Case studies must be submitted as a Word document and should be in the length of 3 pages. All content must be double spaced and follow proper composition, grammar, etc. Note, additional research is required in order to optimally respond to the questions in terms that are relevant today.
Answer the following questions:
1. Analyze the challenges associated with new product development
2. Analyze the challenges associated with on-time delivery
3. What action would you suggest that China Sourcing Group’s Shanghai office undertake in order to improve the rate of its on-time delivery?
Vincent Mak prepared this case under the supervision of Professor Michael J. Enright for class discussion. This
case is not intended to show effective or ineffective handling of decision or business processes.
© 2003 by The Centre for Asian Business Cases, The University of Hong Kong. No part of this publication may be
reproduced or transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or
otherwise (including the Internet) – without the permission of The University of Hong Kong.
Ref. 03/162C 20 May 200
3
1
MICHAEL J. ENRIGHT
Buyer-Supplier Relationships
In recent years, increasing attention has been paid to buyer-supplier relationships and supply
chain management in general. Views of buyer-supplier relationships have evolved from the
old school of the 1980s, where buyers and suppliers were viewed as part of a zero-sum game,
to the more collaborationist outlook of the 1990s, which claimed buyers and suppliers could
co-operate to the benefit of both, to the more network-oriented view of the 2000s, where
buyers and suppliers are parts of organic business eco-systems. One interesting fact is that,
empirically, buyer-supplier relationships exist in surprisingly multifarious forms in different
geographic regions and business sectors. There is simply no one dominant mode. It is
therefore important to examine and identify the many types of buyer-supplier relationships in
existence. What follows is an outline of eight different real-life examples that cover a broad
range of buyer-supplier relationships.
Toyota and Its Suppliers1
Toyota Motor Corporation, the world’s fourth-largest carmaker in 2000 (after General
Motors, Ford, and DaimlerChrysler), managed its relationships with many of its suppliers
according to a model that was traditional among large Japanese companies. This model, a
variationm of the “keiretsu” model, consisted of a federation of companies, usually dominated
by a large firm, such as Toyota, that had special power in the federation. The supplier
partners within a keiretsu were called kankei-kaisha (affiliated companies); usually the parent
firm would have a minority ownership in each of these companies, and would transfer
employees to it. But even independent firms (dokuritsu-kaisha) outside the keiretsu, which
had no ownership relationship with the parent firm, would often work with the parent firm in
much the same way.
The wide use of the keiretsu model implied that, at the highest level, the relationship between
buyers and suppliers required continuous feedback and suggestions for improvement about
each other’s operations. In addition, it required a high level of commitment. In Japan, this
1 Sources unless otherwise stated: Dyer, J. H., (2000), Collaborative Advantage, New York, the United States: Oxford University
Press, pp. 44-45, 64-65, 108; Michael S. Flynn, Kara F. Alkire, and David Graham, “OEM Parts Purchasing: Shifting Strategies”,
University of Michigan Transportation Research Institute, January 2001, pp. 7, 9; Hoover’s Company Profile.
HKU25
7
05/20/03
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commitment could take several forms, including equity investment, implicit long-term
contracts, employee co-location, and customised plant investment. A one-time shortcoming
would trigger efforts to fix the problem instead of a search for an alternate vendor — although
continued problems could eventually result in the withdrawal of a contract.
Long considered the most efficient vehicle manufacturer in the world, Toyota pushed very
hard to implement its lean production system all the way through the supply chain. In the
United States (as well as in Japan and Europe), the company instituted a Toyota Supplier
Support Center, a school for suppliers to learn the core concepts of the Toyota Production
System and to develop strategies for implementation at their own plants. From 1992 to 1997,
senior management teams from nearly 100 supplier firms attended the Center. In fact, Toyota
founded a supplier association in Japan as early as in 1943 to promote “mutual friendship”
and the “exchange of technical information” between Toyota and its suppliers. Later, Toyota
established a similar association with its US suppliers, which was not trusted at first but grew
to become quite successful. Toyota valued face-to-face contact in fostering supplier
relationships, which was why the company took to Internet parts exchanges more slowly than
big US carmakers did in the late 1990s and early 2000s. The profile of Toyota’s suppliers
according to percentage of total component costs, as shown in Exhibit 1, is apparently in
stark contrast to that of its US competitor General Motors.
Under the Toyota Production System as followed in Japan, most Toyota assembly plants were
located within 35 miles of Toyota’s corporate headquarters and technical centre. Toyota’s
suppliers were clustered around the assembly plants in “Toyota City”, with the internal parts
suppliers very close (an average of 10 miles distance in 1992), kankei kaisha a little further
away (average 30 miles) and the dokuritsu kaisha still further away (about 87 miles). This
kind of distance scale was much smaller than that in US auto-supplier networks. On average,
Toyota’s suppliers made more than eight just-in-time deliveries per day. Toyota’s inventory-
to-sales ratio in the early 1990s was about one-fourth that of the leading US carmaker General
Motors.
Toyota appeared to do business only with suppliers that could provide global presence,
technical innovation and speed. Issues such as quality, reliability and commitment to cost
reductions seemed to be prerequisites for consideration, as indeed was the case for other
manufacturers as well. A typical trajectory for a supplier relationship with Toyota started
with the supplier manufacturing a part or system designed entirely by Toyota. Only after a
long period of high performance and continued relationship-building would the supplier
progress reach a point where its own design and technical expertise could be leveraged. Even
when a firm became a preferred supplier, Toyota would seldom cede complete design
responsibility. Toyota had historically been opposed to the use of so-called “black box”
designs, particularly in core components such as engines and power trains. But even so,
suppliers found in Toyota a trustworthy customer mainly because of the fairness and
predictability of Toyota’s routines and processes for dealing with suppliers.
