Somerset Furniture Company\'s Global Supply Chain The Somerset Furniture Company

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Somerset Furniture Company's Global Supply Chain

The Somerset Furniture Company was founded in 1957 in Randolph County, Virginia. It traditionally has manufactured large, medium-priced, ornate residential wood furniture such as bedroom cabinets and chests of draws, and dining and living room cabinets, tables, and chairs, at its primary manufacturing facility in Randolph County. It employed a marketing strategy of rapidly introducing new product lines every few years. Over time it developed a reputation for high-quality, affordable furniture for a growing U.S. market of homeowners during the last half of the twentieth century. The company was generally considered to be an innovator in furniture manufacturing processes and in applying QM principles to furniture manufacturing. However, in the mid-1990s, faced with increasing foreign competition, high labor rates, and diminishing profits, the Somerset Company contracted to outsource several of its furniture product lines to manufacturers in China, simultaneously reducing the size of its own domestic manufacturing facility and labor force. This initially proved to be very successful in reducing costs and increasing profits, and by 2000 Somerset had decided to close its entire manufacturing facility in the United States and outsource all of its manufacturing to suppliers in China. The company set up a global supply chain in which it arranges for shipments of wood from the United States and South America to manufacturing plants in China where the furniture products are produced by hand by Chinese laborers. The Chinese manufacturers are very good at copying the Somerset ornate furniture designs by hand without expensive machinery. The average labor rate for furniture manufacturing in the United States is between $9 and $20 per hour, whereas the average labor rate for furniture manufacturers in China is $2 per day. Finished furniture products are shipped by container ship from Hong Kong or Shanghai to Norfolk, Virginia, where the containers are then transported by truck to Somerset warehouses in Randolph County. Somerset supplies retail furniture stores from this location. All hardware is installed on the furniture at the retail stores in order to reduce the possibility of damage during transport.

The order processing and fulfillment system for Somerset includes a great deal of variability, as do all aspects of the company's global supply chain. The company processes orders weekly and biweekly. In the United States it takes between 12 and 25 days for the company to develop a purchase order and release it to its Chinese suppliers. This process includes developing a demand forecast, which may take from one to two weeks; converting the forecast to an order fulfillment schedule; and then developing a purchase order. Once the purchase order is processed overseas by the Chinese manufacturer, which may take 10 to 20 days depending on the number of changes made, the manufacturing process requires approximately 60 days. The foreign logistics process requires finished furniture items to be transported from the manufacturing plants to the Chinese ports, which can take up to several weeks depending on trucking availability and schedules. An additional 5 to 10 days are required to arrange for shipping containers and prepare the paperwork for shipping. However, shipments can then wait from one day to a week for enough available containers. There are often too few containers at the ports because large U.S. importers, like “Big W” discount stores in the United States, reserve all the available containers for their continual stream of overseas shipments. Once enough containers are secured, it requires three to six days to optimally load the containers. The furniture pieces often have odd dimensions that result in partially filled containers. Since 9/11, random security checks of containers can delay shipment another one to three weeks, and smaller companies like Somerset are more likely to be extensively checked than larger shippers like Big W, whom the port authorities don't want upset with delays. The trip overseas to Norfolk requires 28 days. Once in port, one to two weeks are required for a shipment to clear customs and to be loaded onto trucks for transport to Somerset's warehouse in Randolph County, which takes from one to three days. When a shipment arrives, it can take from one day up to a month to unload a trailer, depending on the urgency to fill store orders from the shipment.

Because of supply chain variability, shipments can be off schedule (i.e., delayed) by as much as 40%. The company prides itself on customer service and fears that late deliveries to its customers would harm its credibility and result in cancelled orders and lost customers. At the same time, keeping excess inventories on hand in its warehouses is very costly, and since Somerset redesigns its product lines so frequently a real problem of product obsolescence arises if products remain in inventory very long. Somerset has also been experiencing quality problems. The Chinese suppliers employ quality auditors who rotate among plants every few weeks to perform quality control tests and monitor the manufacturing process for several days before visiting another plant. However, store and individual customer complaints have forced Somerset to inspect virtually every piece of furniture it receives from overseas before forwarding it to stores. In some instances, customers have complained that tables and chairs creak noisily during use. Somerset subsequently discovered that the creaking was caused by humidity differences between the locations of the Chinese plants and the geographic areas in the United States where their furniture is sold. Replacement parts (like cabinet doors or table legs) are difficult to secure because the Chinese suppliers will only agree to provide replacement parts for the product lines currently in production. However, Somerset provides a one-year warranty on its furniture, which means that they often need parts for a product no longer being produced. Even when replacement parts were available, it took too long to get them from the supplier in order to provide timely customer service.

For the Somerset Furniture Company determine the product lead time by developing a time line from the initiation of a purchase order to product delivery. Discuss the company's possible transportation modes and channels in China and to and within the United States, and the likelihood of potential problems. Identify and discuss how international trade specialist(s), trade logistics companies, and/or Internet exchanges might help Somerset reduce its product lead time and variability.

Specific guidance: you are expected to use the quantitative analysis methods to arrive at conclusions and provide supported recommendations within your formal paper. You should select appropriate graphical presentation methodologies to present this material within the paper. You should include all computation materials as appendices to the completed report.

