STRATEGIC SOURCING REVIEW OF MINIATURE CAMERAS FOR EINSTEIN

COMPANY OVERVIEW

It is now Today (February 2024).

You have recently been appointed as the Procurement lead role on the cross functional team at
Therason conducting market research to source a new miniature camera – a component in a
revolutionary new line of Therason blood testing devices, branded the Einstein. The Einstein
would eliminate needles from drawing blood and have the capability to analyse hundreds of tests
all within minutes at a local retailer. This would decrease wait times for patients for vital
information and potentially revolutionize health care all over the world.

For new product development capital projects, it is estimated that a thorough sourcing process
takes between eight and twelve months to complete, and an additional 2 – 6 months is often
required by new suppliers to invest in any specific tooling requirements, so although the new
Einstein is not expected to be released until November 2024, time is already of the essence.

The Lead Team at Therason have requested your team prepare a briefing paper on the sourcing
recommendation of no more than 3,000 (not including title page or supporting appendices as
supporting information) pre-reading prior to the 8th March 2024 Executive Lead Team meeting,
when you will be advised of approval to proceed.

The cross-functional team realised this supplier selection decision, which is one of the most
critical involving the new product line, is going to be difficult. It is clear that no consensus exists
among the various functions of engineering, marketing or
operations concerning which supplier(s) to select. You have
collated information and data from various departments in
the business, and have summarised everything you know
into the following market and business summary. As the
Procurement lead, you are now responsible for determining
the final supplier selection and document your proposed
sourcing strategy in your company format of the sourcing
recommendation briefing paper.

COMPANY OVERVIEW

Therason is a medium-sized health technology company founded in 2019 by Lilibet Homes,

located south of Sydney in Wollongong, Australia. The company, recognised as a well-
established blood analyser equipment manufacturer, has grown from a single product
manufacturer with annual sales of $2.3 million, to a multi-product $3.2 billion firm in just 5 years.

Blood tests do a lot: assess how well organs are working, diagnose immune disorders, and flag
changes that could hint someone has cancer. Typically when a blood test are required, a health
care provider will take a sample from a vein in the patients arm, using a small needle. After the
needle is inserted, a small amount of blood is collected into a test tube or vial. That blood is then
analyzed by specialized machines that can be anywhere from desktop computer to refrigerator
sized — machines that might only be found at a separate, off-site lab. In its early years, Therason
produced blood analyser equipment for use in laboratories.

Recently, Therason has developed a proprietary technology that can perform a wide range of
laboratory tests using just a few drops of blood, rather than the larger amounts typically required.
The breakthrough technology, named Einstein, is capable of conducting a multitude of tests
quickly, inexpensively, and with minimal blood samples. Rather than having to draw a dedicated
tube of blood for each test, multiple tests can be run using a single micro sample of blood in a
scaled-down, small machine that can fit on a desktop.
To support the release of the new propriety technology, Therason has revised its business model.
Under the new model, these innovative blood tests are offered directly to consumers through
partnerships with retailers, pharmacies and wellness centers, providing a convenient and
accessible alternative to traditional lab testing. The new business model has three pillars:

1. Direct-to-Consumer Model: Therason will disrupt the traditional healthcare testing model
by allowing consumers to order and access a variety of blood tests without the need for a
doctor's prescription. This direct-to-consumer approach will empower individuals to take
control of their health through more frequent and convenient testing.
2. Partnerships with Retailers: Therason has entered partnerships with well-known retail
chains, including C-Mart, to establish blood testing centers within their stores. This was
part of the company's strategy to make its testing services easily accessible to the general
public.
3. Low-cost testing: Support more affordable medical testing by offering tests at a fraction of
the cost charged by traditional laboratories. This will hopefully appeal to a broader
audience and encourage more frequent testing.

Aside from being an industry disruptor, Therason has a vision to be a trusted partner to business
customers with its motto ‘Transform, Perform, Inspire’ describing its mission to revolutionize the
medical testing industry, challenge and stretch boundaries of technology, and focus on customer
solutions and channels through continually improving and innovating. The company also
emphasizes state-of-the-art technology in its product design, production, information, and delivery
systems, safety and environment solutions.

The global blood analysis market size is currently valued at ~$208b, with an expected growth rate
of 7.23%. The growth of the market can be attributed to the increased medical spending by
government and regulatory bodies. These entities are actively involved in promoting regular
diagnostic examinations among patients, thereby driving the demand for blood testing services.
The projected growth rate of Einstein sales to the retail sector far exceeds the traditional blood
diagnostic equipment sector, and is predicted to surpass the traditional sector in total share of
shipments within five years.

As Therason is a small player in the global market, it has decided to pursue an aggressive
strategy of selling high quality Einsteins to the Australian / New Zealand market at affordable
prices. If the Einstein is successful, it is anticipated to increase the earnings of the business
substantially, ultimately accounting for 75% of company revenue after consolidation of its current
portfolio of manufactured products.

Therason has already started a pre-marketing campaign direct to medium and large Australian
and New Zealand business customers, promising prototypes in October 2024 and delivery for
businesses first in line from November 2024. This is designed to provide interest, foresight of the
product coming, and hopefully a market penetration strategy prior to any competitors trying to
infiltrate the Australian and New Zealand markets.

THE EINSTEIN

The new line of blood analyzers will be the flagship product of the company. It will allow a
customer to perform all the tests big lab machines could - from cholesterol to cancer - all from a
painless finger-prick. The technology is two-fold: a blood collection vessel called a Minitainer, is
used to collect microsophic blood volumes through a finger prick. The Minitainer is only 12.9
millimetres in height, just large enough to cold a couple of drops of blood. The blood will then be
tested by another device, the Einstein. The analysis machine, designed to look like an Apple
product, can diagnose 240 different diseases. A cartridge allows initial loading of blood samples
into the Einstein, and a camera captures sample data for indexing processed results. Inside the
Einstein, a material handling robot would move samples around subsystems in the device,
mimicking what a chemist does in an IRL lab, taking samples, diluting them, adding antibodies
and a reagent, and revealing a result. For wide adoption, the Einstein needs ease of use,
durability, portability, affordability and preferably self-calibrating capability.

The Epstein will be marketed as an

integrated point of care system that can
communicate with the Internet to receive
instructions for which blood tests to run
on the samples, before communicating
these results back through the Internet.
The results can then be compared to
medical data available on the Internet,
with the Einstein running supplementary
blood tests that were more targeted
based on the results of the comparison.

As an added incentive and value added offering for business customers, each Einstein will be co-
branded with the customer business logo. This has been confirmed by market intelligence as a
security feature in addition to a brand recognition value proposition for business customers.
Although the cost of the laser printing of the customer logo is low, the printing must be done to the
cases prior to assembly. This requires that the Einsteins are assembled in the Therason factory
as make-to-order.

The decision was made to pursue the business customer, through a strategy focused on shipping
low-cost, high-quality guaranteed, logo personalised Einsteins directly to business customers as
orders are received (make-to-order). This decision poses some risks, given that there is a ‘mixed
bag’ of opinions regarding the growth of the health technology in the retail sector. Lead time in the
value proposition is delivery would be a maximum of 4 weeks from initial order, so stock will be on
a monthly turnover and Einsteins will be generally manufactured in the month of expected sales.
This production model is similar to the Dell approach. Because the company does not plan to
build finished Einsteins (i.e., make-to-stock) in anticipation of future sales, market demand
forecasts, supplier quality, supplier capacity, lead time, and delivery reliability are critical factors.
The company is willing to carry units in component inventory as safety stock as a buffer against
missing customer order commitments.

