446

Operations

and Supply Management

the assessment of the sanchalak. After the inspection and weighing, payment is made to the farmer for his produce and transportation to the procurement hub. In addition to above, e-Choupal has following features: It provides a gateway of an expanding spectrum of commodities leaving farms-wheat, maize, spices, coffee, and aqua-products'. Supply chain is scalable and over the time it has demonstrated sustainability. Direct participation of stakeholders has helped in building trust. It can be customized, validated, and expanded to fulfill the local needs. the power of IT-enablement rice, pulses, soya,

associJ young ~ Jeans ensure Ar quality, early da

Howeve
possibi order I byabo The

E-Choupal has demonstrated of rural economy of India.

of an agro-based supply chain, which is the prime mover

QUESTIONS
I 2 Map and explain the supply chain of e-Choupal. List few other initiatives to manage the operations and supply chains of rural India. worst 0 compet Pepe 200M. percent Pep tives, th associat costs w puts th . 30 perc schedul The indicat Basicall differen found t The! ably be reduced The] Theyfo they wo operate, the reno

REFERENCES
1 2 3 http://www.itcportal.comlrural-development/echoupal.htm Surjeet Das Gupta, The choupal as a meta market, Business Standard, Strategist,S http://www.nextbillion.net/research/e-choupal-india-case-study March 2002.

CASE:

PEPE

JEANS

Pepe began to produce and sell denim jeans in the early 1970s in the United Kingdom and has achieved enormous growth. Pepe's success was the result of a unique approach in a product market dominated by strong brands and limited variety. Pepe presented a range of jeans styles that offered a better fit than traditional 5-pocket Western jeans (such as those made by Levi Strauss in the United States)-particularly for female customers. The Pepe range of basic styles is modified each season, but each style keeps its identity with a slightly whimsical name featured prominently on the jeans and on the point-of-sale material. Variations such as modified washes, leather trim, and even designer wear marks are applied to respond to changing fashion trends. To learn more about Pepe and its products, visit its Web site at http://www. pepejeans.coV Pepe's brand strength is such that-the company can demand a retail price that averages ~bo.J!till (1 = $1.6) for its standard productsf A high percentage of Pepe sales are through about 1,500 independent outlets throughout the United Kingdom. The company maintains contact with its independent retailers via a group of approximately 10 agents, who are self-employed and work exclusively for Pepe. Each agent is responsible for retailers in a particular area ofthe country . ... epe is convinced that a good relationship with the independent retailers is vital to its SUcCess.Tbeagent meets P with each independent retailer three to four times each year in order to present the new collecticns.and to take sales orders. Because the number of accounts for each agent is so large, contact is often achieved by holdjng..a-presentation in a hotel for several retailers. Agents take orders from retailers for six-month delivery. After Pepe receives an order, the retailer has only one week in which to cancel because of the need to place immediate firm orders in Hong Kong to meet the delivery date. The company has had a long-standing policy of not holding any inventory of jeans in the United Kingdom.s> After order is taken and confirmed, the rest of the process up to delivery is a inistered from the Pepe office in Willesden. The status of orders can be checked from a Web site maintained by Pepe. The actual orders are sent to a sourcing agent in Hong Kong who arranges for manufacturing the jeans. The sourcing agent handles all the details

QUES

an'