General Motors and Its Suppliers2
General Motors Corporation (GM) was the world’s leading carmaker in terms of sales by the
early 2000s. It had remained highly vertically integrated throughout its corporate history, and
produced internally roughly 65 to 70 per cent of the components that went into a vehicle. It
also sourced externally, primarily and traditionally through arm’s-length relationships that
depended great deal on price-bidding. The profile of GM’s suppliers according to percentage
2 Sources unless otherwise stated: Dyer (2000), pp. 11, 25, 46, 111; Flynn et al, January 2001, p. 4; Hoover’s Company Profile.
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of total component costs is shown in Exhibit 1, and shows a clear difference from that of
Toyota’s suppliers.
Traditionally, GM, like other big carmakers in the United States, had a relationship with
suppliers that some would consider “adversarial”. GM’s internal manufacturing plants as
well as suppliers’ plants were scattered around the United States, in complete contrast to
Toyota’s Japanese production network, which could fit within the distance between GM’s two
closest car plants. Predictably, GM’s suppliers and buyers did not have a lot of face-to-face
contact compared with Toyota’s. Trust between GM and its suppliers was also much lower,
according to researchers. In 1992, facing poor financial performance, GM’s Group vice-
president for Worldwide Purchasing, Jose Ignacio Lopez, initiated policies that were even
more combative with suppliers, to the extent that GM started demanding double-digit price
reductions in many instances. It also broke the tradition of renewing one-year contracts with
long-term vendors, instead often switching the business to the lowest bidder. On several
occasions, it was alleged, after a supplier helped GM develop a new part — while absorbing
part of the development cost — GM then shopped the proprietary designs to competitors,
searching for the best production prices. GM’s buyers were not allowed to accept a lunch
invitation except under certain conditions — and even that was discouraged. One executive
said:3 “We don’t know what a supplier partnership gets you. It just locks you in. We don’t
even like using the word partner.”
In the short run, GM achieved US$4 billion savings in annual materials under Lopez, but to
the long-term detriment of relationships with suppliers. Suppliers became less likely to
reserve their best ideas for GM, choosing instead to market them to companies that tended to
value supplier relationships more. After Lopez left GM for Volkswagen in 1993, the new
head of purchasing, Richard Wagoner, took a softer stance towards suppliers. He did not
completely repudiate Lopez’s methods, but the more extreme elements seemed to have
generally ceased. Wagoner stated in 1993 that, “GM will remain tough but fair with
suppliers. We don’t believe in the old traditional bear hugs, talking about how we love each
other or don’t. Partnerships have to be based on market demands and customer expectations.”
Harold Kutner, who became vice-president of worldwide purchasing in the mid-1990s, kept to
a similar philosophy. He said, “Our focus is not necessarily having great partnerships with
assumed relationships for life with suppliers. It’s having relationships with suppliers, with
very high expectations. The suppliers should expect me to be a good customer. I should share
data. I should share global opportunities and volume forecasts. And I should give them any
kind of information that will eliminate waste within the system. On the other hand, we have
very high expectations: one, that the supplier should become global, and two, that his
performance can be benchmarked with anybody’s around the world.” But Kutner was soft
only by GM’s standard. He had a reputation among suppliers as a hard-nosed negotiator who
pressured suppliers to slash prices, and had even said, “I’ve spent my whole life kind of
beating up suppliers on their performance.”
4
The Big Three US carmakers — DaimlerChrysler, Ford and GM — set up an Internet
automotive parts exchange platform called Covisint in 2000; two other major carmakers,
Nissan and Renault, soon joined. Covisint allowed the purchasing of the one billion US
dollars’ worth of car parts to be done through an online bidding system. Although some
expressed hope of reducing a great deal of cost with the set-up of this system, carmakers such
as Toyota emphasised that face-to-face meetings with suppliers and personal inspections of
factories and managers could not be done on the Web. In fact, by mid-2002, Covisint as a
business was not generating enough revenue from auction, and had been cutting expenses and
3 Dyer (2000), p. 111.
4 Ralph Kisiel, “Kutner bears heat he once delivered”, Automotive News, 29 July, 2002.
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03/162C Buyer-Supplier Relationships
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jobs for the previous year. Accordingly, many suppliers were reluctant to use Covisint
because it was viewed as a tool that carmakers used to get lower prices on parts.
5
Microsoft and PC-Makers
6
US-based Microsoft Corporation was the global software superpower by the 2000s. It
provided a variety of products and services, including the Windows operating system —
which usually had the Internet Explorer (IE) browser as part of the package — and the Office
software suite. The company held hegemony over several major sections of the personal
computer (PC) software market. One source said that Microsoft Office’s market share by
revenue for its Word and Excel components was about 94 per cent by 2000; Windows’
market share around that time was 92 per cent.7 IE took up 95 per cent of global usage share
of Web browsers, according to a survey in late 2002.8 Other sources pointed to market shares
that were consistently at least above 80 per cent. Microsoft had also expanded into markets
such as video game consoles, enterprise software, computer peripherals, software
development tools, interactive television and Internet access services.
Predictably, Microsoft’s high market shares and aggressive business expansion had brought
charges of antitrust violations. In 1998, the US Justice Department, backed by 18 states, filed
antitrust charges against Microsoft, claiming it stifled browser competition and limited
consumer choice. In 2000, US Federal Judge Thomas Penfield Jackson found that Microsoft
had used its monopoly powers to violate antitrust laws. Judge Jackson’s findings showed that
Microsoft had pressured other companies in a number of ways to achieve monopolistic ends.
