Z. “Dart” Mitchell leaned forward in his chair to read the e-mail that had just
ID: 424829 • Letter: Z
Question
Z. “Dart” Mitchell leaned forward in his chair to read the e-mail that had just arrived from one of his major customers, Avery Machine Corp. It read as follows:
To all our preferred suppliers—
Due to our commitments to our primary customer, Globus Enterprises, we will in the future be doing all of our supply chain business by way of the Internet, e-mail, and EDI. This includes order preparation, bidding, forecasting, production scheduling, delivery monitoring, cost control, accounts payable and receivable, credit and financing, market and advertising planning, human resource acquisition, engineering specifications, and so on. To maintain compatibility with our systems, you will have to invest in a specific set of EDI hardware and software, available from GoingBust.com on the Web. Although the hardware and software are expensive, we anticipate that the cost savings and increased business this will provide over the coming years can more than offset the additional cost. Please let us know if we can continue to count on you as one of our preferred suppliers as we move our supply chain into the information age.
J. R. Avery, Chairman Avery Machine Corp.
Dart’s Parts had been founded in 1974, when the country was coming out of the 1973–1974 recession and the need for machine part fabricators was great. Over the years, Dart had built up the business to where it now had a solid base of major customers and a comfortable back- log of orders. Dart had increased the capacity of the plant substantially over the years, moving from a small rented facility to its own 200,000-square-foot plant, with a separate 50,000-square- foot warehouse located adjacent to the main plant. Although not a “first adopter” when it came to new technology, Dart’s embraced proven advanced technologies both on the plant floor, with innovations such as robots and numerically controlled machine tools, and in the office, with computers, digital copiers, and other such office equipment.
Dart Mitchell had been reading industry magazines about some of these new technologies and had to admit they sounded promising. However, he had read about some horror stories, too, when the much-advertised features turned into a nightmare. In one case, a customer had forced its suppliers to obtain production schedules off its Web site. Initially responding to high growth in a new product line, the firm had put its component needs on its Web site, but when a major order was canceled, it was late in changing the Web production schedule. As a result, the suppliers were stuck with hundreds of unneeded components and the company wouldn’t reimburse them. In another case, a manufacturer had made a bid for electronic parts on a Web auction and won. However, when it received the parts, they were too large to fit in the standard-sized enclosure it was using and they all had to be scrapped.
Dart believed that this new technology was indeed the future of the industry, but he was concerned about getting in too early and being stuck with the wrong equipment. The new supply chain technology would undoubtedly open avenues to increased business, but it would also result in a number of costs. Of course, it would also save the company’s reputation with Avery, a major customer. However, obtaining the EDI system would be a major financial investment for the firm, particularly if Avery later dropped this approach and went to an all- Internet ERP system like some customers had been talking about doing. At this point, Dart wasn’t sure what to do.
Define the problem (keep short, 1 to 2 sentences):
Give an analysis of the situation:
What are their alternatives (minimum of 3):
Give a recommendation (solves the problem, specific and actionable) :
Define the problem (keep short, 1 to 2 sentences):
Give an analysis of the situation:
What are their alternatives (minimum of 3):
Give a recommendation (solves the problem, specific and actionable) :
Explanation / Answer
Answer: The problem statement is the uncertainty in the decision to invest in the specific EDI software and hardware which might become redundant in the future if the client switches to another technology or ERP rendering he entire investment as sunk cost. If they fail to secue substantial business frm the client, then the rate of cost recovery may become protracted.
Dart has always favoured technoloy adoptions and has alse eaped significant benefits in the past. So he has no qualms in investing for procuring the EDI hardware and software. However his past experience with few clients had not been very pleasant ones wherein he had complied to and integrated with the new technologies and platforms of the clients but ended up with huge losses due to in-action from client/lack of preparedness of the client to effectively leverage the new technology.Hence he was apprehensive in moving forward with the investment. He has to diligently weigh the pros and cons and reach a suitable decision. It is like a double eded sword. If he retracts and decides not to invest then his relationship with Avery( one of his major customer) would be affcted and will directly hit he revenue. Now if he decides to go ahead and invest then there is a possibility that AVery might switch to a new technology/platform after sometime and might ask Dart again to comply. This will then be an escalatin of commitment and would mean sunk cost. Moreover if he fails to secure good amount of business despite complying to the dictates of Avery , he would have to wait for a long period to recover the investment.
The alternatives can be listed as below:
- Discuss with Avery and convince them to adopt a cloud based solution/platform rather than an on premise solution/platform. For a cloud based solution pay as you use and the ownership of the hardware and software would be that of the service provider
- Develop a co-investment model and recovery will be from the gains realised and apprtioned as per the ratio of investment
- Frame Schedule of Rates(SOR) to ensure volume commitment at agreed rate over a certain payback period so that the investments by vendors( including Dart) is secured and recovery is ensured
The recommendation can be stated as below:
Develop a rental model with Avery and have a volume commitment over a period of time at a fixed rate through Schedule of rate contract. Instead of going for upfront investment,let Avery invest in EDI software and hardware.Enter into a framework agreement such that Dart can payout the cost of investment in the form of rental payment (as percentage of the order value during any period) adjusted against the receivebles by Dart as a result of the business /orders received from Avery.In future if Avery decides to change the technology or platform , then the cost recovery model will remain unchanged. This will ensure that for Dart the NPV(Net Present Value) of investment is lower as compared to upfront investment. At the same time Dart will be having higher prospect of having regular business from Avery(Higher business orders meaning higher revovery in the form of rental payments) . Avery on the other hand will remain agnostic as they would be able to recover the cost of investment( in the form of rentals) from whosoever vendor receives the orders.
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