Integrative Case: Hudson Jewelers

"Good afternoon, may I help you?" the Naples, Florida jewelry store attendant said with a smile. "No, I'm browsing with my fiance." "Oh! So, you two are getting married. Congratulations! My name is Bill Hudson, my wife Betty and I own the store. What's your name?" as Bill extends his hand out to shake hands. "My name is Lilly and this is my husband to beLester. "Well, if you need my help, please let me know," Mr. Hudson said as he walked behind the counter about 1:30 pm. "Would you like a glass of wine while you browse," Mr. Hudson asked. "No thank you," as Lester noticed for the first time a small wine rack and comfortable leather chairs in the back corner of the store. Lilly and Lester continued looking at engagement rings as Bill gave them space. After about ten minutes, Lester asks Mr. Hudson, "I noticed your big high definition television with that beautiful wedding ring rotating. What is this?" Mr. Hudson replied, "It's a 3D software system that allows you to co-design your own ring. You can pick out the diamond(s) and then mount them on any ring you want. Once the entire ring is finalized our manufacturer will produce it." "Can we sit down and see how it works?" Lilly ask Mr. Hudson. The three of them began to design a prototype ring with Mr. Hudson answering questions. Mr. Hudson and Lilly were beginning to establish a friendly relationship based on trust. All of the ring designs could be stored on the computer for future reference. A diamond became a symbol of social status and wealth in India about 3,000 years ago. De Beers, a diamond mining and production company, began to market diamonds in the 1900s with slogans like "A diamond is a girl's best friend," and "A diamond is forever." De Beers' advertisements promoted the idea that those who do not buy diamond jewelry must not love their partner as much as those who do. One modern De Beers' ad states, "She already knows you love her. Now everyone else will too." A century of advertising and branding has made a diamond a symbol of "eternal love." While Mr. Hudson and Lilly exchanged ideas about alternative ring designs, Lester asked Mr. Hudson's daughter, Jasime, what was the time. "It's 3 pm," Jasime replied. "Whew! I need a break," Lester responded as he stood up from his chair. Everyone laughed at Lester's comment as the clock kept ticking. "OK, I'll hurry," Lilly said as she glanced at Lester. Lester walked around the store for a few minutes and then sat back down to reenter the "design your own ring" conversation. By 4 p.m., everyone was exhausted with an array of ring design questions, answers, and what ifs. However, Lester and Mr. Hudson now had a much better idea of what Lilly wanted in an engagement ring. Jasime had been listening to the three-way

discussion but decided not to join the conversation at this time. Two ring designs were stored on the computer. "I'll have my daughter Jasime work on these designs," Mr. Hudson said. "I am good with the software but my daughter is the true CAD expert. And she will call our diamond and ring dealers in New York and make sure what we have designed can be manufactured at your target price," Mr. Hudson continued. "Mr. Hudson," Lester asked as he was walking toward the door, "Is your inventory lower because of this custom design capability?" Mr. Hudson replied with a positive nod, "Yes, definitely. It is a high risk business to stock lots of diamonds and jewelry at the store. With the 3D/CAD system, I think we do a better job of matching our physical inventory to customer needs and trends. We have less security, loan, and insurance risk using CAD. And the customers seem to enjoy designing their own unique jewelry." (Case Exhibit 1 provides example customer comments during one month.) Lilly and Lester left the store thanking Mr. Hudson and Jasime for their help. At the same time, Betty, Mr. Hudson's wife entered the store and everyone was introduced. Hudson Jewelers was a true one-store family business. Lilly and Lester walked across 5th Avenue to a restaurant and discuss their first computer-aided engagement ring design experience. Lilly was excited about the prospect of having a one-of-a-kind ring as Lester drank a beer as a reward for his patience. After three more visits to Hudson's Jewelers the final ring design was done with everyone's approval. Jasime and Mr. Hudson carefully went over every aspect of the ring design to assure agreement. For example, the CAD technology allowed Lilly and Lester to see several alternative designs regarding gold or platinum prongs to hold a yellow diamond. Checks were written and the final ring design was electronically sent to the manufacturer. One month later Hudson Jewelers called Lilly and Lester, and they went to the store to pick up their engagement ring. As they entered the store Betty and Bill Hudson and Jasime greeted Lilly and Lester by name. "Are you ready to see your ring," Jasime asked in an excited voice. "Yes, we are so excited," Lilly responded. Mr. Hudson asked Lester to come to the backroom safe. He unlocked the safe and gave the ring to Lester "Can we put it in a box?" Lester asked. "Sure." Lester took the box and ring and walked into the storefront and gave Lilly the ring with a kiss on the cheek. Lilly opened the box and the ring sparkled under the high intensity lights of the store. "Oh! It is so perfect," Lilly said as she hugged Lester. Mr. Hudson then said, "We have some other presents for you as he handed Lester a bottle of champagne and Lilly a small picture album that summarized how the

