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2009 ACADEMIC CASE STUDY SERIES Improving the Effectiveness of the Forward Purchasing Strategy at Jiangsu Aucksun Metal Co., Ltd. An Academic...

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Whats are the Advantages and disadvantages of the forward purchasing approach at Aucksun?

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2009 ACADEMIC CASE STUDY SERIES
Improving the Effectiveness of the Forward Purchasing Strategy at
Jiangsu Aucksun Metal Co., Ltd.
An Academic Learning Case Study written for the
Council of Supply Chain Management Professionals Amy Z. Zeng, Ph.D. 1
Department of Management
Worcester Polytechnic Institute
Worcester, MA 01609
USA
Lindu Zhao, Ph.D.
Institute of Systems Engineering
Southeast University
Nanjing, Jiangsu 211189
China
Jing Hou
Institute of Systems Engineering
Southeast University
Nanjing, Jiangsu 211189
China Council of Supply Chain Management Professionals
333 East Butterfield Road, Suite 140
Lombard, Illinois 60148 USA
+ 1 630.574.0985
[email protected] 1 Corresponding author This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin board
without prior written permission from CSCMP. Improving the Effectiveness of the Forward Purchasing Strategy at
Jiangsu Aucksun Metal Co., Ltd.
Prologue
Aucksun, or Australian Foreign Shunchang Metal Co., Ltd., is a professional metal
processing and logistics service provider for the IT manufacturing enterprises. It is located in
Zhangjiagang (ZJG), a medium city in China’s Jiangsu Province. Example products provided
by the company include galvanized steel plates, hot-dip galvanized steel plates, aluminum
alloy plates, cold-rolled steel plates, hot-rolled steel plates, stainless steel products,
electrolytic tin products and other steel plates.
The weather of ZJG in early June is gorgeous. Standing in front of the manufacturing
plant of Aucksun on a Monday morning, Mr. Li, however, is not feeling as bright as the
summer sunshine. Everyday before he goes into his office, he likes to stop at the entrance and
glance at the dark blue building where the workers are preparing for setups to process various
metals sheets. But for the past month, he has been struggling to revise the procurement
strategy for the company.
As the Managing Director of the Manufacturing Department at Aucksun, Mr. Li is
responsible for not only all the manufacturing related decisions, but also the procurement and
supply of raw materials. Since the company was founded not long ago, how to improve and
manage the material flow and the associated operational process is one of the company’s
current primary concerns.
Mr. Li is required to give a report later this week on the performance of his Department,
existing problems, including possible solutions and alternatives. It is crystal clear to Mr. Li
that the procurement of raw materials not only plays a critical role in the well-being of his
Department, but also affects the smoothness and the financial performance of the entire
Aucksun supply chain.
Aucksun was registered in September, 2002 and started operations a year later. Just like
their company, the mid-level management and most of the employees are also quite young,
holding a great passion for work and a positive attitude towards challenges. The core
competency of Aucksun is focused on integrated procurement and metal material processing,
a value-added service for the IT industry which has a bright future in China.
Prior to joining Aucksun at the beginning of 2005, Mr. Li had worked in a number of
companies. With his extensive experience and frequent interactions with Aucksun’s various
partners, he knows what characteristics are needed for a 3PL to succeed in the IT industry.
In China, the intensity of competition varies significantly across different regions. For
instance, the logistics industry nestling in the Pearl River Delta has been in existence for
more than a decade; however, in the Yangtze River Delta where Aucksun is located, the 2 This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin board
without prior written permission from CSCMP. industry has only 6-7 years of history, but the region has a faster growing demand for
logistical services. As such, Mr. Li is optimistic about Aucksun’s future, but, at the same time,
a bit concerned and worried about the quality and knowledge of the employees. With IT
customers demanding higher quality and more complex services and competition in China’s
3PL industry becoming more intense, Mr. Li knows that it’s imperative for both himself and
his employees to keep up with the changes and for Aucksun to constantly improve its
technologies and practices.
Getting back to his office, Mr. Li begins to sort out the piles of papers on his desk.
Under the glass countertop of his desk lies a phone list of all the departments of the company:
operations, materials, information, human resources, and others. Sitting down comfortably,
Mr. Li quickly starts to frame his ideas and outline his report. He realizes the first step to
improving procurement strategy requires looking into the complete process flow of the
company. As such, he starts pulling all the data and facts about the company to analyze them
from both strategic and operational perspectives.
