOs initial inquiries. A review of these proposals revealed that four of the seven suppliers appeared to be cost competitive, given TabletCOs target cost objectives. Engineering supported the category teams preliminary efforts by purchasing off the shelf LCDs for testing. This helped determine if the suppliers had a product that initially satisfied TabletCOs expectations. Relying on product samples, while providing preliminary insight into the capability and technology of each supplier, was not sufficient to support a final supplier selection decision therefore the cross-functional team decided to conduct on-site visits.

The team decided to visit four suppliers to collect additional information. The four visits were completed within a two-week period. These visits were time consuming and exhausting, particularly since two suppliers were located in Asia. Furthermore, no one on the team spoke any foreign languages. Fortunately, the other two suppliers, located in North America, were easier to visit. The following sections summarize data collected during the category teams visits to the four suppliers.

Supplier Visits

Computadora

Computadora, located in Tijuana, Mexico, supplies many United States (U.S.) manufacturers. They frequently ship across the border through TX and into the U.S. On the way to the facility, they saw poverty and long lines at the border coming into the U.S. They were warned by the U.S. agents at the border to be careful of where they stopped because there had been a surge in violent crime in the area.

When they arrived, they found a clean facility that was surrounded by a ten-foot-high barbed wire fence. Several people were picketing outside the factory however the category team did not have a translator and could not read the signs. They were met by the plant manager and several production supervisors. The plant manager showed them a list of recently completed Lean Six Sigma initiatives to take waste and cost out of the manufacturing process. Based on the volume of product shipped to their other customers within the U.S., Computadora could provide small, consolidated shipments twice a week to keep inventory to a minimum (and cuts the per truck shipment cost in half). They had a large manufacturing facility and ran 2 eight-hour shifts. The tour of the manufacturing plant was uneventful, as workers seemed to be efficient and effective. The Kanban system seemed well organized. The category team turned down the offer of dinner so they could make trip back to the Dallas area. Unfortunately, it took them 2 hours to cross the border back into the U.S. so they got home very late.

Keompyuteo 

Keompyuteo, located in Seoul, Korea, was in a crowded complex in a manufacturing park. They provide LCDs domestically to Samsung and had many large customers in the Far East, including many contract manufacturers. Their plant was focused solely on LCDs and imaging technology. They sold components to both the high-tech as well as the medical imaging sectors. For business to North America, the relied on a third-party logistics providers, ShipExpress, to manage the shipments.

The cross-functional team from Keompyuteo who greeted them were enthusiastic and helpful. The vice president of sales met with the TabletCO team for an extensive amount of time talking about how Keompyuteo was interested in expanding more into the U.S. and would work to earn their business. He gave them each his business card in a very formal manner and told them they could contact him directly if there were any issues. They toured the plant which was highly automated and efficient. The workers seemed busy however worked well together in teams. The working conditions were good and the production manager told the TabletCO team that the workers were highly committed and would work as long and as hard as necessary to meet the production quotas. 

Changhong

Changhong is located in Shenzhen, China. Changhong works primarily with Asian manufacturers and currently has no U.S. customers however is eager to break into the U.S. market. The category team were picked up from the airport in a limousine by the CEO and Chairman of the Board. They were taken to a luxurious dinner with fine wine until late in the evening. Even with the interpreter provided by Changhong, they had a difficult time communicating. On the trip to their hotel, they were amazed at the number of new buildings in the city however were dismayed at the ever-present smog.

In the morning, they were picked up in the limousine and taken to a huge industrial park. Changhong was the largest manufacturing plant they had ever seen. There were over 100,000 workers at this single plant and towers of dormitories to house the workers. He also informed them that the workers were housed in dormitories right next to the plant so they did not need to spend time commuting. Many of them had moved from rural farms to get a good job in manufacturing to support their families.

The CEO met them at the entrance and conducted the tour himself utilizing an interpreter. The workers from the night before were just leaving and the day shift was coming on. Both sets of workers looked exhausted. The plant was far less automated than the other factories they had seen. Most of the manufacturing process was manual. Workers did not look up or even acknowledge the members of the category team, nor did they speak to each other. The plant was chaotic with constant movement everywhere and the sheer volume of product moving through the factory was staggering. Through an interpreter, the CEO thanked them for coming and promised to provide them the lowest cost LCDs in the industry. In the limousine on the way to the airport, the TabletCo team members found expensive gifts left on the seats however could not accept them due to their company policy. The driver told them they must accept the gifts and looked very nervous when the TabletCo team refused.

PhotosRUs

PhotosRUs was located in Seattle, WA is a young, start-up company. TabletCo used venture capital when it first started to help fund the companys expansion and one of the venture capitalists who was still on the board introduced TabletCo to PhotosRUs. The venture capital firm had a significant investment in PhotosRUs. PhotosRUs was frequently identified in blogs and trade industry journals as a company to watch as they had formed only four years ago and had grown by 200% per year. PhotosRUs was hopeful that this was the year they could IPO, making the founders and most of the executive team into millionaires. When the category team visited the facility, they were led past ping-pong tables and latte machines into an ultra-modern conference room, where the 27 year-old CEO was talking in an animated fashion with investors about the upcoming IPO. He waved to the category team and gave them the just a minute sign.

