Case study analysis and methodology

Otis Toy Trains

The proposal by the Chinese company JLPTC is attractive in terms of pricing. While price is an important factor and a key success factor in a lot of cases, there are other variables as well that need to be considered. As a consultant, it is important to state down the changes that are expected to take place objectively and then take a course of action based on that.

Some of these factors are how the supply chain will be impacted in terms of sourcing the products, logistics management, contract and service level scenarios, warehousing costs, inventory levels to keep, demand forecasting, level of information sharing as well as reliability, flexibility and responsiveness of the modified supply chain. (Swink, Melnyk, Cooper, & Hartley, 2011)

Discussing each in turn, the quality of the products that JLPTC makes will have to be a top concern, given that one of Otis train's core efficiencies lies in the detailing of its toy trains, and if this is outsourced to JLPTC, there effectively will be a loss of control. Secondly, as far as a logistics management scenario is concerned, the company was based in Minneapolis as the buyers were concentrated mainly in that area, saving on logistics costs. However, now when the production will be done in China, by the company, a host of international trading regulations will be involved, clearing and forwarding agents at both ends respectively will have to be taken on board. Warehousing and inventory management costs will rise, as finished trains will have to be stored first in China and then in the U.S.A. Moreover, demand forecasting will now involve two entities and each will have its own input making it a lengthier process. (Swink, Melnyk, Cooper, & Hartley, 2011)

As far as sharing of information is concerned, the company will have to look at sharing crucial processes with them so that they can make the trains as per specifications. This could also lead to the company employing the same techniques in order to make trains under their own brand name leading to more competition in the industry unless an agreement is made barring that company from continuing its own production of toy trains. Secondly there is also the concern that an IT system will have to be in place to encourage real time information sharing to better align the two companies so that they perform better. This will also be useful whilst forecasting demand and deciding upon inventory levels. (Chopra & Meindl, 2009)

Otis will also have to consider how reliable the Chinese company is in meeting deadlines and in sticking to the commitments it has made. Moreover the flexibility of the company will be affected as now, new designs will have to be developed in conjunction with the Chinese and this will make it less flexible and some people might be conservative towards taking risks. The company being aligned with another will not be as agile either. As far as the responsiveness of the supply chain is concerned, with the increased distance the company will either have to increase its inventory level or incur higher transportation costs (in terms of extra payment for speedy deliveries) in order to maintain its current level of responsiveness. (Chopra & Meindl, 2009)

Some recommendations will be to find out about the company from its suppliers to gauges its financial strength, employee and management strength and capabilities as well as work done in previous years in order to gauge how they can manage in complementing the Otis brand of toy trains. (Swink, Melnyk, Cooper, & Hartley, 2011)

Answer Two

Keeping these issues in mind, I would recommend the company to enter into a strategic alliance with JLPTC for a long-term, and use this alliance to negotiate a deal whereby JLPTC will not enter the U.S. market under its own brand name. The relationship should such and not an arms-length or one-time transaction as the consistency of the product offering and the brand depends upon how the two can work smoothly together. (Chopra & Meindl, 2009)

Secondly if the alliance is made, the company should also make sure to protect its core advantage of designing beautifully detailed trains to them and only share the prototypes of the trains with the Chinese company to enable them to manufacture other products based on this model.

If the proposition is accepted several risks will be faced by the company, which are:

Exchange rate risks in terms of the price that the Chinese company quotes and how it is impacted by the value of the Yuan on that day. Secondly there will be a risk in terms of exposing the chain to vulnerabilities as it has been lengthened and there will be other parties involved including logistics partners.

Another risk here will be that of confidential information being leaked to other parties and care will have to be taken to avoid such a scenario. Moreover, the chain will now be exposed to external shocks in the Chinese economy as well, where inflation will also impact the cost of production for Otis.