CASE STUDY

JIT System in Toyota

Systematic Problem Solving (Six Sigma) to Solve An Actual Problem In A Car
Manufacturing Industry
Inventory Management at Telesys Ventures Inc.
Supply Chain Process of Crocs Inc.

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POST GRADUATE DIPLOMA IN BUSINESS

ADMINISTRATION
OPERATION MANAGEMENT

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SYMBIOSIS CENTRE FOR DISTANCE LEARNING (SCDL)

Case Study 1: JIT System in Toyota

Introduction
Ever since the company was founded in 1937, The TOYOTA MOTOR CORPORATION and
their subsidiaries (TOYOTA), have continuously strived to contribute to the sustainable
development of society and the earth through the manufacturing and provision of high-quality
and innovative products and services. Through these continuous efforts, they have established a
corporate philosophy that has been passed down from generation to generation throughout the
company and which has come to be known as the Guiding Principles at Toyota (originally
issued in 1992, revised in 1997; the Guiding Principles. they have also put TOYOTAs values
and methods in written form, in the Toyota Way (issued in 2001). Such values and methods
must be shared globally among us to realize the Guiding Principles and they are seeking to
pass these on to future generations. Through these efforts and by Passing down corporate
philosophy and values and methods, they are steadfastly striving to realize the creation of a
prosperous society by making things. TOYOTA has long-demonstrated its dedication to
contributing to sustainable development. As their business operations have become increasingly
global, they need to reconfirm their corporate philosophy and have issued an explanatory paper
in January 2005 entitled Contribution towards Sustainable Development. This paper interprets
the Guiding Principles from the stand point of how TOYOTA can work toward sustainable
development in its interactions with its stakeholders. They believe that by implementing the
Guiding Principles in operation, TOYOTA will successfully fulfill its expected contribution
towards sustainable development. Therefore, as stated in the Guiding Principles and explanatory
paper, we must comply with local, national and international laws and regulations, including the
spirit thereof, and act with humility, honesty and integrity. Compared to when the Code of
Conduct for Toyota Employees was first issued in 1998, TOYOTAs presence in society has
greatly increased and also new laws and regulations have been established, such as for the
protection of personal data. With this background in mind, we have revised the existing code of
conduct and created the Toyota Code of Conduct in order to communicate the fundamental
approach necessary to inspire continued confidence in TOYOTA, to respect and comply with the
laws, and to maintain our honesty and integrity. I would particularly like to ask each one of you,

as a person working for TOYOTA, to be aware that you are an essential contributor to the
success of TOYOTA. In this era of global competition, borderless trade, and diversification,
TOYOTA wishes to conduct business in an open and fair way. TOYOTA aims to become the
most valued, respected and trusted company in the world by its customers and society.
Accomplishing this goal requires that each one of us is aware of TOYOTAs respected reputation
and standing in the community, the gratitude their owe to customers and society, and the
necessary respect of laws and regulations. Therefore, they must each act in a steadfast, surefooted, and thorough way, and in accordance with common sense and good judgment. I expect
and ask you to carefully read this Toyota Code of Conduct and to implement the spirit within
March, 2006.
After the Second World War, the distribution of World economic power was totally rearranged.
Before the war, Europe and the USA ruled the world market. The management of Western
companies was based on the "Scientific Management" by Frederick Winslow Taylor (1856-1915)
and on "Modern Sociology" by Max Weber (1864-1920). This intellectual basis characterizes the
begin of industrialization, led to mass production and to tremendous productivity increases. Yet
after the war, new players appeared on the playground, whose work was based on a philosophy,
on methods and rules unknown before. Whilst Western managers turned to short-term thinking to
satisfy shareholders and to endless restructuring, the new actors concentrated on continual
improvement in the quality of products, uniformity of processes and qualification of employees.
Toyota is one of these new players, which despite the fierce competition due to excess
production capacity in the automobile industry of around 25 % outperforms Western competition
in every aspect, in technological innovation, in customer satisfaction, in continuous growth and
in profit. In 2004 Toyota passed Ford to become he second largest automobile producer. Before
long, Toyota will overtake General Motors becoming the biggest car company in the world
probably having no less than 15% of the world market. Toyota will prevail. Most others will
have the choice between shrinking or sinking. This paper tries to shed light on the root causes of
the Toyota Phenomenon, which for some reason or another Western companies find so hard to
understand and much less on how to apply, despite their struggle for its survival.