Therason will assemble the Einstein in its own facilities, but intends to outsource many of the key
product components and subassemblies, including the miniature camera (minicam), a component
that is essential to the basic functioning of the Enstein. The decision to outsource the miniature
camera resulted from an executive-level insourcing / outsourcing study that concluded the cost to
manufacture these in-house was highly prohibitive, with initial analysis identifying more than two
million units manufactured per annum would be required to be anywhere near cost competitive.
The minicam requires production capabilities that are far beyond Therason’s current expertise.
The Sales & Marketing team estimates that first year demand for the Einstein, and therefore the
minicam, would be approximately 500,000 units, with a 20% growth expected for year two.
Expected pricing for the Einstein will be around $1,700 to $1,900 per unit. Camera demand
depends totally on final product demand, which is uncertain and may be volatile.

The table below details the monthly sales forecast for the Einstein. However, given the
uncertainty of the market for this product and Therason’s limited experience with marketing
directly to business customers, marketing estimates, with 95% confidence, that actual demand for
year one will likely be between 400,000 and 600,000 units. As with most high technology
companies, adequate supplier capacity is a critical issue. Taking a lesson from the demands
placed on it by its current customers, Therason will seek some assurance from its suppliers that
they can increase the supply of components by 25% within four weeks notice of changing market
conditions. Supplier responsiveness and ability to satisfy Therason’s volume requirements will be
critical.
 Year 1 Expected Sales (Units) Year 2 Expected Sales (Units)

November 30,000 November 36,000

December 38,000 December 46,000
January 49,000 January 59,000
February 55,000 February 66,000
March 50,000 March 60,000
April 42,000 April 50,000
May 33,000 May 40,000
June 36,000 June 43,000
July 38,000 July 46,000
August 39,000 August 47,000
September 47,000 September 56,000
October 43,000 October 51,000

THE CAMERA MARKET

Therason recognises that demand within the mini camera market is growing rapidly through
strong growth of the consumer electronics camera industry, although actual numbers are difficult
to obtain. The latest figures show the market is $13 billion dollars in total, with a number of large
players and then many small players. One of the challenges Therason faces, and perhaps a
major reason why Therason may want to quickly ‘lock in’ supplier capacity, is that other industries
use the same miniature camera, required for the Einstein to function. In particular, virtual reality
gaming producers are moving aggressively in the camera supply market. It has also been
identified that many new startups as well as academic researchers have invested heavily into
research and development to improve home testing technology, and it is expected that they too
will require the minicam component.

Suppliers of miniature cameras are often the same as suppliers of digital still or video cameras
due to the same components and similar manufacturing and assembly processes. Therason must
share their market with the growing virtual reality gaming, smart phone, computer and traditional
camera markets, and assess their relative leverage in the market given other market demands for
cameras

The decision to outsource the miniature camera resulted from an executive-level insourcing /
outsourcing study that concluded the cost to manufacture these in-house was highly prohibitive,
with initial analysis identifying more than two million units manufactured per annum would be
required to be anywhere near cost competitive. There is a myriad of specific electronic and
subassembly components used as raw materials to manufacture cameras, with many suppliers all
over the world producing on mass scales. The production process would require capabilities that
are far beyond Therason’s current expertise, so the decision to procure ready made minicams
was made. Marketing estimates that first year demand for the Einstein, and therefore the camera,
would be approximately 500,000 units, with a 20% growth expected for year two.

THE EINSTEIN CAMERA REQUIREMENTS

Marketing is now targeting the price of its Einstein line from $1,750 including a quantity discount
for large customers with ongoing high quantity orders, or up to $1,850 for a premium
configuration. Finance and Capital Development have reviewed the business case and
determined that the total miniature camera cost component would need to be in the $140 – 160
range including logistics. This is not unreasonable given the indicative market pricing. The
market for miniature camera extends well beyond the halthcare industry, and is not without its
share of uncertainty and disruptions.
Another key consideration in the supplier selection decision is that Therason is unsure whether it
wants to control the transportation link from the supplier(s) to its facility in Wollongong. The
company would be able to assume responsibility for transportation, but preferably not ownership
of inventory, from the supplier's facility. The company plans to support any inbound logistics with
carriers that offer corporate-negotiated rate discounts and to piggy-back its outbound products
heading to New Zealand, Melbourne and Perth. The team have decided to evaluate whether
suppliers have more efficient transportation provisions than Therason before they decide.

Quality control of the Einstien machines will be critical. The problem is twofold: Firstly, inaccurate
testing results could potentially misdiagnose patients by diagnosing them with an illness they did
not have or not actually diagnosing them at all. This risk was not considered likely to eventuate.
The second quality issue, which was considered more likely, was product defects in the Einstein
device. In particular, there is a recognised risk for potential quality problems associated with mini
camera components, as technology for capturing sample data are still in their infancy.

Business customers that would provide the testing technology to customers demand defect-free
products. With narrow profit margins, a single product defect, particularly when the Einstein is in
the customers' hands, can ‘wipe out’ any profit from the sale. Although exact numbers are difficult
to obtain, financial analysts at Therason calculate, based on experience and assumptions, that
each defect will result, on average, in $400 in non-conformance costs that Therason incurs
(including return freight, replacement and processing costs). Poor quality will also adversely
affect market reputation and future sales. Lost customer goodwill is extremely hard to quantify as
it depends on how the returns process satisfies the customer, however, having many returns can
damage not only the product reputation as being a “lemon”, but also tarnish the organisation’s
reputation as a quality provider.

The company plans to introduce the new line of Einsteins directly to the marketplace in November
2024. It must have inventory by the 7th October 2024 to begin process proving and pilot
production of prototypes to provide to key business customers to trial and influence decision
markers. The November date coincides with other new technology promotions prior to the end of
the year, which is the busiest time of year for businesses investing in technology assets. This
means that you will need to gain approval of the Executive Leadership Team of the
recommended decision at the 8th March 2024 Executive Lead Team Meeting prior to final
negotiations or contractual commitments. All suppliers have indicated they would need a written
and signed contract prior to expenditure for tooling and ramping up of production. Waiting for the
April or May Executive Lead Team Meeting could be disastrous for the timeline.

THE SOURCING PROCESS

Therason relies on cross-functional category teams to develop sourcing strategies for key
purchased items. Executive management views the miniature camera supplier selection decision
as a critical part of the Einstein development.

After being involved in an initial product development team which commenced in mid-2023,
Procurement researched the market in June 2023 and found that suppliers of miniature cameras
are generally the same suppliers of digital cameras due to the similar technologies. Components
for the miniature camera are common to producing smart phones, computers, webcams and
traditional cameras. The technology in digital cameras has matured, so more technical suppliers
were moving into the less developed area of minicams.

An initial search of miniature camera manufacturers by Procurement occurred during June and
July 2023 including sources such as internal subject matter experts, Dun and Bradstreet, Bureau
van Dyke, Global Edge, various government sources, chambers of commerce, electronics and
computer trade journals, professional associations and searching the internet. This market
intelligence estimated that the market size was approximately $13 billion in the financial year
2023. Suppliers of miniature camera capturing devices (and hence potentially cameras) was
initially 87 around the world.

During the months of June and July 2023 you attempted to contact all these 87 suppliers through
email or other forms of communication asking if they supplied cameras, and received 43 positive
responses. You were successful in procuring (through either a free sample, or buying through a
purchase order directly or through an intermediary) up to 5 specification equivalent items from 34
of these suppliers for Engineering to test, review and provide recommendations. Although some
suppliers were not keen about providing such a low quantity order, if they completely refused to
assist at all you assumed that they may not be interested in additional business.

