1. KEY ISSUES - identify all those noted in the case

Sher-Wood Hockey Sticks: Global Sourcing

Global Sourcing in the Hockey Equipment Industry

Similar to other industries, the hockey industry eventually entered the global sourcing era. Global sourcing is the process by which the work is contracted or delegated to a company that may be situated anywhere in the world.8 Sourcing activities can be categorized along both organizational and locational dimensions (Exhibit 2 lists several types of global sourcing). From an organizational perspective, the choice between insourcing and outsourcing involves deciding whether to keep the work within the firm or contract it out to an independent service provider. From a locational perspective, three

choices are available onshoring (within the nation), nearshoring (to a neighbouring country) and offshoring (to a geographically distant coun- try). To optimize the overall benefits and hedge risks, companies often seek to balance their global outsourcing and insourcing activities. Exhibit 3 lists several of the factors typically considered by manufacturers faced with the deci- sion of whether to onshore insource or offshore outsource.

As early as the 1980s, western sports equip- ment manufacturers, such as Nike and Reebok, started to outsource the manufacture of sporting goods, such as running shoes, to Asia. Neverthe- less, before the year 2000, hockey companies preferred insourcing over outsourcing and exe- cuted this strategic focus through organic growth, strategic acquisitions and establishing company-owned factories in other countries; for example, Easton and Warrior had factories in Tijuana, Mexico. During the past decade, the hockey industry began to outsource. In 2004, Bauer Nike Hockey shut down or downsized three plants in Ontario and Quebec, eliminating 321 manufacturing jobs. The company out- sourced about 90 per cent of its production to other makers in Canada and the rest to inter- national suppliers. From 2002 to 2008, Reebok- CCM closed five plants in Ontario and Quebec and outsourced manufacturing to other coun- tries, eliminating about 600 jobs. Easton and Warrior also outsourced part of their manufac- turing to Asia but still kept their factories in Mexico. The capacity of Warriors Mexican fac- tory was estimated to be 4,000 composite sticks per week produced by 250 employees in 2008. (Exhibit 1 lists the manufacturing sites associated with several of the leading hockey stick brands.)

Global manufacturing outsourcing was characterized by some drawbacks. It separated manufacturing activities from R&D and marketing activities and challenged a companys ability to coordinate initiatives between these functions, such as product innovation, designing for manufacturability, supply chain efficiency and quality control. Especially in offshore out- sourcing, cultural differences caused miscom- munication, technology distance necessitated extra training, and geographic distance resulted in extra lead time or cycle time.9 In March 2010,

Bauer Hockey recalled 13 models of junior hockey sticks, manufactured outside of Canada, due to excessive lead levels in the sticks paint that was detected by public health officials in random testing.

Offshore outsourcing also threatened to negatively impact a companys public image if it reduced domestic employment. In November 2008, UNITE HERE10 launched a national campaign to persuade Reebok to repatriate the production of its hockey equipment and jerseys.11

Additionally, global economic dynamics, such as changing labour costs, raw material costs and exchange rates, introduced new uncertainties into global sourcing. Exhibit 4 lists a sample of comparative labour rates prevailing in Canada, the United States, Mexico and China. In 2011, the Boston Consulting Group (BCG) concluded that with Chinese wages rising and the value of the Yuan continuing to increase, the gap between U.S. and Chinese wages was narrowing rapidly.

Industries other than sporting goods had already begun to practice repatriating manufac- turing, also known as reshoring or backshoring. In fact, reshoring had been an alternative in global sourcing planning from the beginning. For German manufacturing companies in the period 1999 to 2006, every fourth to sixth off- shoring activity was followed by a reshoring activity within the following four years, mainly due to lack of flexibility and quality problems at the foreign location. This served as a short-term correction of the prior location misjudgement rather than a long-term reaction to slowly emerging economic trends.