Guiding Principles at Toyota

1. Honor the language and spirit of the law of every nation and undertake open and fair
corporate

activities to be a good corporate citizen of the world.

2. Respect the culture and customs of every nation and contribute to economic and social
development through corporate activities in the communities.

3. Dedicate ourselves to providing clean and safe products and to enhancing the quality of
life everywhere through all our activities.

4. Create and develop advanced technologies and provide outstanding products and services
that fulfill the needs of customers worldwide.

5. Foster a corporate culture that enhances individual creativity and teamwork value, while

6. Honoring mutual trust and respect between labor and management.

7. Pursue growth in harmony with the global community through innovative management.

8. Work with business partners in research and creation to achieve stable, long-term growth
and mutual benefits, while keeping ourselves open to new partnerships.

9. The Toyota Way includes a set of tools that are designed to support people continuously

improving and continuously developing. For example, one-piece flow is a very

demanding process that quickly surfaces problems that demand fast solutions, or else
production will stop. This suits Toyotas employee development goals perfectly because it
gives people the sense of urgency needed to confront business problems. The view of
management at Toyota is that they build people, not just cars.

Toyota Production System (TPS)

First, of course, it taught the modern car industry how to make cars properly. Few had heard of
the Toyota Production System (TPS) until three academics in the car industry study programme
run by Massachusetts Institute of Technology (MIT) wrote a book in 1991 called The Machine
that Changed the World. It described the principles and practices behind the just-in-time
manufacturing system developed at Toyota by Taiichi Ohno. He in turn had drawn inspiration
from W. Edwards Deming, an influential statistician and quality-control expert who had played a
big part in developing the rapid-manufacturing processes used by America during the Second
World War. At the core of TPS is elimination of waste and absolute concentration on consistent
high quality by a process of continuous improvement (kaizen). The catchy just-in time aspect of
bringing parts together just as they are needed on the line is only the clearest manifestation of the
relentless drive to eliminate mud waste) from the manufacturing process. The world's motor
industry, and many other branches of manufacturing, rushed to embrace and adopt the principles
of TPS. Toyota's success starts with its brilliant production engineering, which puts quality
control in the hands of the line workers who have the power to stop the line or summon help the
moment something goes wrong. Walk into a Toyota factory in Japan or America, Derby in
Britain or Valentines in France and you will see the same visual displays telling you everything
that is going on. You will also hear the same jingles at the various work stations telling you a
model is being changed, an operation have been completed or a brief halt called. Everything is
minutely synchronized; the work goes at the same steady cadence of one car a minute rolling off
the final assembly line. Each operation along the way takes that time. No one ushers and there
are cute slings and swiveling loaders to take the heavy lifting out of the work. But there is much
more to the soul of the Toyota machine than a dour, relentless pursuit of perfection in its car
factories. Another triumph is the slick product-development process that can roll out new models
in barely two years. As rival Carlos Ghosn, chief executive of Nissan, notes in his book Shift
(about how he turned around the weakest of Japan's big three), as soon as Toyota bosses spot a
gap in the market or a smart new product from a rival, they swiftly move in with their own
version.

The result is a bewildering array of over 60 models in Japan and loads of different versions in big
overseas markets such as Europe and America. Of course, under the skin, these share many
common parts. Toyota has long been the champion of putting old wine in new bottles: over twothirds of a new vehicle will contain the unseen parts of a previous model. But TPS alone would
not justify the extraordinary success of the company in the world market.