Engineering supported the Procurement team's preliminary efforts by approving purchasing off-
the-shelf cameras for testing. This helped determine if the suppliers had a product that initially
satisfied Therasons expectations. Relying on product samples, while providing preliminary insight
into the capability and technology of each supplier, was not sufficient to support a final supplier
selection decision. Engineering have shortlisted to the following suppliers having the minimum
specifications required, in order from 1 (being best) to 13 (being the lowest, but still acceptable).
Engineering commented that there was a large difference from the 13th supplier in their ranking to
the 14th, and they would not recommend extending the list. They completed this assessment over
a quiet period from mid-August to mid-September 2023, ready for Procurement to analyse and
determine the sourcing strategy to approach the market.

RANKING SUPPLIER LOCATION

1 Sloan Capability Amsterdam, Netherlands
2 DragonReid Electrics Taipei, Taiwan
3 Calvin Projections Barcelona, Spain
4 Taegeuk Tech Seoul, South Korea
5 PEO Group Auckland, New Zealand
6 C-Cells Hitachi, Japan
7 Gaffney Tech Auckland, New Zealand
8 Wolfconn Bangalore, India
9 Lucky Technologies Shanghai, China
10 Mineo-X Port Kembla, NSW, Australia
11 Lexi Logic Guangzhou, China
12 Lonhro & Co Silicon Valley, USA
13 Gunther Data Capture Munich, Germany

All items would require a slight modification which was seen as simple for any manufacturing
supplier. Any minor modification would require tooling – an additional machine on the suppliers
manufacturing line to place a bracket to the rear of the component so that it could be fixed into the
socket of the Einstein. Tooling could take a number of weeks or months prior to lead time and
delivery. The team believe we should conservatively allow more time rather than minimum in
case suppliers had restrictions for operations to invest capital for tooling.

Operations have asked you whether they should have single or multiple suppliers and how any
requirements would be split proportionally between them at length. Having two or more suppliers
would mean tooling costs for each supplier (as tooling would have to be made to each suppliers’
plant). Due to the added complexity of monitoring quality issues, operations said that additional
resources may be required to be employed in the warehouse if there was more than one supplier
to manage stocks.

After the Sourcing Strategy was approved by the Lead Team on the 4th September 2023, the
team sent a confidentiality agreement to the 13 suppliers endorsed by engineering, advising they
were sending an RFI and required the company to sign prior to providing them the information.
This confidentiality agreement was to attempt to keep the intellectual property of the Einstein in
confidence as the intent was to provide the basic specifications required for the tooling. Wolfconn
refused to sign the confidentiality agreement due to company policies not allowing them and were
removed from the shortlist.
The RFI was developed and sent on the 2nd October 2023, requesting the 12 suppliers to provide
basic information regarding their company, indicative pricing on the specification and interest in
progressing as part of the process. The reason the team conducted an RFI was to shortlist
suppliers based on the indicative pricing and to provide further information from which to build an
RFT. The RFI allowed 3 weeks as the maximum time to respond.

By 30th October 2023, eleven of the suppliers replied with nine of the suppliers indicating pricing,
although not all cost competitive and within the initial target landed cost of below $160. Lexi
Logic replied indicated no pricing and that they were not interested in progressing. A follow-up
phone call indicated that they were simply using the RFI as market intelligence although would
not be using the information to share with others due to the confidentiality agreement. Sloan
Capability was disregarded in the shortlist as they advised their pricing would not be in the target
range and were honest to say it would not change. Lonhro & Co were also disregarded as the
landed cost would have completely been outside the target range. DragonReid Electrics stated
that they were at capacity, and although they were in the process of commissioning another line,
they would not be able to ramp up production until late 2025 so were excluded. Gaffney Tech
also indicated they were at capacity and would not be able to be included at this point. Gunther
Data Capture said they were interested in our requirements; they had the best product on the
market, but would only be prepared to disclose prices if Therason committed to dealing with them
from this point forward exclusively. Given the ranking of the engineering tests and the risk this
posed in term of not understanding other suppliers capabilities, the team rejected this immediately
and unanimously.

A concern that some of the suppliers may have not had a focus on this was raised by one of the
team members given Lucky replied in two days and Lexi Logic replied on the day of closing the
tender process. The team were particularly excited about the low prices indicated by the China,
Japan and Korean suppliers, with some team members stating that we should not progress with
the Australian or New Zealand suppliers at all. There was heated discussion about the costs and
benefits of including all five suppliers on the Request for Tender moving forward but it was
ultimately decided that the costs of additional analysis and time spent on progressing the RFT
process with five suppliers rather than three was worth the effort.

A summary of the results is shown below.

SUPPLIER LOCATION RFI RESPONSE INDICATIVE REQUEST

PRICING PROPOSAL?
Sloan Capability Amsterdam,  - price is base – this will not $175 NO
Netherlands reduce. Do not wish to waste time
to continue discussions if your
required price point is below this
DragonReid Taipei, Taiwan  - would not be able to supply you 2814.09 tnd NO
Electrics until 2025 as capacity extension
manufacturing line is being built
Calvin Barcelona, Spain  - no response received – this was NO
Projections followed up, but no reply
Taegeuk Tech Seoul, South  - would be very keen to discuss $130 YES
Korea requirements and get contract (quoted in
Won)
PEO Group Auckland, New  - would welcome being included $140 AUD YES
Zealand in future process, offer to be
involved in design improvements
C-CELLS Hitachi, Japan  - would be honoured to continue $120 YES
discussions (quoted in
Yen)
Gaffney Tech Auckland, New  - not interested as at full capacity, $155 AUD NO
Zealand but have indicated pricing for your
reference
Wolfconn Calcutta, India Refused to sign Confidentiality NO
Agreement – No RFI sent
 Lucky Shanghai, China  - would be humbled to serve your $105 YES
Technologies requirements – we are a new (quoted in
business and excitable for big cyn)
customer
Mineo-X Port Kembla,  - yes, very interested as a local $150 AUD YES
NSW, Australia customer
Lexi Logic Guangzhou,  - email response received - no NO
China interest – we deal mainly with
consolidated purchasing offices for
standard items – do not do
customised tooling
Lonhro & Co Silicon Valley,  - given AUD exchange rate and $185 USD NO
USA additional logistics to Australia, do
not believe we can satisfy your
pricing requirements if you are also
looking at ASEAN suppliers, but
happy to be involved
Gunther Data Munich, Germany  - would be very happy to discuss NO
Capture pricing, however would require a
commitment to exclusive
discussions from this point forward

While waiting for RFI responses, the cross functional team work-shopped their decision criteria
that they would evaluate against. The decision criteria are as follows (weighted to show priority of
each of the alternatives): Total ratings would be a score out of 1,000 when the options are
weighted against all criteria.

