Improving the Effectiveness Improving the Effectiveness of the Forward Purchasing of the Forward Purchasing

Strategy at Jiangsu Aucksun Strategy at Jiangsu Aucksun Metal Co.,Ltd.Metal Co.,Ltd.

ByPhongwarin

Buranasathitwong&

Suchaluck Boonipat

CONTENTCONTENT•Prologue•Background•The Products and Services of Aucksun•Aucksun Supply Chain•Problem Description and Statement•Summary and Discussion•Case Questions

PROLOGUEPROLOGUEJiangsu Aucksun Metal Co., Ltd is a China-based company

engaged in processing and logistics services of steel plates and aluminum alloy plates. The Company provides galvanized steel plates, hot-dip galvanizing steel plates, aluminum alloy plates, cold-rolled steel plates, hot-rolled steel plates, stainless steel products, electrolytic tin products and other steel plates, among others.

The Company's clients are mainly information technology (IT) manufacturing enterprises. It operates its businesses principally in Jiangsu province, Shanghai and Zhejiang province, China.

PROLOGUEPROLOGUE

For the procurement and supply of row material, The company was founded not

long ago, how to improve and manage the material flow and the associated

operational process.

The procurement of raw materials are not play a critical role in well-being , but also affects the smoothness and the financial

performance of the entire Aucksun supply chain.

PROLOGUEPROLOGUE

Aucksun was register in 2002 and started operations a year later, so it’s a mid-level management and the most of employee

also quite young.

The core competency is focused on integrated procurement and metal

material processing, value added service for IT industry which has bring future to

China

BACKGROUNDBACKGROUNDLocation :-In the well-developed city of Zhangjiagang(ZJG) in Jiangsu province.-At the intersection of two economics zone along China’s eastern coastal line and the Yangzi River.

BACKGROUNDBACKGROUNDZJG is the city, where was ranked second

among China’s top 100 cities in 2006 based on

the composite social and economic index.

The superb geographic location of ZJG offer the

good transportation infrastructure,

constituting a four dimensional transport

system that includes land, rail, water and air.

Land: •The highway along the coast goes across the

city.•Only one-hour drive, a number of cities such

as Shanghai, Suzhou, Wuxi, Changzhou and Nanting.

•Two hours from Hangzhou to Nanjing.

Four-Dimensional transportation system

Rail:

•Shanghai-Nanjing railway is 40 kms away in the south.

•Xinchang railway is only a little of 10 kms in the west.

Four-Dimensional transportation system

Water:

Four-Dimensional transportation system

•Aucksun Metal will be expanded to include the distribution of armor plates and aluminum plates in the Yangtze River Delta and Pearl River Delta.

•33 berths at ten-thousand tons catering for containers, steel, chemical, coal and others merchandise.

•Handle 80 million tons of goods•23 routes to 40 countries, over 140

harbors.

Air: •3 international airports nearby ; Shanghai

Hongqiao airport, Pudong international airport, and Nanjing Lukou airport.

Four-Dimensional transportation system

Jiangsu Aucksun Metal Co.,Ltd.Jiangsu Aucksun Metal Co.,Ltd.Aucksun is established under the joint investment of Jiangsu

Australia Industry Corporation and the Hong Kong Chang-Zheng, Ltd.

The land area is about 24,000m2 with the construction area of 9,600 m2.

Its production and processing capacity is attainably 132,000 tons per year, processing steel production 8,000 to 10,000 tons per month and aluminum 1,000 tons per month.

The inventory is 30,000 tons of steel and 2,000 tons of aluminum.

The current number of customers is about 300.

The target company recorded 2010 revenue of 410.79 million yuan and net profit of 16.12 million yuan.

The organization of The organization of AucksunAucksun

General Manager

Association GM Association GM

Operations Dept.

Business Support

Dept.

Manufactering Dept.

Information Dept.

Administration Dept.

Plant & Factory

Material & Supply

Quality Control

Production

Customs Clearance

Human resourcesFinance

& Accountin

gSales & Marketin

g

• Jiangsu Aucksun Metal Co., Ltd. engages in the provision of logistics and supply chain services for information technology manufacturing companies.

• The company’s services include warehousing, separation, processing, packaging, delivery, and related technical support services.

• It provides its logistics services for steel sheets that are primarily used in liquid crystal displays

(LCDs) , printers, copiers, computers, set-top boxes, and servers, as well as for aluminum alloy plates,which are used in notebook computer central processing units, notebook computer liquid crystal panel backboards, and LCD backboards. The company is based in Zhangjiagang.