World Class Manufacturing

Many firms have tried to install the Toyota Production system TPS. They set up the Kanban
system, which is a tool for managing the flow and production of materials in a Toyota-style
pull production system. They plug in the andon, which is a visual control device in a
production area that alerts workers to defects, equipment abnormalities or other problems using
signals such as lights, audible alarms, etc. Finally, with all these devices the workplace looks like
a Toyota plant. Yet over time the workplace reverts to operating like it did before. And this is
exactly what many Western organizations have experienced. With the set up of TPS, the real
work of implementing TPS has just begun. In the Toyota Way, its the people who bring the
system to life by working, communicating, resolving issues and growing together. The Toyota
Way encourages, supports and in fact demands employee involvement. The Toyota Way is much
more than a set of improvement and efficiency techniques. Its a culture depending on worker
attitude to reduce inventory, identify hidden problems and to fix them with a sense of urgency,
purpose and team work. The Toyota Production System can be copied, the Toyota Way cannot. It
has to be built, maintained and refined over decades. The roots of the Toyota Way go back to
1926, when Sakichi Toyoda (1867 1930), a brilliant engineer, later referred to as Japans King
of Inventors, founded Toyoda Automatic Loom Works. His work ethics was significantly
influenced by the book of Samuel Smiles, Self- Help, first published in England in 1859. The
book grew out of the devotion, to help young man in difficult economic circumstances by
improving themselves. The book chronicles inventors whose natural drive and inquisitiveness led
to great inventions that changed the course of humanity. When looking for instance at the success
and impact of James Watt, Smiles concluded, that both were not the result of natural endowment

but rather trough hard work, perseverance and discipline. These few words summarize the spirit,
which Sakichi Toyoda handed over to his son Kiichiro Toyoda (1894-1952), the founder of
Toyota Motor Company, his son Shoichiro Toyoda, Honorary Chairman and director of Toyota
Motor Corp., and on to his nephew Eiji Toyoda (*1913), President of Toyota from 1967 to 1994.
Spend some time with Toyota people and after a time you realize there is something different
about them. The rest of the car industry raves about engines, gearboxes, acceleration, fuel
economy, handling, ride quality and sexy design. Toyota's people talk about The Toyota Way
and about customers. In truth, when it is written down the Toyota creed reads much like any
corporate mission statement. But it seems to have been absorbed by Japanese, European and
American employees alike. Mr. Cho thinks that something of the unique Toyota culture comes
from the fact that the company grew up in one place, Toyota City, 30 minutes drive from Nagoya
in central Japan, where the company has four assembly plants surrounded by the factories of
suppliers. In this provincial, originally rural setting, Toyota workers in the early days would often
have small plots of land that they tended after their shift. Mr. Cho, who made his career in the
company by being a pupil of Mr. Ohno and becoming a master of production control, thinks that
the fact that Toyota managers and their suppliers see each other every day makes for a sort of
hothouse culture rather like Silicon Valley in its early days. Jim Press is boss of Toyota's sales
in North America. He left Ford in frustration 35 years ago, because he did not think it handled
customer relations properly and he suspected that the upstart Japanese company making its way
in the American market might do better. He was right. Toyota shares a production plant in
California with GM. Identical cars come off the line, some badged as GM, the rest atlas: after
five years, according to one study by Boston Consulting Group, the trade- in value of the Toyota
was much higher than that of the American model, thanks to the greater confidence people had in
the Toyota dealer and service network. Mr. Press talks with a quiet, almost religious, fervor about
Toyota, without mentioning cars as such. The Toyota culture is inside all of us. Toyota is a
customer's company, he says. Mrs. Jones is our customer; she is my boss. Everything is done
to make Mrs. Jones's life better. We all work for Mrs. Jones. But not even the combination of its
world leading manufacturing, rapid product development and obsess ional devotion to customer
satisfaction is enough to explain Toyota's enduring success. There is one more ingredient that
adds zest to all these. Tetsuo Agata doubles as general manager of Toyota's Honsha plant in
Toyota City and as the company's overall manufacturing guru. The magic of Toyota's winning

culture was summed up for him by an American friend who observed that Toyota people always
put themselves outside the comfort zone: whenever they hit one target, they set another, more
demanding one. That relentless pursuit of excellence certainly explains much of what has been
happening to the company in recent years, at home and abroad.