9
As for PC-makers, he wrote: “With respect to OEMs [original equipment manufacturers, i.e.,
PC-makers in this context], Microsoft’s campaign proceeded on three fronts. First, Microsoft
bound Internet Explorer to Windows with contractual and, later, technological shackles in
order to ensure the prominent (and ultimately permanent) presence of Internet Explorer on
every Windows user’s PC system, and to increase the costs attendant to installing and using
Navigator on any PCs running Windows. Second, Microsoft imposed stringent limits on the
freedom of OEMs to reconfigure or modify Windows 95 and Windows 98 in ways that might
enable OEMs to generate usage for Navigator in spite of the contractual and technological
devices that Microsoft had employed to bind Internet Explorer to Windows. Finally,
Microsoft used incentives and threats to induce especially important OEMs to design their
distributional, promotional and technical efforts to favor Internet Explorer to the exclusion of
Navigator.”
Microsoft had the power to behave in this way, since many consumers bought a computer
model because of the pre-installed software in it or at least the software that was compatible
with it. And PC-makers had to pay Microsoft a licensing fee for incorporating Microsoft’s
programmes on each single product. Below are some more details:
1. Microsoft used a variety of tactics to deter PC-makers, Internet-access-service companies
and Web content providers from using the Netscape Navigator browser, IE’s major rival
product. Microsoft used licensing agreements and technical integration to make sure that
PC-makers and other partners had little choice but to use IE in their products.
5 Ralph Kisiel, 29 July, 2002.
6 Sources: Hoover’s Company Profile and media sources as referenced below.
7 International Data Corporation (IDC) figures quoted by Patrick Thibodeau, “Gartner: Microsoft licensing could push users to
StarOffice”, Computerworld, 1 May, 2002. Since Office could also be run on Apple Computer’s Macintosh system, it was
expected to have a higher market share than Windows.
8 Press release, “Microsoft’s Internet Explorer global market share is 95% according to OneStat.com”, OneStat.com, 16
December, 2002.
9 Don Clark, “The Microsoft Ruling — Portrait of a Monopolist: Threats, Profits and Power”, Wall Street Journal, 8 November,
1999; “Excerpts from the ruling that Microsoft Violated Antitrust Law”, New York Times, 4 April, 2000.
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03/162C Buyer-Supplier Relationships
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2. IBM was both a big customer (as computer-maker) and competitor (through its OS/2
operating system and others) of Microsoft by the early 1990s. In 1995, IBM announced
plans to install software produced by Lotus, a competitor of Microsoft, on its PCs.
Microsoft then terminated negotiations with IBM to license the upcoming Windows 95
system, giving a reason concerning the audit of IBM’s royalty payments to Microsoft.
Microsoft did not grant IBM a licence until the latter agreed to pay Microsoft US$31
million for back royalties; that deal was made only 15 minutes before the official launch
of Windows 95 in August 1995. IBM still had to bear missing substantial revenues, and
its plight did not end there. “From 1994 to 1997 Microsoft consistently pressured IBM to
reduce its support for software products that competed with Microsoft’s offerings, and it
used its monopoly power in the market for … PC operating systems to punish IBM for its
refusal to co-operate,” wrote Judge Jackson.
3. Although Apple Macintosh was a rival to Windows, Apple Computer relied on Microsoft
to develop software for its operating system. It then happened that Apple wanted to
develop a multimedia technology called QuickTime that could be used on both Macintosh
and Windows, making it easier to write software that was compatible with both systems.
However, Microsoft repeatedly and unsuccessfully tried to get Apple to drop the project.
Another dispute involved Microsoft threatening to withhold the development of a
Macintosh version of Office to try to persuade Apple to adopt IE in the standard shipment
of Macintosh. It culminated in 1997, when Apple signed a deal that included its
endorsement of IE, a patent cross-licence agreement, and a Microsoft investment in
Apple.
4. The big computer-maker Compaq Computer irked Microsoft with a plan to ship part of its
PCs without the screen icons for IE and MSN. Microsoft repeatedly protested this move
as a violation of licensing agreements. Then, in 1996, Microsoft sent Compaq a letter
stating its intention to terminate Compaq’s license for Windows 95 if Compaq did not
restore the MSN and Internet Explorer icons to their original positions. Compaq, for fear
of losing the licence, capitulated. Later the companies even signed one of the most
favourable contracts between Microsoft and any PC-maker, in which Compaq promised
to promote IE exclusively for its PC products and thus ceasing to pre-install Netscape
Navigator in its PCs. “In return … Microsoft has guaranteed Compaq that the prices it
pays for Windows will continue to be significantly lower than the prices paid by other
OEMs [original equipment manufacturers, i.e. PC-makers] … Compaq has enjoyed free
internal use of all Windows products for PCs since March 1998,” wrote Judge Jackson.
Hong Kong Container Terminals: the THC Dispute
10
By the early 2000s, Hong Kong handled a large chunk of Mainland China’s trade cargo,
mostly originating from the thriving Pearl River Delta, and had long been the world’s busiest
container port. By 2002, Hong Kong had four container terminal companies operating eight
container terminals with a total of 18 berths at Kwai Chung and the nearby Stonecutters
Island. Total capacity was estimated to be around 25 million TEUs.11 The container
throughput of Hong Kong was 17.83 million TEUs by 2001, 11.3 million TEUs of which
were handled at Kwai Chung and the rest by ocean and river vessels. Hong Kong’s container
10 Sources: CLSA Emerging Markets, Hong Kong Strategy — Market Outlook, October 2002, pp. 21-24; Hong Kong Consumer
Council, “Assessment of complaints against members of shipping line agreements”, July 2002; Hong Kong Shippers Council
website, URL: www.hkshippers.org.hk.
