2009 ACADEMIC CASE STUDY SERIESImproving the Effectiveness of the Forward Purchasing Strategy atJiangsu Aucksun Metal Co., Ltd.An Academic Learning Case Study written for theCouncil of Supply Chain Management ProfessionalsAmy Z. Zeng, Ph.D. 1Department of ManagementWorcester Polytechnic InstituteWorcester, MA 01609USALindu Zhao, Ph.D.Institute of Systems EngineeringSoutheast UniversityNanjing, Jiangsu 211189ChinaJing HouInstitute of Systems EngineeringSoutheast UniversityNanjing, Jiangsu 211189ChinaCouncil of Supply Chain Management Professionals333 East Butterfield Road, Suite 140Lombard, Illinois 60148 USA+ 1 630.574.0985education@cscmp.org1Corresponding authorThis document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from theCouncil 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 boardwithout prior written permission from CSCMP.Improving the Effectiveness of the Forward Purchasing Strategy atJiangsu Aucksun Metal Co., Ltd.PrologueAucksun, or Australian Foreign Shunchang Metal Co., Ltd., is a professional metalprocessing and logistics service provider for the IT manufacturing enterprises. It is located inZhangjiagang (ZJG), a medium city in China’s Jiangsu Province. Example products providedby the company include galvanized steel plates, hot-dip galvanized steel plates, aluminumalloy 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 manufacturingplant of Aucksun on a Monday morning, Mr. Li, however, is not feeling as bright as thesummer sunshine. Everyday before he goes into his office, he likes to stop at the entrance andglance at the dark blue building where the workers are preparing for setups to process variousmetals sheets. But for the past month, he has been struggling to revise the procurementstrategy for the company.As the Managing Director of the Manufacturing Department at Aucksun, Mr. Li isresponsible for not only all the manufacturing related decisions, but also the procurement andsupply of raw materials. Since the company was founded not long ago, how to improve andmanage the material flow and the associated operational process is one of the company’scurrent 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. Lithat the procurement of raw materials not only plays a critical role in the well-being of hisDepartment, but also affects the smoothness and the financial performance of the entireAucksun supply chain.Aucksun was registered in September, 2002 and started operations a year later. Just liketheir 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 corecompetency 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 ofcompanies. With his extensive experience and frequent interactions with Aucksun’s variouspartners, 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. Forinstance, the logistics industry nestling in the Pearl River Delta has been in existence formore than a decade; however, in the Yangtze River Delta where Aucksun is located, the2This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from theCouncil 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 boardwithout prior written permission from CSCMP.industry has only 6-7 years of history, but the region has a faster growing demand forlogistical 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 ITcustomers demanding higher quality and more complex services and competition in China’s3PL industry becoming more intense, Mr. Li knows that it’s imperative for both himself andhis employees to keep up with the changes and for Aucksun to constantly improve itstechnologies 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 toimproving procurement strategy requires looking into the complete process flow of thecompany. As such, he starts pulling all the data and facts about the company to analyze themfrom both strategic and operational perspectives.BackgroundAucksun is located in the well-developed city of Zhangjiagang (ZJG) in JiangsuProvince with its growth inevitably influenced by the economy of the city. ZJG isstrategically located at the intersection of two economic development zones along China’seastern coastal line and the Yangtze River. A number of more well-known and larger citiessuch as Shanghai, Nanjing, Suzhou, Wuxi and Changzhou are in the neighborhood. Figure 1shows the geographic position of ZJG.Figure 1: The Geographic Position of Zhangjiagang (ZJG)3This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from theCouncil 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 boardwithout prior written permission from CSCMP.Because of its excellent location, ZJG is a rising star among the medium-sized industrialcities along the downstream of the Yangtze River. The city was ranked second amongChina’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 wasdesignated as a province-level development area in late 1993. With over a decade ofdevelopment and construction, this special zone has become the center of new technologiesand an important channel to attract both domestic and foreign investments. By the end of2006, this region has attracted over 1,500 enterprises, out of which over 300 are jointventures, Sino-foreign cooperative enterprises, and wholly foreign-owned enterprises. Morethan a dozen world-famous and leading enterprises are housed in here, and the zone is rankedin 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 afour-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 bereached. Additionally, it takes two hours to get to Hangzhou and Nanjing.•Rail: The Shanghai-Nanjing railway is 40 kilometers away in the south and theXinchang railway is only a little over 10 kilometers in the west.•Air: Three international airports are nearby: Shanghai Hongqiao airport, Pudongairport, and Nanjing Lukou airport. There are also three regional airports. Theexistence of multiple airports in the greater ZJG area provides a convenient gatewayto the world-wide market.