Criteria Sub Criteria Weight Max

Specification - 5 Quality of Product - The quality of the miniature camera against
40 10
engineering specifications
Quality Defect Rate - The quality performance of suppliers based on
60 10
quality defect rate ppm
Criteria Total 50
Manufacturing - Quality Systems - Commitment to quality processes and systems 30 10
20 Capacity - Capacity to satisfy volume forecasts 30 10
Capacity Increase - Capacity to increase supply by 25% on provision of 4
40 10
weeks notice
Criteria Total 200
Costs - 25 Cost per Unit/Term - Manufacturers quoted total cost per unit 20 10
Tooling Costs - Manufacturers ability to minimise total tooling costs 10 10
Total Cost of Ownership - Minimise total cost of purchase including
50 10
inventory holding and logistics
Cost Reductions - Manufacturers ability to maintain or reduce costs over
20 10
the term
Criteria Total 250
Logistics - 20 Implementation Schedule - Ability to meet tooling, ramp-up and lead time
30 10
implementation schedule
Lead Time - Lead time and ability to change requirements 30 10
Delivery Performance - Delivery Reliability based on delivery performance
30 10
and systems
Order Processing - Ability to use forecasts and reduce administrative
10 10
processing
Criteria Total 200
Organisational Customer Status - Priority customer status (ie high level of attractiveness
20 10
Alignment - 10 of account to Supplier)
Organisational Fit - Organisational fit with our mission statements and
20 10
potential to build a strong working relationship
Technological Innovation - Investment in research and development and
40 10
commitment to continually improving and innovating
Long term Partnership - An ability to have a potential long term partnering
20 10
relationship
Criteria Total 100
Safety - Record and priority of safety 50 10
 Corporate
Citizen - 10 Social Responsibility - Community perception of partnering with supplier 50 10
Criteria Total 100
Management Supplier Reputation - Reputable Supplier (inc.staff) who possess a high
30 10
Capability - 10 level of knowledge, expertise and resources
Financial Stability - Business is financially stable for future 30 10
Information and reporting - Management reporting capability including
40 10
market intelligence
Criteria Total 100
TOTAL SCORE 1000

From the 6th November 2023 after receiving all responses, the team commenced developing an
RFT, with standard boilerplate clauses and including the technical specification and commercial
requirements. The schedules of the section that was to be filled out by the suppliers and sent to
Therason were based on the decision criteria. They continued populating the RFT with additional
questions and clauses based on their market intelligence of risks and innovations they received
from the RFI responses. This took longer than expected (5 weeks!) due to comparison and
convergence of the various opportunities and team members taking annual leave. The shortlisted
five suppliers were sent the RFT on the 11th December 2023 with tenders closing on the 22nd
January 2024, allowing a reasonable six-week timeframe while locally team members took annual
leave around school holidays. These were then extensively analysed, with the information in this
pack being a summary to date.

The team was somewhat divided, as some members felt that Therason should globalize its
sourcing initiatives, while others felt that local suppliers would be a better choice in terms of
working arrangements. A sub-section of the team spent the last week of January and second
week of February 2023 visiting all five camera suppliers directly to collect detailed information and
clarify the tender responses. The visits ranged from one to two days each. These visits were
time-consuming and exhausting, particularly since three suppliers were located in the Asia region.
Unfortunately, Therason does not have an International Purchasing Office (IPO) to support its
international procurement activities and no one on the team spoke Chinese / Mandarin, Korean or
Japanese. Fortunately, the other two suppliers, located in Australia and New Zealand were much
easier to visit, with one supplier located only ten kilometres from the Therason assembly facility.

The team discussed whether they should have single or multiple suppliers at length. Having two
or more suppliers would mean tooling costs for each supplier (as tooling would have to be made
to each suppliers’ plant). Due to the added complexity of monitoring quality issues, a part time
employee would have to be added to payroll as a quality inspector and auditor to ensure any
defects could be traced back to the correct manufacturer. The part time employee has been
calculated as approximately $115,000 per annum including on-costs and bonus. The Logistics
Manager said this was a waste of money employing additional resources and believed we should
simply have one supplier which would make the logistics easier. He also expressed concern that
any new recruitments for new positions needed to be signed off by the Executive Leadership
Team members which could be extremely difficult and bad for optics.

The team expects to begin negotiations with one or more suppliers immediately following the
Executive Lead Team decision on the 8th March 2024. Negotiations and contract development
will take approximately 8 weeks but this cannot start until approval is given to go ahead with the
recommendation. A legal resource would be made available to vet all the legal contractual
clauses, but you will need to give an insight into what may be the issues, risks or mitigation
strategies.

Contract approval will take approximately 5 days once contracts are developed to be able to gain
legal sign-off and delegated authority approvals, and all suppliers have indicated they would need
a formal contract prior to investing in capital equipment for tooling and ramp up. Time is tight as
this it is near the end of the financial year and senior executives are often busy briefing investors,
analysts and media the annual financial results. The team has decided that no matter what the
project plan is, a buffer time of 1 week would be prudent to build in where no activities occur, in
case there are any issues obtaining sign-off.

Inventory of at least 20,000 units must be received at the Wollongong factory by the 7th October
2024 for testing production in October for the November 2024 sales. 10,000 of the initial delivery
will be used for making prototypes while the remainder will be held as buffer stock into the first
month prior to the November delivery depending on the day that the first ongoing delivery comes
in (ie particular working day of month or a certain day of the week). Generally though, production
will be in the same month of sales (ie make to order).

THE SUPPLY ALTERNATIVES

Taegeuk Tech
The highest ranked supplier by the Engineering team, Taegeuk Tech, is a South Korean company
based in Inch’on, near Seoul with almost 12% of global market share in mini camera sales. More
than ten million people live in Seoul, and most of the modern city has been built in the last sixty
years since the end of the Korean war. Seoul has concentrated to producing exporting
manufactured goods, setting up huge industrial companies, known as chaebol to make shoes,
clothes, ships, cars and more recently computers and video sets. A secure government and
encouragement of foreign investment have helped generate trade and continue the rate of
economic growth. South Korea now has one of the most successful economies in the world.

On arrival at the Seoul airport late afternoon Tuesday, the team were impressed with the
excellent public transport system, with one easy to follow timetable linking all buses, trains, boats
and planes. This made moving to the hotel extremely stress-free. The Plant Manager met them
at the hotel and joined them for dinner, but did not offer to pay for the meal as it was only himself
in attendance. He ordered for the group, and the team enjoyed a meal of rice with barley and red
beans, with side dishes of spicy vegetables, herbs and meats. For dessert, a sweet called
“jeolme” was described as a type of rice cake powdered with soya flour. The Plant Manager
spoke excellent English, and advised that he had studied abroad due to his family travelling
through Asia and America for his fathers business. He did explain that South Korea has an
excellent schooling system which is now resulting in a very well educated and multi-lingual
workforce, stating this had been strongly influenced by Japan.

The team felt much more comfortable at Taegeuk Tech than at C-Cells. While this supplier has
no experience doing business with Australian firms, the company seemed quite anxious for the
contract. The company has several large Hong Kong, Taiwan, Thailand and Singapore PC
manufacturers as customers. At this time Taegeuk Tech has no Australian facilities or support
staff. The team had some concerns about becoming Taegeuk Tech first major Australian
customer. During the team's visit the Plant Manager claimed that capacity was not an issue, and
that the company would be willing to commit the required production capacity to the Therason
contract.

The company's product was excellent. Every camera went through an extensive testing
procedure that assured few problems would occur. In fact, Taegeuk Tech process control and
testing were more thorough than any other supplier the team visited. However, the combination
of the testing process and geographic distance meant that delivery cycle times were much longer,
up to 5 weeks per order, although the on-time delivery performance of 97.5% for the facility was
excellent. The team was not sure if current Asian delivery performance would be indicative of
delivery performance to Australia.

The facility was new, only built approximately 4 years ago. Although the plant appeared well
maintained, clean, and orderly, the team observed there was an extremely high number of
employees. Around one machine that seemed to be down for maintenance, there was at least
twelve employees all sitting on nearby pallets talking and smoking. After visiting the other three
suppliers, the team was expecting employees to be wearing PPE, and when questioned, the
manager advised their safety performance was excellent and PPE was deemed to not be
required inside the building. The sales manager said that work days are only six days a week, up
to twelve hours but the employees were transported to and from Inch’on by public transport bus.
He also took some pains to explain they did not employee children younger than fourteen, and
were very good employers.