11 TEU means twenty-foot equivalent unit, is a measure of container box volume. One TEU is the size of a standardised
container measuring 20ft x 8ft x 8ft.
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terminals were unique in the world in that they were fully funded, owned and managed by the
private sector with no government involvement. By 2002, the biggest of Hong Kong’s four
container terminal operators was Hongkong International Terminals (HIT), a subsidiary of the
Hutchison Whampoa Group. It operated 10 berths on its own. HIT and China Ocean
Shipping Company (COSCO) operated two additional berths under a HIT-COSCO joint
venture. The second-largest operator was Modern Terminals Limited (MTL), which operated
five berths and was owned by Swire Pacific, Wharf, China Merchants and Jebsen & Co. The
smallest operator was CSX World Terminals, which operated the remaining one berth.
12
Meanwhile, the city of Shenzhen, the immediate northern neighbour of Hong Kong, was
developing its own container ports. In the 1980s, the Shenzhen authorities decided to develop
its own ports in Yantain, Shekou and Chiwan. Starting from 1990, the throughput volume
handled by Shenzhen grew rapidly; it reached 5.1 million TEUs by the end of 2001, 4.1
million TEUs of which were containerised, making Shenzhen the eighth-busiest container
port in the world. Certain major Hong Kong container terminal operators had shareholder or
business interests in the Shenzhen ports. Swire Pacific, China Merchants and COSCO had
interests in Chiwan and Shekou, and MTL had the management contract for Shekou.
Yantian, the largest of the three, was 48 per cent owned by Hutchison Whampoa. Its
throughput was 2.7 million TEUs in 2001, which was 0.5 million above its capacity. Yantian
was seen as the pacesetter among Shenzhen terminals in terms of pricing.
Officially, Terminal Handling Charges (THCs) were collected by shipping lines from shipper
clients (i.e., the manufacturers and cargo owners) in order to recover the cost of paying the
container terminals or mid-stream (river-trade) operators for the loading/unloading of
containers and other costs borne by the shipping lines. THCs thus involved three parties: the
terminal operators, the shipping companies and the shippers. The terminal operators charged
the shipping lines a fee to allow them to berth at their terminals (berthing changes) and
another fee to load/unload the containers (container handling charges). The shipping lines
were supposed to charge the shippers an amount of THC that would exactly recover the
container handling charge. In reality, by 2002, shippers said that they were being charged
double the amount of the container handling charge. In fact, the Hong Kong Shippers’
Council claimed that THCs had been increasing at double digits since they were introduced in
1990 until 1998, and that by 2001 the Hong Kong shippers were suffering from the world’s
highest THCs [Exhibit 2]. When midstream operations controlled by the terminal operators
sought to impose an HK$40-per-container service fee, the Shippers’ Council took the case
public. They went on to voice their grievances concerning THCs to the Hong Kong
Consumer Council, the Hong Kong Legislative Council and certain Hong Kong government
departments as well.
The shippers in particular complained that they were being charged the same THC from
members of the same “conference” between shipping lines. Historically, in international liner
shipping, “conferences” were created between liners for the purpose of ensuring that
appropriate returns were achieved to guarantee that the long-run availability of efficient
shipping services was maintained. The conferences were in effect joint-venture operations,
and pooling arrangements between members resulted in economies of scale. Among these
conferences, the Shippers’ Council specifically mentioned the Intra-Asia Discussion
Agreement (IADA) and the Transpacific Stablization Agreement when discussing their
complaint with the Hong Kong Consumer Council.
The Shippers’ Council lobbied unsuccessfully for a reduction in THCs in 1998. In 2001, they
raised the request again. Terminal operators claimed they had lowered THCs by 20 per cent
12 CSX was a joint venture between US container shipping line Sea-Land Services, Hong Kong-based Orient Trucking and ATL
Logistics Hong Kong. ATL was a joint venture between CSX World Terminals, Hongkong Land, New World and Sun Hung Kai
Properties.
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to 25 per cent since 1997. Meanwhile, the liners had only been maintaining the same THCs
since 1998. The case, then, should have been clear enough, and the shippers accused shipping
lines of disguising their charges as a cost-recovery mechanism to increase revenue at the
expense of shippers in light of weak freight rates. However, K Line, one of Asia’s leading
shipping lines with no interest in the Hong Kong terminals, expressed doubt as to whether the
terminal operators had really lowered charges.
Not only were the conferences reportedly acting like pricing cartels to the shippers; so were
the terminal operators. Shippers said that the high THCs that they had to bear indicated that
there was price-rigging between operators. Since the late 1990s, the container ports at
Shenzhen rose in significance, providing the first feasible and potential alternative to shippers,
but shippers also suspected price-rigging between Hong Kong and Shenzhen operators.
Shenzhen’s THCs were also very high compared to Shanghai; and the terminals at Shenzhen
and Hong Kong had largely common shareholders. Added to that, operators at Shenzhen did
not have to pay premiums to local governments in return for development rights. So the
pricing at Shenzhen probably seemed even more unreasonable to shippers.
The Hollywood Motion Picture Industry
13
Hollywood, or more properly the Los Angeles area, had dominated the US motion picture
industry since the 1920s. In 1987, the Los Angeles-Long Beach Primary Metropolitan
Statistical Area accounted for 71 per cent of US motion picture and 60 per cent of the nation’s
television show production.
