A Supply Chain Problem

Metrovox is a German electronics manufacturer that designs, develops and manufactures a range of products for the entertainment and home electronics sector. Management has recently focused on two related products, Bugabyte and Bugabyte Lite. The Bugabyte is a video and audio player with a flash drive. The company has invested heavily in the research and development of this product, which is a small hand-held unit about the size of a credit card, and is about 50 percent thinner than its competitor's offerings. The Bugabyte Lite is a flash drive and MP3 player. Metrovox sells this product to a distributor in North America and to a major European retailer.

The market for these two products is highly competitive, and Metrovox relies on product differentiation as a source of competitive advantage in both Europe and North America. The retail price is the same as, or slightly higher than, its competitors. Product uniqueness is based on the size of the Bugabyte and the storage capacity of the Bugabyte Lite. The Bugabyte is a relatively new product on the market and was designed to meet predicted future growth in the popularity of handheld video devices. Demand is anticipated to be low to moderate for the first few years of sales, and expected to grow thereafter. The Bugabyte Lite has been on the market for over six years, under a different product name. The casing design was recently changed to compliment the Bugabyte, and marketing efforts within the last few months have strived to address the fact that this is the same quality product with a new look. This product experienced healthy growth for its first four years, and has stabilized over the past two. The Bugabyte Lite is not a product that will contribute to significant revenue growth for Metrovox, although its presence in the market contributes to brand continuity and awareness in an increasingly competitive marketplace.

Currently, Metrovox purchases components for these products from suppliers in China and has them shipped to its assembly plant in Germany. The suppliers are reliable, and do not contribute to any delays in production or assembly. The assembly process involves mounting a SMD (surface-mount device) decoder chip and a PIC controller to a circuit board, sending the assembled boards for testing and then integrating the tested boards into the product casing. Due to the recent development of the video-capable Bugabyte, Metrovox is experiencing increasing production delays, contributing to its 30 percent late delivery rate. As a result, management is considering outsourcing the assembly process to one of its suppliers. The company now needs

to determine which of the two products, the Bugabyte or the Bugabyte Lite, is the best candidate for outsourcing assembly.

In Need of Advice

Metrovox hires the services of Grunwald and Vogel, a manufacturing consultant, to help determine how delivery times can be better managed and how to reduce its 30 percent late delivery rates. On-time delivery lead times from procurement, assembly and circuit board testing through to the assembly of the tested components in their casings takes approximately four weeks. There are very specific measurements for circuit board quality testing compliance, defined in terms of the solder used and the soldering process. The circuit boards for both the Bugabyte and the Bugabyte Lite must have a minimum life span of ten years.

Annual demand for the Bugabyte in the first year of release is 300 percent over forecasted demands. Production management and the sales team cannot reasonably predict future demand. Since the Bugabyte Lite has experienced stability in sales over the past two years, forecasting has been accurate and the margin of error is much lower than that of the Bugabyte. The entire assembly process for Bugabyte and the Bugabyte Lite accounts for about 5 percent of each product's price, and is not viewed as an aspect that contributes to the product's competitive advantage.

With the recent design and production of the Bugabyte, Metrovox has had to include several new stages in the assembly stage, to accommodate the video capability of the product. There is also a significant amount of proprietary information that is used during circuit board testing. Bugabyte Lite has a well established assembly process because of its existing presence in the market. Product testing is based on technology that is widely used and that has been around for five years.

Outsourcing Criteria

Grunweld and Vogel's task is to assess which product is the most suitable candidate for outsourcing assembly. A key element that needs to be taken into account is that the new supplier and assembler must commit to delivering the assembled circuit boards to meet Metrovox's delivery schedule. Metrovox has an agreement with North American distributors and European retailers that it would deliver the Bugabyte and Bugabyte Lite in the same shipment. With quality and defective rates a concern of management, the outsourced assembler must ensure Metrovox will maintain its market position and competitive advantage.

Learning Outcomes

This case study relates to the following learning outcomes from the moduleCost and Pricing

AnalysisandRisk Analysis and Managementin the courseFeasibility of International Tradeand

the moduleDocument Managementin the courseGlobal Value Chain:

Describe possible effects of Incoterms in relation to export and import costs. Identify the intellectual property (IP) assets and potential risks associated with IP infringement in order to ensure business viability within both the domestic and international target markets. Describe the types and purposes of international trade documentation for the management of the movement of goods and services in international trade transactions. Explain the purpose and importance of using Incoterms rules within international trade transaction documentation. Manage required documentation for international trade transactions to ensure compliance and maximum efficiency.

Case Study Questions

Based on the risk factors associated with the Bugabyte and the Bugabyte Lite, which product do you think Grunwald and Vogel will recommend as the best candidate for assembly outsourcing?

Based on Grunwald and Vogel's decision, what will be the benefits and disadvantages of outsourcing the assembly function?

If Metrovox can outsource the assembly of the circuit boards to an existing supplier, discuss the key contract issues Metrovox will need to consider with its supplier.

Which inventory management strategy should Grunwald and Vogel recommend Metrovox adopt to ensure efficiencies throughout its entire supply chain? Why?