A young lady introduced by the Plant Manager as the head of accounts kindly provided a one
page print out of the operations financials. She explained that Taegeuk Tech has many
operations and could not provide the information for the entire company, but she completed the
financial balance sheet and profit and loss just for the miniature camera operations in Inch’on and
hoped it would please us. She provided this in South Korean Won and also AUD, although on
review post the visit, some of the currency exchange calculations seemed to be incorrect. She
also confirmed that payment terms were important and required prior to release on board the ship
due to the cash flow and inflation issues.

The team noticed that the camera facility was extremely busy and wondered if the plant
manager's claim about adequate capacity was accurate. Industry experts viewed Taegeuk Tech
as one of the most promising and dynamic companies in the industry who had a real ability to
replicate any new technology being released within an extremely short period of time. The team
was quite impressed at the insistence of the Plant Manager who was quite convincing that the
tooling costs were accurate and could be completed for $1.1 million. The ramp-up time for the
production of the first shipment ready for delivery was quoted as about 13 weeks.

Relevant Taegeuk Tech data from their tender response include:

 FOB quoted price = $133 AUD, however quoted as currency in South Korean Won
 Ramp up time = 13 weeks
 Delivery lead time = 5 weeks (from time to order to day received)
 Line capacity = 12,000,000 units
 Current installed capacity for camera production = 95%
 On-time delivery record = 97.25% on-time (for current customers)
 Quality = 8,000 defects ppm
 Minimum batch size = 10,000 units for mini container
 Currency denomination = South Korean Won
 Price basis = FOB = Free On Board
 Tooling cost = $1.1 million plus any extras deemed required on final contract
 Payment Terms – payment on Bill Of Lading (prior to departure of ship) – approx 4 weeks
prior to delivery

Relevant Therason data specific to Taegeuk Tech include:

 Frequency of Shipment = four weekly
 Estimated day of arrival = Every Fourth Monday
 Ordering cost per order = $750 due to needing all paperwork and individual orders prior to
shipment
 Receiving cost per delivery = $550 for unloading container and inspection
 Sea transport (ship) = $38,500 per batch in mini container
 Land transport (truck) = $7,000 per batch in mini container including load / unload and
transport from Sydney to Wollongong
 Duties / customs / tariffs = $31,000 per batch in mini container
 Insurance = $19,800 per batch in mini container
 Financing Cost = Total Cost of Units X 4 weeks / 52 weeks X 5% since Therason will pay for
the items 4 weeks prior to receipt in store

It must be noted that regional instabilities between South Korea and North Korea pose a threat to
international sourcing as there is potential political and economic risks with region predicted within
the next two years.
PEO Group
A good candidate for the contract is PEO Group, a small proprietary limited manufacturer located
in Glenbrook, a half hour drive from Auckland on the North Island of New Zealand. The company
focuses exclusively on the design and production of camera devices. The team discovered this
company almost by accident. A team member was browsing a trade journal and saw PEO
Group’s advertisement. When the team further researched the company, they found “IT World”
and “Technology Today” magazines had praised the company’s products and innovative abilities
in several recent editions.

When the team visited the facility, the team was surprised at its small size and by the fact that it is
located in an old warehouse. PEO Group President, Piper Owen met with the team in person.
She explained that she was a graduate of Harvard in electrical engineering with an MBA from the
Sydney Business School and had decided to start her own company after working overseas for
Apple and Tesla for 15 years. The company entered the miniature camera market four years ago
and has produced miniature cameras for just over a year. During this time, however, PEO Group
has established a reputation for delivery reliability and innovation. The President seemed
extremely focused on statistics and measurements, explaining that their delivery metrics were
measured as door to door, and very stringent on DIFOTIS, so if one item had a defect or was one
day late, then the whole delivery was measured as a non-conformance.

The President explained that PEO Group’s success was based largely on its commitment to
develop new technology, especially technology that enhanced product reliability. She also
claimed that she knew every business customer personally. Some of the team expressed
concerns that the company was way too small for Therason to deal with a posed a significant risk
to our business. The company was definitely a small growing entity (with just under 4% of global
market share), but they expressed their intent to focus more on the business mobile computer
industry as opposed to the home consumer computer industry, and intended to concentrate on
the Australia and New Zealand geographies.

Everyone in the plant seemed highly motivated, and, except for the president, the team did not
see any person who appeared over the age of 35. There was a high number of Maori workers,
and there were many signs about upcoming ceremonies and community events focusing on the
Maori community. The President explained that New Zealand was a progressive country, and
seemed proud of the fact that New Zealand had a female Prime Minister before Australia had,
and the first western leader ever to become a mother during her tenure. She also explained that
New Zealand was at the forefront of environmentally friendly industry, with carbon emissions
taxes and a high percentage of the country being powered by hydro-electric plants. The
President explained that the facility had a zero waste methodology and was powered by wind
turbine energy.

The President was particularly excited about the possibility of working with Therason, and
promised to work with them closely on this contract and for any new product lines. She offered
that during the selection process she would be willing to bring a small team to Therason premises
to talk to manufacturing, R&D and engineering to assist in the design of the operations. In
particular, she emphasized that she had been to a number of manufacturing operations and could
discuss best practices in factory layout, manufacturing improvements and other technology
improvements that were happening in the industry for mobile devices.

When asked if her firm would have any problem in meeting demand should they receive the
contract, she hesitated before answering. She admitted that this contract would be the largest in
PEO Group’ relatively short history. She also indicated that several international buying teams
were also going to be sending teams to evaluate PEO Group within the next month. However,
she assured the Therason team that she would do whatever it took to maintain reliable delivery
schedules if PEO Group received a contract. She also indicated that given assurance of future
supply, she would consider further investments in R&D and facilities to expand production.
Interestingly, it appeared that the production lines were experiencing some problems during the
team's visit, as they were shut down for nearly four hours!
The President introduced them to line staff by name as she walked around, and even
congratulated a team of people who seemed to be working particularly safely. There were graphs
and charts indicating safe work practices and a number of safety alerts and procedures on
noticeboards as they walked around. The President had scheduled a meeting with the designer
and technicians on the technical specifications and their initial implementation schedule should
they gain the business. To be extra diligent in ensuring tooling was perfect and allowing time for
adequate ramp-up, the time to start real production for the new camera would be approximately 3
months. Lead time was two weeks after ramp up to when Therason could receive the first
delivery, and then batches could be dispatched each fortnight from the site.

The Logistics manager explained with a high level of excitement and passion that they had
quoted the packaging and delivery requirements by transporting the miniature cameras by a
custom designed tailored polypropylene pallet that would protect the product in transit and allow
for lower order quantities at an economical cost. This packaging was reusable and recyclable,
and would ensure no customs issues or environmental concerns of treated timber pallets. The
pallets collapsed for return transport and his proposal was to have the pallets returned to their
premises. He also believed there would be less customs expenses due to the packaging not
requiring fumigation or additional checks at the Australian clearance docks.

The tooling cost and the project process had been detailed out and discussed with the Therason
team by the Chief Engineer. The comment from the President was that they had conservatively
estimated the tooling cost to be a maximum of $1.7 million, however if they were able to come in
under budget, she would only be passing the actual costs by an open book invoicing arrangement
up to that amount.