Products and Services of Products and Services of AucksunAucksun

•To adopt a forward forward purchasing strategy purchasing strategy to maintain certain level on inventory.

Products and Services of Products and Services of AucksunAucksun

- Aucksun implements ERP ERP system system for supply chain management, marketing, order processing, and manufacturing operation.

ERP SystemERP System• ERP system use to manage inventory information , forecast

the demand of downstream customers, and place orders three months in advance.

• Materials from upstream suppliers arrive before the actual demand is received.

• VMI (Vendor Managed Inventory) service to the downstream customers and maintains one and a half months of supply.

• Most transportation operations are outsourced to other logistics service providers in order to focus on the company’s core competency and to reduce traffic problem.

• The entire service cycle, the processing center is a key value-added step, bring in about 15% of the total profit for Aucksun

Aucksun’s ERP systemAucksun’s ERP system

Aucksun has a self-invented ERP system, with which the company can operate harmoniously. The reason Aucksun don‘t use these famous ERP system is that they think its own system will fit its operations more due to its own specialty. This ERP system is composed of three main parts, execution part, management part and decision-making part. These three parts make sure Aucksun run smoothly.

Forward Purchasing Procurement•Purchasing goods or raw materials in

excess of current needs to avail of volume discounts or to hedge against possible shortages.-The major objectives of purchasing are to (1) maintain the quality and value of a company's products, (2) minimize cash tied-up in inventory, (3) maintain the flow of inputs to maintain the flow of outputs, and (4) strengthen the organization's competitive position.

- Purchasing may also involve (a) development and review of the product specifications, (b) receipt and processing of requisitions, (c) advertising for bids, (d) bid evaluation, (e) award of supply contracts, (f) inspection of good received, and (g) their appropriate storage and release.

The Aucksun Supply ChainThe Aucksun Supply Chain

•Aucksun has developed a complete supply chain that spans procurement, distribution, manufacturing, and sales

Procurement

Aucksun provides two kinds of logistical services;

-Delivery of imported materials

-Delivery of supply materials

•Explain by two modes for this type of service;▫(1) Regular Purchasing

Forecasts customer’s demand by ERP system. Generates and places purchase order to

manufacturers.

Procurement

Inventory analysis and

demand forecast

Placement consolidated orders

Department and contracts

Earnest money deposit and

letter of credit

Inspection, Customs,

Clearance and Shipping

Barcode and

storage

Final Payment

The regulation purchasing process

Procurement•Explain by two modes for this type of

service;▫(2) Spot Purchasing

This is occasionally used or irregular demand occurs and the steel suppliers in the market happen to have request supplies available.

In this case , purchasing plan are made and implemented based on the production requirements and purchasing price will be the market price at the time of purchasing.

Manufacturing•Two main products are steel sheet and

aluminum alloy sheet.•Need metal material in IT inductry and

covered 88% of product line.•Make to order.•Keep a three-months supply of row

materials as inventory.•There are 3 critical steps namely cutting,

coiling and flattening, that take place on the plants.

Marketing and Sales1. Determining the target of customer.2. Understanding the customer’s needs.3. Explaining Aucksun’s capabilities and

negotiating.4. Obtaining customer requirement and

expectation.5. Provide sample products.6. Obtaining customer’s approval and agreement.7. Developing contracts.8. Placing orders.9. Processing, storing and delivering goods10.Receiving payment

Distribution

1. Distribution Process of Imported Material

2. Distribution Process of Supplied Material

• Main row materials are fingerprint-gulvanized and hot-dip gulvanized sheets.

• First, produced and developed in Japan, become commercialized later and have been widely use in electronic industry.

• There are abundant supplies of these products that differ significantly among various steel manufacturers.▫ Japanese supplier -- High-end customers▫Korean supplier – Medium quality and price, but

offer the best quality and price▫Chinese supplier– Lowest price, but due to the

instability of the manufacturing process and demand is small.

Distribution

• In the situation▫ Purchasing prices is lower than market price, so

customers order is placed.▫ Aucksun usually adjusts the sales price to benefit for

customers.▫ Aucksun’s imimplementation of forward purchasing

method is less complex than the practices in the west.

▫ In the long-term strategic partnership allows Aucksun and its customers to share risk and benefits.