By the 1990s, in the Hollywood motion picture industry, studio projects, studio-backed
independent projects and negative pickup deals (an arm’s-length transaction on what was
essentially a spot market) provided co-ordination through hierarchy, quasi-markets and spot
markets respectively. Although the precise organisation might differ, in each case an
individual film was created through the efforts of a short-term coalition with little
consideration for long-term loyalty. The minimum efficient scale for movie production was
the single production unit or single project. Project-based coalitions of directors, actors, crew,
contractors and subcontractors were assembled for each major motion picture. Large
numbers of contracts had to be written for each motion picture, concerning every issue from
story rights acquisition to pre-production, principal photography and post-production. Even
the studios’ in-house production involved the hiring of many individuals and subcontractors
on a one-film basis. The costs of casting, negotiations, agents’ and lawyers’ fees, and
monitoring, could account for a substantial portion of the costs of a film.
14
Localisation was no doubt vital for such an industry, in which participants were in constant
communications. In order to participate in it, one had to be part of the local subculture.
Formal and informal networks had developed among the studios, directors and local firms in
the area. The motion picture community was relatively small: there were only a few dozen
key decision-makers. Since information flowed so quickly and completely through the
industry, a reputation for fair dealing was essential, and opportunistic behaviour was often
swiftly punished. Producers, executive producers, talent agents, entertainment lawyers and
business affairs executives negotiated the multitude of deals that had to be made for each
13 Adapted from Enright, M. J., (1995), “Organization and Coordination in Geographically Concentrated Industries”, in
Lamoreaux, N. R., and Raff, D. M. G. (eds), (1995), Coordination and Information, the United States: the National Bureau of
Economic Research, pp. 103-146.
14 The costs associated with negotiating the contracts and monitoring the production were at least 10 per cent of the production
budget for a typical movie in 1992 — in addition to the search costs involved in casting and crew selection.
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motion picture, effectively matching supply and demand and setting prices for the services of
film artists.
Inter-firm and interpersonal competition was a driving force in the industry. The studios
competed fiercely with one another to attract talented individuals and promising projects, and
to place their films at the most desirable theatres. The larger talent agencies had used their
control over access to many top-name clients to become major forces in the industry. Star
actors were also big winners. The contract fees for actors before and after they became stars
could differ enormously. In particular, if a star had been identified with a character in a
movie — for example, the child actor Macaulay Culkin with his character in the blockbuster
Home Alone (1990) — the sequel of the movie would need that star and no other to act in it.
In such cases, the star could have overwhelming bargaining power against the studios.
15
Therefore, studios had used the tactic of signing multi-picture contracts with stars for more
than one episode in a series of movies. Natalie Portman, for example, was signed to a three-
picture deal for the Star Wars prequels. Child actor Daniel Radcliff was signed for a two-film
deal worth about US$300,000 in 2000 for the first two instalments of the Harry Potter
movies, in which he played the eponymous hero.16 Warner Brothers, which made the movies,
was in an advantageous bargaining position in setting the fees because so many child actors
wanted to be the lead. It remained to be seen what arrangement would be worked out for
subsequent films in the series.
The Prato Wool Textile Industry17
By the mid-1990s, the Prato region of Italy, just outside Florence, accounted for about 50 per
cent of Italian wool textile production. Prato firms generally supplied medium-quality wool
fabrics for women’s wear, and roughly accounted for three-quarters of the medium-quality
wool fabric produced in Italy. Prato’s skilled workers were masters at the flexible, rapid-
turnaround, short production runs needed for fashion apparel and prototypes of mass-market
apparel. Modern technology and machinery (mostly supplied by local machinery firms) and
the short production runs required for fashion apparel allowed for efficient operation on a
small scale. Fragmentation led to an increase in variety, which along with the geographic
concentration of the industry, reduced shopping costs for customers and attracted buyers from
around the world. Most Prato firms specialised in a single stage of production. A single
batch of raw material often passed through five, six or more Prato firms on its path to finished
textile. No firms were engaged in all production stages. Most firms in the area were
suppliers and buyers at the same time, and they co-operated as equals, without a senior
partner that dominated in deciding the terms of co-operation.
The co-ordination of production involved arranging and guiding the flow of material through
and between the stages. Apart from manufacturing, skills such as marketing, design creativity
and capacity to serve new market were also needed. The localisation of the industry
facilitated the organisation of a complex system where each stage of production delivered
just-in-time to each subsequent stage. Moreover, a large number of firms were set up that
provided services to the textile industry, thus further increasing the importance of the efficient
flow of financial, organisational, commercial and technical information within the district. It
had been estimated in the mid-1980s that communication costs (including the value of the
time used in communication) in the Prato textile district was approximately 2.9 per cent of
15 Culkin’s fee for Home Alone was US$100,000, compared to about US$5 million plus five per cent of the domestic gross
(which turned out to be US$8.7 million) for Home Alone 2: Lost in New York (1992). Source: Brandenburger, A. M., and
Nalebuff, B. J., (1996), Co-opetition, New York, the United States: Doubleday, pp. 48-49.
16 Jojo Moyes, “Agents withdraw child actors from pounds 90m Harry Potter film in protest at low pay”, The Independent, 16
October, 2000.
17 Adapted from Enright (1995).
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total sales. Information flow within the district’s textile industry had benefited from its
localisation. Virtually everyone in the area was involved in the textile industry in some
capacity. Everyone spoke the same language, including business idioms and ways of
thinking. Social contacts and interpersonal networks helped spread information about the
industry and its firms. Standardised contracts had emerged.
Most transactions in the Prato industry took place in spot markets. Co-ordination was
achieved through contractual relationships and market parameters such as price, quality, time
and reliability, rather than hierarchical authority. Impannatori, entrepreneurs that took orders,
sub-contracted production, supervised fabric design, found clients, purchased material and
arranged logistics, often without directly controlling any productive capacity themselves, had
emerged as the central co-ordinating agents, occupying a unique position in the industry.