Methods Used In Controlling Waste

The purpose of TPS is to minimize time spent on non-value adding activities by positioning the
materials and tools as close as possible to the point of assembly. The major types of non-value
adding waste in business or production process are overproduction, waiting or time on hand,
unnecessary transport or conveyance, over processing or incorrect processing, excess inventory,
unnecessary movement, defects and unused employee creativity. The driving force behind the
Japanese system of production is eliminating waste, thereby maximizing process efficiency and
the returns on resources. A wide number of principles and practices can be employed to achieve
this goal. As Shingo once noted, people instinctively know to eliminate waste once it is identified
as such, so the task of reducing waste often centers first around identifying unnecessary uses of
human, capital, or physical resources. After waste is targeted, new processes or practices can be
devised to deal with it.

Just-In-Time (Jit)
Just-in-time (JIT) production or so-called lean manufacturing. The pioneers of these methods
were Taiichi Ohno, a former Toyota executive, and Shigeo Shingo, an eminent engineer and
consultant. In his 1989 book The Study of the Toyota Production System from an Industrial
Engineering Perspective, Shingo identified these basic features of TPS:
1. It achieves cost reductions by eliminating waste, be it staff time, materials, or other
resources.
2. It reduces the likelihood of overproduction by maintaining low inventories ("nonstock")
and keeps labor costs low by using minimal manpower.

3. It reduces production cycle time drastically with innovations like the Single-Minute
Exchange of Die (SMED) system, which cuts downtime and enables small-lot
production.
4. It emphasizes that product orders should guide production decisions and processes, a
practice known as order-based production.

Process Improvement
An important aspect of eliminating waste is designing efficiency into production processes and
methods. For example, in the Toyota system heavy emphasis was placed on lowering the time
and complexity required to change a die in a manufacturing process. A time-consuming diechanging process is wasteful in two ways. First, while it is happening production is often at a
standstill, increasing cycle times and all the costs associated with longer cycle times. (However,
it is important to note that idle time for individual machines in a system is not always viewed as
wasteful under the TPS philosophy.) Second, workers' time and effort are spent on activities that
aren't directly related to production (i.e., no value is being added by changing a die). As a result
of such concerns, the push at Toyota was to reduce significantly the time it took to change dies.

VALUE ADDED
TPS and similar Japanese manufacturing techniques distinguish between activities that add value
to a product and those that are logistical but add no value. The primaryeven the solevalueadded activity in manufacturing is the production process itself, where materials are being
transformed into progressively functional work pieces. Most other activities, such as transporting
materials, inspecting finished work, and most of all, idle time and delays, add no value and must
be minimized. When processes are examined for potential improvements and cost cutting,
reducing non-value-added activities is often the highest priority. Conversely, processes that add
the most value, even if they are expensive, will usually not be compromised to achieve lower
costs at the expense of quality.

Quality by Design
Another feature thought to be defining in Japanese manufacturing is a marked attention to quality
throughout the production process. Specifically, under the influence of such luminaries as W.
Edwards Deming and Joseph M. Juran, Japanese manufacturers have sought to achieve quality
by designing it into the production process rather than simply trying to catch all the errors at the
end. As noted, poka-yokes can serve this function either by halting/correcting a faulty process or
by alerting a worker to a problem as it occurs. While plenty of traditional, defect-monitoring
sorts of quality controls are still used, philosophies such as TPS hold that the results of quality
inspections should be used to informand improvethe manufacturing process, not just to
describe it. This means the feedback from a quality inspection is expected to be immediate and,
often, to result in some change in the process so that the likelihood of similar problems in the
future is reduced.

Order-Based Production
A natural and necessary extension of the non-stock goal is that manufacturers need specific
customer information to drive their production decisions. Obtaining this information necessitates
effective market research/forecasting and communication with customers. As much as possible,
production under the Japanese system is guided by actual orders, rather than anticipated demand
based on less reliable information such as past sales. The order-based system is said to provide
production "pull" from the actual market, as opposed to "push" that stems only from the
manufacturer's conjecture.

Transportation
The Toyota Production System also recognizes waste in the excess movement of items or
materials. In general, the more transportation required, the less efficient the process, since
moving goods back and forth is normally not a value-adding procedure. Transport waste is
usually addressed by changing the layout of a factory, its geographic location relative to its
customers, and so forth. While sometimes transportation problems can be mitigated through
automation, the ideal under the Japanese system is to minimize it altogether. Cell and flexible
manufacturing layouts are one approach to controlling transport waste.

