recommended sourcing strategy

Pacific Systems Corporation Case Questions:1. What is your recommended sourcing strategy in this case? Please support your decision with quantitative and qualitative evidence gathered during the case analysis. Also, present your plan to reduce any risks associated with your sourcing decision.2. This case provided the data necessary to perform a cursory supplier financial analysis. In reality, cross-functional sourcing teams must often obtain this data during their assessment of potential suppliers. Discuss possible sources of supplier financial information. What may impact a purchaser’s ability to obtain supplier financial data?3. A sourcing decision of the magnitude highlighted in this case requires a serious commitment of resources and time. Do all sourcing decisions require similar commitments of time and effort? If not, describe the types of sourcing decisions that justify this effort. Describe the types of sourcing decisions that do not justify or require the level of effort and analysis required in this case.4. How important is the issue of supplier capacity in this case? How did your group evaluate supplier capacity? What level of attention or importance should supplier capacity receive during the sourcing decision? Why?5. Supplier selection decisions, such as the one presented in this case, usually require many weeks or months of analysis and discussion before reaching final agreement with a supplier(s). Creatively identify ways that the buying company can shorten the time from recognition of a purchase need to reaching agreement with the selected supplier. (Hint: Consider performing certain required activities concurrently or in anticipation of a purchase requirement).6. The issue of single versus multiple sourcing is an important consideration during supplier selection. Using the following table, identify the potential advantages and disadvantages of single and multiple sourcing (not only as they relate to this case).OVERVIEWPacific Systems Corporation, Inc. (PSC) is a medium-sized high technology company located north of San Francisco. In its early years PSC produced component parts and subsystems for personal computers and engineering workstations. In 2000, PSC added its own line of engineering workstations to its product offering. Recently, the company decided to expand its product line to include fully assembled personal computers (PCs). The company, recognized as a well-established component and subsystem manufacturer, has grown from a single product manufacturer with annual sales of $2.5 million, to a multi-product $3 billion firm in just ten years. This growth was helped in part through acquisitions in server markets and related computer industries. Pacific Systems Corporation has a strong reputation for manufacturing high quality products with on-time customer delivery. The company also emphasizes state-of-the-art technology in its product design, production, information, and delivery systems.PSC’s decision to enter the personal computer market occurred during the peak of the Internet boom in late 1999. In particular, the marketing department decided to focus on the home PC user, to exploit the booming growth in home computer use. The projected growth rate of U.S. PC shipments to the home sector in the 1990s exceeded the business sector, and was predicted to surpass the business sector in total share of shipments.1 Although Pacific Systems Corporation was a small player in this market the company decided to pursue an aggressive strategy of selling high quality computers at affordable prices. The new line of computers, called the 9000x series, would come with a Pentium 600 MHz microprocessor, 128 megabytes of memory, 8-14 gigabytes of hard disk space, a read/write CD-ROM/DVD (digital video disc) drive, and a 17-inch flat screen color monitor.Although industry forecasts have certainly been downgraded, PCS is betting that in 2003 the computer industry will grow at a slow but steady state as consumers upgrade their computers with the predicted slow but steady growth in the economy. This decision poses some risks, given that there is a “mixed bag” of opinions regarding the growth of the electronics sector in 2003. The decision was made to pursue the home computer user, through a strategy focused on shipping low-cost, high-quality computers directly to customers as orders are received (make-to-order). This production model is similar to the Dell approach, and appears to be the model that will dominate the PC industry. Because the company does not plan to build finished PCs (i.e., make-to-stock) in anticipation of future sales, market demand forecasts, supplier quality, supplier capacity, lead time, and delivery reliability are critical factors. The company is willing to carry some units in component inventory as safety stock as a buffer against missing customer order commitments.Pacific Systems Corporation will assemble the computers in its own facilities, but intends to outsource many of the key product components and subassemblies, including the DVD drive, a feature that will be standard on each PCS computer. The decision to outsource the DVD drive resulted from an executive-level insourcing/outsourcing study that concluded the cost to manufacture these drives in-house was highly prohibitive. The product requires production capabilities that are beyond PCS’s current expertise. Marketing estimates that first year demand for the new PC, and therefore the DVD drives, would be