After receiving orders, impannatori subcontracted productive activities on a spot basis. They
tended to use many subcontractors, each of which tended to serve many customers, with the
local market providing the principal co-ordination mechanism for firm activities. Most
impannatori rotated their subcontractors periodically. Those that did not still used the
presence of numerous local competitors and common knowledge of local quality and price
standards to set contract parameters. This resulted in essentially market-mediated outcomes,
even for what appeared to be long-term relationships. As long as a subcontractor did not
deviate from local standards of quality, or tried to charge above the going price for a service,
there was no reason to change subcontractors.
By 1990, there were approximately 600 active impannatori in Prato. They had become the
market-makers of the system, matching and co-ordinating supply within the area with demand
from other parts of Italy and abroad. They ran trade fairs in which buyers from around the
world were invited to see the newest products of local firms. Since impannatori also obtained
information on improved machinery, new processes and markets wherever it was available,
the Prato firms were able to keep abreast of the most modern technology as it competed on
the basis of quality, design, reliability, continuity of supplies and punctual delivery.
Sometimes large rush orders came in that strained the system. Firms might then pay their
subcontractors more to expedite their orders. Or, interpersonal and family ties allowed
priority to be given to rush orders while less important orders were slightly delayed. Trust
played an important part here: it was implicitly agreed that the favour would be returned in
granting future deals or special contract terms. Some larger firms invested in weaving and
finishing firms in order to ensure rapid turnaround on special orders for large customers.
Increases in equity cross-holdings also complemented the inadequacies of the spot market.
The Prato system had proven better able to change from the production of commodities to the
production of differentiated products than the textile industries in other European nations,
which were not as localised or fragmented. The specifics of wool textile production,
particularly the separability of production stages, and the segments served by the Prato
industry, particularly fashion-related segments, had been amenable to the fragmented
structure of the Prato industry. Prato firms remained unmatched in their ability to turn out
short production runs of a wide variety of fabrics at short notice, making them ideal for the
fashion-related segments of the garment industry, with their short seasons and short
production runs.
Airbus and the Making of A380
According to Giunta (1999), “the commercial aircraft industry shows marked division of
labour between firms extending over the international scale. With the high costs and serious
risks involved in research and development and engineering, the complexity of the productive
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cycle and the application of extremely diverse technologies … a number of enterprises must
be involved.”18 This characteristic was reflected in the production of A380, the flagship new
project in the early 2000s of aircraft maker Airbus.
By that time, two companies dominated the global commercial aircraft manufacturing market:
Airbus (owned by the European firms EADS and BAE SYSTEMS) and US-based Boeing.19
Boeing was the older company and had led the race for many years. Boeing’s B747, in
particular, was the first of the world’s jumbo jets, with a capacity of more than 400
passengers, and had not been matched by any Airbus models. Airbus’ most important goal in
the early 2000s was to produce an aircraft that could beat the B747. The project, called
A3XX, was conceived as early as 1996 but was only officially launched in late 2000. It was
later renamed the A380. In terms of size, the A380 was unprecedented among airliners. The
“Super Jumbo” would be a long-range triple-decker that would seat more than 550
passengers. By early 2003, it was known that the new model was expected to enter service by
2006. Airlines that were known to have placed orders by then included Air France, Emirates
Airline, Federal Express, International Lease Finance, Lufthansa, Malaysia Airlines, Qatar
Airways, Qantas, Singapore Airlines (the airline for the service launch) and Virgin Atlantic; a
total more than 100 planes had been ordered by these 10 airlines. The cost of each new
aircraft had been estimated as being within the US$200 million-to-US$250 million range.
The project was a very expensive investment even by the standard of commercial aircraft
manufacturing. The company’s manufacturing plants throughout Europe were enlarged for
the production processes, and Airbus even had to build a new factory in its home base in
Toulouse, France, to accommodate the final, main assembly line that would give birth to the
new aircraft. The research and development costs of A380 were about US$10 billion — and
that was before including the cost of the factory building.
The way that Airbus developed and built A380 was in line with previous Airbus aircraft
projects. Many of the major assemblies, such as wings, fuselage and rudder, were
manufactured in different locations in Airbus’ European plants and then shipped and trucked
to Toulouse.20 On the other hand, much of the work was also contracted out by Airbus to
first-tier suppliers that often contracted out their share of the work to other, smaller suppliers.
All these suppliers would contribute not only the manufacturing but also some technological
development to the project. Exhibit 3 gives an idea of the outsourcing involved.
In fact, over the 30-odd years of Airbus’ existence up to the A380 project, it had built up a
network of 1,500 contractors in more than 30 countries which, according to the Airbus
website, “have demonstrated they can deliver the quality we demand within the required
timeframes.” Of these, more than 800 companies were in the United States, contributing
products that ranged from engines to window glass. There were also contractors in Europe,
Asia, Africa and Australia, providing aerostructure commodities, materials, equipment
systems, propulsion systems, company consumables and services, and product-related
services. Bringing all the inputs, components and systems together according to tight
production schedules was a logistical challenge of the highest order.
Procurement was one of the major branches of the Airbus organisation, headed by an
Executive Vice President. It comprised five areas: airframe procurement; equipment and
propulsion systems; general procurement, capital goods and services; quality and supplier
development, and strategy and services. The branch as a whole was responsible for
18 Anna Giunta, “Supplier Relations in Commercial Aircraft Industry: the Case of Alenia in Southern Italy”, 1999 ICSB Naples
Conference Proceedings, International Council for Small Businesses, URL:
www.sbaer.uca.edu/Research/1999/ICSB/99ics122.htm.
19 EADS stands for European Aeronautic Defence & Space Company. It consisted of three companies based in Germany, France
and Spain respectively. BAE SYSTEMS was a UK-based company.
20 In previous projects the parts were flown to Toulouse, but this time most of the new model’s parts were too big for that.