Market-Driven Pricing
In contrast to the traditional practice of setting prices by marking up some percentage over the
cost of manufacturing, the Japanese system attempts to identify the market-determined price for
a good and then engineer the manufacturing process to produce at this price profitably. Under
this principle, increases in costs are not passed on to the consumer in the form of higher prices.
As a corollary, the only way for a firm to increase profitability is by lowering costs; lower costs
may also allow the company to be profitable yet deliver products at the low end of the pricing
spectrum, a practice central to the rise of the Japanese auto manufacturers in the U.S. market.

Worker Flexibility
Maximizing returns on human capital is another goal of Japanese manufacturing practices.
Driven by the theory that human time is more valuable than machine time, the Japanese system
attempts to optimize labor efficiency by deploying workers in different ways as order-based
production requirements fluctuate. The main two dimensions of this flexibility are skills and
scheduling.

Lean Principles

Precisely define value by specific product.

Identify the value stream for each product.

Make the value flow without interruptions.

Let the customer pull value from the producer.

Pursue perfection

Principles Adopted By Toyota to Achieve Their Goals

Toyotas business practices differ from those of Western automobile manufacturers in
a number of aspects:

Operations are strictly governed by a sustainable business policy, which is passed on

from one generation to the other and not by short-term decision making or by the
attitudes of changing management teams and variable customer tastes.

Growth comes from the inside out and not through mergers and acquisitions, in other
words, growth through continual improvement of products and services and not through
continued restructuring.

Production is controlled by customer demand (pull system) not by production capacity

(push system).

Qualified employees are attracted with the possibility to participate in the companys
striving to meet and exceed customer expectations with products of unparalleled quality
and not with compensation schemes. Toyota employees work for a winner. Who wants to
work for an employer, whose products have to be forced onto the customers with
discounts and incentives? Who wants to work for a looser?

No unions are admitted which force both management and employees to defend their
own interests and by so doing distract from the shared responsibility to satisfy customers.

For more than 50 years, Toyota experienced an extraordinary history of continuous

growth without major layoffs

Base your management decisions on a long-term philosophy, even at the expense of

Short-term financial goals.

Create continuous process flow to bring problems to the surface.

Build a culture of stopping to fix problems, to get the quality right the first time.

Standardised tasks are the foundation for continuous improvement and employee
Empowerment.

Use visual control so no problems are hidden.

Use only a reliable, thoroughly tested technology that serves your people and
Processes.

Grow leaders who thoroughly understand the work, live the philosophy, and teach it to
others.

Develop exceptional people and teams who follow your companys philosophy.

Respect your extended network of partners and suppliers by challenging them and
helping them improve.

Go and see for yourself to thoroughly understand the situation (genchi genbutsu).

Make decisions slowly by consensus, thoroughly considering all options; implement

decisions rapidly.

Become a learning organisation through relentless reflection (hansei) and continuous

Improvement (kaizen)

Conclusion
As one of the leading automobile manufacturers in the world, Toyota ranks within the top three
worldwide. Due to their unique business model, they are now having a market share of 14% in
the first four months of this year. That is an astonishing 2.3% jump from the previous year.
According to Autodata.com, the Toyota City based automaker ranks fourth in United States sales.

We have determined that their business model is an Integrated Low Cost? Differentiated
Strategy. It involves finding the lowest operational cost along with a unique niche or strategy that
separates them from the competition. Toyotas new statement? Moving Forward? Reflects their
plans and expectations for the future. This includes the known and the unknown factors that a
business must face. In 2000, Toyota launched a new cost effective strategy called CCC21
(Construction of Cost Competitiveness for the 21st century), for Low Cost operational expenses.
With this aspect Toyota plans to advance such initiatives globally, based on its policy of
purchasing the worlds best parts at the lowest cost with the shortest lead times.