Sher-Wood Hockey: Company Timeline

Sher-Wood Hockey Inc. manufactured and dis- tributed hockey sticks and equipment in Canada. Based in Sherbrooke, Quebec, it was founded in 1949 and was formerly known as Sherwood- Drolet, Ltd. For more than 60 years, it had been one of Canadas best-known hockey equipment manufacturers. In 1976, Sherwood-Drolet intro- duced its flagship wooden stick, the PMP 5030, which was described as the best stick in the world by NHL legend Guy Lafleur. By 2007, the company had made more than 6 million PMP 5030s.

In 2006, Sherwood-Drolet sold about one million wooden and 350,000 composite sticks. The company anticipated that the composite stick business would continue to grow in terms of volume and profitability. Earlier, Sherwood- Drolet had started contracting out the production of its lower end wooden models to producers in the Ukraine. In 2007, it outsourced the produc- tion of PMP 5030 (mid to high end wooden) sticks to a local provider in Victoriaville, Quebec. Meanwhile, the company concentrated on making composite sticks fashioned from graph- ite, Kevlar and other synthetics. Notwithstanding the companys efforts to move its wooden stick production offshore, it claimed that it would con- tinue to make custom wooden models for profes- sional hockey players, such as Jason Spezza of the Ottawa Senators.

However, when Spezza learned that Sherwood- Drolet would no longer be manufacturing his favourite wooden sticks in Canada, he decided to move to another company. They [local manu- facturers] can get sticks to me in a week now. If its over there [China], the process will probably be just too much, said Spezza.14 Ultimately, Montreal-based Reebok designed and produced a stick for him that had a graphite shaft and wooden blade, but the look of a one-piece. In November 2008, Reebok issued a press release announcing that Spezza would start using their sticks, . . .we are excited to work with Jason, not only on marketing initiatives, but also on the research, design and development of future Reebok Hockey equipment

By May 2008, Sherwood-Drolet had filed a proposal to its creditors under the Bankruptcy and Insolvency Act. CBC News reported, It has been hurt in recent years by shift from wooden hockey sticks to composite sticks.16 Richmond Hill, Ontario-based Carpe Diem Growth Capital bought the company and changed its name to Sher-Wood Hockey Inc.

In September 2008, Sher-Wood purchased the hockey novelty and licensed assets of Inglasco. In December that same year, it purchased TPS Sports Group, a leading manufacturer and distributor of hockey sticks and protective equipment. Sher-Wood transported TPSs assets from Wallaceburg and Strathroy, Ontario to Quebec, consolidated three companies and invested an additional $1.5 million to set up the new factory.

Production

As of March 2011,17 Sher-Wood produced sticks (sticks, shafts, blades), protective equipment (gloves, pants, shoulder pads, elbow pads, shin pads), goalie gear (goalie pads, catcher, blocker, knee protector, arm and body protector, pants) and other accessories (pucks, bags, puck holders, mini sticks, bottles, carry cases) for ice hockey. The company also sold some equipment and accessories for street hockey (goalie kit, sticks, pucks, balls), as well as sports novelties for hockey fans.

The company introduced new sticks twice a year in May/June and at the end of October. The life cycle of a product line in the market was about 18 to 24 months. By the end of 2010, Sher- Wood provided 27 types of player and goalie sticks. Thirteen of them were wooden.

Although Sher-Wood had targeted various NHL players in order to support the credibility of the brand, the company mostly targeted junior teams, AAA teams and a couple of senior leagues. Sher-Wood only conducted a low volume of custom design for high-end players and mainly provided custom products from a cosmetic stand- point. For example, personalizing the graphic or colour of the sticks. Sher-Wood used to need two to three weeks to produce customized sticks for an NHL player.

In 2010, Sher-Wood sales volume for sticks produced in Sherbrooke dropped almost 50 per cent compared to 2009. Its Chinese partners manufactured most of their composite hockey sticks. Sher-Woods plant manufactured the remaining high-end, one-piece composite sticks and goalie foam sticks, about 100,000 units annually, with 33 workers in the factory and seven staff in the office. The return on investment of the fixed cost in Canada was low.