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negotiating with suppliers and arranging the provision of externally sourced goods and
services to time, cost and quality as agreed with Airbus’ Programmes and Operations
branches. Procurement implemented standards, policies and processes across the whole of
Airbus and its supply chain. Through such efforts, Airbus could manage its relations with
suppliers, monitor their performance and drive corrective and improvement actions. The
company had even set up an online system called “Airbus Sourcing” that allowed buyers and
suppliers to exchange requirements, proposals and technical innovations. Airbus spent 14.1
billion euros (about US$12.5 billion) on procurement in 2001, compared with sales of
US$18.2 billion in the same year.
The Acer Group by 200121
Contract electronic manufacturers (CEM), or electronics manufacturing services (EMS)
providers, were companies that manufactured a variety of electronic products for computer
and electronics companies on a contract basis. By 2000, CEM/EMS providers often supplied
complete manufacturing services, including product design, manufacturing, quality control
and related activities. In that aspect, they were also original equipment manufacturers
(OEMs), which manufactured finished products often to be sold under the brand names of
client companies (sometimes, as in the Microsoft ruling mentioned earlier, brand-name
companies that might not have internal manufacturing facilities were also called OEMs).
They might also be involved in some design work, and were called in that capacity original
design manufacturers (ODMs).
CEM/EMS had become a big business by 2001, when 15 to 20 per cent of total electronics
production worldwide was outsourced. According to an industry source, by 2001 there were
50 contract electronics manufacturers worldwide with revenues over US$100 million. A
number of observers agreed that PC-makers would outsource more and more of their
production to EMS providers on an OEM basis. It had been claimed that the worldwide
contract manufacturing market amounted to US$103 billion in 2000. The leading CEM/EMS
companies, US-based Solectron and Singapore-based Flextronics International, both had sales
in excess of US$10 billion in 2001. The main competitive variables and purchasing criteria
for the CEM/EMS business were product quality, reliability of delivery and price. For
companies that also outsourced design, design capabilities were also critical. Asia in general,
and Taiwan in particular, was the home of many medium-sized contract manufacturers.
The Acer Group, one of Taiwan’s foremost PC-makers and peripherals-makers, was by early
2001 in a special and embarrassing position of being both a contract manufacturer and also a
vendor of its own brand-name PCs. In other words, it was simultaneously a supplier and
buyer among PC-makers. By early 2001, the Acer Group’s flagship company Acer Inc.’s
leading product lines were notebook PCs, desktop computers and computer motherboards.
Developing a global brand name was the quest of Acer’s founder and guiding light Stan Shih,
who had been leading the company since its inception as an OEM in 1976. Acer had ranked
seventh in the world in PC unit sales (including its own brand and OEM production) in the
late 1990s, and was the ninth in 2000. Own-brand sales accounted for roughly 40 per cent of
Acer Inc.’s revenues in 2000, with contract manufacturing accounting for 60 per cent. Acer
Inc.’s branded business suffered a loss of over US$60 million in 2000 in the Americas and
Europe, and continued to lose money overall.
The contract manufacturing business, which had factories in different parts of the world, was
profitable, though its revenues had fallen. At the same time as the global economy suffered
from a recession by 2001, affecting Acer’s revenues, Acer also ran into issues combining
21 Adapted from Enright M. J., and Mak, V., (2001), “Acer in 2001: The Reorganisation”, Hong Kong: Centre for Asian
Business Cases, School of Business, The University of Hong Kong.
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03/162C Buyer-Supplier Relationships
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contract manufacturing and own-brand business. Since Acer might manufacture a PC model
for a client and a similar Acer-brand one in direct competition, OEM clients feared leakage of
business secrets. Acer’s OEM operations suffered after IBM, a major customer, cancelled an
order in 2000. IBM accounted for 53 per cent of Acer’s total revenue in the first quarter of
2000, but only 26 per cent in the second quarter of 2001.
To address the problem of conflict of interest, and also to re-focus its own-brand business, in
May 2001 Acer announced that it would spin off its Design, Manufacturing and Services
(DMS) i.e., its contract manufacturing arm, into a new company called Wistron Corporation.
Acer Brand Operation (ABO) would become the flagship business of the Acer Group, and
would concentrate on marketing and sales for Acer’s own branded products. It would
outsource all its manufacturing and would give a free hand to its contract manufacturers.
With eight global operation sites, Wistron claimed to have achieved US$3 billion in OEM
business revenue in 2000 (as Acer Group’s DMS arm). It also claimed to be the top global
ODM/OEM supplier for the PC industry that year — but provided no information about how
that figure had been arrived at. Wistron was dedicated to achieving global leadership in
design and OEM manufacturing within the information and communications technology
(ICT) fields. Acer planned to reduce its ownership of Wistron from 100 per cent to about 30
per cent by mid-2002. The spin off was expected to allow Wistron to make the best use of its
research and development resources, design capabilities and global logistics system, and to
have a free hand in looking for new customers. At its inception, Wistron would have clients
that included IBM, Dell, Hitachi and Fujitsu, with IBM the single largest client. Acer claimed
that ABO would just be another client of Wistron.
