Question

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Questions

1.Help Alex and Meghan brainstorm risks for each of the three sourcing alternatives. Write down all of your risks—don't be too judgmental or selective.

2.Conduct an FMEA. Build a thoughtful worksheet (see Table 5-4). You'll have to make judgment calls on severity, likelihood, and detectability. Compute appropriate RPNs. What actions would you suggest to mitigate these risks?

3.Considering short- and long-term implications, articulate your overall risk-mitigation plan to Alex.

Alex Gardner arrived at her office at 5:30 am. She hadn't been able to sleep and her head hurt. But she was in crisis mode. She wondered what she was going to do about Midwest's flawed outsourcing strategy.

As a new CEO, Alex hadn't expected to get a lot of sleep. But she hadn't expected so many nightmares. About a year ago, Alex had joined Midwest Table, a small Michigan table manufacturer with about 30 workers and a long tradition of manufacturing the high-quality wood tables. She had been fully aware that competition had been ratcheting up, squeezing margins. Chinese furniture manufacturers could no longer be ignored. But, Alex had a plan. She would source finished, flat-pack tables from Mexico to round out Midwest's portfolio.

Sourcing in Mexico

The Mexico-sourcing strategy had worked beautifully at first. High-quality tables arrived on time—and they sold well. Alex looked like a genius—and she was getting six hours of sleep every night. Then, quality dropped dramatically and deliveries became erratic. Sellable in-store inventories fluctuated wildly. Costs were going up. Customer satisfaction was going down. Midwest's image was being dinged. Alex had intervened, personally calling the CEO of Madera Specialties, Midwest's Mexican supplier. After all, she had been losing sleep and it was past time to fix the problem.

Then, yesterday morning, Alex almost came unhinged! She had stopped by the loading dock to personally inspect the new Mexican shipment. She wondered whether her call had made a difference. She had greeted Pete, Midwest's production supervisor, asking, "Good morning! What do you expect today? Have our long-distance quality interventions paid off?" Pete simply smiled, saying, "Let's take a look." Pete cut the seal on the doors and swung them open. Alex and Pete gasped audibly. They couldn't believe their eyes. The truck was empty!

By 5:00 pm—after some frantic phone calls—Alex and Pete had assembled most of the story. At an overnight stop just south of the U.S.-Mexico border, thieves had taken off the hinges to the trailer doors. The thieves emptied the truck before hanging the doors back in place. Alex and Pete had never heard of such a brazen—or clever—roadside hijacking. Although the driver had heard some strange noises during the night, he hadn't been too concerned. Strange things happen all the time at roadside rests on both sides of the border. When he checked the seal in the morning, everything seemed to be in order.

Time to Take the Risk Out of Outsourcing

Refocusing on this latest nightmare, Alex thought back to a year-old conversation she had had with Meghan, a friend who just happened to be a global supply chain consultant. The day before Alex flew to Mexico to sign the deal with Madera, she had met with Meghan at Café Luwak, their favorite hangout. Meghan had warned Alex to take it slowly. Alex smacked her forehead, saying, "I should have listened to Meg's advice." She picked up her phone and texted Meghan: "Can you meet for coffee this evening at Café Luwak?" Within 60 seconds, she received a reply: "Sure, I'll see you their at 5:45." Alex sighed, wondering aloud, "When does Meg sleep?"

Alex arrived at Café Luwak at 5:50. Meghan was sitting at their favorite table. A freshly brewed latte macchiato was waiting for Alex. Alex sat down. It was the first time today that she didn't feel agitated. Meghan would offer some good advice. After some brief chit chat and munching a couple of Luwak's delicious cranberry-oat cookies, Alex outlined three alternatives she had been contemplating. 1

Continue Mexican Outsourcing

Alex was convinced that sourcing from Mexico could work. Midwest's early success had made that case. If Alex pursued this strategy she could either work with Madera to fix the quality and delivery problems or look for a new supplier in Mexico. The risk profile would remain the same, but a better relationship or a better supplier could mitigate some of the costs. Of course, if she switched suppliers, it was always possible to pick a worse-performing supplier.

