What would be the risks for Trojan associated with low-cost region sourcing? What contingency plans would you make?

426 Purchasing and Supply Management Case 14-1 Trojan Technologies As Joyce Guo, senior buyer at Trojan Technologies Inc. (4) environmental contaminant treatment, and (5) indus- in London, Ontario, Canada, finished her presentation, trial process. Systems for commercial and government cus- Randy Haill, materials manager, made the following com tomers ranged from approximately $50,000 to more than ments to her $1 million. These systems, which typically had a product It appears there is a lot of opportunity and I want to life cycle of 7 to 10 years before being replaced with a new design, were designed and manufactured at the London proceed to the next step. Joyce, I need you to lay out an implementation plan for low-cost region sourcing that facility, and modified to meet individual customer require we can take to the president for his approval. Our plan ments. In a typical year, Trojan manufactured 500 to 600 sys- will have to include the sourcing process, a schedule and tems for its commercial and government customers. timeline for implementation, a budget and the expected rings. We will also have to identify risks and our THE PURCHA ORGANIZATION contingency plans. Get to work on this and let's meet Friday morning next week to follow-up. Trojan's purchasing organization had seven buyers re- sponsible for six commodity groups: It was Thursday, February 23 and, as Joyce packed up her laptop and notes, she recognized that she had a lot 1. Lamps, quartz sleeves, and ballast. more work to do before her meeting with Randy the fol 2. Electrical parts and panels. lowing week. 3. Stainless steel fabrication parts. 4. Machined and plastic parts. TROJAN TECHNOLOGIES 5. Hydraulic parts and sensors. 6. MRO. Trojan Technologies Inc. (Trojan) was a leading water treatment technology company with the largest installed Purchases in the first two commodity groups accounted base of ultraviolet water treatment systems in operation for approximately 60 percent of Trojan's $45 million around the world. Trojan specialized in the design, manu spend on direct materials. However, most of these compo- facture, and sale of pressurized and open-channel, ultra nents were high-technology items and were locked up in violet disinfection and water treatment systems for indus strategic sourcing agreements. The remaining 40 percent trial, municipal, commercial, and residential applications comprised approximately 400 SKUs that were sourced pri- Trojan's head office was in London, Ontario, Canada. The marily to North American suppliers. company had sales of $140 million and employed approxi- mately 400 people in offices around the world, and served its customer base through an extensive network of dealers THE LOW-COST REGION and representatives SOURCING PROJECT Trojan was owned by Danaher Corporation (Danaher), which had acquired the company in 2004. Danaher was a Following its acquisition of Trojan, Danaher implemented diversified global manufacturer, with businesses in pro several new initiatives aimed at improving corporate per fessional instrumentation, industrial technologies, and formance. One area targeted was global sourcing--an ini- tools and components. Sales revenues were $6.8 billion tiative Randy was asked to champion with a net profit of $746 million, and Danaher employed Randy turned to Joyce to lead a project investigating approximately 37,000 people. Management used its Da potential opportunities at Trojan for global sourcing and to naher Business System (DBS) of continuous improve recommend what action, if any, the company should take. ment to guide and measure operations and business ac Joyce had joined Trojan, approximately one year prior fol- tivities. lowing completion of her MBA at the Richard Ivey School Trojan's current product line consisted of 10 systems of Business, as senior buyer for stainless steel fabrication across its five markets: (1) residential water treatment, parts. With her background as a purchasing manager for a (2) municipal drinking water, (3) municipal wastewater, state-owned enterprise China before returning school Chapter 14 Global Supply Management 427 Part Number Description Piece Price ($) Annual Volume EXHIBIT 1 Parts List of Potential Candidates for Global Sourcing PJ-224 PJ - 245 ML-092 ML - 667 RK-376 LM - 144 GA-136 GA-208 GA-659-1 GA-659-2 GA-659-3 GA-024 RR - 061 JH - 625 DM-354 - 01 DM - 354 - 02 TB-024-01 TB-024 - 02 TB - 024 - 03 TB-024 - 04 PB - 554 ML-174 Stainless Steel Tray Stainless Steel Tray Metal Disk Clamp Spring O-Ring Quartz Sleeve Quartz Sleeve Quartz Sleeve Quartz Sleeve Quartz Sleeve Quartz Sleeve Ceramic Disk Machined Collar Weldment Weldment Wire Harness Wire Harness Wire Harness Wire Harness PS 120/130V 50W Metal Bracket 13.31 6.11 2.37 1.65 1.07 0.18 27.62 18.57 6.19 5.85 8,66 27.62 1.87 139.15 52.03 63.03 9,47 13.27 17.15 21.37 46.20 15.95 2,000 10,000 72,000 15,000 20,000 20,000 15.000 18,000 700 1,000 11,000 2,000 70,000 500 6,000 1,000 2,500 2,500 2,500 2,500 250 1,050 at Ivey, Randy felt that Joyce had the perfect credentials to lead the low-cost region sourcing project. In her report to Randy on February 23, Joyce indicated As part of her report to Randy, Joyce also identified a preliminary list of purchased components that she consid- ered potential candidates for global sourcing that were not purt of strategic sourcing agreements (see Exhibit 1). that Trojan's global sourcing was not part of the com- pany's purchasing strategy. Presently, international purchases were limited only to those components that were otherwise not available to North America. By not engaging in global sourcing, Trojan was miss- ing potential opportunities for lower costs, higher quality, and improved product availability. Companies using global sourcing