Distribution

Distribution Process of Imported Material

In this service, all of the materials are imported by the

supliers and shipped to a domestic dock and then finally to

Aucksun. Therefore, the supply and price

of row materials have a big impact on

Aucksun

Distribution Process of Supplied Material

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 row materials have little impact on Aucksun

Problem Description and Problem Description and StatementStatement

Competition within the IndustryCompetition within the IndustryYangtze River Delta

1980: Open Door PolicyLow-quality servicePrice competition intense

Pearl River Delta2001: Entry to WTO“Imported Materials Processing”Focus high technology

• Standard Higher than Pearl River Delta• High-Quality and Full Professional Logistic Services require by customer• Need business scope, technology and management capability

Shanghai, Nanjing, Suzhou, Wuxi, Changzhou, Yangzhou, Zhenjiang, Nantong, Taizhou, Hangzhou, Ningbo, Huzhou, Jiaxing, Shaoxing, Zhoushan and Taizhou.

Guangzhou, Shenzhen, Dongguan, Foshan, Zhongshan, Zhuhai, Jiangmen, and parts of Huizhou and Zhaoqing

Competition within the IndustryCompetition within the IndustryFocus on High Technology

Suzhou Nippon Metal Co., Ltd Invested by: Japan Nippon Steel Co., LtdThe steel sheets produced by Japan Nippon Steel Co., Ltd. Its service objectives are copiers manufacturers( such as Sharp).

Competition within the IndustryCompetition within the Industry

Yangtze River Delta

Jiangsu ProvinceJijie Metal Co., Ltd (Suzhou) Wuxi Meifeng Metal Co., Ltd (Wuxi)Nippon Metal Co., Ltd. (Suzhou)

Jijie Metal Co., LtdInvested by: Taiwan Jijie steel Co., LtdThe steel sheets produced by Japan Nippon Co., Ltd and Taiwan China Steel Co., Ltd. Its service objectives are computer manufacturers (such as Asus) and LCD manufacturers (such as Auo).

Wuxi Meifeng Metal Co., Ltd Invested by: Japan Sumitomo Co., Ltd, Shanghai Sumitomo Co., Ltd and Taiwan Meisheng Co., LtdThe steel sheets produced by Japan Kobe Metal Co., Ltd.Its service objectives are LCD manufacturers(such as Sharp, Chimei)

• First mover AdvantageOne of the first full service providers in the Yangtze River Delta

• Scale Advantage- Large Asset and Strong Distribution capabilityIn 2006: shipped out 90,000 tons of goodsBy the end of 2007, Aucksun‘s assets worth 421 million and its distribution amount reached 131,500 tons. - Reduce Purchasing Cost: Increase Revenue Large purchase volume and good relationships

Aucksun’s Competitive AdvantageAucksun’s Competitive Advantage

Aucksun’s Competitive AdvantageAucksun’s Competitive Advantage• Client Relation Advantage• Long term relationship with more than 200 customers in IT

industry & Fortune 500 Companies• Human Resource Advantage • Emphasis on Training and Identify Talents• Location Advantage• - ZhangJiaGang (ZJG), Jiangsu: thousand IT

manufacturers in residence = enormous consumer base• - Transportation• - Rule and Regulation on Free-Trade Zone (tariff free

logistic services)

ClientsClients• leading technology, high precision products to achieve the internationally renowned IT (PHILIPS, BenQ, ASUS, etc.)• appliances (LG, SUMSUNG, etc.), • auto parts ( GM, NISSAN, etc.) • and other customers for high quality, high technical requirements for supporting metal. 

Aucksun’s Challenges and ProblemAucksun’s Challenges and ProblemRegion and Distribution Capability Restricted- Only 1 distribution center (ZJG headquarters)- Lost Prospect Customer beyond 250 km distance shipping limit

Forward Purchasing Strategy - An Unbalance between Integration and CustomizationFailure in integrating uncertainty demand: risk pooling.Customer request specific raw material which cannot be combine with other - Uncertainties in Supply, Inventory, and Price Raw material prices and customer’s demands fluctuate in 3 month windowRisk in overstock/ understock Risk in financial loss/ goodwill damage-Capital RiskFinancial reserve for inventory investment Limited loan channels with high interest rate

Aucksun’s SolutionAucksun’s Solution

1. Better Collaboration with Downstream Customer

2. Better Supply bas management with emphasis on how to deal with supply disruption

solution

Nature of the Steel IndustryNature of the Steel IndustryIn 2007, the country produced 489.2 million tons of crude steel, recording a production growth of 15.7% from the previous year, while the Chinese consumption of crude steel reached 434.4 million tons, rising by 11.9% from the previous year.

Ranked behind China were Japan and the U.S., with a production of 120.0 million tons and 97.2 million tons respectively. 