References

www.toyota.co.uk

http://www.strategosinc.com/just_in_time.htm

http://en.wikipedia.org/wiki/The_Toyota_Way

http://www.springerlink.com/content/f432382q8x486312/

http://www2.toyota.co.jp/en/vision/production_system/index.html

http://www.1000ventures.com/business_guide/cs_efficiency_toyota_ps.html

http://www.vorne.com/learning-center/tps.htm

http://www.swmas.co.uk/info/index.php/Toyota-Production-System?

http://www.toyoland.com/history.html

http://www.toyota-europe.com/experience/the_company/index.aspx

http://homepages.ius.edu/GCENTER/Toyota%20Project.htm

http://www2.toyota.co.jp/en/vision/index.html

http://wapedia.mobi/en/The_Toyota_Way

http://www.toyota.co.jp/en/csr/principle/policy.html

http://www.toyota.co.jp/en/environment/communication/glossary/glossary_02.html

Case Study 2: SYSTEMATIC PROBLEM SOLVING (SIX SIGMA) TO SOLVE AN

ACTUAL PROBLEM IN A CAR MANUFACTURING INDUSTRY

Introduction:
The great pioneer companies like GE, Motorola, American express, are just some of the
successful companies which have taken benefits of six sigma in recent years that brings them
incredible increase in profits and market share

Industries in our country special car manufacturing industry are passing critical era. They must
prepare themselves as soon as possible to enter world of competitive market. So they have to
increase quality to worldwide level and decrease the costs to reach economical scale in
production. They can use six sigma tools as a key to reach these targets. This can be done by
defining improvement projects with a very systematic phase through problem solving (as we
have six sigma).

1. Define Phase:

In order to clarify present situation, complete information about noise of cars has been gathered
by gemba investigations and measurements, which became the basis of project definition.
In define phase, team working scope, team members and champions, targets and CTQ is defined.
In Fig.1 the main charter of project, which included mentioned information, has been shown.

Fig.1
The main controllable characteristic of this project (y) is the negative score of whole defects are
regarding to noise of vehicle, which is measured by third level auditor (IDRO).

2. Measurement phase:

Regarding to final audits information (the audit which represents customer view and is done
after commercialization of car. this process is doing in car manufacturing of Iran officially by
IDRO ), it is shown that level of internal and external noise of car is above Iran Khodros
standard limits.
Based on present information, it is clear that the sigma level of process is ZERO.
In early analysis, three modules which are noise source in cars, has been distinguished:
1. Internal noise of car
2. External noise of car
3. under body noise
Because of numerous sources of causing noise in cars, 32 subprojects have been defined to
decrease and control the noise problems in 405. For this aim all projects must have been started
and improved simultaneously.
The start date of projects is mid September and the predicted duration was 6 month.
The most important sources of noise in 405 cars can be narrowed down to:

1. Fuel tanks door

2. Side windows
3. Parcel shelf
4. Dashboard
5. Drivers seat
6. Trunk door

3. Analyse phase:
For analyzing each important source of defect, which mentioned before (7 items), has been
analyzed separately and using brain storming and gemba investigation. 5M of defect have been
drawn. (One sample has been presented in Fig.2 for noise of front drivers seat).

Fig.2

After investigating potential causes of the most repetitive defects, repetitive root causes are
known and related corrective action has been considered to be followed up in next phases.
4. Improvement phase:
Knowing potential and practical root causes based on brainstorming, fish bone diagrams, and
also gemba investigations, Leaded us to real repetitive causes which need to be corrected and
solved. So related corrective action has been defined
Sample of action plans for noise of front seat has been presented in Fig.3

SEAT ACTION PLAN

1

Decreasing the loosing tolerance in recliner of seat

SAPCO

Adding a specific tat around the foam of seat to decrease the

rubbing noise

SAPCO

3.

Defining and applying proper welding point in joint venture of two

parts of
seat for decreasing metal parts contacts

SAPCO

4.

Define and apply proper gap between seat cover and its structure

SAPCO

Cutting down the stopper slider of seat

R&D

Decreasing noise of fuel regulator (CNG)

SAPCO

Fig. 3
5. Control phase:
In the beginning of this project the negative score (based on defect per unit) was 1.053, the target
of noise in 405 cars was 0.2, but using systematic problem solving with support of managers
reached us to 0.15 DPU.

