5EC517 International Project Management Case Studies (CW2)

CASE STUDY 1: CONNECTING THE WORLD IN HONG KONG

In 2004, a multinational consumer electronics manufacturer re-adjusted its strategy from outsourcing
manufacturing to Engineering and Manufacturing Services and Original Design Manufacturers to
regain full control by manufacturing a significant percentage of the products in their own factories.

In order to reduce the risk and make production more flexible, the company decided on establishing
a central hub for so-called Supplier Managed Inventory (SMI) or Vendor Managed Inventory (VMI).
This is a business model in which the buyer of a product provides electronic information to component
suppliers. The component suppliers take full responsibility for maintaining an agreed inventory of the
parts, in this case at the manufacturer’s central hub. A third-party logistics provider is involved to make
sure that the buyer has the required level of inventory by adjusting the demand and supply gaps.
Based on Electronic Data Interchange formats, EDI software and statistical methodologies, the
suppliers and the manufacturer can obtain a better understanding about each other’s situation,
enabling more accurate forecasts and the maintenance of correct inventory in the supply chain.

As the main factories were in Asia, the location of the first hub for most of the product components
should be in Asia. Due to an excellent infrastructure, the absence of major natural catastrophes, tax
and duty advantages, and ease of doing business, Hong Kong was chosen as the hub location.

The main stakeholders of the project were:

-the consumer electronics manufacturer

-115 suppliers located in Europe (e.g. Hungary), Asia (e.g. China, Vietnam, the Philippines, Japan), and
the Americas (e.g. Mexico and Brazil) that were supposed to deliver their components to the Hong
Kong hub.

-thirty internal and external factories for sub-assemblies and finished goods which had to procure
components from the SMI hub

-the logistics partner.

This complex international project had a very long planning phase which started in 2004. The concept
needed to be worked out, and the right logistics partner found. Lead times needed to be calculated
with different local customs regulations in mind. For instance, the operations in Brazil and India caused
uncertainties due to frequent strikes and customs clearance issues. An extra week for those deliveries
needed to be factored in. India posed an additional challenge because in some states electronic
invoicing was not allowed. In addition, a poor infrastructure and power outages had to be considered.

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The implementation phase started in 2006. The project was divided into four smaller sub-projects:

1 Processes: responsible for the re-design of supply chain processes

2 IT: responsible for information technology support

3 Legal: responsible for a consideration and adherence to global rules and regulations as well as
contract management

4 Business control sourcing: responsible for a global integration of suppliers and EMS/ODMs
with the new hub.

In total the project had roughly 200 members, with 175 of them being external contractors and only
10 permanent employees assigned to the project’s core team. The project had a steering committee
with the Head of Sourcing and Supply, the Vice President of Supply Chain Operations, the Director of
High-Volume Sourcing, and the Director of Sourcing Business Management. The project sponsor was
the Senior Vice President of Operations. The organizational chart in the Figure on the next page
illustrates the structure of the project.

All necessary communication needed to go through the consumer electronics manufacturer. The
suppliers were not supposed to get in touch directly with the logistics company.

The implementation phase started with a pilot that was carried out manually, i.e. without information
system support. Some pre-selected component suppliers located in France, the USA, and Germany
took part in the pilot to validate the process. They were selected based on their experience with the
RosettaNet system. This is an organization working on common standards between companies to
electronically process transactions and move information within extended corporate supply chains.
RosettaNet member companies represent 1.2 trillion US$ in annual revenue and in moving billions of
US$ within their trading networks using RosettaNet Partner Interface Processes (RosettaNet, 2008).

In the middle of the first part of the implementation phase, the sub-project leader for processes
noticed that the team had to spend time on a task they hadn’t been aware of: the alignment of
processes between the suppliers and their own processes. The bigger the suppliers, and the lower the
transaction volume they had with the manufacturer, the more challenging the negotiations were
regarding process synchronization. No quick fix was available for this issue apart from an additional
resource that was allocated to the sub-team to accelerate negotiations.

The sub-project ‘business control sourcing’ was contacted by an upset US supplier regarding the
following problem: the hub staff in Hong Kong registered parts according to Hong Kong local time. For
instance, they will register a goods receipt at 10.00 a.m. on July 1st. However, the local time of the
US-American supplier will be 1 p.m. on June 30th which represents a different quarter of the year.
This caused inconsistencies in the quarterly book closing. In a brainstorming meeting, the sub-project
team came up with the solution to send the information to the South-East Asian operations of the US-
American supplier located in the same time zone as Hong Kong. It took the team two weeks to work
out this countermeasure and establish it.