Relevant PEO Group data from their tender response include:

 DAT quoted price = $143 per unit
 Ramp up time = conservatively 3 months
 Delivery lead time = 2 weeks (from time of order to day received)
 Current utilised capacity = 83%
 Current installed capacity = 4 million
 On-time delivery record = 93% on-time (but measured as DIFOTIS)
 Quality = from experience 13,000 defects ppm as a maximum on any initial orders, with any
issues usually attributed to tooling aspects that would be worked out within the first month
during pilot testing, dropping to well less of this ongoing
 Minimum batch size = 4,000 units for optimizing transport options on a purpose designed
pallet, which could be recycled and reused
 Price basis = DAT = Delivered at Terminal to Sydney (Port Botany), with customs and duties
payable, expected to be low
 Tooling cost = $1,655,000 as a maximum, downside to budget maximum to Therason through
an open book arrangement

Relevant Therason data specific to PEO Group include:

 Frequency of Shipment = Fortnightly
 Estimated day of arrival = Every second Thursday
 Ordering cost per order = $160 due to individual purchase orders fortnightly
 Receiving cost per delivery = $160 for unloading container and inspection
 Land transport (truck Sydney to Wollongong direct) = $2,600 each pallet including load /
unload and return transport of the pallets
 Insurance = $0.14 per unit while in transit, including the pallets
 Duties / customs / tariffs = $0.68 per unit – due to the lower tariffs paid on New Zealand goods
and lower customs clearance due to the pallet design

C-Cells
Initial research into potential suppliers quickly found C-Cells. Many articles in trade journals
referenced them, with industry experts praising them as world leaders in research and
development of new technology. It has been well known for years that Japanese excel at making
electronic goods and components. C-Cells, located in Hitachi, Japan, just over 100km from
Tokyo, where over thirteen million people live, was the largest supplier the team visited (sales of
$5.602 billion). The team landed at Tokyo airport and were surprised at the high levels of activity
and people in Tokyo while they awaited their chauffeured transport to take them to Hitachi. The
plant covered five acres, with a wide variety of computer and electronic components produced in
the facility.

Camera’s represent a large segment of C-Cells production (C-Cells commits 75% of total capacity
to camera production and derives 75% of its revenues from cameras). Because of its size,
however, the company seemed most interested in large contracts. C-Cells was recently analysed
in a technology magazine as the largest manufacturer of cameras, with figures that states it
currently controls approximately one-third of the total market share of global miniature camera
sales. Geographic distance from Australia, along with the need to accommodate the needs of
some large customers, made C-Cells quoted lead time one of the longest of the four suppliers
being evaluated.

The highest-ranking employee that met with the Therason team was a Sales Manager, who took
the team to visit various departments. The Sales Manager could speak some English, however
had a translator that explained the more technical requirements for him. The division Vice-
President and Plant Manager were in conference with a large miniature camera customer, who
the Therason team found out was bound by cross-ownership in their keiretsu and had been at the
facility for the last few weeks playing golf and having dinners with senior management from C-
Cells.

The Therason team felt a bit ‘snubbed’ at the facility, particularly the group's female members as
their questions were often not answered directly. The Therason team requested the plant
managers email address to clarify any aspects since he could not meet with them and were
particularly surprised when they were told the Plant Manager did not have a computer, as his
work was done by the female clerical staff and it would be better to see him in person at another
visit.

The facility was efficient, spotless, and modern while the manufacturing process was highly
advanced with computer assisted robotics. Kanban signals were set up and many noticeboards
displaying the 5S Lean methodology and processes.

The operation staff were viewed from a distance, with no-one from the group including the Sales
Manager or translator approaching them or talking to them. They were all in pristine uniforms
with logos on their shirts and wore helmets and glasses at all times. The translator spoke to
some members in the team explaining the set up of the quality circles used for TQM with Ringisei
style decision making. The teams were highly collective with all seeming to know their roles. He
advised that the employees were focused on seniority of service length, with pay encouraging
patience and loyalty, and the company was good to work for with group incentives, housing
allowances and medical coverage. The operation seemed to be completely male dominated, with
the only females seen in a few of the office roles.

When the team visited engineering, they spoke with an engineer in design. The engineer
estimated, based on previous experience, that the ramp-up time to begin production that would
satisfy Therason’s specifications would be about 15 weeks. His estimate of tooling costs was $2
million, although dependent upon the timing of the machine time; this could increase by up to
20% to take lost production into account.

The Sales Manager was proud that C-Cells was ‘the price leader’ for the industry, and was
producing cameras for several of the major brand name mobile phone companies and cameras
for the mass gaming industry. He also talked about the company's extensive investment in
research and development. He spoke at some length about how their business served the local
society and community by providing employment, and went to some pains to describe the high
ethical requirement of being a manager in the business.

The Sales Manager advised the team that the most viable logistics was via a container, holding
20,000 items, and that they could provide free alongside ship with the required amount of
dunnage as per shipping requirements at the local port. When the sales manager heard that the
camera order, based on 500,000 units in year one, would likely not exceed $100 million per year,
he hesitated, saying that he did not understand this from the briefing from his subordinates of the
RFI response. Moreover, he indicated that the company typically was not interested in orders of
less than $150 million per annum, but that exceptions might be possible. He stated the
economics associated with large orders is what made C C-Cells a low-cost producer but he would
discuss with management and assured the team they were an important and respected client and
that he would be honoured to establish them as a preferential customer.

When the team asked a question about government policies that excluded foreign competition in
the logistics area, the translator shut down the conversation immediately without answering and
called a halt to the meeting.

Relevant C-Cells data from the tender response include:

 FAS quoted price = 10,454.18 Yen. Today conversion rate is 85.69JPY to 1AUD
 Ramp up time = 15 weeks
 Delivery lead time = 6 weeks (from time of order to day received)
 Current installed capacity for camera production = 84%
 Market Share = 32.82%
 Plant Installed Capacity = 41,000,000 units
 On-time delivery record = 95.5% on-time (for large customers, somewhat less for smaller
customers)
 Quality = 12,000 defects ppm
 Minimum batch size = 20,000 units for container
 Currency denomination = Yen
 Price basis = FAS = Free along side ship
 Payment Terms – payment on Bill Of Lading (prior to departure of ship) – approx 4 weeks
prior to delivery
 Tooling cost = $2,000,000 Australian dollars equivalent, however could incur lost production
costs additional to this

Relevant Therason data specific to C-Cells include:

 Frequency of Shipment = monthly
 Estimated day of arrival = first working day of month
 Ordering cost per order = $750 due to needing all paperwork and individual orders prior to
shipment
 Receiving cost per delivery = $1,100 for unloading container and inspection
 Sea transport (ship) = $88,000 per container (includes labour to pack and load ship with the
dunnage provided)
 Land transport (truck) = $16,000 per container including load / unload and transport from
Sydney to Wollongong
 Duties / customs / tariffs = $56,000 per container
 Insurance = $1.82 per unit
 Financing Cost = Total Cost of Units X 4 weeks / 52 weeks X 5% since Therason will pay for
the items 4 weeks prior to receipt in store

Mineo-X
The local supplier, a fairly large and reputable manufacturer of camera equipment, including
miniature camera equipment, was located in Wollongong less than ten kilometres from
Therason’s facilities. About 65% of the company’s sales came from the sale of cameras, whilst
the remainder was local assembly of video cameras for video conferencing. In fact, the firm was
one of the largest producers of these devices worldwide (with almost 10% market share).
Upon entry at the administration office and while waiting to sign in to the premises as visitors, the
Office Manager gave a brief safety induction and a company overview. He explained that the
business espoused a high value of corporate social responsibility, which the team noted the
number of plaques in the administration office recognising their year on year sponsorship of
Clean Up Australia day, local sporting teams and local schools. The Office Manager also
explained with pride that they had a strong association with a local not-for-profit social enterprise
which employed people with an intellectual disability to support them in undertaking meaningful
paid employment by having them complete all their repetitious sorting of recycling activities.