The Future of Buyer-Supplier Relations
Several trends in the early 2000s were likely to influence buyer-supplier relations. These
included an increased emphasis on supply chain management, an increased use of online
communications and purchasing, increasing outsourcing in manufacturing, increased
outsourcing in the service sector, and profit pressure on major firms. Increased emphasis on
supply chain management, with its focus on providing complete information through every
step in the supply and distribution chain and its desire to minimise inventories, pushed some
companies to limit the number of suppliers they used to a relatively small number that could
be true partners in an integrated supply chain. Online communications and purchasing tended
to provide greater pricing information to buyers, which in turn could cause them to push for
lower prices. Several large companies began to go to online auctions in the early 2000s for
many of their inputs in order to obtain better pricing and improved terms. Increased
outsourcing in both manufacturing and services have served to bring new parts of the world,
China and India in particular, into the global economy. The trend also has made many
manufacturing and some service activities commodities, in which it is increasingly difficult
for suppliers to earn high returns. The increasing globalisation of competition and the
emergence of new players from new markets also resulted in substantial profit pressure on
many venerable firms in the early 2000s. Most analysts expected that this pressure would
push them to rethink their supplier relations, though it was not clear in which directions many
firms would take those relations.
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EXHIBIT 1
PROFILE OF TOYOTA’S AND GENERAL MOTORS’ SUPPLIERS
Percentage of Total Component Costs
Internally
Manufactured
Partner
Suppliers*
Arm’s-length
Suppliers
Toyota 27% 48% 25%
General Motors 55% 10%** 35%
* Kankei-kaisha (affiliated companies) in the case of Toyota.
** Two or fewer suppliers for a product category.
N.B.: “internally manufactured” implies production as part of the vertically integrated
company; arm’s-length relationships relied primarily on legal contracts with outside
suppliers; partnerships were external relationships governed by trust and implicit long-term
agreements rather than legal contracts.
Source: Dyer, J. H., (2000), Collaborative Advantage, New York, the United States: Oxford
University Press, p. 33.
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EXHIBIT 2
TERMINAL HANDLING CHARGES (THC) IN SELECTED MAJOR PORTS
THCs for Europe are as of March 2001. All other THCs are as of August 2002.
(in HK$) USA
20’
USA
40’
Europe 20’ Europe 40’ Asia 20’ Asia 40’
Hong Kong 2,140 2,855 2,060 2,750 1,800 2,650
Shenzhen 1,096 2,087 1,100 2,100 1,096 2,087
Taiwan 1,271 1,589 1,150 1,450 1,096 NA
Singapore 788 1,170 720 1,020 788 1,170
Japan 749 936 1,870 2,680 686 1,030
Indonesia 1,012 1,557 NA NA 1,051 1,557
South Korea 657 891 620 840 657 891
Malaysia 590 880 480 710 590 880
Thailand 478 718 480 710 478 718
Shanghai 510 680 120 180 113 175
The Philippines 85 113 270 340 507 669
Germany NA NA 1,110 1,110 NA NA
The Netherlands NA NA 790 790 NA NA
Note: “20” is a standard unit for container volume and is equivalent to the volume of a
container measuring 20ft x 8ft x 8ft; “40” is similarly equivalent to the volume of a container
measuring 40ft x 8ft x 8ft.
Source: CLSA Emerging Markets, Hong Kong Strategy — Market Outlook, October 2002, p. 23.
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EXHIBIT 3
SOME A380 SUPPLIERS AS OF 10 MARCH, 2003
Supplier Components
Aerolec (joint venture of Goodrich
and Thales)
Variable-Frequency (VF) Electrical Generation
Aircelle Nacelle
Belairbus Slat Track Systems for Wing Sections
COMTAS Aerospace Upper Frame Cross Beams
Diehl Avionik Systeme Doors and Slide Management System, Highlift Slat
Flap control Computer
Draeger Aerospace Emergency Oxygen System
EADS Augsburg Flap Tracks, Floorbeams, Front Wing Frame
Eaton Hydraulic Pumps, etc.
Fairchild Controls Galley Cooling
Fenwal, Meggitt, Thermocoax Bleed Overheat Detection
FR HiTemp Fuel Pumps
Frisby (Triumph Group) Cargo Door Actuators
Fuji Heavy Industries Vertical Tailplane Edges, Tip, Fairings
GE-Pratt &Whitney Engine Alliance GP7200 Engine
GKN Aerospace Services Wing Trailing Edge Panels
Goodrich (with Auxitrol, Thales) Flight Control Systems, Landing Gear, Air Data
Systems, etc.
Hamilton Sundstrand Air Conditioning, Ram Air Turbine
Honeywell Aircraft Environment Surveillance System, Flight
Management System, etc.
KID-Systeme Cabin Communication Data System, Passenger
Supply Channel, etc.
Kollmorgen Artus Emergency Electrical Generation
Liebherr (with Honeywell, Smiths) Bleed (main WPs), Spoiler Actuators, Highlift
Actuation
M. C. Gills Cockpit & Electronic Equipment Bay Floors
Messier-Bugatti Braking & Steering Control Systems, etc.
Messier-Dowty Landing Gear — Nose
Mitsubishi Heavy Industries Front & Aft Lower Cargo Doors
Nord-Micro Avionics Ventilation, Cabin Pressure Control, and
Ventilation Control Systems
Northrop Grumman Air Data Inertial Navigation System
Pfalz-Flugzeugwerke (PFW) Fluid Distribution Systems
Pratt & Whitney Canada Auxiliary Power Unit (APU)
Rockwell Collins (with Honeywell,
Thales)
Avionics Communication Router, Radio
Communications, etc.
Rolls-Royce Trent 900 Engine
Ruag Outer Fixed Trailing Edge, etc.
Smiths Aerospace Landing Gear Actuation, Video
Concentrator/Multiplexer, Wing Flaps/Slats, etc.
Thales (with Diehl Avionik Systeme) Flight Control Unit, etc.
TRW Cargo Loading System, Rudder, etc.
ZODIAC (with ECE, Intertechnique,
Monogram Sanitation)
Electrical Distribution — Primary, Fuel
Hydromechanical, Water Waste, etc.
Source: “Airbus A380 Suppliers”, SpeedNews, URL:
www.speednews.com/lists/A380_Suppliers.html
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