Begin Offshoring

Competition from China and Southeast Asia wasn't going to go away. Maybe Midwest should offshore production by investing in a Mexican maquiladora. Maquilas, as they are often called, are Mexican assembly plants close to the US border. They had become popular because of their proximity to the U.S. and their tariff-free status. Taking ownership (full or partial) would give Alex a lot more control over the production process. She could send Pete to Mexico to help the operation get up to speed.

Begin Sourcing from China

Sourcing in China would put Midwest in its rivals' backyard. But, it would involve a longer, potentially more complex supply chain (since ocean freight would be involved). Savings from lower labor rates would be offset with the more costly transportation. Alex wasn't really sure she would save much on labor. She had heard that labor rates had risen by 18% per year for the past 10 years. She was also unclear of whether she would be able to find a Chinese supplier that would meet Midwest's stringent manufacturing requirements. She knew high-quality suppliers existed. She just wasn't sure she could find one and then build a winning relationship.

Meghan had attentively listened to Alex, jotting down some notes on the back of her napkin. "These are all viable options," Meghan started. "But, now that you have experienced first-hand some of the risks, I think we should systematically brainstorm what could go wrong for each option. Having it all on paper will help you make a better decision."

Alex and Meghan ordered another round of cappuccinos—this time with soup and sandwiches. Meghan also asked the server for a notepad. He gladly obliged. Above-and-beyond service was one of the benefits of tipping well after each get-together at the Café. Meghan pulled three pages out of the notepad, one for each of the three alternatives. "Ok Alex, let's start! What could go wrong with each option?"

Answer 1

Help Alex and Meghan brainstorm risks for each of the three sourcing alternatives. Write down all of your risks—don't be too judgmental or selective.

Continue Mexican Sourcing

Risks in continuing their current operations with their supplier in Mexico is the cost. Not only did they start receiving low quality products, but they also lost inventory which then became an expense for their company. They may or may not have too much control with these situations because it is from their supplier and not within the company. If they start to search for a different supplier, the risks come with choosing the right supplier, but even then, “the risk profile would remain the same.”

Begin Offshoring

Midwest is looking to invest in a Mexican maquiladora. According to the text, “Maquilas, as they are often called, are Mexican assembly plants close to the US border.” The risks of this sourcing alternatives is the reputation these places get. According to mtholyoke.edu, “The environmental damage along the border is extensive and plainly the direct result of maquiladoras.” These environmental damages aren’t being monitored because the laws in Mexico aren’t as strict as the ones in the US. Not only do most Maquilas break the laws, but they don’t get caught so it is repeatedly occurring. Another risk is lack of environmental responsibility. Because of the lack in stricter laws, Maquilas highly contribute to air pollution and dumping of chemicals into bodies of water. All these give risks for Midwest Table to have bad reputations or known as low public relations. This can be risky because it can drive away customers and create an overall bad image of the company.

Begin Sourcing from China

There are a couple of risks with this option. As stated in the text, one of the risks are “[putting] Midwest in its rivals’ backyard.” Sourcing from China is highly competitive because not only are foreign companies sourcing from China, but China is its own power in manufacturing furniture. Midwest would have to be very strategic in order to penetrate into China for sourcing. Another risk involved is the complexity of importing. Even though Midwest will save money through cheaper labor, the costs of importing goods will offset the money saved especially for far distances. They would need to use ocean freight which can be risky because of costs and how long it takes to get their supplies. Lastly, Midwest would have to establish new relationships and find the right supplier. This may take time and Midwest might not have that time.

Considering short- and long-term implications, articulate your overall risk-mitigation plan to Alex.

Through my FMEA worksheet analysis, Midwest should continue with Mexican outsourcing. As I’ve recommended, the issues the company is currently facing can be stopped. The first issue was change in quality. This can be avoided through the implementation of stricter and more frequent quality inspections. Midwest and their supplier can set up a plan that if the quality is being met, the suppliers must refund Midwest or make up for what happened. The other issue that came on hand is the deliver started becoming erratic. Midwest can also implement stricter rules for deliveries. They can have contracts that will set and record the date and time for arrivals of the trucks (i.e. scheduling). Lastly, thieves emptying the trucks can also be avoided. The company should have training for all the drivers to properly secure the trucks and for protocol when there is suspicious activity. Also, the company should invest in better secured trucks in order to avoid what had happened. If these rules are implemented, it may cost the company in short term to fund the new rules, but can save them money and other resources in the long-term.