The Plant Manager introduced the team to the Supply Chain Manager who set out their proposal
to simply have a blanket order for the two years, and then to provide rolling forecasts of expected
production of Einsteins so that the Mineo-X plant could mirror the production and deliver in any
batch size. This interested the team as the reduction in processing and administration of
purchase orders would be reduced. They determined that Mineo-X would place only 1 invoice
per month against this blanket order.

The Plant Manager also emphasized that because of their close proximity to Therason, they
would have no problem delivering the product in daily lot sizes, "just-in-time," to Therason’s
facilities. The Plant Manager stated that they had priced their product as FIS stating that due to
having other customers in the area they would be able to co-ordinate delivery without additional
costs. They also had mini-vans that could deliver small to mid loads with their own lifting
equipment meaning that the receiving costs at Therason’s warehouse would be minimized.

The Plant Manager explained that they were extremely keen about gaining a large customer
close to their premises as they could keep vendor held stock and simply deliver as required,
rather than what they do for export customers which was to produce for weeks at a time, and then
deliver batches. He stated that supplying batches for overseas caused their production to be
“lumpy” and that they were keen to be able to smooth production and saw a local customer as
being able to do this, even if they did not receive all the business, it would be beneficial for their
company just to utilize their existing capacity. He stated that the production lines they had had a
capacity limit of nine million units.

The Supply Chain Manager pointed out that the company has committed significant resources to
setting up a JIT production system for the camera line. Indeed, the Therason team was
impressed with the performance of the kanban signals and flow-through workstations. All
operators wore high visibility shirts and safety shoes with helmets and glasses, and the Supply
Chain Manager explained that the workforce was highly mobile utilising local labour providers,
with many employees being on contract from labour providers which allowed them flexibility in
workloads. This was why all the operating lines had very clear procedures and signs advising of
requirements.

The Supply Chain Manager was able to show the team reports that backed their incredible
delivery performance of 99.95% on-time delivery claim. Mineo-X had a solid reputation within the
industry for working with its customers on supply chain efficiencies. Mineo-X’s larger customers
in Australia included CSC, Fuji Xerox, Telstra and HP.

Upon visiting the quality department, the Quality Manager seemed particularly preoccupied.
When the Plant Manager left for a few minutes to answer a phone call, the group asked the
Quality Manager if the company had experienced any significant problems recently. He
confessed that the last shipment of cameras had several quality problems, and the number of
returns from large distributors had increased dramatically from the historical performance of 7,000
parts per million to a record high of 9,500 parts per million during the last two months. This was
creating some fairly severe disruptions to production scheduling and delivery. The most serious
problem was an annoying "clicking" sound made by the device as it engaged the camera.
However, he assured the Therason team that the design engineers were working full-time on the
problem, thought it was a recent tooling implementation issues, and that it would be solved well
before Therason placed an order. When the plant manager returned, the quality manager made
no further mention of the problem.

The Plant Manager estimated that the ramp-up time for the first shipment would be very short,
approximately 8 weeks. They would have people working full time on the implementation of the
tooling machinery, and the estimate for the tooling would be approximately $1.8 million. When
clarifying that this amount seemed high, the Plant Manager advised that labour was a shortage in
the Illawarra area, and that he would need to compete with local businesses to secure machining,
fabrication and installation providers to have the tooling completed in such a short time. This was
the best estimate as a maximum cost that they would guarantee.

Relevant Mineo-X data from their tender response include:

 FIS quoted price = $149 per unit
 Ramp up time = 8 weeks
 Delivery lead time = 1 weeks (for initial order, then on a weekly rolling forecast but could
delivery with a days notice where required). They explained that much of the tooling time and
ramp up time was reduced allowing more testing during the first week
 Frequency of Shipment = daily
 Estimated day of arrival = Any weekday, 9am – 10am
 Plant capacity = 9 million units per annum
 Current operating capacity = 92%
 On-time delivery record = 99.95% on-time
 Quality = recent performance 9,500 defects ppm as a historical high
 Minimum batch size = 1 unit – due to being so close and having their own courier system,
they could deliver any number per day
 Price basis = FIS = Free In-store - unloaded
 Tooling cost = $1,800,000
 Payment terms = monthly – pay on the last day of the month for all deliveries that month

Relevant Therason data specific to Mineo-X include:

 Ordering cost = $1,800 as a total for the two years as a blanket order and monthly invoicing
 Receiving cost per delivery = $200 per month for inspection (25 months of deliveries)
 Financing cost = not required as payment would be after receipt of the items during the month

Lucky Technologies
The final supplier, Lucky Technologies, was referred to the team by another supplier when
requesting samples. They were not on their initial list of camera suppliers. Lucky Technologies is
a Chinese company based in Suzhou, near Shanghai with less than 2% of global market share in
mini camera sales. Suzhou is a new industrial epicenter of China, with manufacturing facilities for
many of the world’s Fortune 500 companies and a high number of apartments blocks dedicated
for accommodation of expatriates. Lucky Technologies provided the lowest bid at $105 per unit,
quoted in cyn. The team were very excited about the possibility of such a low price from the
tender, although a little skeptical about the lack of any real detail in the tender itself.

The Plant Manager was extremely welcoming, and spoke fluent English although he often
checked his mobile phone translator to ensure he communicated well. On arrival at Shanghai on
a Sunday after visiting C-Cells in Japan, the team were excited about spending a day in busy
Shanghai before the Monday site visit. The entire team were picked up from the airport by the
Plant Manager, and were in awe of the stark contrast between the run-down quadrangles of
housing and the extravagant hotel they were staying at. The Plant Manager was very proud of
the Chinese culture and accomplishments, and took them to many local sites showing them
Chinese gardens, zigzag bridges, pagodas and water pavilions – anywhere they wanted to go.
He spoke to locals on their behalf and negotiated for them when they wished to purchase
anything, also advising them what was counterfeit or pirated versions and what was authentic,
even the Coca Cola! The team were treated to a traditional Chinese dinner, including Maotai and
rice wine while in attendance at the visit and were very impressed with the cultural explanations
and hospitality.
On the Monday morning, the team met in the lobby of the hotel expecting to go to the site,
however the Plant Manager explained there was a ceremony at site that day and the general
manager and his team would be meeting them in a conference room in the hotel. The meeting
started with Wulong tea and discussions about the companies, customs and people. The team
were each presented with a traditional Chinese painting on Xuan paper of flowers, birds and
dragons. Everyone in the meeting seemed very friendly, nodding their heads and smiling,
although the Therason Engineering Manager later commented that he was starting to get
annoyed that they were always asking questions about his wife and four children, he just wanted
to get on with the visit.

While this supplier has no experience doing business with Australian firms, the company seemed
quite anxious for the contract. They are a new company, and keen to gain any contracts for any
quantities. The team had some concerns about becoming Lucky Technologies first major
Australian customer. The team were most frustrated at not being able to visit the site after
travelling all the way to Shanghai, with the Therason Engineering Manager being quite vocal
about the visit being a waste of time and the Plant Manager apologising profusely about the
ceremony constraints and offering them a more in-depth visit next time.