approximately 500,000 units, with a 20% growth expected for year two. Expected pricing for the computers will be under $1000. DVD demand depends totally on final product demand, which can be volatile.1 “Home Computers”, Business Week, November 28, 1994, pp. 89-96.Exhibit 1 details the monthly sales forecast for the 9000x series. However, given the volatility of the computer market and PSC’s limited experience with marketing directly to end users, marketing estimates, with 95% confidence, that actual demand will likely be between 400,000 and 600,000 units. As with most high technology companies, adequate supplier capacity is a critical issue. Taking a lesson from the demands placed on it by its current customers, Pacific Systems Corporation will seek some assurance from its suppliers that they can increase the supply of components by 25% within four weeks notice of changing market conditions. Supplier responsiveness and ability to satisfy Pacific Systems Corporation’s volume requirements will be critical.DVD Market InformationPCS recognizes that DVD demand is growing rapidly, although actual numbers are difficult to obtain. One of the challenges PCS faces, and perhaps a major reason why PCS may want to quickly “lock in” supplier capacity, is that other industries use the same DVD drives as are used in personal computers. In particular, producers of home theater systems (for digitally recorded movies and music) are moving aggressively in the DVD supply market. There has also been several controversies, regarding lawsuits on illegal copying of DVD’s (see Article appendix). Another risk is the potential for quality problems on new electronic components (see Article applendix). Another consider is the growth of the consumer electronics DVD industry:Report Name: Consumer Platforms – Q1 2002: DVD Players and Recorders: Seizing a Spot in Every Home Entertainment SystemCompany: iSuppli CorporationDescription: DVD players have become the hottest consumer electronics product in the market. With prices of DVD players hitting sub $100 price points, OEMs are looking to add new features to DVD players to enable them to increase their average selling prices and consequently their profit margins. This report looks at the DVD recorder market and the various standards and presents a forecast and strategies for specific companies attempting to participate in this marketplace…IN sum, PCS must share their market with the growing home DVD system, and assess their relative leverage in the market given other market demands for DVD’s.August 2003 September 2003 October 2003 November 2003 December 2003 January 2004 February 2004 March 2004 April 2004Exhibit 1Two – Year 9000x Demand Forecast55,000 units 50,000 units 40,000 units 40,000 units 45,000 units 35,000 units 35,000 units 40,000 units 40,000 units 40,000 units 40,000 units 40,000 units66,000 units 60,000 units 48,000 units 48,000 units 54,000 units 42,000 units 42,000 units 48,000 units 48,000 units 48,000 units 48,000 units 48,000 unitsMay 2004 June 2004 July 2004August 2004 September 2004 October 2004 November 2004 December 2004 January 2005 February 2005 March 2005 April 2005Pacific Systems Corporation is targeting the price of its PC line from $900 – $1100, depending on the model and configuration. This means that the DVD’s unit price would need to be in the $125 – 150 range. This is not unreasonable given current market pricing (see Appendix). However, the market for DVD’s extends well beyond the computer industry, and is not without its share of uncertainty and disruptions (see Appendix).May 2005 June 2005 July 2005

Making the right component decisionsBy Chris Henry EBN(09/04/2002 12:45 PM EST)As the economic downturn continues, companies are retooling and searching for the latest operating methodologies to position themselves for the next upswing. In search of this Holy Grail, they continue to look for the secrets to greater effectiveness in electronic product design and efficiencies in manufacturing.This voracious appetite for improvement has driven many to consider information databases. Engineers who are able to learn about the manufacturing viability of an electronic component at the same time learn its technical parameters will make better choices. With better device selection comes accelerated design success, steady production, and market share gain.There are a number of information databases available today. They range in size from a few million devices (Aprisa) to nearly 20 million (i2’s Aspect), (PartMiner CAPS iContent), and (Ubiquidata from Arrow’s Global Information Business). Some cover only semiconductors. One focuses primarily on military-standard tested devices. And a few attempt to cover the electronic component horizon, from semiconductors to passive and electromechanical devices.Most provide the technical parametrics of the devices they support. One or two offer some level of lifecycle calculation and information on how to contact a supplier. Another offers lifecycle, breadth of use, lead time, product change notifications, and column resale pricing, along with the technical parametrics. While some information database providers work to include recently introduced devices, others built several years ago benefit from a large quantity of older obsolete products.As you can see, there are various sizes of information databases and varying amounts of information within each. But even with all these options, the key question to ask is: How can you ensure that the