In 2007, China’s steel industry revealed signs of consolidation in a market that was previously rather fragmented, and in need of mergers and acquisitions. Within the market, the 10 leading steelmakers produced 162.7 million tons of steel products, accounting for more than 50.0% of the country’s total output.

Shougang Group and Tanggang Group in North ChinaBaoshan Iron and Steel (Baosteel) Group and Maanshan Steel Group in East ChinaWuhan Iron and Steel as well as the Panzhihua Iron and Steel Group in Central China

Nature of the Information Technology (IT) IndustryNature of the Information Technology (IT) Industry

• Profitability is determined by all members along the chain,

including the raw material suppliers, manufacturer, retailers,

consumers

• Capital Intensive- investment in R&D and Cost control and

Risk Management

• Simple Logistic Operations usually do not add significant

values

Nature of the Logistic IndustryNature of the Logistic Industry

In 2005, some 16,000 companies were registered as logistic providers

Although none has more than 1.4% market share

3PL comprised of four major groups:

1.Large state-owned enterprises

2.Medium-size logistics providers

3.Logistic divisions of large manufacturers and distributors

4.Foreign companies

• High growth is expected in the industry

• Customer will become more sophisticated

Nature of the Logistic Nature of the Logistic IndustryIndustry

Challenges

1.Government regulations

- Localized regulation: not national

- Many government sectors

2.Quality of services

3.Internal Road and Rail systems

4.Transportation and Logistic Data Tracking

Logistic growth benefit IT Logistic growth benefit IT industryindustry

• Cost effective: purchasing raw material,

inventory control, distribution, and after-sales

services

• Outsource logistic operation with Professional

• Better service, technology

SummarySummary

• Yangtze River Delta Competitors and Challenges

• Value-added activities for raw material

• Attract and Retain high quality customer base

• Better serve customer, while reduce cost and risk

Logistic Model support

• Low risk

• High efficiency

• Competitive IT supply chain

Case Case QuestionsQuestionsDescribe Aucksun’s metal procurement and delivery process.Is the chain Centralized or Decentralized? Explain the difference.Centralized

Decentralized

• decision made at central location of entire supply network• minimized total cost at a satisfy service level• network generally own by single entity • saving/ profit allocate across network using contractual mechanism • centralize central lead to global optimization • require technology allows single point of contact• fewer distribution center – lower overhead cost

• each facility identifies its most effective strategy without consider the impact on other facilities in the supply chain• decentralize system leads to local optimization • lead time can be reduce as located in the market• transportation cost are higher

Centralized• Manage and Store own Inventory

• One main location, ZNG

Decentralized

• Outsource transportation to logistic service provider• Customer storage of goods in the case in Distribution Process of Supplied Material

Distribution Process of Imported Material

Distribution Process of Supplied Material

Advantages and Disadvantages of the forward purchasing approach at Aucksun.

Advantage• Potentially Reduce Cost of raw material while Gain higher Profit margin.• the other advantages followed by the definition. (slide 18th)

Disadvantage

• An Unbalance between Integration and Customizationo Failure in integrating uncertainty demand: risk pooling.

o Customer request specific raw material which cannot be

combine with other

• Uncertainties in Supply, Inventory, and Price o Raw material prices and customer’s demands fluctuate in 3

month

o Risk in overstock/ understock

o Risk in financial loss/ goodwill damage

• Capital Risko Financial reserve for inventory investment

o Limited loan channels with high interest rate

Why do IT manufactures outsource the procurement of raw materials to Aucksun? What are the benefits? How would this affect the upstream material suppliers?Outsource benefit

• Reduce Cost and Risk in Inventory Management o Management Cost o Risk in Overstock/ Understock o Risk in Demand uncertainty - failure Risk pooling

• Reduce Capital Investment

• Focus on its core competency and strengthen image

• Flexibility in transfer o The ability to better react to changes in customer demando The ability to use the supplier’s technical knowledge to accelerate product development cycle timeo The ability to gain access to new technologies and innovation. o Critical in High tech where technologies change very frequently

Affect upon Upstream SupplierAffect upon Upstream Supplier

Cost

• Reduce price due to larger bargaining power from Aucksun

• Bullwhip effect with the faults presumption of consumer

demand result in larger volume production/ overstock

Benefit

• Demand guarantee

• Larger volume of purchase

• Selling through Aucksun – do not need processing process

Plan for improving current forward purchasing processWhat are key issues, difficulties, and required resources for each action step.

What data and additional information are needed for further analysis and decision making?