Background
Aucksun is located in the well-developed city of Zhangjiagang (ZJG) in Jiangsu
Province with its growth inevitably influenced by the economy of the city. ZJG is
strategically located at the intersection of two economic development zones along China’s
eastern coastal line and the Yangtze River. A number of more well-known and larger cities
such as Shanghai, Nanjing, Suzhou, Wuxi and Changzhou are in the neighborhood. Figure 1
shows the geographic position of ZJG. Figure 1: The Geographic Position of Zhangjiagang (ZJG) 3 This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin board
without prior written permission from CSCMP. Because of its excellent location, ZJG is a rising star among the medium-sized industrial
cities along the downstream of the Yangtze River. The city was ranked second among
China’s top 100 cities in 2006 based on the composite social and economic index.
Aucksun is located in the economic-technological development zone of ZJG, which was
designated as a province-level development area in late 1993. With over a decade of
development and construction, this special zone has become the center of new technologies
and an important channel to attract both domestic and foreign investments. By the end of
2006, this region has attracted over 1,500 enterprises, out of which over 300 are joint
ventures, Sino-foreign cooperative enterprises, and wholly foreign-owned enterprises. More
than a dozen world-famous and leading enterprises are housed in here, and the zone is ranked
in the top ten of the province’s development zones.
The superb geographic location of ZJG offers the city easy access to surrounding regions.
The transportation infrastructure of the city is well established, constituting a
four-dimensional transport system that includes land, rail, water and air.
• Land: The highway along the coast goes across the city. Within only one-hour drive,
a number of cities such as Shanghai, Suzhou, Wuxi, Changzhou, and Nantong can be
reached. Additionally, it takes two hours to get to Hangzhou and Nanjing. • Rail: The Shanghai-Nanjing railway is 40 kilometers away in the south and the
Xinchang railway is only a little over 10 kilometers in the west. • Air: Three international airports are nearby: Shanghai Hongqiao airport, Pudong
airport, and Nanjing Lukou airport. There are also three regional airports. The
existence of multiple airports in the greater ZJG area provides a convenient gateway
to the world-wide market. • Water: The ZJG harbor is considered first-class international business harbor and the
largest freight hub in Yangtze River Delta. It has 33 berths at ten-thousand tons
catering for containers, steel, lumber, chemical, coal, and other merchandise. The
harbor can house vessels of 50,000 tons and handle 80 million tons of goods every
year. There are 23 routes to various places including Japan, Korea, Hong Kong,
America, Australia, and European countries. Every month, 42 voyages deliver freight
to and from 40 countries and over 140 harbors in the world voyage
Jiangsu Aucksun Metal Co., Ltd.
Aucksun (www.aucksun.com) is established under the joint investment of Jiangsu
Australia Industry Corporation and the Hong Kong Chang-Zheng, Ltd. The total initial
investment is about $10 million. The land area is about 24,000m2 with the construction area
of 9,600 m2. Aucksun specializes in processing and distributing cold-roll steel and zinc sheets 4 This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin board
without prior written permission from CSCMP. for computer and electronic manufacturers. Its production and processing capacity is 120,000
tons per year.
Aucksun is composed of five primary departments: operations, manufacturing,
information, business support, and administration. The complete organization chart is shown
in Figure 2. General Manager Associate GM Operations
Dept Associate GM Business
Support
Dept Manufacturing
Dept Information
Dept Administration
Dept Customs
Clearance
Plant & Facility Production Material & Supply Quality Control Human
Resources
Finance
& Accounting
Sales
& Marketing Figure 2: The Organization Chart of Aucksun The Products and Services of Aucksun
With its rapid growth in southeast China, Aucksun is becoming the core customer of
many steel companies such as Nippon Steel Corporation of Japan, POSCO of Korea, DongBu
Steel of Korea, SK Network of Korea, China Steel in Taiwan, and the three largest steel
companies in China. With respect to its downstream, Aucksun has established steady and
long-term relationships with more than 200 customers in the IT industry, which include
computer and electronic consumer goods manufacturers. Aucksun’s products are used in
customers’ personal computers and laptops, and the company’s distribution networks span the
entire world.
Relying on its excellent collaborative relationships with both domestic and international
steel manufacturers, Aucksun is able to purchase steel materials with special standards from
multiple channels in order to help customers reduce costs and wastes. Aucksun has a storage
capacity of up to 15,000 tons to ensure a constant supply of materials to its customers.
Additionally, Aucksun has installed advanced computer-based automation processes and 5 This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin board
without prior written permission from CSCMP. implemented ERP system for supply chain management, marketing, order processing, and
manufacturing operations. The technical leads of the company not only are knowledgeable
about the functionality of various steel materials, but also possess abundant experience in
metal processing technology such as pressing, plating, and spray painting. This allows
Aucksun to offer high-quality products and comprehensive technical supports to its
customers. Striving to facilitate customers to achieve zero-inventory, Aucksun promises
accurate and fast order fulfillment with its high-speed equipment and professional operations.