information you’re using is really accurate?It’s all about measuring the quality and reliability of information. Providers that claim 90% accuracy, or providers that can’t provide a description of their quality programs, could likely cause as much harm as good. It will take a reasonable effort to get engineering and material management teams to begin referencing this database of choice. It will only take a few disappointments for them to go back to their old ways.Is 90% accuracy good enough? Well, let’s calculate it. Assume four million devices, each with 25 parameters. That totals 100 million data elements. At a 90% accuracy level there are 10 million accepted errors. That’s right, 10 million! Even if you have a relatively limited AVL, you are likely to bump into an error. And when you do, there is grief ahead. Designs are completed that don’t function at the prototype stage, possibly due to race conditions or functional inconsistencies.Worse yet, you get quantities for the prototype build. Your product passes with flying colors. On you go to the production floor only to find that a key component within your design is impossible to get a steady supply of. Or, even worse: EOL. Now we can be talking $100,000 per day while the production line sits waiting for you to redesign. Information quality is very important, and can keep you out of the big boss’ office.Here are the items to look for as you select an accurate, high-quality information database:1. Look for an information provider that has a formal quality assurance program established. Does it have a quality assurance manager and team? Also, verify that this manager does not report to the same organization that is building the data. This avoids any conflict of interest.2. The quality program must be integrated within the data build and data maintenance processes. This guarantees that quality is built into the database, not just tacked on afterward.3. Within the quality process, what is the standard to which quality is being tested? Military Standard 105E establishes a quality sampling program at an acceptable quality level of 99.95%. That’s the type of accuracy your team requires.4. Finally, look for a provider that has a corrective action report process. This provides you with the assurance that, should you experience a quality problem, your provider will find the root cause and correct the problem throughout the existing database, and not generate the same problem in the future.Information database quality is critical. It takes a fair amount of personal equity to drive acceptance and usage of an information database. Engineering departments will begin to use it reluctantly, as it forces them to change their device discovery and education process. Momentum will be gained over time.However, it only takes a few quality problems, and then a lack of follow-up process by the provider, to put you back to square one. Follow the four steps above to ensure that your company gets the best possible information database experience.Chris Henry is vice president and general manager for Global Information Business, an Arrow Electronics Inc. unit in Melville, N.Y., focused on the creation and selling of information to the electronics industry. Tuesday, January 21, 2003EBI inches ahead in December, but Leading Index heads other wayBolaji OjoEBN(01/06/2003 12:01 PM EST) The EBN Electronics Buyers’ Index (EBI) ticked upward in December, after reaching a low in November not seen since late in 2001. The significance of the movement was offset, however, by a decline in the EBI Leading Index, which fell 5.4% from November, to 50.8.The EBI crept to 36.8 last month from 36.2 in November, which was the lowest level since December 2001. The index failed to surpass the September level of 39.3 or the October figure of 37.7, indicating that weak year- end business conditions will likely persist into early 2003. November’s modest improvement was in keeping with a trend seen much of last year in which the EBI failed to break 40. Moreover, the drop in the EBI Leading Index, after posting sequential gains since September, supports the opinion of industry executives that the outlook for this year remains unsettled. The Leading Index precedes the EBI by about six weeks.Procurement professionals polled for the December EBI cited several macroeconomic and political factors as causes for concern, including a dearth of corporate spending, signs of slowing business in some Asian countries, the continued possibility of war with Iraq, troubling revelations regarding the resumption of North Korea’s nuclear weapons program, and an oil strike in Venezuala that is causing fuel prices to rise.”Month to month, quarter to quarter, we continue to see a lack of capital spending, which continues to hinder any kind of recovery in the electronics industry,” said a buyer at one major contract manufacturer.Indeed, production fell in December to 36.4 from 39.5 in November, while inventory levels climbed to 36.4 after dropping to 28.3 in the prior month. While prices showed a four-month growth trend to 36 and export orders rose to 39.1 from 37.4 in November, new orders overall in December rose just half a point, to 40.5 Recent Headlines NEC appoints new president and vice chairman ASIC vendors tackle SOC hurdles Processor makers eye security issues Lattice debuts mixed- signal PLDs Distributors appoint new executives Arrow-Pioneer deal winnows the distribution field again Plasma display vendors defend turf from LCD makers EBN