What “cost of quality” criteria (i.e., prevention, appraisal, internal failure, and external failure costs) might be included in an analysis at the following stages of a global diamond supply chain---mining, cutting and polishing centers, and retail jewelry store? Explain. Provide examples.

The Global Value Chain for Diamonds

A simple way to view the major stages of the diamond value chain is exploration, mining, rough diamonds, polished diamonds, and customer jewelry. It is normally 18 to 36 months from the time a diamond is mined until it reaches a retail store. Rare or large stones often reduce this processing time by one-half. The supply chain is global since no one country or company performs all the work required to bring a diamond to its final resting place – customer jewelry. About one-half of rough diamonds are used in industrial applications such as oil and gas drilling equipment and metal cutting tools. The major stages of the global value chain for diamonds can be defined in numerous ways but usually consists of the following stages.

Exploration

A diamond is a unique pyramidal structure of carbon atoms. Billions of years ago heat and pressure deep inside the earth created natural diamonds. The ancient Greek word for diamond means “unbreakable.” Historically, much of the diamond industry involves African countries and sometimes the exploitation of native people. Russia and Africa account for 70 percent of the world’s diamond reserves.

Major corporations that focus on diamond mining, production, and sales include DeBeers, with about 37% market share. DeBeers is a Kimberley, South Africa based corporation with mines and facilities in South Africa, Tanzania, Botswana, and Namibia. ALROSA is a Russian state-owned corporation with about 30% market share, and with mines and facilities in Russia and Angola. Rio Tinto is an Australian corporation that mines diamonds, iron, copper, uranium, aluminum, gold, and coal, with about a 5% global market share in diamonds. Its mines and facilities are in Australia, Zimbabwe, Africa, and Canada. Other firms such as Aber, BHP Billiton, and Leviev compete in the diamond industry.

Mining

The two major ways to mine rough diamonds are an open-pit method, where rock and soil at the surface are excavated; and underground mining. First-level sorting is done at this stage, to separate gem-quality stones from obvious industrial grade stones.

The controversies begin at this stage of the diamond value chain. The 2006 movie Blood Diamond, for example, starring Leonardo DiCaprio, Jennifer Connelly, and Djimon Hounsou, highlighted militant groups and corrupt governments trying to get their share of “blood diamond” revenues to fund revolutions and wars. Conflict-free diamonds are supposed to be free of other injustices such as child labor, smuggling, worker exploitation, and sexual violence. And, of course, ethical supply chains try to prevent all of the previous cited issues, plus worker accidents, environmental pollution, deceitful grading of diamonds, deforestation, poverty, low wages, and so on.

Sorting and Grading

The basic criteria for grading diamonds include size (carats), color, shape, and quality. At this stage second-level sorting and grading begins at separate locations from the mines. About 20-25 percent of rough diamonds are used in the retail value chain while the rest are used for industrial proposes. Human eyes, hands, and expertise assess the quality and value of most diamonds. Advanced machines do some of the sorting and grading process for smaller stones. But sorting and grading diamonds is not an exact science even with current industry regulations and quality standards.

Cutting and Polishing Centers

The Four C’s – Cut, Color, Clarity, and Carat weight – are used to further classify diamonds at a production facility, located in cities like Dubai, New York, Johannesburg, Hong Kong, London, Tel Aviv, Antwerp, and Mumbai.

Normally, by the end of this stage one-half to two-thirds of the rough diamond is waste. For example, a ten-carat rough diamond might result in a three- to five-carat diamond that can be set in customer jewelry. Much of the waste is used in industrial diamond applications or by the cutters themselves for cutting and polishing.

During the Great Recession smaller diamond cutters and polishers went out of business while larger firms gained market share. Cutting and polishing costs-per-carat range from about $100 in Antwerp, New York, and Tel Aviv; to $10 to $50 in India, China, and Thailand. Diamond defects and errors can take many forms in this industry: impurities, optical flaws, mixed colors, crystal flaws, cutting mistakes, and non-ethical diamonds. The cutter must decide how best to cut the rough diamond to remove defects, keep the most carat weight possible, and make the diamond as perfect as possible.