Relevant Lucky Technologies data from their tender response include:

 FOB quoted price = $105 AUD quoted at 4.39172cyn to $1AUD
 Ramp up time = 3 months
 Delivery lead time = 4 weeks (from time to order to day received)
 Current installed capacity for camera production = 50%
 On-time delivery record = 99% on-time (for China customers)
 Quality = 1,000 defects ppm
 Minimum batch size = 10,000 units for mini container
 Currency denomination = cyn
 Price basis = FOB = Free On Board
 Tooling cost = $1.4 million – to be paid upfront

Relevant Therason data specific to Lucky Technologies include:

 Frequency of Shipment = four weekly
 Estimated day of arrival = Every Fourth Friday
 Ordering cost per order = $750 due to needing all paperwork and individual orders prior to
shipment
 Receiving cost per delivery = $550 for unloading container and inspection
 Sea transport (ship) = $38,500 per batch in mini container
 Land transport (truck) = $7,500 per batch in mini container including load / unload and
transport from Sydney to Wollongong
 Duties / customs / tariffs = $29,500 per batch in mini container
 Insurance = $15,720 per batch in mini container
 Financing Cost = Total Cost of Units X 4 weeks / 52 weeks X 5% since Therason will pay for
the items 4 weeks prior to receipt in store

NOTE ON LUCKY TECHNOLOGIES:

As the Procurement Lead, you were introduced to a consultant that is currently being engaged by
Therason for a low cost country sourcing project for MRO items. Through discussion you
determined that the consultant would be in Shanghai, China mid-month of February, and you
requested that they stop by the Lucky Technologies factory as an impromptu visit.

The report that came back stated that there was no company called Lucky Technologies. The
address given in the tender was a factory leased to “Lucky Sparks” who were in the business of
spark plugs, which was a highly labour intensive process, with outdated machinery.

You have contacted the Plant Manager since and demanded an explanation, and they have
advised that they are still setting up, and if they have customers than they will build the plant.
After advising the remainder of the team, it has been decided that Lucky Technologies should be
excluded from any further decision analysis.

ADDITIONAL INFORMATION AND ASSUMPTIONS

 Although Therason is buying a standard miniature digital camera, extra production demands
and a small level of design customization will result in additional tooling requirements at each
supplier. While tooling depreciation could be a cost consideration, this case does not
consider depreciation. The commodity team will allocate all supplier-related production costs,
such as tooling, as a total amount over the two years. Tooling will remain with the supplier as
it has no salvage value and cannot be reused for any other purpose.

 The company expects the Einstein to have a two-year life cycle. The company fully expects to
introduce its next generation of skin-wearable blood diagnostic devices at the end of two
years – the Einstein 2.0. The Einstein 2.0 is now in concept feasibility stage and will be the
first of its kind capable of drawing tiny amounts of blood through microneedles and responding
with real-time drug therapy.

 The outlook for the Australian dollar is that it may further weaken against many of the Asian
currencies in the next few years. The team has not done enough research in this area to
determine the extent of this weakening.

 Therason plans to maintain a standard base level of safety stock inventory for the cameras.
Due to varying material pipelines, Therason expects to maintain an amount of safety stock as
below:
 Frequency – Monthly. Safety stock equivalent to the next 28 days ie, for a monthly
shipment where the following 28 calendar days estimated usage is 60,000, then by the
next delivery the stock should be no lower than 60,000 units. Safety stock for each
supplier should be increased based on the company’s on-time delivery record.
 Frequency – Fortnightly. Safety stock for equivalent to 21 calendar days stock ie, if
lead time is two weeks and the following 21 calendar days production is expected to
be 35,000 units, then by the next delivery the stock should be no lower than 35,000
units. Safety stock for each supplier should be increased based on the company’s on-
time delivery record.
 Frequency – Daily. Safety stock will be an absolute minimum of 10,000 units safety
stock.
 Where multiple suppliers may be selected, safety stock will be the lower of the two
requirements above.

 Inventory carrying costs, which include warehouse management, storage, handling,

obsolescence, taxes, and cost of capital, are 21% per annum of the inventory's unit
purchased price. The company assumes carrying costs for safety stock material.

 An additional part time employee would be required if more than one supplier was selected,
resulting in $230,000 employment costs (including wages and on-costs) over the total period
or $115,000 per annum.

 Although exact numbers are difficult to obtain, financial analysts at Therason calculate, based
on experience and assumptions, that each defect will result, on average, in $400 in non-
conformance costs that Therason incurs (including return freight, replacement and processing
costs). Poor quality will also adversely affect market reputation and future sales. Lost
customer goodwill is extremely hard to quantify as it depends on how the returns process
satisfies the customer, however, having many returns can damage not only the product
reputation as being a “lemon”, but also tarnish the organisation’s reputation as a quality
provider.
 Although payment terms will vary to payment prior to delivery or payment following month in
which the goods are received, the payment terms of each supplier does not need to be taken
into account for this commercial analysis. Financing cost for payment upfront during sea
logistics has been given for relevant suppliers

 Assume the unit price quoted by each supplier is what Therason would pay for the camera
from each supplier. Subsequent negotiations will likely alter the quoted price and could be
considered in the negotiation plan. All other terms and conditions or relevant costs on the
total cost of ownership could also be negotiated. Although there is some potential for
increases or decreases in any of the quoted details of the tenders, figures should be taken as
provided in the tenders, and then refer to risk / opportunities of changes.

 Current installed capacity as a percentage indicates that portion of the supplier’s camera
production capacity that is currently utilized. For example, if current installed capacity is 98%,
then this supplier is utilizing 98% of its production capacity and therefore has 2% of its
capacity available for new business. Percentage capacity available needs to apply to their
plant installed capacity.

 Suppliers have quoted price based on varying incoterm. Therason has chosen to manage
their own transport within Australia and Therason has gained indicative quotes where it makes
sense from current logistics providers – these have been stated in the information for each of
the suppliers.

SUPPLIER FINANCIAL DATA

The team also gathered financial data for each supplier. While the team believes the data for the
Aust and NZ suppliers to be reliable from their most recent audited annual reports, several
assumptions and estimates had to be made regarding the Taegeuk Tech and C-Cells. Neither
company are required to provide financials by legislation, nor are completely compliant with
Australian Accountancy law. The team had to convert Japanese currency into Australian dollars,
and the Korean exchange rate calculations were inconsistent. In some cases, the desired figures
were not available, or the supplier showed no interest in providing the team with the requested
information. In particular, this was an issue with C-Cells. The tables below summarises selected
supplier financial data to the best of your knowledge today.
 Selected Supplier Balance Sheet Data (Australian Dollars - $ in millions)
For Period Ending June 2023

Taegeuk PEO
C-Cells Mineo-X
Tech Group
ASSETS
Cash $54 $37 $96 $85
Marketable securities $28 $8 $122 $104
Accounts receivable $130 $52 $890 $381
Inventories $184 $36 $720 $170
Total current assets $396 $133 $1,828 $740
Investments at equity $96 $21 $739 $70
Goodwill $80 $20 $300 $145
Total investments and other assets $176 $41 $1,039 $215
Property, plant, and equipment $313 $86 $1,612 $420
TOTAL ASSETS $885 $260 $4,479 $1,375

LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable $160 $74 $1,067 $273
Taxes due on income $52 $18 $253 $70
Accrued payroll and employee benefits $139 $14 $264 $210
Total current liabilities $351 $106 $1,584 $553
Long-term debt $123 $12 $876 $200
TOTAL LIABILITIES $474 $118 $2,460 $753
Shareholders' equity $411 $142 $2,019 $622
TOTAL LIABILITIES AND SHAREHOLDERS' $885 $260 $4,479 $1,375
EQUITY

Statement of Income Data (Australian Dollars - $ in millions)

Year Ended June 2023

Taegeuk PEO
Tech Group
C-Cells Mineo-X
Net sales $1,528 $475 $5,602 $2,056
Cost of goods sold $1,298 $328 $4,482 $1,378
Selling, general, and administrative expenses $169 $66 $500 $370
Interest expense $49 $6 $438 $100
Costs and expenses $1,517 $400 $5,420 $1,848
Income before income taxes $11 $75 $182 $209
Estimated taxes on income $4 $23 $36 $58
NET INCOME $7 $53 $146 $150