ring was designed and manufactured step-by-step. It showed a 3D line drawing of the ring, a wax model of the ring that was used in production, the raw casting with platinum and gold prongs without the diamonds, and finally the complete ring from several viewpoints. The couple thanked everyone and walked across the street to their favorite restaurant to celebrate this memorable experience. Computer-Aided Design Since the 1970s, computer-aided design (CAD), computer-aided-engineering (CAE) and computer-aided manufacturing (CAM) enable corporations to design and manufacture a wide variety of items such as industrial parts, buildings, furniture, landscapes, and kitchens. Today, many firms have achieved complete integration of their design and production functions into what we now call computer-integrated systems. Designers can design, analyze, test, and simulate product design options before they physically exist, and then actually produce them such as with Boeing's 777 Dreamliner airplanes. Also, 3D CAD and 3D printing are expanding the frontier of designing plastic parts almost instantaneously such as gears, toys and heart values. Today CAD technology has made its way into the design of custom jewelry either on-line or in-the-store. The customer and/or in-store CAD expert go through a step-by- step computer led process to co-design the jewelry. For a diamond wedding ring, for example, the size, clarity, color, cut, price, and shape of the diamond are first selected followed by choosing the setting such as a single gold band of a certain thickness with matching prongs to hold the diamond. Once the CAD designed ring is assembled it can be rotated to any angle and even placed on a virtual male or female hand. This ring can be stored as design option 1, followed by other design options, and then portrayed side- by-side on the high definition television screen. And, of course, alternative ring designs can be e-mailed to friends and family worldwide. The Global Value Chain for Diamonds A simple way to view the diamond value chain is mining, rough diamonds, polished diamonds, and customer jewelry. From the time a diamond is mined until it reaches a retail store is normally 18 to 36 months. Rare and 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. 1. 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 with 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 sale 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 Nambia. Aapoca-Alrosa is a Russian state-owned corporation with about 30% market share 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. Their mines and facilities are in Australia, Zimbabwe, Africa, and Canada. Other firms such as Aber, BHP Billiton, and Leviev compete in the diamond industry. 2. Mining The two major ways to mine rough diamonds are an open pit method where rock and soil at the surface is excavated and underground mining. First level sorting is done at this stage with gem-quality stones being separated 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. 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, and low wages. 3. Sorting and Grading The basic criteria for grading diamonds include size (carets), color, shape, and quality. At this stage second-level sorting and grading begins normally 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 access 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. 4. Cutting and Polishing The Four C's - Cut, Color, Clarity, and Carat weight - are used to further classify diamonds at the production facility located in cities like Dubai, New York, Johannesburg, Hong Kong, London, Tel Aviv, Antwerp, and Mumbai. Diamond defects can take many forms in this industry such as impurities, optical flaws, mixed colors, crystal flaws, and cutting mistakes. The cutter must decide how best to cut the diamond to remove defects and make the diamond as perfect as possible. Normally, by end of this stage over one-half 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. The remaining carats are lost in previous stages as waste. Yet, some of this waste can still be used as industrial diamonds. 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. 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. 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 with a select group of buyers and sellers. Long-term contracts provide price and demand stability, predictable buyers and sellers, and large sales volumes. 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 often take place at Sotheby's and Christie's. 5. Jewelry Manufacturing Manufacturing transforms cut, polished, and graded diamonds into customer jewelry. 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 added is created at the jewelry manufacturing and retail store stages. 6. Retailing In the diamond value chain, Tiffany & Company and Cartier are two example 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 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, they 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. Synthetic diamond pollution of the value chain is an ever-increasing industry problem. However, some argue that synthetic diamonds are 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 poor. 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. Case Exhibit 1 Example Hudson Jewelers Customer Comments (Source: store comment cards) No one has a ring like our custom designed wedding rings. Thanks so much! I thought it was too risky to design our rings on-line by ourselves with no expert knowledge, so that is why I bought from Hudson Jewelers. Mr. Hudson's daughter, Jasime, is great with this software, and she helped us through several improvement cycles until we got the design "perfect." The Hudson's work with you on price. You set a target price and they will help you discover designs that match that price. And they can help you finance the ring(s). Thank you. Mr. Hudson and his family are friendly and let you set the pace. They don't rush you. And they know the jewelry business inside and out. They called diamond dealers in New York and London on our behalf to check on prices and cuts. Although I bought from you, I forgot to ask if your store only sells certified non- conflict diamonds. I hope so. I was disappointed with the paperwork your store provided me on my new wedding ring appraisal. There was no conflict-free certification and when I asked you said "No,

none came with the diamonds." The high definition 3D pictures are stunning and bring the ring to life. When Jasime took a picture of my left hand and then put our ring on my hand virtually, I was sold. She changed colors (gold or platinum) and diamond pin locations virtually on that high definition TV so I could see what I liked best. Wow! Bill was rather shocked when I ask him, "Have you ever sold a blood diamond?" His answer was "Not to my knowledge." We co-designed the ring that fit my personality perfectly. Stunning and unique forever!

questions

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

2. Students will provide their feedback as to how they would have dealt with the issues/situations/challenges in the case study as if they were the operation manager of the organization discussed in the case.