had been able to reduce costs substantially for some products and services. Several Danaher businesses sourced components globally and the company had set up an international purchasing office in China, staffed by five people: a sourcing manager, a buyer, and three engineers. China appeared to offer Trojan the best opportunities for low-cost sourcing, and Joyce suggested that the company start its global sourcing initiative there. IMPLEMENTATION PLAN In preparation for her meeting with Randy, Joyce wanted to prepare a thorough plan for implementing low-cost region sourcing. Joyce expected that if the project went ahead, Randy would put her in charge and she wanted to make sure it would be a success. As a starting point, Joyce wanted to create a process that Trojan would use for low-cost region sourcing. She expect ed that people from the engineering and quality departments would be involved, and Joyce wanted to identify the specific steps that would be used to source each component. Joyce wanted to identify the approximate time to complete each step in order to estimate the sourcing cycle time. Starting the low-cost region sourcing process would re- quire clear criteria on which to select components and eval- uate their suitability. Joyce wanted to establish guidelines 428 Purchasing and Supply Management the ins an to MA for components that could be used to identify parts that pro Not only would Joyce have to provide an estimate vided the greatest opportunity and probability for success. to Randy concerning what Trojan could save each year A major consideration for Joyce was setting expec through low-cost region sourcing, but also s guidelines tations for cost reductions that Trojan could achieve regarding when piece price reductions justified the costs through low-cost region sourcing. Based on the infor and efforts to switch suppliers. In preparing her cost sav- mation that she collected so far, Joyce found that while ings estimate, Joyce would have to take into account that global sourcing provided opportunities for substantial re Trojan's standard costs were adjusted each January the ductions in niepe.prices. Jh. w-ce leo.ad Hiina... - Streeyulmuy, davmys viny ve cialmea for the For example, Trojan would have to pay 8 percent duties year in which purchases were made. for products imported from China. She also learned that, A final concern was risk management and contingency based on the experience of other Danaher businesses, in planning. Trojan was enjoying strong sales growth and ventories could increase by 25 percent and transportation Joyce wanted to avoid supply shortages or quality prob- premiums averaged 5 percent. In addition, Joyce believed lems. Consequently, Joyce wanted to establish appropri- that there would be other administrative and travel costs ate policies that would address low-cost region sourcing she would need to budget. supply risks. Pic BCI diti vice men In e stror Supe A Pien cate: func ings busis been Case 14-2 Marc Biron Cas Sa MARC BIRON tion of BCI requirements. For example, the consultants pointed out that in their estimate IT expenditures with "I want you to see how supply can add value to our global suppliers might exceed $6 billion per year and that major marketing spend. You've got a couple of months to come improvements in process and spend should be possible. back to me with a plan." Mare Biron, supply manager at BCI, BCI's senior management board followed the consul- one of the world's largest financial institutions, headquartered tant's advice and hired Pierre Jardin, who had managed in Paris, France, pondered the new assignment just given to the supply function at one of BCI's competitors, to estab- him by Pierre Jardin, the vice president of supply at BCI. lish a central procurement organization. Pierre had per- sonally started on the IT spend in Europe, while build- BCI ing up a group of supply professionals at head office. In BCI started as a small commercial bank over a hundred the first two years, Pierre had succeeded in saving about years earlier, had grown over the years to offer a large va- $1 billion on Europe's IT spend with suppliers, and he riety of financial services, including commercial and retail ing spent three years in IT supply worldwide, Marc had then hired Mare Biron to take over IT acquisition. Hav- banking, asset management, and retail and wholesale in- surance. Over the past two decades BCI had expanded its learned how each of the international business units oper- ated. He was also well aware that business unit managers international presence significantly by acquisition of re- gional financial institutions in all major countries around prized their local independence and were wary of head office involvement in their units. Nevertheless, Marc was the world. With revenues in excess of $200 billion a year, successful in negotiating IT supply contracts that provid- BCI was considered a major global giant in the industry. ed an additional $1 billion in annual savings. SUPPLY AT BCI THE NEW BCI PRESIDENT Until five years ago, supply at BCI had been decentral- ized with each local or regional business unit responsible Two years ago, a new president took over at BCI. With a for managing its own supply requirements. A review of strong marketing background, the new president insisted supply by a major consulting firm pointed out that a cen on worldwide brand recognition for BCI, with all business tralized supply function might be able to achieve con units displaying the corporate logo in all of their com- siderable savings by consolidating world requirements munications, promotion, and advertising. In addition, a and bringing professional supply expertise to the acquisi- major increase in marketing spend was initiated to grow Alan mace Vanc fero Heh Sarin of the preps chasi with SAF Foun and disco for pc reven The worki Sa vacci