October 24, 2007

Operations Management Lesson 5 Exercise

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IBM is famous for its level of supply-chain de-integration. For one section of the organisation, write about the strategy behind this approach and the advantages and disadvantages.

What I am going to analyze in this blog is the supply chain management of the IBM Personal Computer Division that was sold three years ago to Lenovo company.

The four main stage of the supply chain for the Personal Computer production are

  • Materials Acquisition
  • Assembly
  • Test Quality
  • Delivery

Blog lesson 5 img1

Let’s analyze in detail the different stages:

Acquisition of materials and assembly:
Of course, the Lenovo do not produces all the components of its Personal Computers but uses third-party by supplying from different vendors.
Almost all of the components are manufactured outside, and then assembled by Lenovo.

There are two main types of supplier:

  • Transactional relationships suppliers: these are normally used for components that do not require technical specifications; it’s easy to find them in large quantities and varieties on the market, p. e. cables, power supplies, or the screws.
    These suppliers are not strategic and therefore, in case of lack of quality/low performance they can be substituted easily, since Lenovo has signed non binding contracts with them.

  • Longterm partnerships suppliers: these are suppliers with which Lenovo develops synergies and maintain good relations to maintain standards; p. e. processors or Laptop chassis, which has been developed specifically for this models.
    These suppliers are strategic and therefore, Lenovo has signed binding contracts with them, sharing objectives, profits and expected service levels or product quality. The relationship with these suppliers is based on a win-win approach in which every single problem is a common problem to resolve and every single business opportunity is for the entire supply chain.

Quality Test:
In order to maintain an high quality standards, when the Personal Computer assembly is completed, they switch to testing. This step is fundamental for a threefold purpose: 1. Control if everything works; 2. Monitor the quality of components acquired from the suppliers 3. Decrease the number of repairs to be carried out on site by the customer (cost saving on the maintenance).

This stage is totally given in outsourcing.

It’s very important to outsource the non-core activities, like the production of Hard drive or the delivery. This will be able the company to significantly reduce costs and focus on the core business.

In order to make a more competitive products, Lenovo is trying to optimize the delivery times, shipping, reduce inventories and reduce costs. In this direction, a great advantage has been taken by improving the control over the entire "Supply Chain" by integrating the supply chain of the most important longterm partners within their "Supply Chain.

Let’s analyse a problem caused by the outsourcing or the supply to the long term partners: the inefficiency caused by the supplier failures.

For example, two years ago there were a major problems with a faulty batch of hard drive that after about three working months they crashed; the supplier has not been able to prevent the failure. This led to a high cost of extraordinary maintenance and to a very low customer satisfaction; another example is the missed deliveries on time, due to inefficiencies of the carrier.

All these event are referred from the customers to Lenovo even if Lenovo has no the control on them.

Zoe Radnor (2007); «Operation Management »;Warwick Business school
N. Slack, S. Chsmbers, R. Johnston, A. Betts;
«Operation and Process Management »; Prentice Hall
Navi Radjou (2005); «IBM Transform Its Supply Chain "To Drive Growth"»

- One comment Not publicly viewable

  1. Another good analysis of a familiar situation.

    However, I think you also need to say a bit more about what happens when the relationships do not work well, you gave some examples.

    If its a ‘non core’ supplier you can use another – but what about the key suppliers ?

    26 Oct 2007, 15:25

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