In particular, the average lead time has now shortened to no more than three days.
To provide efficient services and to improve customer service, Aucksun has adopted a
forward purchasing strategy to maintain certain level of inventory. Forward purchasing is a
type of procurement technique used to satisfy prospective demand and implemented before
actual orders are received. As a critical step in Aucksun’s operational process, forward
purchasing is a weapon to create competitive advantage; on the other hand, it may also lead
to overstock risk. The company is concerned about how to implement the forward purchasing
strategy to balance the supply, inventory, and price.
The Aucksun Supply Chain
As a professional metal logistics service provider for the IT industry, Aucksun has
developed a complete supply chain that spans procurement, distribution, manufacturing and
sales. In what follows, a detailed description of each element is provided.
Procurement
Aucksun provides two kinds of logistical services: delivery of imported materials, and
delivery of supplied materials, where in the latter, Aucksun’s customers are responsible for
procurement whereas Aucksun takes the responsibility of materials processing and
distribution. In this case, the first service—delivery of imported materials, in which Aucksun
handles both procurement and processing and delivery—is the focus. With respect to
procurement, Aucksun offers two modes for this type of service, which are explained below.
(1) Regular Purchasing
The procurement group under the Manufacturing Department analyzes Aucksun’s
inventory records of raw materials and forecasts customer’s demand using ERP system, and
then generates and places purchase orders to manufacturers, both domestic and abroad, in a
three-month forward purchasing contract. The purchase price is specified in the contracts
under the agreement with the upstream suppliers when the contracts are determined. The
procurement process is shown in Figure 3. 6 This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin board
without prior written permission from CSCMP. Inventory analysis and Placement of consolidated demand forecast orders Development of contracts Barcodes and Inspection, Customs Final Earnest money deposit Storage clearance, and Shipping Payment and letter of credit Figure 3: The Regular Purchasing Process
(2) Spot Purchasing
This is used when occasional or irregular demand occurs and the steel suppliers in the
market happen to have requested supplies available. In this case, purchasing plans are made
and implemented based on the production requirements, and the purchasing price will be the
market price at the time of purchasing.
Aucksun can purchase materials from both domestic and international suppliers.
Demanded by the downstream customers, Aucksun currently purchases goods primarily from
the international suppliers, which is accomplished in one of the following two ways
depending on whether the final products will be exported or not: free trade and regular trade.
The main difference between the two types of trade is whether or not tariffs should be paid.
Obviously, for free trade, the tariffs on the merchandise are waived at the customs; but the
decision should be made by following the “electronic account manual” and by monitoring the
entire flow of the purchased merchandise as well as the merchandise’s final destination.
Usually, as long as the purchased items are used for export and not domestic consumption,
the duties and tariffs are not required.
Manufacturing
Aucksun’s two main products are steel sheets and aluminum alloy sheets. The steel
sheets consist of galvanized fingerprint resistant sheets, general cold sheets and hot-rolled
sheets. The galvanized fingerprint resistant sheets are the mainly needed metal material in IT
industry and covered 88% of company’s product line in 2007. Aucksun processes and
manufactures metal sheets for their customers in a make-to-order fashion, but keeps a
three-month supply of raw materials as inventory in their own storage place. The Operations
Department takes the full responsibility to manage manufacturing, distribution, order picking,
technical support, storage scheduling, and delivery scheduling. There are three critical steps,
namely cutting, coiling, and flattening, that take place on Aucksun’s manufacturing plants.
Marketing and Sales
Aucksun uses primarily direct shipment; that is, each salesman handles each target
customer on a one-to-one basis. The series of activities needed in the sales process include: (1)
determining the target customer, (2) understanding the customer’s needs, (3) explaining 7 This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin board
without prior written permission from CSCMP. Aucksun’s capabilities and negotiating, (4) obtaining customer’s requirements and
expectations, (5) providing sample products, (6) obtaining customer’s approval and
agreement, (7) developing contracts, (8) placing orders, (9) processing, storing and delivering
goods to the customer, and (10) receiving payment.
Distribution
The majority of the raw material used by Aucksun is metal, which is primarily acquired
from international metal manufacturers. On the basis of forward purchasing, Aucksun relies
on inventories to satisfy customer needs in one of the following two service formats.
(1) Distribution of Imported Materials (Figure 4 offers a detailed process of this service type)
The main raw materials are fingerprint-resistant galvanized and hot-dip galvanized sheets.