Executives believed that they needed to pro- vide a competitive retail price to boost the demand. To do so, they also needed to afford retailers a higher margin than their competitors did, so that retailers would help with product presentations in stores and marketing efforts. These approaches called for low cost production as well as decent quality. To reduce the cost and fully utilize the facilities, they could outsource the remaining production to the partner based in Victoriaville and move facilities there. However, according to regulations in Quebec, Sher-Wood did not have enough latitude to move or sell the equipment to their subcon- tractor in Quebec. They also considered back- shoring the manufacturing out of China. They concluded that it would be more advantageous to stay in China from both cost reduction and R&D standpoints.

Chinese Partners Condition and Collaboration

Sher-Woods suppliers were located in Shanghai, Shenzhen and Zhongshan City near Hong Kong. They were producing tennis and badminton rackets, developing the expertise in composite technology and relevant sporting goods produc- tion. Sher-Wood began to cooperate with them about 10 years ago when it started selling com- posite sticks. For years, these suppliers manufac- tured one-piece and two-piece composite hockey sticks for hockey companies around the world. Gradually, they accumulated manufacturing cap- acity and R&D capability. Sher-Woods main supplier in Zhongshan City operated two shifts for 10 hours a day, six days a week. Their annual capacity was more than 1 million units. More- over, they possessed an R&D team with 10 to 15 engineers, which was able to produce a prototype within one day with full information. On the contrary, it would cost Sher-Wood four to five months with a team of two to three engineers to produce a similar prototype. More importantly, as a consequence of their long-term cooperation, the main supplier had developed a certain feeling about hockey so that language and cultural bar- riers were not problems any more. They were becoming a partner rather than one section within the supply chain, said Eric Rodrigue, Sher-Woods marketing vice president.

Sher-Wood and its Chinese supplier partner needed to collaborate closely. On one hand, Sher-Wood had to send their experts to China to coach the partner about how to produce sticks according to their specifications. On the other hand, although Sher-Wood and the partner had similar on-site labs to conduct product tests, Sher-Wood mainly focused on the feeling of the stick, that is, the reproduction of how the slap shot, passes, reception, etc., would feel when a player placed his or her hands a certain way on the stick. Sher-Wood also conducted tests on ice with professional players, something their sup- plier could not do.

Moreover, with young, passionate and know- ledgeable new managers in management and marketing, company executives thought they were ready to meet the extra cost and effort in market collaboration between Sher-Wood, the partner in China and retailers.

Company executives were concerned with rising labour costs, material costs and the cur- rency exchange rate in China. Nevertheless, the overall cost of manufacturing in China was still lower than the cost in Quebec. They estimated that cost reduction was 0 to 15 per cent per unit depending on the model, with good quality and fast turnaround time. Moreover, some industries such as textiles had started to relocate their manufacturing to new emerging countries, such as Vietnam and Cambodia, for low labour and equipment costs; however, there was no R&D advantage in composite materials in these alter- native locales.

Executives were also concerned with other issues. First, although the main supplier was able to produce customized sticks for an NHL player within 24 hours, the shipping was quite expen- sive from China to Quebec. Second, the main supplier used to produce huge volumes fast but without product personalization. Third, the game of hockey was perceived as a Western cultural heritage sport, so anything relevant to hockey which was made in China had the potential to negatively influence the market perception. However, all their competitors had outsourced manufacturing to China for years.

The Challenge

In early 2011, the question for Sher-Wood senior executives was how to boost their hockey stick sales. They believed that they should cope with this challenge by providing sticks with better quality, better retail price and better margin for retailers. They wondered whether they should move the manufacturing of the remaining high- end composite sticks to their suppliers in China or whether there was any alternative.

If they decided to shift their remaining manu- facturing outside of the company, they needed to deal with a variety of issues. To fully utilize the facilities in Sherbrooke, they needed to move equipment to China, which was difficult and time-consuming because of export regulations. To set up the manufacturing machines and guide the manufacturing team, they would need to send experts there. To complete the coming hockey season between September and April but still implement the decision, they needed to plan every phase precisely. They also needed to figure out what to say and do about the 40 affected employees. Many had worked for Sher-Wood for more than 30 years, and their average age was 56. How could this be communicated to the public? They needed to make a final decision soon.