Pacific Systems Corporation

Pacific Systems Corporation Case

o Develop a process that provides a logical order evaluating the market data and reach a
recommendation regarding how to proceed with the supplier selection process
Identify Key supplier Organize and file data
evaluation criteria available. Look for
information gaps

Gather Additional Info from

suppliers:
Same Management and
information No personnel capabilities
for all? Total quality
Gaps? management philosophy
Processes and techno
capabilities
Production schedule,
Yes
No information and control
systems
Company culture and
Reject supplier Suppliers alignment
comply with min. Supply base info
requirements? References
(quality, delivery, Verify international supplier
etc) financial data (international
risk agencies, chambers of
commerce, see question # 2)
Perform a financial
risk analysis Identify key financial
ratios (Appendix 1)

Excessive Perform total cost

financial risk? analysis (Appendix 2)

Identify and weight each

Yes Excessive supplier evaluation category
Total Cost? and subcategory. Define
Reject supplier scoring metrics (Appendix 3)
Yes

Supplier grants
further
Perform supplier evaluation
consideration?
and selection analysis
Select suppliers

1
Define a sourcing risk
management plan
Estimated Supplier Capacity

Elecom SureTech E-Drive Park

Market Share 30% 4% 20% 12%
Market Revenue 3900000000 520000000 2600000000 1560000000
Av Price 127 144 140 132
Units (M.Revenue/Price) 30708661 3611111 18571429 11818182
Current Installed Capacity (CIC) % 98 92 96 92
Available Capacity (Units*(1-CIC)/CIC) 626707 314010 773810 1027668

The only supplier that could totally satisfy demand is Park Technologies. Elecom and E-Drive
have a very tight capacity availability and SureTech would is not able to satisfy the total amount
of units.

Supplier Financial Analysis

Selected Financial Ratios Elecom SureTech E-Drive Park Average
Market Share 30% 4% 20% 12% 66%
Asset Utilization:          
Asset Turnover = Sales/Assets 1.32 1.57 1.64 1.38 1.48
Inventory Turnover = Cost of
Sales/Average Inventory 5.20 5.43 9.06 7.01 6.67
Receivable Days = Accounts
Receivable/Sales X 360 49.24 29.45 59.48 46.36 46.13
Payable Days = Accounts Payable/Sales
X 360 29.13 49.09 35.22 33.21 36.66
Capitalization:        
Leverage = Assets/Equity 2.58 2.03 2.28 2.09 2.25
Return on Equity = Net Income/Equity =
Profit Margin X ATO X Leverage 6.5% 21.7% 16.9% 9.9% 13.8%
Long-term Debt to Equity = Long-term
Debt/Equity 0.65 0.32 0.39 0.35 0.43
Long-term Debt to Assets = Long-term
Debt/Assets 0.25 0.16 0.17 0.17 0.19
Current Ratio = Current Assets/Current
Liabilities 1.22 1.34 1.35 1.13 1.26
Quick Ratio = (Cash + Short-term
Inventory + Accounts Receivable)/ Current
Liabilities 1.15 1.27 1.16 1.05 1.15
EBIT Coverage = Earnings Before Interest
and Taxes/Interest Expenses 0.75 5.46 2.62 1.85 2.67
Profitability Ratios:          
Contribution Margin = (Sales - Variable
Cost)/Sales 0.15 0.26 0.35 0.30 0.27
Profit Margin = Net Income/Sales 1.9% 6.8% 4.5% 3.4% 4.2%

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Appendix 2: Total Cost Analysis

Total Cost Analysis Worksheet--Year One

         
Cost Category Elecom SureTech E-Drive Park

Quoted Unit Price

127.0 144.0 140.0 132.0
Transportation
18.0 6.0 14.0 18.0
Tooling (Tooling cost/1000000 units) 3.0 3.5 3.3 2.8
Quality non-conformance costs (PPM
defects*300/1000000)
2.9 3.2 2.3 1.2
Duties/customs, insurance, and tariffs
11.5 1.5 3.0 13.0
Inventory safety stock carrying
charges: (unit cost * 18/month in inventory) 22.9 13.0 12.6 23.8
Ordering, inbound receiving and
inspection costs
4.5 4.0 3.3 2.3
Estimated Per Unit Total Cost 189.7 175.1 178.4 193.0

