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Case Problems

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Case Problems CASE PROBLEM 10.1 Somerset Furniture Company’s Global Supply Chain The Somerset Furniture Company was founded in 1957 in Randolph County, Virginia. It traditionally has manufactured large, medium-priced, ornate residential wood furniture such as bedroom cabinets and chests of draws, and dining and living room cabinets, tables, and chairs, at its primary manufacturing facility in Randolph County. It employed a marketing strategy of rapidly introducing new product lines every few years. Over time it developed a reputation for high-quality, affordable furniture for a growing U.S. market of homeowners during the last half of the twentieth century. The company was generally considered to be an innovator in furniture manufacturing processes and in applying QM principles to furniture manufacturing. However, in the mid-1990s, faced with increasing foreign competition, high labor rates, and diminishing profits, the Somerset Company contracted to outsource several of its furniture product lines to manufacturers in China, simultaneously reducing the size of its own domestic manufacturing facility and labor force. This initially proved to be very successful in reducing costs and increasing profits, and by 2000 Somerset had decided to close its entire manufacturing facility in the United States and outsource all of its manufacturing to suppliers in China. The company set up a global supply chain in which it arranges for shipments of wood from the United States and South America to manufacturing plants in China where the furniture products are produced by hand by Chinese laborers. The Chinese manufacturers are very good at copying the Somerset ornate furniture designs by hand without expensive machinery. The average labor rate for furniture manufacturing in the United States is between $9 and $20 per hour, whereas the average labor rate for furniture manufacturers in China is $2 per day. Finished furniture products are shipped by container ship from Hong Kong or Shanghai to Norfolk, Virginia, where the containers are then transported by truck to Somerset warehouses in Randolph County. Somerset supplies retail furniture stores from this location. All hardware is installed on the furniture at the retail stores in order to reduce the possibility of damage during transport. The order processing and fulfillment system for Somerset includes a great deal of variability, as do all aspects of the company’s global supply chain. The company processes orders weekly and biweekly. In the United States it takes between 12 and 25 days for the company to develop a purchase order and release it to its Chinese suppliers. This process includes developing a demand forecast, which may take from one to two weeks; converting the forecast to an order fulfillment schedule; and then developing a purchase order. Once the purchase order is processed overseas by the Chinese manufacturer, which may take 10 to 20 days depending on the number of changes made, the manufacturing process requires approximately 60 days. The foreign logistics process requires finished furniture items to be transported from the manufacturing plants to the Chinese ports, which can take up to several weeks depending on trucking availability and schedules. An additional 5 to 10 days are required to arrange for shipping containers and prepare the paperwork for shipping. However, shipments can then wait from one day to a week for enough available containers. There are often too few containers at the ports because large U.S. importers, like “Big W” discount stores in the United States, reserve all the available containers for their continual stream of overseas shipments. Once enough containers are secured, it requires three to six days to optimally load the containers. The furniture pieces often have odd dimensions that result in partially filled containers. Since 9/11, random security checks of containers can delay shipment another one to three weeks, and smaller comp

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