2
THE IDEA FO DATA GIVEN

Supply Chain Strategy

447

associated with materials, fabrication, and shipping the completed jeans to the retailer. Pepe has an outstanding team of young in-house designers who are responsible for developing new styles and the accompanying point-of-sale material. Jeans are made to specifications provided by this team. The team works closely with the Hong Kong sourcing agent to ensure that the jeans are made properly and that the material used is of the highest quality. A recent survey of the independent retailers indicated some growing problems. The independents praised the fit, quality, and variety of Pepe 's jeans, although many thought that they had become much less of a trendsetter than in their early days. It was felt that Pepe's variety of styles and quality were the company's key advantage over the competition. However, the independents were unhappy with Pepe's requirements to place firm orders six months in advance with no possibility of amendment, cancellation, or repeat ordering. Some claimed that the inflexible order system forced them to order less, resulting in stockouts of particular sizes and styles. The retailers estimated that Pepe's sales would increase by about 10 percent with a more flexible ordering system. The retailers expected to have some slow-moving inventory, but the six-month order lead time made it difficult to accurately order and worsened the problem. Because the fashion market was so impulsive, the current favorites were often not in vogue six months in the future. On the other hand, when demand exceeded expectations, it took a long time to fill the gap. What the retailers wanted was some method of limited returns, exchange, or reordering to overcome the worst of these problems. Pepe was feeling some pressure to respond to these complaints because some of Pe pe's smaller competitors offered delivery in only a few days."/ Pepe has enjoyed considerable financial success with its current business model. Sales last year were approximately 200M. Cost of sales was approximately 40 percent, operating expenses 28 percent, and profit before taxes nearly 32 percent of sales. The company has no long-term debt and has a very healthy cash position. Pepe was feeling considerable pressure and felt that a change was going to be needed soon. In evaluating alternatives, the company found that the easiest would be to work with the Hong Kong sourcing agent to reduce the lead time associated with orders. The agent agreed that the lead time could be shortened, possibly to as little as six weeks, but costs would increase significantly. Currently, the agent collects orders over a period of time and about every two weeks puts these orders out on bid to about 1,000 potential suppliers. The sourcing agent estimated that costs might go up 30 percent if the lead time were shortened to six weeks. Even with the significant increase in cost, consistent delivery schedules would be difficult to keep. The sourcing agent suggested that Pepe consider building a finishing operation in the United Kingdom. The agent indicated that a major retail chain in the United States had moved to this type of structure with considerable success. Basically, all the fmishing operation did for the U.S. retail chain was apply different washes to the jeans to give them different "worn" looks. The U.S. operation also took orders for the retail stores and shipped the orders. The U.S. firm found that it could give two-day response time to the retail stores. The sourcing agent indicated that costs for the basic jeans (jeans where the wash has not been applied) could probably be reduced by 10 percent because the volumes would be higher. In addition, lead time for the basic jeans could be reduced to approximately three months because the finishing step would be eliminated and the orders would be larger. The Pepe designers found this an interesting idea, so they visited the U.S. operation to see how the system worked. They found that they would have to keep about six weeks' supply of basic jeans on hand in the United Kingdom and that they would have to invest in about I,000,000 worth of equipment. They estimated that it would cost about 500,000 to operate the facility each year. They could locate the facility in the basement of the current Willesden office building and the renovations would cost about 300,000.

s
n r,

QUESTIONS
Acting as an outside consultant, what would you recommend that Pepe do? Given the data in the case, perform a financial analysis to evaluate the alternatives that you have identified. (Assume that the new inventory could be valued at six weeks' worth of the yearly cost of sales. Use a 30 percent inventory carrying cost rate.) Calculate a payback period for each alternative. Are there other alternatives that Pepe should consider?
BY

o
d

e
to Is

THE IDEA FOR THIS CASE CAME FROM A CASE IDLED "PEPE JEANS" WRmEN DATAGIVEN IN THE CASE DO NOT REPRESENTACTUAL COMPANY DATA.

D.

BRAMlEY AND

C.

JOHN OF THE LONDON BUSINESS SCHDOl.

PEPE JEANS IS A REAL COMPANY, BUT THE

CASE:

BE S T PR A CTI C ES AT

L GEL ECT R 0 Nle sIN DI A LT D

Best operations management practices of global leaders like Korean company LG Electronics, Japanese company Suzuki and so on are well reflected in their Indian counterparts. These companies have adapted to the concept of open, responsive, and flexible approach towards developing operations and supply chain strategy. For example, in 1998, with an investment of around Rs. 500 crore, LG Electronics India Ltd. (LGEIL) has set up a world-class manufacturing facility for color televisions, washing machines, air-conditioners, and microwave ovens at Greater Noida, very near to the capital city of India-Delhi. Production of eco-friendly refiigerators and PC monitor started here in year 2001.' LGEIL has developed many good practices to improve its operational strategies. For example, the Production, Sales and Inventory (PSI) plan and Rolling Sales Plan-review (RSP) are conducted daily, followed by on weekly and monthly