Conclusions and Comments:

Although Elecom and Park may sound more attractive because of their lower quoted unit price, the total
cost analysis reveals that Suretech and E-Drive offer a better final unit total cost. The most important
factors impacting this difference are higher transportation cost and costs associated with the import
process such as duties and insurance expenses. Additionally, the longer lead-time increases the risk
factor affecting the safety stock and its carrying cost. Finally, Elecom presents an additional risk factor
since the contract denomination is in yens. Fluctuations in the exchange rate may negatively affect the
estimated per unit total cost. The exchange rate has presented a high volatility in the last 4 years and is
expected to continue wit this trend1

1
3
Metric:

Category Score

Quality Performance
Total Quality Commitment 1=Poor, 3=Average, 5=Excellent
Parts per million defect performance 1=poor, PPM>10000
2=Fair, 7500<PPM< 9000;
3=Average, 7500<PPM<9000
4=Good, 4000<PPM<7500
5= Excellent, PPM<4000
Financial Risk Analysis Average = industry average
Asset Utilization 1=Poor, 3=Average, 5=Excellent
Capitalization 1=Poor, 3=Average, 5=Excellent
Profitability 1=Poor, 3=Average, 5=Excellent
Total Cost Analysis Poor=1, Cost>190
Fair=2, 185<Cost<190
Average=3, 180<Cost<185
Good=4, 176<Cost180
Excellent=5, Cost<175
Delivery Performance
Performance to promise 95%=3=Average; 97%=4=Good; 99%=5=Excellent
Rump-up time 5 months=2=Fair; 4 months=3=Average; 3 months
=4=Good
Lead time requirements 10 weeks =1=Poor; 8 weeks=2=Fair; 3 weeks
=3=Average; 2 weeks=5=Excellent
Responsiveness to customer needs 1=Poor, 3=Average, 5=Excellent

Management and personnel Capability. 1=Poor, 3=Average, 5=Excellent

Flexibility- Responsiveness - Service Long term 1=Poor, 3=Average, 5=Excellent

relationship potential

Volume Capacity Poor = 1, V<300k

Fair=2, 300k<V<400k
Average=3, 400K<V<700k
Good=4, 700k<V<800K
Excellent=5, V>800k
Information System capability 1=Poor, 3=Average, 5=Excellent
Extra Risk
Industry expertise/market experience 1=Poor, 3=Average, 5=Excellent
Exchange rate 1=Poor, 3=Average, 5=Excellent
Country security risk 1=Poor, 3=Average, 5=Excellent

Supplier Evaluation

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 Elecom Technologies

Category Weight Sub Score Weighted Comment

weight (5pt scale) Score
Quality Performance 20        
Total Quality Commitment   5  
Parts per million defect performance   15 Second higher PPM (9500 ppm)
Financial Risk Analysis 15    
Asset Utilization   5 is not efficient managing its assets
Capitalization   5 Over leveraged. May not meet short and long
term debt
Profitability   5 Presents the lower profitability
Total Cost Analysis 10   Higher total cost (including transportation etc)

Delivery Performance 15    
Performance to promise   5 95% for large customers
Rump-up time 3 4 months. First delivery=august
lead time requirements 5 8 weeks
responsiveness to customer needs   2 Company more interested in large contracts.
Frequency of shipment = 1 month

Technical/process capability (product 10   Facility: Efficient, spotless, modern. R&D=

innovation, facility, R&D) Extensive research
Management and personnel Capability. 5   N/A. Investment in other areas may point the
commitment to support future growth
Flexibility - Service Long term relationship 5   Supplier more interested in high volume.
potential Contact= sales manager

Volume Capacity 9 Available capacity= 630.000 units

Information System capability (EDI) 2   Internet-based EDI
Extra Risk 9    
Industry expertise/market experience   3 30% market share
Exchange rate   3 Contract denomination=yen
Country security risk   3 uncertain regional environment
Total 100    

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 Supplier Evaluation
SureTech Company