When they sat down to talk with him, he was clearly a visionary. He talked about how their patented, leading edge technology would transform the imaging market. He discussed PhotosRUss aggressive growth plans and innovative direction of the companys products. They were introduced to the Chief Operating Officer (COO), a seasoned industry executive from Dell. With a smile, she said, OK, now let me show you how we actually get work done around here. Both she and the CEO laughed. The COO led the category team through a well-organized facility but small. There seemed to be a few production problems as they walked through the facility, however the COO was quickly working with the personnel to trouble-shoot and fix issues as they arose. The personnel were friendly and engaged frequently with the category team to show them how they built quality into their product. The manufacturing facility seemed to be bursting at the seams and when asked about capacity, the COO said, dont worry, once we IPO we will have plenty of capital to expand. After a full day at the facility, they had dinner with the CEO and COO at a very nice restaurant in Seattle where both executives assured the category team that they would work hard to earn TabletCOs business.

Additional Information and Assumptions

• TabletCO will hold 2 weeks of safety stock inventory for Computadora and PhotosRUs and 1 month of safety stock inventory for Keompyuteo and Changhong
• Inventory carrying costs, which include storage, handling, obsolescence, taxes and cost of capital, are 18% per year of the inventories unit price.
• Ramp-up time is the number of weeks needed from the point the contract is signed until the product arrives at TabletCO and can be put into inventory.
• Delivery Lead Time is the time from when you place a purchase order to when the LCDs arrive at TabletCOs receiving dock. All terms are FOB shipping point.
• Tooling is amortized over 2 years.
• Although exact numbers are difficult to obtain, TabletCO estimates the cost of a defective component such as the LCD to cost TabletCO $400 per occurrence.
• Also difficult to quantify, we estimate that each late shipment costs $4,000 in production delays.
• Cost of a container shipment is $3,000 and the cost of a truck shipment is $400.
• Keompyuteo unit price has already been converted to U.S. dollars based on the current exchange rate. If the exchange rate changes, it will affect the unit price in U.S. dollars.
• If needed, assume 52 weeks per year, 30 days in a month, and 365 days per year

Bid Summary and Total Cost Analysis Worksheet Changhong $6.00 $150,000 Bid Summary Quoted Price Tooling Costs (total) Quality (defects per million cameras) Ordering, Inbound Receiving, and Inspection Cost (per unit) On Time Delivery Duties and Customs (per unit) Ramp up Time (weeks) Shipment Frequency Lead Time (from time of order until product ships) Capacity Utilization (based on maximum capacity) Denomination of Contract 100 Computadora $10.00 $500,000 500 $0.75 99% $1.00 8 2 per week 1 day 90% Dollars PhotosRUs $14.00 $300,000 1,000 $0.50 90% $0.00 Keompyuteo $10.00 $250,000 300 $1.50 95% $2.00 10 2 per month 4 weeks 75% Korean Republic 5 1 per week 2 days 97% Dollars $1.50 98% $2.50 4 1 per month 6 weeks 80% Dollars Changhong $6.00 Cost Category: use formulas for your calculations and calculate per unit cost All Calculations should be done for the first year volumes only except tooling (amortized over 2 years) Cost Element / Supplier Computadora PhotosRUs | Keompyuteo Quoted Unit Price $10.00 $14.00 $10.00 Tooling Quality Nonconformance Costs Late Delivery Cost Ordering, Inbound Receiving, and Inspection Cost (per unit) Shipping/Transportation Cost Duties and Customs Transportation Inventory Safety Stock Inventory Estimated Per Unit TCO Bid Summary and Total Cost Analysis Worksheet Changhong $6.00 $150,000 Bid Summary Quoted Price Tooling Costs (total) Quality (defects per million cameras) Ordering, Inbound Receiving, and Inspection Cost (per unit) On Time Delivery Duties and Customs (per unit) Ramp up Time (weeks) Shipment Frequency Lead Time (from time of order until product ships) Capacity Utilization (based on maximum capacity) Denomination of Contract 100 Computadora $10.00 $500,000 500 $0.75 99% $1.00 8 2 per week 1 day 90% Dollars PhotosRUs $14.00 $300,000 1,000 $0.50 90% $0.00 Keompyuteo $10.00 $250,000 300 $1.50 95% $2.00 10 2 per month 4 weeks 75% Korean Republic 5 1 per week 2 days 97% Dollars $1.50 98% $2.50 4 1 per month 6 weeks 80% Dollars Changhong $6.00 Cost Category: use formulas for your calculations and calculate per unit cost All Calculations should be done for the first year volumes only except tooling (amortized over 2 years) Cost Element / Supplier Computadora PhotosRUs | Keompyuteo Quoted Unit Price $10.00 $14.00 $10.00 Tooling Quality Nonconformance Costs Late Delivery Cost Ordering, Inbound Receiving, and Inspection Cost (per unit) Shipping/Transportation Cost Duties and Customs Transportation Inventory Safety Stock Inventory Estimated Per Unit TCO