Question: What can Russel do differently to reduce the company’s risk exposure w

Question

Question: What can Russel do differently to reduce the company’s risk exposure while still benefiting from global sourcing?

-I have attached the case below. The question needs to be answered based on the case. A detailed answer is needed to get full marks.

Case 12–2

Russel Wisselink

“Have a plan ready for me by 9:00 a.m. tomorrow morning” was the instruction Russel Wisselink, senior buyer for Trojan Technologies in London, Ontario, Canada, received from Randy Haill, Trojan’s materials manager. In the morning of March 12, Russel Wisselink had received an e-mail from China stating that Trojan’s UV4 crystal glass sleeves requirements would not be met because of a governmental ban on the use of its raw material. Russel, aware of the consequences of stockouts on this critical part, had immediately notified Randy.

TROJAN TECHNOLOGIES

Trojan Technologies Inc. (Trojan) was a leading water treatment technology company with the largest installed base of ultraviolet water treatment systems in operation around the world. Trojan specialized in the design, manufacture, and sale of pressurized and open-channel, ultraviolet disinfection and water treatment systems for industrial, municipal, commercial, and residential applications. Trojan’s head office was in London, Ontario, Canada. The company had sales of $140 million, employed approximately 400 people in offices around the world, and

served its customer base through an extensive network of dealers and representatives. Trojan was owned by Danaher Corporation (Danaher), which had acquired the company in 2004. Danaher was a diversified global manufacturer, with businesses in professional instrumentation, industrial technologies, and tools and components. Sales revenues were $6.8 billion with a net profit of $746 million, and Danaher employed approximately 37,000 people. Management used its Danaher Business System (DBS) of continuous improvement to guide and measure operations and business activities. Trojan’s current product line consisted of 10 systems across its five markets: (1) residential water treatment, (2) municipal drinking water, (3) municipal wastewater, (4) environmental contaminant treatment, (5) and industrial process. Systems for commercial and government customers ranged from approximately $50,000 to more than $1 million. These systems, which typically had a product life cycle of 7 to 10 years before being replaced with a new design, were designed and manufactured at the London

facility and modified to meet individual customer requirements. In a typical year, Trojan manufactured 500 to 600 systems for its commercial and government customers.

LOW-COST REGION SOURCING PROJECT

Following its acquisition of Trojan, Danaher implemented several new initiatives aimed at improving corporate performance. One area targeted was low-cost region sourcing (LCR)—an initiative originally championed by Russel’s boss, Randy Haill. Russel had been given responsibility

for the LCR sourcing project in January after his predecessor left the company. One of the products critical for Trojan’s UV water treatment and purification systems was a crystal quartz sleeve that acted as an ultra-transparent barrier between the water and the UV lamp. These sleeves were built to custom specifications for size and optical transparency for each of Trojan’s product applications, making them very expensive and difficult to procure. Depending on the system, several crystal quartz sleeves could be required for each unit. The company had traditionally sourced its crystal quartz sleeves from Advanced Material Solutions, Inc. (AMS), located in Dearborn, Michigan, approximately 150 miles from Trojan’s plant in London, Ontario. AMS produced the sleeves from various types and purities of silica sand. While there were a number of locations that could have supplied the silica sand used for manufacturing crystal quartz sleeves, China was selected as the primary location for LCR sourcing for three reasons. First, China had a good supply of both regular quartz sand for standard sleeves, and uncontaminated crystal sand for UV4 sleeves. Second, Danaher already had an established sourcing group in China and as a result, Trojan would not have to do much of the work to locate suppliers. Third, Trojan had been developing plans to establish its own manufacturing operations center in China to service the region. These plans were ready for implementation but had been stalled due to slowing demand in the Asia-Pacific region. AMS’s pricing for crystal quartz sleeves for Trojan’s UV4 model (part number GA-311) was $51 per unit, and the delivery lead time was approximately two weeks. Trojan’s annual requirements for the UV4 sleeves was about 10,000, which represented roughly 15 percent of Trojan’s total sleeve orders, but approximately 30 percent of total sleeve costs. Very few places in the world had crystal sand resources of sufficient quality (e.g., very low levels of impurities) to produce sleeves with the necessary optical transparency for UV4 applications. After Trojan’s careful screening of potential suppliers, Juntao

was chosen in May the previous year to be the primary Chinese supplier. The net cost savings to Trojan on the sleeves would be 70 percent. However, the delivery lead time from Juntao would be extended to eight weeks due to longer lead times for production and shipping. Once the sourcing relationship was established, it took approximately six months for Juntao to begin accepting orders from Trojan because of communication problems, which Russel found particularly frustrating. The first shipment of sleeves from Juntao arrived at Trojan in February.