Category Weight Sub Score Weighted Comment

weight (5pt scale) Score
Quality Performance 20        
Total Quality Commitment   5 PC week has priced the company products
(reliability)
Parts per million defect performance   15 Higher PPM of the industry (10500)
Financial Risk Analysis 15    
Asset Utilization   5 Inventory turnover problems
Capitalization   5 Good performance
Profitability   5 Best performance in the industry
Total Cost Analysis 10    
Delivery Performance 15    
Performance to promise   5 May not meet demand. Production lines may
be experiencing problems. Delivery record=
97%
Rump-up time 3 5 months (plus lead time product will be ready
by July)
lead time requirements 5 3 weeks
responsiveness to customer needs   2 PSC will be a high priority customer
Technical/process capability (product 10   Small size, old warehouse. Reputation of
innovation, facility, R&D) reliability and innovation
Management and personnel Capability. 5   Personnel is motivated. May lack experience,
under 35 years old. Manager graduated from
Stanford and has IBM experience.
Management very interested

Flexibility - Service Long term relationship 5   President meet with the team in person.
potential Willingness
Volume Capacity 9 Extra capacity= 310.000 units
Information System capability (EDI) 2   N/A
Extra Risk 9    
Industry expertise/market experience   3 4 % market share. 1 year experience in the
DVD market
Exchange rate   3  
Country security risk   3  
Total 100    

Supplier Evaluation

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 E-Drive Systems

Category Weight Sub Score Weighted Comment

weight (5pt scale) Score
Quality Performance 20        
Total Quality Commitment   5 employees concerned and aware of quality
problems
Parts per million defect performance   15 7500 PPM
Financial Risk Analysis 15    
Asset Utilization   5 Problems with accounts receivable
Capitalization   5 Good performance
Profitability   5 Over the average
Total Cost Analysis 10    
Delivery Performance 15    
Performance to promise   5 May experience problems due to quality
problems
Rump-up time 3 4 months
lead time requirements 5 2 weeks
responsiveness to customer needs   2 Assumed
Technical/process capability (product 10   JIT, kanban. NPD Reputation
innovation, facility, R&D)
Management and personnel Capability. 5   N/A

Flexibility - Service Long term relationship 5   Access to plant manager and quality
potential department. 2 day lot sizes
Volume Capacity 9  
Information System capability (EDI) 2   N/A
Extra Risk 9    
Industry expertise/market experience   3 Reputable. 20% market share
Exchange rate   3  
Country security risk   3  
Total 100    

Supplier Evaluation

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 Park Technologies

Category Weight Sub Score Weighted Comment

weight (5pt scale) Score
Quality Performance 20      
Total Quality Commitment   5 Test and Control systems in place
Parts per million defect performance   15 4000 PPM
Financial Risk Analysis 15    
Asset Utilization   5 Not effective. Accounts receivable and asset
turnover problems.
Capitalization   5 May have problems meeting short-term cash
needs
Profitability   5 Profit margin below the average
Total Cost Analysis 10   Higher total cost
Delivery Performance 15    
Performance to promise   5 Asian performance may be different from
expected
Rump-up time 3 4 months
lead time requirements 5 10 weeks
responsiveness to customer needs   2 No representation in the U.S.
Technical/process capability (product 10   Facility well maintained. Promising and
innovation, facility, R&D) dynamic company
Management and personnel Capability. 5   N/A

Flexibility - Service Long term relationship 5   Direct contact with the Plant manager
potential
Volume Capacity 9 Capacity may not be accurate. Higher capacity
available
Information System capability (EDI) 2   N/A
Extra Risk 9    
Industry expertise/market experience   3 12% global market share. No U.S. customer
experience
Exchange rate   3  
Country security risk   3  
Total 100    

Appendix 4: Sourcing Risk Management Plan

Sourcing Risk Management Plan

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 Supplier: E-Drive

Potential Concern Risk or Concern Risk Reduction Plan

Area
Management o Possibly hiding information? o Increase number of company
Capability/personnel o Low knowledge of visits to get to know better
capability management capabilities their abilities and uncover
possible additional issues
o Show supplier evaluation
results.
o Explain concerns and inform
where to focus their
improvement efforts.
o Regular feedback

