Example Of Case Study On Supply Chain

Management

2. Once a supplier is given a new order, he has to set up a team and a production process to deliver on the order. Initially, the supplier would necessarily go through the growing pangs of any organization. There would be missed deadlines, quality issues, production failures, labor problems and other similar management challenges. However, over time, the supplier would be able to identify the areas that he would need to concentrate upon to increase his efficiency. In this context, the learning rate would indicate the rate at which a supplier would be able to improve processes, management practices, carry out innovation, carry out substitutions and undertake standardization in order to produce the goods or provide the necessary services more effectively and efficiently. With increased effectiveness and efficiency, the cost of production would decrease. Simultaneously, the supplier might be able to ramp up production and leverage economics of scale if the supplier’s processes have become more efficient due to learning. In both cases, the cost per unit for the supplier would reduce. Therefore, when a buyer has a sound knowledge of the learning rate of the supplier, he would have a good idea about the rate at which the cost of production of the supplier would reduce over a period of time. This would enable the buyer to negotiate pragmatic contracts with the supplier over the long run.
3a. India, China, Eastern Europe and other developing countries are currently much in demand as countries where companies from the West outsource their work. This phenomenon arises from the fact that these countries have low per capita income. As a result, the cost of labor is low. For instance, the cost of producing a garment in USA might be as much as a hundred times as expensive as producing it in India. Therefore, global firms outsource work to developing countries to capitalize on the differential in the base rate of labor as compared to the home country. Moreover, once the firms in developing countries to which any process is outsourced begin their contractual obligations, they begin to go down along the learning curve. As a result, their production processes become more efficient, and the cost of production further reduces. If the client companies were alive to this fact, they would tailor their contracts to capitalize on the learning curve payoffs of the developing countries and further gain on differentials of labor rates. Thus, over a long term, global companies stand a chance of dramatically reducing costs through outsourcing to low cost developing countries.
3b. Theoretically, the learning curve should serve to provide long-term reductions in cost when global companies outsource to low cost countries. However, certain complications may defeat the purpose of outsourcing. Local political and social factors may lead to clamors regarding the gross differential labor rates prevailing in the global company’s home company and in the outsourced country. The global company may be accused of exploitation, forcing it to raise labor rates above the prevailing rates existing in the developing countries and rendering it uncompetitive. Such situations could arise if the global company has poor human relation skills and is unable to put the labor rates negotiated with the firm in the developing country in the correct perspective and show that the business creates a win-win situation for all concerned. Further, if the global company were inefficient in negotiating, it would create inefficient contracts not leveraging the learning curve advantages of the developing country. This would create further liabilities to the balance sheet of the sourcing company. Thus, if the company were not alive to the pitfalls of outsourcing, it may lead to a situation where it actually loses money instead of making profits by resorting to outsourcing.