Lean Manufacturing

493

basis, with an aim to increase the accuracy in planning activities of sales and production. To maintain a high-quality six-sigma level and 100 PPM (parts per million), it aims to reduce defects through modification in process using S.M.A.R.T. targets. S.M.A.R.T. stands for "Self-monitoring, Analysis, and Reporting Technology." Vendor-performance-linked rating system, called as ABC system in LGEIL, identifies A-class as excellent vendors, B-class as Ok and C-class as "should-improve vendors." Open communication systems, such as pizza-lunch with MD helps LGEIL employees to share work-related issues with MD. Dosti tour is another concept used to improve team work in the continuous improvement process. It provides a forum where an operator shows to his supervisor the job or process-related improvements to get acknowledgement and reward," Like LG Electronics Korea, LGEIL has also launched its own codes of conduct by nurturing a "green partnership" with the first-tier suppliers in order to maintain high standards of environmentally-sound practice and product quality! The goal of innovation is to introduce a positive change, to make someone or something better. LGEIL believes in open innovation culture, where employees at all levels are encouraged to create, implement, and share their innovative ideas. It encourages various approaches to innovate the products, processes, and systems, e.g. Six Sigma and TDR (TearDown Re-engineering). Six-sigma, a statistical approach for product quality improvement, is used to optimize the existing processes by reducing the overall variation in the process. Through this the root cause of the problem is identified and eliminated through statistical tools and techniques. The quality issues are identified at different stages like (i) incoming part issues from suppliers, (ii) assembly processes during manufacturing, and (iii) product issues while actual usage by the consumer. These issues are resolved by quality experts known as Six Sigma Black Belts certified by Korea HQ. These black belts follow DMAIC Approach (Define, Measure, Analyse, Improve and Control) to eliminate the root causes of quality issues. In order to focus on waste elimination, Lean Six Sigma drive has been initiated across the whole organization of LGEIL. In the process, employees use value-stream-mapping to identify and eliminate the non-value-added activities to improve the level of prevailing processes through different statistical approaches. The idea behind using six-sigma approach is to create value and eliminate waste. In his forward to a book authored by Dr. Yasho Y. Verma-now the COO of LGEIL, Mr. Y. K. Kim, LG Electronics at Seoul writes, "LGEIL has often been benchmarked by other LG Electronics subsidiaries and also credited as a suecessfullocalization case ... From planning and administration, to marketing and sales, to R&D, local Indian employees are actively engaged in all areas of business."

QUESTIONS
1. What are the reasons of competitive advantages of LGEIL? 2. Map the growth ofLGEIL in consumer durables and electronics goods in India in terms of product, brand, best practices in manufacturing, and HR.

REFERENCES
(a) http://www.zoominfo.comlpeoplelPersonDetaiILimited.aspx?PersonlD=60359777&lastName=Verma&id=603 59777 &firstName= Y.Y.&searchSource=page&page= I (b) Ki-Hoon Lee and Ji-Whan Kim, Current status of CSR in the realm of supply management: the case of the Korean electronics industry, Supply Chain Management: An International Journal, 14(2),2009, pp. 138-148. (c) http://www.in.lge.comlAboutU s/aboutus-companyProfile-overview.aspx (d) Y. Y. Verma (2000) LG Electronics: Towards Openness, Global Journal of Flexible Systems Management, 1(1), pp. 81-83. .

CASE:

QUALITY

PARTS

COMPANY

Quality Parts Company supplies gizmos for a computer manufacturer located a few miles away. The company produces two different models of gizmos in production runs ranging from 100 to 300 units.

636

Operations

and Supply Management

MONTH Beginning Inv. Demand Production Ending Inv. 2,000 18,050

19,500

18,370

16,520

20,825

17,540

17,535

17,000

CASE:

BRADFORD

MANUFACTURING-PLANNING

PLANT

PRODUCTION

THE SITUATION

You are the operations manager for a manufacturing plant that produces pudding food products. One of your important responsibilities is to prepare an aggregate plan for the plant. This plan is an important input into the annual budget process. The plan provides information on production rates, manufacturing labor requirements, and projected finished goods inventory levels for the next year. You make those little boxes of pudding mix on packaging lines in your plant. A packaging line Excel: Bradford has a number of machines that are linked by conveyors. At the start of the line the pudding is mixed; Manufacturing it is then placed in small packets. These packets are inserted into the small pudding boxes, which are collected and placed in cases that hold 48 boxes of pudding. Finally, 160 cases are collected and put on a pallet. Th pallets are staged in a shipping area from which they are sent to four distribution centers. Over the years, the technolog of the packaging lines has improved so that all the different flavors can be made in relatively small batches with no setu time to switch between flavors. The plant has 15 of these lines, but currently only JO are being used. Six employees are required to run each line. The demand for this product fluctuates from month to month. In addition, there is a seasonal component, with peak sales before Thanksgiving, Christmas, and Easter each year. To complicate matters, at the end of the first quarter of each year, the marketing group runs a promotion in which special deals are made for large purchases. Business is going well and the company has been experiencing a general increase in sales. The plant sends product to four large distribution warehou e strategically located in the United States. Trucks mov product daily. The amounts shipped are based on maintaining target inventory levels at the warehouses. These targetsare calculated based on anticipated weeks of supply at each warehouse. Current targets are set at two weeks of supply. In the past, the company has had a policy of producing very close to what it expects sales to be because of limite capacity for storing finished goods. Production capacity has been adequate to support this policy. Forecast Demand by Quarter (1,000 Case Units) 3,000 r-------------------2,500 2,000 1,500 1,000 500