These products, first developed and produced in Japan, became commercialized in the 80’s
and have been widely used in the electronic industry ever since. There are abundant supplies
of these products that differ significantly among various steel manufacturers. The Japanese
steel manufacturers, which target their markets to high-end customers, provide relatively high
quality and high priced products. The products from the Korean manufacturers have medium
quality and price, but offer the best quality-price ratio; thus, the demand for this product
group is the largest. The Chinese products have the lowest price, but due to the instability of
the manufacturing process, the demand is relatively small.
Aucksun’s product prices fluctuate somewhat, even though it often purchases materials in
advance. In the situation where the purchased price is lower than the market price at the time
a customer order is placed, Aucksun usually adjusts the sales price to benefit the customer. In
the opposite scenario, Aucksun sells the products at the market price if the fluctuation is
within 5%; otherwise, Aucksun negotiates the sales price with the customer. It should be
pointed out that Aucksun’s implementation of forward purchasing method is less complex
than the practices in the West, where many metal firms establish contracts with their buyers
or use a combination of option and fixed purchase quantity to hedge against price uncertainty.
In general, the long-term strategic partnership allows Aucksun and its customers to share
risks and benefits. 8 This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin board
without prior written permission from CSCMP. Contract Technical Consultation Acceptance Demand sample Forecast Materials Plan Support
Customer Evaluation
Transportation
Order Before Service
N Storage Keep in the customers’ archives Order Filled?
Y Selecting Materials
Technical Service
Assorting Materials Production Plan During Service
Order Pickup Machine Scheduling Disposal Cutting
Waste Package/Barcode Storage Assembly Shipping Post Service
Customers Technical Support Process Support 9 This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin board
without prior written permission from CSCMP. Figure 4: The Distribution Process of the Imported Materials
These products, first developed and produced in Japan, became commercialized in the
80’s and have been widely used in the electronic industry ever since. There are abundant
supplies of these products that differ significantly among various steel manufacturers. The
Japanese steel manufacturers, which target their markets to high-end customers, provide
relatively high quality and high priced products. The products from the Korean manufacturers
have medium quality and price, but offer the best quality-price ratio; thus, the demand for this
product group is the largest. The Chinese products have the lowest price, but due to the
instability of the manufacturing process, the demand is relatively small.
Aucksun’s product prices fluctuate somewhat, even though it often purchases materials in
advance. In the situation where the purchased price is lower than the market price at the time
a customer order is placed, Aucksun usually adjusts the sales price to benefit the customer. In
the opposite scenario, Aucksun sells the products at the market price if the fluctuation is
within 5%; otherwise, Aucksun negotiates the sales price with the customer. It should be
pointed out that Aucksun’s implementation of forward purchasing method is less complex
than the practices in the West, where many metal firms establish contracts with their buyers
or use a combination of option and fixed purchase quantity to hedge against price uncertainty.
In general, the long-term strategic partnership allows Aucksun and its customers to share
risks and benefits.
(2) Distribution of Supplied Materials (Figure 5 offers a detailed process of this service type)
In this service, all of the materials are directly purchased by the customers and shipped to
a domestic dock and then finally to Aucksun. Therefore, the supply and price of the raw
materials have little impact on Aucksun. 10 This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin board
without prior written permission from CSCMP. Demand
Consultation Technology Materials Plan
Before Service
Customer Evaluation Order Keep in the customers’ archives Selecting Materials Customer Order
Technology Sorting Materials
Shipping
Production Plan Storage
Order Pickup Machine Scheduling
Second Cutting
Finished Products Waste Package/Barcode Recycle Storage Assembly Shipping
Last Period
Customer Technical Support Processing Support 11 This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from the
Council of Supply Chain Management Professionals (CSCMP). You may not upload any of this site's material to any public server, online service, network, or bulletin board
without prior written permission from CSCMP. Figure 5: The Distribution Process of the Supplied Materials
Problem Description and Statement
Aucksun uses its own ERP system to manage the inventory information, forecast the
demand of downstream customers, and place orders three months in advance. As such, the
materials from the upstream suppliers arrive before the actual demand is received. Aucksun
then provides VMI service to the downstream customers and maintains one and a half months
of supply. After receiving the orders from the customers, Aucksun cuts the raw materials into
smaller pieces in accordance with the required dimensions, packages them and then ships
everything to the customers. Most of the transportation operations are outsourced to other
logistics service providers in order to focus on the company’s core competency and to reduce
the troubles caused by traffic proble...

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Advantages and Disadvantages of Forward Purchase Policy Approach at  Aucksun Metal Co.docx

Advantages and Disadvantages of Forward Purchase Policy Approach at Aucksun Metal
co.
ADVANTAGES
• Aucksun’simplementation of Forward Purchasing method is less complex as compared to
other...

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