•Water: The ZJG harbor is considered first-class international business harbor and thelargest freight hub in Yangtze River Delta. It has 33 berths at ten-thousand tonscatering for containers, steel, lumber, chemical, coal, and other merchandise. Theharbor can house vessels of 50,000 tons and handle 80 million tons of goods everyyear. There are 23 routes to various places including Japan, Korea, Hong Kong,America, Australia, and European countries. Every month, 42 voyages deliver freightto and from 40 countries and over 140 harbors in the worldvoyageJiangsu Aucksun Metal Co., Ltd.Aucksun (www.aucksun.com) is established under the joint investment of JiangsuAustralia Industry Corporation and the Hong Kong Chang-Zheng, Ltd. The total initialinvestment is about $10 million. The land area is about 24,000m2 with the construction areaof 9,600 m2. Aucksun specializes in processing and distributing cold-roll steel and zinc sheets4This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from theCouncil 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 boardwithout prior written permission from CSCMP.for computer and electronic manufacturers. Its production and processing capacity is 120,000tons per year.Aucksun is composed of five primary departments: operations, manufacturing,information, business support, and administration. The complete organization chart is shownin Figure 2.General ManagerAssociate GMOperationsDeptAssociate GMBusinessSupportDeptManufacturingDeptInformationDeptAdministrationDeptCustomsClearancePlant & FacilityProductionMaterial & SupplyQuality ControlHumanResourcesFinance& AccountingSales& MarketingFigure 2: The Organization Chart of AucksunThe Products and Services of AucksunWith its rapid growth in southeast China, Aucksun is becoming the core customer ofmany steel companies such as Nippon Steel Corporation of Japan, POSCO of Korea, DongBuSteel of Korea, SK Network of Korea, China Steel in Taiwan, and the three largest steelcompanies in China. With respect to its downstream, Aucksun has established steady andlong-term relationships with more than 200 customers in the IT industry, which includecomputer and electronic consumer goods manufacturers. Aucksun’s products are used incustomers’ personal computers and laptops, and the company’s distribution networks span theentire world.Relying on its excellent collaborative relationships with both domestic and internationalsteel manufacturers, Aucksun is able to purchase steel materials with special standards frommultiple channels in order to help customers reduce costs and wastes. Aucksun has a storagecapacity 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 and5This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from theCouncil 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 boardwithout prior written permission from CSCMP.implemented ERP system for supply chain management, marketing, order processing, andmanufacturing operations. The technical leads of the company not only are knowledgeableabout the functionality of various steel materials, but also possess abundant experience inmetal processing technology such as pressing, plating, and spray painting. This allowsAucksun to offer high-quality products and comprehensive technical supports to itscustomers. Striving to facilitate customers to achieve zero-inventory, Aucksun promisesaccurate 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 aforward purchasing strategy to maintain certain level of inventory. Forward purchasing is atype of procurement technique used to satisfy prospective demand and implemented beforeactual orders are received. As a critical step in Aucksun’s operational process, forwardpurchasing is a weapon to create competitive advantage; on the other hand, it may also leadto overstock risk. The company is concerned about how to implement the forward purchasingstrategy to balance the supply, inventory, and price.The Aucksun Supply ChainAs a professional metal logistics service provider for the IT industry, Aucksun hasdeveloped a complete supply chain that spans procurement, distribution, manufacturing andsales. In what follows, a detailed description of each element is provided.ProcurementAucksun provides two kinds of logistical services: delivery of imported materials, anddelivery of supplied materials, where in the latter, Aucksun’s customers are responsible forprocurement whereas Aucksun takes the responsibility of materials processing anddistribution. In this case, the first service—delivery of imported materials, in which Aucksunhandles both procurement and processing and delivery—is the focus. With respect toprocurement, Aucksun offers two modes for this type of service, which are explained below.(1) Regular PurchasingThe procurement group under the Manufacturing Department analyzes Aucksun’sinventory records of raw materials and forecasts customer’s demand using ERP system, andthen generates and places purchase orders to manufacturers, both domestic and abroad, in athree-month forward purchasing contract. The purchase price is specified in the contractsunder the agreement with the upstream suppliers when the contracts are determined. Theprocurement process is shown in Figure 3.6This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from theCouncil 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 boardwithout prior written permission from CSCMP.Inventory analysis andPlacement of consolidateddemand forecastDevelopment of contractsordersBarcodes andInspection, CustomsFinalEarnest money depositStorageclearance, and ShippingPaymentand letter of creditFigure 3: The Regular Purchasing Process(2) Spot PurchasingThis is used when occasional or irregular demand occurs and the steel suppliers in themarket happen to have requested supplies available. In this case, purchasing plans are madeand implemented based on the production requirements, and the purchasing price will be themarket 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 fromthe international suppliers, which is accomplished in one of the following two waysdepending 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 thedecision should be made by following the “electronic account manual” and by monitoring theentire 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.ManufacturingAucksun’s two main products are steel sheets and aluminum alloy sheets. The steelsheets consist of galvanized fingerprint resistant sheets, general cold sheets and hot-rolledsheets. The galvanized fingerprint resistant sheets are the mainly needed metal material in ITindustry and covered 88% of company’s product line in 2007. Aucksun processes andmanufactures metal sheets for their customers in a make-to-order fashion, but