1st (1-13)

2nd (14-26)

3rd (27-39)

4th (40-52) 1st (Next Year

A sales forecast for next year has been prepared by the marketing department. The forecast is based on quarterly sales quotas, which are used to set up an incentive program for the salespeople. Sales are mainly to the large V.S. retail

Aggregate Sales and Operations

Planning

637

grocers. The pudding is shipped to the grocers from the distribution warehouses based on orders taken by the salespeople. Your immediate task IS to prepare an aggregate plan for the coming year. The technical and economic factors that must be considered in this plan are shown next.
TECHNICAL AND ECONOMIC INFORMATION

2 3

5 6

Currently the plant is running 10 lines with no overtime. Each line requires six people to run. For planning purposes, the lines are run for 7.5 hours each normal shift. Employees, though, are paid for eight hours' work. It is possible to run up to two hours of overtime each day, but it must be scheduled for a week at a time, and all the lines must run overtime when it is scheduled. Workers are paid $20.00Ihour during a regular shift and $30.00Ihour on overtime. The standard production rate for each line is 450 caseslhour. ' The marketing forecast for demand is as follows: QI-2,000; Q2-2,200; Q3-2,500; Q4-2,650; and QI (next year)-2,200. These numbers are in I,OOO-case units. Each number represents a 13-week forecast. Management has instructed manufacturing to maintain a two-week supply of pudding inventory in the warehouses. The two-week supply should be based on future expected sales. The following are ending inventory target levels for each quarter: QI-338; Q2-385; Q3-408; Q4-338. Inventory carrying cost is estimated by accounting to be $1.00 per case per year. This means that if a case of pudding is held in inventory for an entire year, the cost to just carry that case in inventory is $1.00. If a case is carried for only one week, the cost is $1.00/52, or $0.01923. The cost is proportional to the time carried in inventory. There are 200,000 cases in inventory at the beginning ofQI (this is 200 cases in the 1,000-case units that the forecast is given in). If a stockout occurs, the item is backordered and shipped at a later date. The cost when a backorder occurs is $2.40 per case due to the loss of goodwill and the high cost of emergency shipping. The human resource group estimates that it costs $5,000 to hire and train a new production employee. It costs $3,000 to layoff a production worker.

QUESTIONS
Prepare an aggregate plan for the coming year, assuming that the sales forecast is perfect. Use the spreadsheet "Bradford Manufacturing" from this book's DVD. In the spreadsheet, an area has been designated for your aggregate plan solution. Supply the number of packaging lines to run and the number of overtime hours for each quarter. You will need to set up the cost calculations in the spreadsheet. You may want to try using the Excel Solver to find a solution. You will also need to set the "not-negativity" box in the "options" area. Remember that your final solution needs an integer number of lines and an integer number of overtime hours for each quarter. (Solutions that require 8.9134 lines and 1.256 hours of overtime are not feasible.) 2 Review your solution carefully and be prepared to defend it. Bring a printout of your solution to class. If you have a notebook computer, bring it to class with a copy of your completed spreadsheet. Your instructor may run a simulation in class using your solution.

SELECTED
FlIher, . L.; J. H. Hammond; W. R. Obenneyer; M no. 3 (May-June 1994), pp. 83-93. Silver, A.; D. F. Pyke; and R. Peterson. Inventory E. Vollmann, E.; W. L. Berry; D. C. Wbybark; T. lrwinIMcGraw-Hill, 2004. Wallace, F. Sales and Operations T. Planning:

BIBLIOGRAPHY
Supply Meet Demand in an Uncertain World." Harvard Business Review 72, Planning and Scheduling. New York: Wiley, 1998. 51b ed. New York:

and A. Raman. "Making Management

and Production

and F. R. Jacobs. Manufacturing The How-To Handbook. Planning:

Planning

and Control for Supply Chain Management. OH: T. F. Wallace & Co., 2004. OH: T. F. Wallace & Co . 2006.

2nd ed. Cincinnati,

Wallace, F., and R. Stahl. Sales and Operations T.

The Executive

Guide. Cincinnati,