Delivery Performance o Quality problems may affect o Set specific targets and
delivery? commitments
o Establish program of warnings
and penalties
o Establish a reward program
o Continuous follow-up and
measurement

Quality Performance o Clicking sound o Set supplier performance

o Returns from large targets
distributors o Build appropriate quality
incentives
o Establish program of warnings
and penalties
o Create cross functional
engineering team to share
best practices and support
quality efforts
o Continuous follow-up and
measurement

Process Capability o Supply disruptions due to o Continuous follow-up and

New JIT system measurement

Capacity o Has very large customers o Establish capacity

and PSC may not be a commitment
priority o Share forecast
o Remaining capacity is very o Assign only 75% of the
tight forecast
o Early warning of forecast
changes

Cost o Cost improvement o Establish joint cost savings

commitments programs

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Potential Concern Risk or Concern Risk Reduction Plan
Area

Technical Ability

Logistics o Need more information on o Research their information

logistics and information system and EDI capability
systems

Financial Issues o Receivable days o Continuous follow-up on

financial performance

Other Commercial
Issues

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 Sourcing Risk Management Plan
Supplier: SureTech

Potential Concern Risk or Concern Risk Reduction Plan

Area
Management Capability o Professional managerial o Increase number of
experience company visits to get to
o Low knowledge of their know better their abilities
managerial capacities and help improve in this
area
o Show their supplier
evaluation and how their
performance compares with
other competitors. Inform
where to focus their
improvement efforts.
o Share best practices
o Offer training opportunities
o Regular feedback

Delivery Performance o 97% on-time delivery. o Set specific targets and

o No experience with large commitments
contracts. This contract o Offer assistance
would be the largest in their o Establish program of
history warnings and penalties
o Ramp-up time o Establish a reward program
o Continuous follow-up and
measurement

Quality Performance o Quality problems. Higher o Set supplier performance

ppm defects in industry targets
o Build appropriate quality
incentives
o Establish program of
warnings and penalties
o Create cross functional
engineering team to share
best practices and support
quality efforts
o Perform quality audits.
Continuous follow-up and
measurement

Process Capability o Not enough information o Increase knowledge of their

process capability

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Potential Concern Risk or Concern Risk Reduction Plan
Area
Capacity o This contract would be the o Establish capacity
largest in their history commitment
o Limited capacity (300.000 o Share forecast
units) o Assign only 25% of the
o Other industries are forecast
interested in SureTech o Early warning of forecast
changes

Cost o Ability to generate cost o Establish joint cost savings

improvements programs

Technical Ability

Logistics o Low knowledge of o Assessment of their

communication and capabilities
information systems in o Study the possibility to
place develop improved
information systems. EDI

Financial Issues o Inventory Turnover o Continuous follow-up on

o Payable Days financial performance
o Small growing entity, o Assessment of the reasons
why they have problems
financial condition may
with the inventory turnover
change at any time

Other Commercial
Issues

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Insourcing Outsourcing
Costs Per Unit: Year One Year Two Costs Per Unit: Year One Year Two

Direct Materials
Semi- $4.29 $4.29 Quoted Price $12.20 $12.20
Finished $0.78 $0.78
Other

Direct Labor $2.36 $2.43 Transportation $0.10 $0.10

Indirect Labor $0.73 $0.65 New Tooling $0.50 $0.43

Factory
Overhead and $4.31 $3.86 Administrative $0.09 $0.08
Administrative Support

Preventive
Maintenance $0.15 $0.14 Inventory $0.07 $0.07
Carrying

Machine Repair $0.13 $0.13 Safety Stock $0.18 $0.18

Ordering $0.06 $0.05 Quality-Related $0.38 $0.38

Costs

Depreciation $0.50 $0.43 Ordering $0.06 $0.05

Inventory $0.06 $0.06 Other Costs

Carrying

Total $13.58 $13.49

Transportation $0.12 $0.12 Outsourcing
Costs Per Unit

Consumable $0.19 $0.19 Total Savings $30,000 -124,200

Tooling (1)

Less: Taxes on
Other Costs ---- ---- Savings (40%) $12,000

Total Insourced Net

Per Unit Cost $13.68 $13.13 Outsourcing $18,000
Savings

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