Pacific Systems Corporation
Case Study
SCM 406
Taryn Weaver
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I. Objective
The objective of this report is to analyze and recommend a sourcing strategy for
DVD drives for Pacific Systems Corporation (PSC). A conclusion will be drawn after
extensive analysis of suppliers’ capabilities and finances.
II. Executive Summary
Pacific Systems Corporation is a medium-sized company specializing in
technology and located north of San Francisco. In the past, the company has
manufactured subsystems, but recently, PSC has added a product line of fully
assembled personal computers. PSC is known for producing high quality products
and its strategy is to sell these products at affordable prices. The personal
computers will be assembled at PSC’s facilities, but many of the product components
and subassemblies will be outsourced. This case is focused on selecting a supplier to
outsource the DVD drive. PSC is looking to start production at 500,000 disk drives in
the first year.
After the purchasing team at PSC visited suppliers, they narrowed it down to
four choices: Elecom, SureTech, E-Drive Systems and Park Technologies. Each
company has advantages and disadvantages. Elecom is located in Japan and is the
largest supplier. They have the lowest quoted price, but the contract is in Yen and
the large size of the company was a turnoff for PSC’s team. SureTech is a small
company in Colorado. They specialize in disk drives, but have just over a year of
experience, so it is hard to tell what their future holds. E-drive Systems is located
just ten miles from PSC, allowing for the most flexible delivery, but they are
currently experiencing a quality issue. Park Technologies is in Korea and had the
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most in-depth quality testing. The only draw back is that PSC would be their first
larger North American customer. An analysis must be done to decide which of the 4
suppliers will get PSC’s contract.
III. Introduction
Pacific Systems Corporation needs a DVD drive in the unit price range of
$125-$150. It is currently January of 2003, and the inventory needs to be available
to start production in June, because the computers need to be available for sale by
August for back to school. Appendix I outlines the ramp-up time and lead-time of the
four possible suppliers, at this time, E-drive is the only company to meet the needs
of PSC. Responsiveness and quality of suppliers is critical. PSC is known for their
quality and every item that is not up to par is estimated to cost the company $300 in
addition to word of mouth and loss of customer faith. The company selected to
source must also have the capacity to support PSC and be in good financial standing.
IV. Recommended Sourcing Strategy
I recommend that PSC use E-Drive Systems as their supplier of the DVD disk
drives. While E-Drive Systems does not fall in the total price requirement of $125$150 (appendix II), neither do the other companies and E-Drive has the second
lowest price. It makes up for the price, however, with the just in time delivery option
due to it’s close proximity to PSC (the company is willing to deliver every other day).
They are also available to have the production lines up and running by June, which
is a major requirement of PSC. While E-Drive is the second largest producer of the
DVD drives worldwide, they still had an attitude that could lead to a great supplier
relationship, unlike some of the other larger suppliers. While their financials were
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not necessarily the best of the four companies (appendix III), there are no red flags
and they show signs of future growth and are willing to work with companies such
as PSC on future product development. This will allow PSC to be long time
customers and still be able to keep up with the ever-changing technologies in the
industry.
The only risk that E-Drive has is a quality issue of a “clicking” sound made
when the drive is engaging the disk. The quality manager assured PSC that this
would be fixed before PSC would even be placing orders. In order to mitigate this
risk, due to the close proximity of the supplier, PSC will send an engineer of their
own to check in on E-Drive’s engineers as they work on this issue. There should be
detailed weekly reports on fixing the problem as well as ten free drives that PSC can
use as prototypes and test in their own facilities before entering a long-term
contract. This will ensure that the problem is fixed, as the manager promised.
Overall, the supplier responsiveness, close proximity to the PSC facility and promise
for future growth makes E-Drive the most attractive of the four candidates.
V. Obtaining Financial Data
This case study provided the information necessary to perform a financial
analysis (appendix III), although this is not always the case for purchasers. If a
supplier is a public company, financial data is readily available on resources such as
Hoover’s database. However, it can be more substantially more difficult if the
company is private. In this case, a purchasing company can attempt to privately seek
financial data on potential suppliers. In this case, the supplier may not want to
readily supply this information, especially if it is against company policy, or if it is
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not information that will make the company look attractive. Purchasers can ask
other companies that source with the supplying company if they are well connected
in the industry. There are also business-to-business agencies that have financial
reports. In this case, however, multiple sources should be used and cross-referenced
in order to get the most accurate analysis possible.
VI. Sourcing Decisions
While the sourcing decision outlined in this case required ample resources
and time, other sourcing decisions may not. The disk drive in this case is an “A” item.
