Reasons to Diversify the Supply Chain

CJI Case Study

I. Major Facts

1. CJ Industries (CJI) Awarded a Major Contract: In October 2007, CJI secured a 5-year contract with Great Lakes Pleasure Boats, worth $10 million annually, starting July 2008. This contract represents 30% of CJI's annual sales.

2. CJI's Dependency on Heavey Pumps: CJI has been purchasing bilge pumps from Heavey Pumps, a local manufacturer, on a non-contractual basis. These pumps are a part of the components CJI supplies to Great Lakes.

3. Increased Demand and Supply Challenges: The new contract requires CJI to supply 50 bilge pumps per month, a significant increase from the previous sporadic orders of 50 pumps every four to six months.

4. Uncertainty of Heavey Pumps' Capacity: There are doubts about Heavey Pumps' ability and willingness to meet the increased demand.

5. In-House Production Consideration: CJI has the capability to manufacture these pumps in-house, but it would require a $500,000 investment, space clearance, and additional labor.

6. Alternative Suppliers: There are other bilge pump manufacturers, but they are located further away and have not been previously used by CJI.

II. Major Problem

Can CJ Industries guarantee a consistent and reliable supply of bilge pumps to meet the demands of the new contract with Great Lakes Pleasure Boats, considering the uncertainties with their current supplier, Heavey Pumps, and the challenges of in-house production or using alternative suppliers?

III. Possible Solutions

A. Continue with Heavey Pumps

· Advantages: Established relationship, proven quality.

· Disadvantages: Uncertainty in meeting increased demand, potential production and delivery cost increases.

B. In-House Production

· Advantages: Control over production, potential long-term cost savings.

· Disadvantages: High initial investment, lack of experience in pump manufacturing, time constraints.

C. Use Alternative Suppliers

· Advantages: Potential to meet demand, diversification of supply sources.

· Disadvantages: Unknown quality and reliability, increased logistics costs.

D. Combination of Suppliers

· Advantages: Spreads risk, ensures supply.

· Disadvantages: Complexity in coordination, potential quality inconsistencies.

IV. Choice and Rationale

My choice is D. Combination of Suppliers. This approach allows CJI to manage the risk of supply disruption by not relying solely on one source. CJI can maintain its relationship with Heavey Pumps while gradually integrating alternative suppliers or in-house production. This gives CJI a buffer period to assess the feasibility of in-house production and the reliability of other suppliers

V. Implementation

CJI should immediately initiate discussions with Heavey Pumps to assess their capacity and willingness to meet the increased demand. It should also negotiate terms for a more formalized contract to ensure reliability and possibly secure better pricing or priority production. At the same time, it should identify and engage with alternative suppliers by conducting due diligence to evaluate their quality, capacity, and reliability. It should start with small orders to test their capability.

Then it can begin a small-scale pilot of in-house production. This would involve allocating the required space, making the necessary capital investment, and hiring skilled labor. CJI should monitor this closely to assess viability for larger-scale production. After this, it can gradually shift to a diversified supply chain model where Heavey Pumps, alternative suppliers, and in-house production are all utilized. This would reduce dependency on any single source.

Implementing tight quality control measures for all suppliers, including the in-house production, would be the next step. This would involve regularly reviewing supplier performance based on quality, delivery time, and cost. It would also be advised to maintain transparent and continuous communication with Great Lakes Pleasure Boats regarding supply chain strategies and any potential risks or changes. This will help in managing expectations and building trust. CJI should also develop contingency plans for potential supply chain disruptions, identifying additional suppliers, considering stockpiling critical components, and having a crisis management team in place. If it implements this plan, CJI can reliably supply bilge pumps for the Great Lakes contract while managing risks associated with supplier dependency and in-house production challenges.

Discussion Questions

From CJI’s perspective, Mr. Ashby needs to investigate the capacity of Heavey Pumps to meet the increased demand, considering the new contract requirements. Additionally, he should evaluate the costs and practicality of CJI producing the pumps in-house, including the required capital investment, space, and labor. From Heavey’s perspective, the key issues include their ability to scale up production, the investment needed for increased production, the implications of a long-term contract with CJI, and the impact on their business if CJI chooses another supplier or opts for in-house production.