• Risk pooling inefficiency

•Need to know re-evaluate client request on

material and re-segment demand, not group

everyone together

What data and additional information are What data and additional information are needed for further analysis and decision needed for further analysis and decision making? (Contd.) making? (Contd.)

• Potentially decrease forward purchasing time

(less than three month)

• evaluate deal price with customer to better

meet the price of inventory in storage

• discuss with client to increase more of the

storage in client ‘s warehouse.

What data and additional information are What data and additional information are needed for further analysis and decision needed for further analysis and decision making?making? (Contd.) (Contd.)

• Reduce Spot purchasing

• evaluate the cost of inventory storage compare

to the ability to gain profit margin

▫ from forward purchasing

• Utilize technology

• utilize the Vendor Managed Inventory (VMI)

service to better communicate and

▫ adjust client demand

• Manufacturing and Distribution center Expansion of location

to other major economic zone with high emphasis on

technology and high demand in the market. (Pearl River

Delta, Bohai Bay Region) – reach wider customer base and

supplier base ▫Need to consider about • Potential market demand• Competition – their growth and weakness• Supplier and product supply volume – match quality and

service• Government’s regulation• Transportation and Logistic Provider

• Centralize Transportation – rather than outsource to logistic

provider

• Consider the Cost vs Benefit

• Logistic on national scale

• Contractual relationship with Supplier – Backward Integration • Shanghai Securities News, citing a company filing reported

that Jiangsu Aucksun Metal intends to acquire a 45% stake in SK (Dongguan) a steel processer and distributor, for CNY 29.08 million. The proposed acquisition will increase the stake of Aucksun Metal in the target company to 75 percent. (11 APR 2011)

Do you think Aucksun should adopt other procurement strategies as well?How to determine the types of purchases and/or customers appropriate for each procurement approach?

Bottleneck Items• Ensure Supply

Strategic Items• Form partnerships

Non-Critical Items• Simplify and automate

Leverage Items• Exploit purchasing power and minimize cost

LowLow

High

HighProfit Impact

Su

pp

ly R

isk

Kraljic’s supply matrix on purchasing strategy

Kraljic’s Supply Matrix Kraljic’s Supply Matrix • Firm’s supply strategy should depend on

two dimensions• profit impact

oVolume purchased/ percentage of total purchased cost/ impact on product quality or business growth

• supply riskoAvailability/number of suppliers/competitive

demand/ make-or-buy opportunities/ storage risks/ substitution opportunities

Bottleneck Items• Ensure Supply

Strategic Items• Form partnerships

Non-Critical Items• Simplify and automate

Leverage Items• Exploit purchasing power and minimize cost

LowLow

High

HighProfit Impact

Su

pp

ly R

isk

Kraljic’s supply matrix on purchasing strategyKraljic’s supply matrix on purchasing strategy

High Supply Risk and High Impact on Profit: Strategic ItemsProduct that are crucial for the buyer while face with scarcity/ difficulty of supplyHighest impact on customer experience Price is large portion of the system costLong-term partnership with suppliers such as Strategic Alliance, Vertical Integration

Low Supply Risk and High impact on Profit: Leverage ItemsBuyer dominateMany supplier - encourage competition in priceHave large impact on bottom line & ProfitPurchasing Strategy: Vendor Selections, Targeted pricing, Competing Bidding

High Supply Risk and Low impact on Profit: Bottleneck ItemsProduct that can only be acquired through one supplier Seller dominateDo not contribute a large portion of the production cost but supply is riskyEnsure continuous supply is important -Long term contracts and/or carrying stock

Low Supply Risk and Low impact on Profit: Non-Critical ItemsProduct that are easy to buy with low financial impactStandardization: Simplify and Automate the procurement process Decentralized procurement policy is appropriate – no need for managerial process

Push and Pull StrategyPush and Pull Strategy

Aucksun : the Push strategy mainly with its’ forward purchasing strategy

Push-based supply chain:

Production and distribution decision are based on long-term forecasts

Pull-based supply chain:

Production and distribution decision are demand driven so that

they are coordinated with true customer demand rather than

forecast demand

Should achieve balance between push and pull strategy varies with the type of product

References • Zeng, A.Z., Zhao, L. and Hou, J., “Improving the

Effectiveness of the Forward Purchasing Strategy at Jiangsu Aucksun Metal Co., Ltd,” Council of Supply Chain Management Professionals Teaching Library, 2009.

• Simchi-Levi, Kaminsky, “Designing and Managing the Supply Chain” McGrow.Hill International Edition, 2009

• www.aucksun.com

Thank you for your Thank you for your attentionattention