All sub-teams encountered communication problems they had not expected. First, it was very difficult
to understand project members from Singapore and Hong Kong, due to their local accents and high
talking speed. Second, the meaning of the words turned out to be different between various
stakeholders. Industry standard terms like ‘Inventory Balance’ can have different meanings. Is this
total inventory? Do you include inventory committed to production, inventory with quality issues,
inventory in incoming inspection, etc.? Another example is the term ‘delivery date’. Is this the date

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when the logistics provider picks up the goods? Or is it the date when the goods arrive in the hub? Or
is it the date when the supplier places the goods at the pickup location? The project manager
established a task force to clarify all critical terms with all major parties involved. This additional effort
took three months and prevented team members from pursuing other tasks in the meantime.

Organization chart of consumer electronics manufacturer’s global hub project

The legal sub-project team had to negotiate Trading Partner Agreements with each of the 115
suppliers and 30 factories comprising the technicalities and details regarding process and data flows
via the B2B communications. The contract was a written and legally binding agreement about the
responsibilities and liabilities of each party. These started with the selected suppliers that had
RosettaNet experience. Early on in the process it became obvious that the negotiations would take
much more time than had been anticipated. This was due to the necessary process alignment which
had not been taken into consideration. Another issue was the interdependencies between all
agreements. When the project manager received the report about the prolonged negotiations he
escalated this to the steering committee, highlighting an expected project delay of at least three
months due to a lack of additional resources. Although unhappy, the steering committee accepted the
delay because of resource constraints. To minimize delays, the sub-project leader and his team made
it a priority to learn from the first Trading Partner Agreement negotiations. Together, they created a
checklist which reduced the negotiation period from six to two months. In addition, an
interdependency diagram was created in order not to lose the overview of what had been negotiated
with the impacts on further negotiations.

The project manager was taken by surprise by a near showstopper for the whole project, namely
internal politics at the participating global suppliers. When the negotiations with the first suppliers
started, they quickly reached a stalemate due to internal fights on the suppliers’ side. The reason was
conflicting interests in different subsidiaries. This was especially true for suppliers without global
account management. A common conflict was the allocation of sales revenues within the international
supplier. Has the European or the Asian operation sold the components to the manufacturer? Before
the introduction of the Hong Kong hub, the factory they did business with, for instance, was in
Hungary. Now, they needed to sell the components to an international sales unit of the manufacturer
in Hong Kong. The European operation of one supplier ‘lost’ 100 million Euros sales volume to the
Asian operation, which led to unpleasant arguments.

In one of the first weekly status reports, the project manager was informed about this issue.
Immediately, he put the traffic light on red. As this issue was outside of his control, he escalated this
to the steering committee. He urged members of the steering committee to meet with high level
managers at the component suppliers in order to overcome their internal deadlock and save the
project.

After six months of manual testing, the automated information system was introduced in phases
which took about twelve months. During that time, more issues emerged.

The business control sourcing team leader together with the IT team leader reported another problem
they had encountered with training the internal users of the new system. Legal requirements and
regulations could not be met because of a lack of knowledge inside the consumer electronics
manufacturer. The employees had no understanding of applicable tariff rates and statistical categories
for merchandise trading, such as HTS-numbers or export control classification numbers. According to

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international standards, the net weight of components needed to be indicated on the invoice. Again,
the manufacturer did not have this information.

The project manager received a project report with a red light. He negotiated with line managers to
get additional resources for a task force that obtained the missing information. In parallel, he
suggested to the steering committee those internal procedures and systems needed to be changed.
He got approval, for instance, to modify the request for quotations. Simultaneously, training in export
and import regulations of the main trading zones was provided to the internal users of the SMI system.
This led to yet another delay and increased costs.

The go live of the SMI hub with all the parties involved finally took place six months after the scheduled
date. Additional training and other countermeasures had also led to a cost overrun.

However, the project manager was still successful due to the creativity of his team: in one of their
status meetings, they had the idea of adding a simple additional feature to the existing software which
protected the commercial information belonging to the component suppliers against unauthorized
access by OCMs/ODMs or even direct competitors, which is a frequent issue with UMI management.
As the component suppliers benefited from this software change, they were prepared to reciprocate
by granting additional commercial benefits to the consumer electronics manufacturer. Thus, the
manufacturer could amortize the investment in the SMI hub with the related software within six
months.

Questions to use as a guide for your report

1 What areas would should the project manager have prioritised?

2 Identify the issues emerging during the implementation phase

3 Where do you see the links between project planning and project implementation?