keeps athree-month supply of raw materials as inventory in their own storage place. The OperationsDepartment 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 SalesAucksun uses primarily direct shipment; that is, each salesman handles each targetcustomer 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) explaining7This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from theCouncil 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 boardwithout prior written permission from CSCMP.Aucksun’s capabilities and negotiating, (4) obtaining customer’s requirements andexpectations, (5) providing sample products, (6) obtaining customer’s approval andagreement, (7) developing contracts, (8) placing orders, (9) processing, storing and deliveringgoods to the customer, and (10) receiving payment.DistributionThe majority of the raw material used by Aucksun is metal, which is primarily acquiredfrom international metal manufacturers. On the basis of forward purchasing, Aucksun relieson 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’sand have been widely used in the electronic industry ever since. There are abundant suppliesof these products that differ significantly among various steel manufacturers. The Japanesesteel manufacturers, which target their markets to high-end customers, provide relatively highquality and high priced products. The products from the Korean manufacturers have mediumquality and price, but offer the best quality-price ratio; thus, the demand for this productgroup is the largest. The Chinese products have the lowest price, but due to the instability ofthe manufacturing process, the demand is relatively small.Aucksun’s product prices fluctuate somewhat, even though it often purchases materials inadvance. In the situation where the purchased price is lower than the market price at the timea customer order is placed, Aucksun usually adjusts the sales price to benefit the customer. Inthe opposite scenario, Aucksun sells the products at the market price if the fluctuation iswithin 5%; otherwise, Aucksun negotiates the sales price with the customer. It should bepointed out that Aucksun’s implementation of forward purchasing method is less complexthan the practices in the West, where many metal firms establish contracts with their buyersor 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 sharerisks and benefits.8This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from theCouncil 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 boardwithout prior written permission from CSCMP.ContractTechnicalConsultationAcceptanceDemandsampleForecastMaterials PlanSupportCustomer EvaluationTransportationOrderBefore ServiceNStorageKeep in the customers’ archivesOrder Filled?YSelecting MaterialsTechnical ServiceAssorting MaterialsProduction PlanDuring ServiceOrder PickupMachine SchedulingDisposalCuttingWastePackage/BarcodeStorageAssemblyShippingPost ServiceCustomersTechnical SupportProcess Support9This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from theCouncil 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 boardwithout prior written permission from CSCMP.Figure 4: The Distribution Process of the Imported MaterialsThese products, first developed and produced in Japan, became commercialized in the80’s and have been widely used in the electronic industry ever since. There are abundantsupplies of these products that differ significantly among various steel manufacturers. TheJapanese steel manufacturers, which target their markets to high-end customers, providerelatively high quality and high priced products. The products from the Korean manufacturershave medium quality and price, but offer the best quality-price ratio; thus, the demand for thisproduct group is the largest. The Chinese products have the lowest price, but due to theinstability of the manufacturing process, the demand is relatively small.Aucksun’s product prices fluctuate somewhat, even though it often purchases materials inadvance. In the situation where the purchased price is lower than the market price at the timea customer order is placed, Aucksun usually adjusts the sales price to benefit the customer. Inthe opposite scenario, Aucksun sells the products at the market price if the fluctuation iswithin 5%; otherwise, Aucksun negotiates the sales price with the customer. It should bepointed out that Aucksun’s implementation of forward purchasing method is less complexthan the practices in the West, where many metal firms establish contracts with their buyersor 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 sharerisks 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 toa domestic dock and then finally to Aucksun. Therefore, the supply and price of the rawmaterials have little impact on Aucksun.10This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from theCouncil 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 boardwithout prior written permission from CSCMP.DemandConsultationTechnologyMaterials PlanBefore ServiceCustomer EvaluationOrderKeep in the customers’ archivesSelecting MaterialsCustomer OrderTechnologySorting MaterialsShippingProduction PlanStorageOrder PickupMachine SchedulingSecondCuttingFinished ProductsWastePackage/BarcodeRecycleStorageAssemblyShippingLast PeriodCustomerTechnical SupportProcessing Support11This document is available from our site and provided for your personal use only and may not be retransmitted or redistributed without written permission from theCouncil 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 boardwithout prior written permission from CSCMP.Figure 5: The Distribution Process of the Supplied MaterialsProblem Description and StatementAucksun uses its own ERP system to manage the inventory information, forecast thedemand of downstream customers, and place orders three months in advance. As such, thematerials from the upstream suppliers arrive before the actual demand is received. Aucksunthen provides VMI service to the downstream customers and maintains one and a half monthsof supply. After receiving the orders from the customers, Aucksun cuts the raw materials intosmaller pieces in accordance with the required dimensions, packages them and then shipseverything to the customers. Most of the transportation operations are outsourced to otherlog…