“A” items are of utmost importance and the suppliers who source them should be
analyzed as if a partnership is being formed. The relationship and communication
between the sourcing company and the purchaser must be strong. “B” and “C” items
do not always require extensive research. While quality inspection for all parts of
the supply chain is key to a quality product, many times “B” and “C” items can be
sourced by multiple reputable suppliers or even with a blanket purchase order. This
does not require the same amount of research or communication as “A” items.
In this particular case, supplier capacity was important, but not the most
important element. While PSC is looking for 20% growth in the next year and will
need a supplier to support this, none of the 4 companies included in the study had a
capacity issue. When making a sourcing decision, capacity is important. It should be
one of the first things viewed by a purchasing company because if a supplier cannot
meet capacity, they either need to be overlooked, or multiple sourcing needs to be
analyzed. If a supplier cannot reach capacity requirements, many times their price
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and other elements do not matter because a company that can meet capacity must
be used anyway.
When deciding which supplier to choose, there may be an option of multiple
sourcing rather than just using one supplier. The advantages of multiple sourcing
include assurance of supply and creating a competitive market to drive down prices.
However, multiple sourcing can be a disadvantage because having fewer suppliers is
often more efficient and it gives the purchasing company less control over the
product. There also may be less knowledge of each supplier if a purchaser chooses
to multiple source rather than single source. The advantages of single sourcing
include having more leverage and power over the supplier and an advantage of
having a stronger relationship with that supplier. However, single sourcing could
cause reduced flexibility of shipments and offer less innovation of product. If a
company single sources, they feel the repercussions of mistakes or production
stoppages by the supplier.
VII. Conclusion
The conclusion of having PSC source their DVD disk drives from E-Drive
Systems was based on supplier responsiveness, supplier visits, financial
information, and opportunity for future growth. In my opinion, E-Drive Systems is
the best overall choice taking these requirements into account. In order to make this
decision process shorter in the future, PSC may want to consider attempting to get a
small sample of an item made during the ramp-up time so that they can prototype
while the supplier is ramping up for mass production of the item. This would have
opened the door to other suppliers that were being considered but had longer lead
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times than E-Drive Systems. Another suggestion would be to have the crossfunctional teamwork remotely by sending separate members of the team to
separate locations instead of everyone. Especially because some of the suppliers in
this case were in Asia, this would save time in visits and they can take notes and
remotely compare the suppliers in a shorter amount of time instead of taking weeks.
VIII. Appendixes
I. Lead Time
Company
Ramp up
Lead Time
Elecom
4 months
8 weeks
SureTech
5 months
3 weeks
Delivery
Monthly
Weekly
E-Drive
4 months
2 weeks
Every Other
Day
Park
4 months
10 weeks
Monthly
II. Total Cost Analysis
Cost Category
Quoted Unit Price
Transportation (per unit)
Tooling (total)
Quality Non-Conformance (per year)
Duties/Customs, Insurance, Tarriffs (per unit)
Ordering, Inbound Receiving and Inspection Costs (per
unit)
Estimated Per Unit Total Cost
Elecom
SureTech
$127.00
$144.00
$18.00
$6.00
$3,000,000.00 $3,500,000.00
$1,425,000.00 $1,575,000.00
$11.50
$1.50
$4.50
$161.00
$4.00
$155.50
**based on 500,000 units in year one
Continued:
E-Drive
Park
$140.00
$132.00
$14.00
$18.00
$3,250,000.00 $2,750,000.00
$1,125,000.00
$600,000.00
$3.00
$13.00
$3.25
$2.25
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$160.25
$165.25
III. Financial Analysis
Ratio
Asset Turnover
Inventory Turnover
Receivable Days
Payable Days
Elecom
1.32
5.93
0.0004
0.0002
SureTech
1.57
6.46
0.0002
0.0004
E-Drive
1.64
12.91
0.0005
0.0003
Park
0.05
9.26
0.0004
0.0003
Leverage
ROE
Long term D/E
Long term D/A
Current Ratio
Quick Ratio
EBIT Coverage
2.58
6.53%
0.6497
0.2518
1.22
1.15
1.75
2.03
21.74%
0.3188
0.1571
1.34
1.27
6.46
2.28
16.86%
0.3925
0.1721
1.35
1.16
3.62
2.09
9.94%
0.3527
0.1684
1.13
1.05
2.85
Profit Margin
1.92%
6.82%
4.50%
3.43%
IX. Table of Contents
I. Objective
pg 2
II. Executive Summary
pgs 2-3
III. Introduction
pg 3
IV. Recommended Sourcing Strategy
pgs 3-4
V. Obtaining Financial Data
pgs 4-5
VI. Sourcing Decisions
pgs 5-6
VII. Conclusion
pgs 6-7
VIII.Appendixes
pgs 7-8
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