DELIVERY PROBLEMS

The original procurement plan developed by Russel’s predecessor was to use an 80/20 production ratio with Juntao and AMS respectively. However, when AMS became aware that Trojan was going to source from China they issued an ultimatum: “Keep 100 percent of the business with us or the pricing for sleeves would be increased to $77 per sleeve. Furthermore, delivery lead time will be extended to 12 weeks because we will no longer stock sleeves for Trojan.” This development led Trojan to decide to source 100 percent of the sleeves from Juntao. Russel felt that AMS believed that they would ultimately lose all of Trojan’s business to offshore

suppliers, and thus they wanted to extract a premium price from Trojan. On March 12, Russel received an e-mail stating that new regulations imposed by the Chinese government temporarily banned all uncontaminated crystal sand mining because government officials wanted to establish regulations for use of natural resources. According to the e-mail, it was uncertain how long the ban would be in place and what the new regulations would entail. Trojan had not received any warning or indication regarding the change in government regulations. However, this new development meant that Juntao would be unable to provide the crystal sleeves for Trojan once their existing supply of crystal sand was depleted. Because Trojan did not stock the crystal sleeves, any disruption in supply would rapidly lead to negative impacts on customer orders and projects.

IDENTIFYING OPTIONS

As soon as Russel received the e-mail he informed Randy, who asked him to put together a list of viable options and to make a recommendation. Top among Randy’s concerns were to minimize the financial impact while ensuring no disruptions to Trojan's customers. Juntao only had a small

supply of the crystal sand on hand, which meant that Trojan would face a sleeve shortage in approximately 30 days. Juntao had offered to import crystal sand for use in sleeve production; however, this alternative would require time to run tests to ensure that the new crystal sand would meet the purity requirements for making UV4 sleeves. It was unlikely that the samples using the new imported sand would be available within the next month. Furthermore, importing raw material would add to Juntao’s costs, which would represent doubling of its prices, increasing

to approximately $28 per sleeve. Russel felt he could order just the crystal sleeves on an as-needed basis from AMS and keep all other sleeve production with Juntao, but the downside to this option would be the premium cost of $77 per sleeve and the extended lead times. Alternatively, Russel had an option to sign a one-year contract with AMS at $51 per sleeve on the condition that AMS provided 100 percent of Trojan’s UV4 sleeve requirements. Another option was to investigate alternative suppliers of crystal quartz sleeves in China who might have raw material stockpiles in reserve. Russel felt that dual sourcing would help reduce Trojan’s risk exposure, provided supply from China eventually returned to normal. Russel knew that a plan needed to be put in place quickly to ensure a continuous supply. However, Randy was expecting that Russel would address both the long-term sourcing strategy for crystal quartz sleeves as well as the short-term supply issue.

Explanation / Answer

My recommendation to Russel was to create a 50/50 production ratio with AMS & Juntao respectively with a service level agreement of 6 months, once the contract gets signed. This would not have avoided the conflict between the two main sourcing suppliers, as they were very much aware of the competitor. Secondly, he was also aware about the new rules and regulation imposed by the Chinese government; therefore he should not have done any negotiation with both the suppliers and simply instructed them to showcase their capabilities in order to capture the complete business. This strategic move would have minimized the financial impact without disrupting the end to end supply chain of the organization, because if they had re-aligned their supply chain then their operating cost would have sky rocketed in a big way.

Secondly, Russel should have immediately made a action plan, once he got the news of the ban, because every organization should have a solid risk management plan in place of crisis depending upon the needs and requirements of the organization i.e. listing of individual risk, then in turn each risk based on likelihood and the impact of it, assessment of the current controls of the organization and finally a brief action plan which consists of roles and responsibilities of each stakeholder involved in the project.

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