Explanation / Answer

Ans:

In tune with increased economic globalization and offshore sourcing, global supply chain management is becoming a vital subject for many businesses and Somerset Furniture is one of the companies facing the challenges when set up its global supply chain.

The business strategy constitutes overall direction to achieve corporate objectives and goals in long term, but supply chain strategy focuses on driving down operational costs, streamlining procedures and maximizing efficiencies. However, most companies have wonderful business strategies but most of them are unlikely designed a seamless supply chain strategy which can result in great failure when doing business overseas.

In this case study, Somersets current approach to manage its supply chain resulted in poor business performance, the visible hazards and other negative factors frustrated Somerset included poor logistics management, ineffective order system and inventory management as well as inconsistency of product quality. In adopting a value chain, Somerset must incorporate and execute a robust supply chain management strategy for best-fit suppliers selection, further establish on how to work with supply partners, distributors, suppliers, customers or even customers customers as a way to remain competitive. Otherwise, the company will not survive.

As the marketplace changes rapidly and becomes very competitive, it is critical that Somerset reinforces existing relationships and work together internally and externally. That being said, a well-practiced supply chain strategy results in value creation for the whole organization. In a nutshell, supply chains have shifted from a cost focus to a customer focus, until currently to a strategic focus, scrutinizing the success of a strategy is just as good as the companys capabilities to fully and properly execute all. A great supply chain strategic approach, connected with operational excellence, can provide success for not only the company in crisis but also its partners and customers.

While Somerset formulated a good strategic marketing plan for continually launching new product lines every few years during half of the twentieth century, simultaneously, experienced the positive effects of applying the TQM in its furniture manufacturing and popularly is known as high-quality yet affordable wooden furniture provider in domestic market. However, since the mid-1990s, the company suffered from the stiffer competition, high labour rate and decreasing profits. To get out of this situation, Somerset started outsourcing several furniture product lines to China that helped benefit from cost-effective and reduced operating costs. Another strategy was reducing the manufacturing facility and labour force, to keep the low costs in line with the pace of outsourcing. It was very successful initially in reducing costs and increasing profits for the company.

Shipments of Raw Materials and Inconsistency of Product Quality

Somersets global supply chain facilitates the wood shipments from the United States and South America to manufacturing plants in China. This shipment itinerary takes a long time to arrive China, therell be unexpected delays for processing shipment which incurs customer complaints and orders cancellation. Despite of long shipping time, the costs of shipment to the final destination and the raw material from US and South America are apparently high that reduced the profits.

As the manufacturing plants employed Chinese workers to produce products by hand in China, it will cause discrepancies in product dimension and quality. Customers would ask for exchange or refund as the quality is not assured by hand-made.

Poor Distribution Network and Transportation Management

The finished furniture products are shipped by containers from Hong Kong or Shanghai to Norfolk, Virginia, once arrived, the containers are transported by truck to Somerset warehouses in Randolph Country, where all of retailers stores located and installed the furniture to prevent from damage during transport.

Ineffective Order Management

It is found that therere some critical flaws exist internally within Somersets global supply chain on its order processing and fulfillment system. Somerset processes orders weekly and biweekly and it takes 7-14 days to developing demand forecast and 12 -25 days for processing order which amount totally 22 to 45 days for purchase order to eventually complete. It requires another 60 days to produce product by hand when going into production.

Poor Transportation Management

As required by Chinese logistics, all finished furniture items have to be transported from the manufacturing plants to Chinese ports, which can take up to several weeks depending on trucking availability and schedules. Since 9/11, random security checks of containers will delay shipment for another one to three weeks and the trip overseas to Norfolk takes 28 days.

Manufacturer storage with direct shipping

Manufacturer storage with direct shipping and in-transit merge

Distributor storage with package carrier delivery

Distributor storage with last-mile delivery

Manufacturer/distributor storage with customer pickup

Retail storage with customer pickup

Somerset can select one of above distribution network to help in improving its distribution network.

Choosing the manufacturer storage with direct shipping will help to eliminate the movement of furniture from Somerset warehouse to retail stores. This will have the advantages of better customers experience and lower inventory costs. Installation of hardware can therefore also be done at customers house instead of at retail stores. However, it has the disadvantages of higher transportation costs (because of increased distance and disaggregate shipping) and requiring investment in information infrastructure to integrate manufacturer and retailer.

Another improvement in transportation is to eliminate export of raw materials from US to China by sourcing these materials from China or its neighbouring countries. This not only saves transportation time but also costs of materials. Purchasing department of Somerset will thus have the task to source for these new raw materials ar

Somerset can also assist in the implementation of lean manufacturing for its outsourced China manufacturing plant or introduce Lean Six Sigma methodology to effectively control the process for better consistency in products quality. The requirements for the successful implementation of lean manufacturing, as per Swamidass (2002), are:

All levels in the plant, from the production worker to the president must be educated in lean production philosophy and concepts.

Top management must be totally committed to this venture and provide necessary leadership. Everyone must be involved in the change, and the internal customer must be empowered to play a vital role in this evolutional process.

Everyone in the plant must understand that cost, not price, determines profit. The customer determines price, the plant determines the cost.

Everyone must be committed to the elimination of waste. This is fundamental for becoming lean.

The concept of standardization must be taught to everyone and applied to documentation, methods, processes as well as system metrics.

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