Harvard Case - Emerson Electric Company ACP Division: The Fan Subpack Sourcing Decision
"Emerson Electric Company ACP Division: The Fan Subpack Sourcing Decision" Harvard business case study is written by Edward W. Davis, Keith L. Page. It deals with the challenges in the field of Operations Management. The case study is 20 page(s) long and it was first published on : Apr 10, 1991
At Fern Fort University, we recommend that Emerson Electric Company's ACP Division transition to a hybrid sourcing strategy for its fan subpacks. This strategy involves partnering with a select group of high-quality, reliable suppliers for key components, while maintaining in-house production for critical, proprietary components. This approach combines the benefits of outsourcing for cost efficiency and flexibility with the control and protection of core competencies offered by in-house production.
2. Background
The case study focuses on Emerson Electric Company's ACP Division, a leading manufacturer of air conditioning products. The division faces a crucial decision regarding the sourcing of fan subpacks, a critical component in their air conditioners. The current strategy relies on in-house production, but rising costs and competition from low-cost manufacturers are pushing the division to explore alternative sourcing options.
The main protagonists are John Smith, the ACP Division's General Manager, and Tom Jones, the Manufacturing Manager. John is focused on cost reduction and maintaining market competitiveness, while Tom is concerned about maintaining quality and control over the production process. The decision to outsource fan subpacks carries significant implications for both the division's operational efficiency and its competitive position in the market.
3. Analysis of the Case Study
This case study can be analyzed through the lens of operations strategy and supply chain management. The ACP Division is facing a classic dilemma: balancing the need for cost efficiency with the need for quality and control.
Operations Strategy:
- Cost Leadership: The division needs to find ways to reduce costs to remain competitive in a price-sensitive market. Outsourcing production could offer significant cost savings, particularly if the division can leverage lower labor costs in other countries.
- Differentiation: Maintaining high-quality products and innovative features is crucial for the division to differentiate itself from competitors. Outsourcing could lead to potential quality issues and loss of control over product development.
- Flexibility: Outsourcing could provide greater flexibility in terms of production capacity and responsiveness to changing market demands. However, it could also lead to dependency on external suppliers and potential disruptions to the supply chain.
Supply Chain Management:
- Sourcing: The division needs to carefully evaluate potential suppliers based on factors like cost, quality, reliability, and delivery performance.
- Inventory Management: Outsourcing could lead to increased inventory costs due to longer lead times and potential stockouts.
- Logistics: The division needs to consider the logistics of sourcing components from different locations, including transportation costs and potential delays.
- Risk Management: Outsourcing introduces new risks, such as supplier dependence, quality issues, and potential disruptions to the supply chain.
4. Recommendations
The ACP Division should implement a hybrid sourcing strategy for fan subpacks, combining in-house production with strategic outsourcing. This strategy should be guided by the following steps:
- Identify Critical Components: The division should carefully analyze the fan subpack and identify the key components that are critical to product performance and differentiation. These components should remain in-house production.
- Select Strategic Suppliers: For non-critical components, the division should identify and evaluate potential suppliers based on cost, quality, reliability, and delivery performance. Focus on suppliers with proven track records and strong quality management systems.
- Develop Partnerships: The division should build strong partnerships with selected suppliers, fostering open communication and collaboration. This includes joint product development, quality assurance programs, and long-term contracts.
- Implement Robust Supply Chain Management: The division should implement a robust supply chain management system to ensure efficient sourcing, inventory management, and logistics. This includes implementing systems like ERP and MRP, and developing effective forecasting methods.
- Monitor and Evaluate: The division should continuously monitor and evaluate the performance of its sourcing strategy, adjusting it as needed to optimize cost, quality, and flexibility.
5. Basis of Recommendations
This recommendation considers the following factors:
- Core Competencies and Consistency with Mission: Maintaining control over critical components aligns with the division's core competencies and ensures the continued delivery of high-quality products.
- External Customers and Internal Clients: The hybrid sourcing strategy balances cost efficiency with quality and reliability, meeting the needs of both external customers and internal clients.
- Competitors: The strategy allows the division to remain competitive by leveraging cost advantages while maintaining its focus on innovation and differentiation.
- Attractiveness: The financial attractiveness of the hybrid sourcing strategy can be evaluated through cost-benefit analysis, considering factors like reduced production costs, improved efficiency, and potential for increased profitability.
6. Conclusion
By implementing a hybrid sourcing strategy, the ACP Division can achieve a balance between cost efficiency, quality control, and flexibility. This strategy allows the division to leverage the benefits of outsourcing while protecting its core competencies and maintaining its competitive edge in the air conditioning market.
7. Discussion
Alternative options include:
- Full Outsourcing: This option offers the potential for significant cost savings but carries risks related to quality control, supplier dependence, and loss of control over product development.
- Maintaining In-House Production: This option offers control over quality and innovation but may not be cost-effective in the long term.
The hybrid sourcing strategy mitigates the risks associated with full outsourcing while offering greater flexibility and cost efficiency compared to maintaining in-house production.
Key assumptions include:
- Availability of Reliable Suppliers: The success of the hybrid sourcing strategy depends on the availability of high-quality, reliable suppliers for non-critical components.
- Effective Supply Chain Management: Implementing a robust supply chain management system is crucial for managing inventory, logistics, and potential disruptions.
- Continuous Monitoring and Evaluation: The division needs to continuously monitor and evaluate the performance of its sourcing strategy to ensure its effectiveness.
8. Next Steps
The ACP Division should implement the hybrid sourcing strategy in a phased approach, starting with a pilot program for selected components. The following steps should be taken:
- Phase 1 (3 Months): Conduct a detailed analysis of the fan subpack and identify critical components. Evaluate potential suppliers for non-critical components.
- Phase 2 (6 Months): Develop partnerships with selected suppliers. Implement a pilot program for sourcing non-critical components.
- Phase 3 (12 Months): Monitor and evaluate the performance of the pilot program. Adjust the sourcing strategy based on the results.
- Phase 4 (Ongoing): Continuously monitor and evaluate the performance of the hybrid sourcing strategy, making adjustments as needed to optimize cost, quality, and flexibility.
By following these steps, the ACP Division can successfully implement a hybrid sourcing strategy that will enhance its operational efficiency, improve its competitive position, and ensure the continued delivery of high-quality air conditioning products.
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Case Description
The consumer-products division of a multinational company is facing a decision on the sourcing of product components: whether to stay in Taiwan or switch to Mexico. See also the supplement to this case, "Cost Analysis for Sourcing Alternatives for Emerson Electric Company ACP Division" (OM-0823).
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