The quality of a rough diamond can be enhanced or hindered by the way the rough diamond is cut and polished. High-quality rough diamonds of over 20 carats almost always go to the world’s best cutters and polishers.

Trading Centers

A current industry trend is the consolidation of cutting and polishing with trading centers into a “diamond hub” in cities like New York, Tel Aviv, Antwerp, Dubai, and Mumbai. Major producers like DeBeers sell most of their diamonds based on long-term contracts to a select group of buyers and sellers. Long-term contracts provide price and demand stability, predictable buyers and sellers, and large sales volumes. Trading centers and producers are sometimes accused of forming price-controlled cartels by holding back diamond stocks (reserves) to maintain retail prices. Another way to limit supply in the global diamond market is for major producers to sell diamonds only to their “site holders.” A site holder can be a company or individual who can only buy direct from major producers. If all reserves of diamonds were released, supply would greatly exceed demand, and diamond prices would plummet.

However, new sales channels are emerging that take advantage of Internet capabilities such as on line auctions and virtual sales platforms. Sales take many forms such as face-to-face negotiations, take-it-or-leave it on line offers at fixed prices, live on line auctions with multiple bidding rounds, and time limited on line auctions. In addition, physical diamond auctions take place at Sotheby’s and Christie’s.

Jewelry Manufacturing

Manufacturing transforms cut, polished, and graded diamonds into customer jewelry. Often a custom setting for the stones includes pouring hot metal into a ring or jewelry mold; and/or metal machine fabrication, milling, and polishing. Standard diamond ring production exhibits both job and flow shop characteristics while custom jewelry is a job shop. Diamond defects can be hidden by the clever design of customer jewelry. Here the jewelry artist or customer designs how the finished diamond will be displayed

. Over $50 billion in value is added at the jewelry manufacturing and retail store stages.

Retailing

In the diamond value chain, Tiffany & Company and Cartier are two examples of luxury goods retailers that enjoy high margins. The price per carat (value) of a typical diamond usually increases eight to ten times from mining to retail store as each stage of the value chain adds its profit margin. After the original sale, most diamonds don’t wear out so they are resold (recycled) many times within the value chain. The “diamond is forever” slogan also applies to generating repeat sale profits.

To further complicate customer- and trading-center buying decisions, diamond buyers must cope with whether the diamond is synthetic. In one audit by the International Gemological Institute with a sample of 1,000 stones over one-half were found to be synthetic diamonds. Moreover, the synthetic diamonds had human-engineered flaws to make them appear as natural stones. Only expert gemologists with special equipment can tell the difference between a natural and synthetic stone.

From the viewpoint of natural diamond producers, synthetic diamond pollution is an ever-increasing industry problem. A four-carat synthetic diamond might sell for a few hundred dollars. In addition, synthetic diamond producers argue their diamonds are brighter and clearer than natural stones, and the only true ethical diamonds.

The Kimberley Process Certification Scheme (KPCS)

A multitude of industry-related associations, governments, and corporations have adopted quality and sustainability standards, trade regulations and laws, and certification programs to ensure no conflict or blood diamonds enter their value chain. But diamond traceability along the value chain is very poor. Few diamond producers or retailers actually investigate the route their diamonds take along the supply chain. Diamond smugglers and corrupt governments often certify diamonds without complete investigations while worker exploitation and environmental pollution continues.

In 2003 in Kimberly, South Africa the KPCS was designed to certify rough diamond shipments as “conflict-free” and prevent conflict diamonds from entering the value chain. This initiative has been somewhat successful but fake KPCS certification documents have been found throughout the value chain. A recent initiative is to etch a serial number on each non-conflict diamond with a laser that is not visible to the human eye. The KPCS process is criticized for focusing on front-room customer perceptions, not back-room supply chain practices.

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Cost of Quality which may explain the cost associated with poor quality of products and services There are some major types of cost of quality are 1 I... View the full answer