Conclusion

In this paper application of a systematic problem solving has briefly explained which resulted in
noticeable improvement of a defect situation (noise of 405 cars). This has been done with the
help of DMAIC tools.
The sigma level of this defect has increased wonderfully from zero to 2.175 and so the negative
score from 1.053 has been decreased to 0.15 (below the target of 0.2 of project). In summary, it
can be claimed that application of six sigma can help us to reach enormous redaction in cost
(based on redaction of level of reworks and scrubs which is the logical result of a decreasing
defects). Improvement in product and process quality level and so sup rising improvement in
profit making and share of markets. These are essential items for companies survival in present
competitive world.
Beside standardization and publication of case studies can help trainings and spreading the six
sigma knowledge application in learning organization .

References:
1-Hidetoshi Shibata (2003) "ProblemSolving: Definition, terminology, and patterns"
2- Raskin, Andy, A Higher Plane of Problem Solving. TRIZ Journal, June 2003, Vol. 4, Issue 5,
p. 54
3- Darrell L., Mann, "Better technology forecasting using systematic innovation methods",
Technological Forecasting & Social Change Journal, Vol. 70, pp 779- 795. 2003.
4-Kane,V.E(1986)"Process Capability Index"Journal of Quality Technology,Vol,18.

Case Study 3: Inventory Management at Telesys Ventures Inc.

Objective:

The Case Study helps to understand the requirement of inventory management

The various constraints encountered during inventory management
The different approaches utilized to overcome the above said constraints
Evaluation of different proposed changes
Optimization and implementation of Solution
Measurement of Effectiveness of the changes.

Telesys Inc. is a leading manufacturer of Laptops & desktop in India. It imports Monitors from
China. Earlier the company was performing very well but now the situation has changed. There
is a reduction in the gross profit. There are various reasons like changing suppliers, complicated
customs procedures, entry of new competitors, the resurfacing of high sea piracy and economic
slowdown. On the other hand most of the company cash is blocked in inventory. This has led to a
situation of the cash crunch and Management is seeking for a mean to overcome from this
problem.
Lead time also fluctuates at around an average of 21 working days. To facilitate a desired service
level of 95% and avoiding lockout condition / late delivery penalty, company spends Rs 150000
per year in administering a perpetual review system (Fixed Quantity interval system).
To avoid the high monitoring costs for the perpetual system, Rohit, a young Industrial Engineer,
has proposed to change to a Periodic Review system (Fixed order Interval system). Without any
additional investment, Rohit found that administrative costs would drop by 75% approximately.
But management was in a dilemma whether to implement the proposed solution or not. The
review period for the system was one month.

A local supplier promises to deliver any order within 7 working days. It reduces the Order cost to
Rs 25000 per order, but the unit price increases by 2%.
The Information provided by purchase department is written below.
1. Per unit price for monitor is Rs.4200
2. Ordering & Shipping cost is Rs. 65000 per shipment.
3. Inventory holding costs are 20% p.a. of average inventory
4. Forecasted Daily demand is normally distributed and averages 100 units
5. The minimum Lot size ordered is 15,00
6. The maximum lot size per shipment is 40,00
7. As per company policy five days demand to be kept for safety stock.

The questions before management are:

Deciding appropriate amount of order for the monitors
To procure from local vendor or kept outsourcing through China
Solution:
Rohit checked for scientific inventory control method. The excess inventory is already eating up
the company liquidity. The expenses are in the form of raw material cost ,in process work
,finished goods ready to sale .It also include the expenses incurring to meet storage,
transportation, approximation for losses arising out of pilferage insurance and damages. He
wanted to minimise this cost (holding cost or carrying cost).
On the other hand, if he thoughts for opting very less or no inventory then company face lockout
situation. In that case with addition to late delivery Penalty Company may suffer from the
important order /customer losing and the company reputation is also on the stack in the market.
He analyses the requirement of inventory based on below written parameters:

Priority to customer
Effective Capital utilization
Economy in buying

The different methodology adopted is

(a) Fixed Order Quantity system.
(b) Fixed Order Interval System.
In each methodology again evaluation is done for both Local supplier and manufacturer (from
china) for the feasibility. The results are tabulated below after the calculations.
(A) FIXED ORDER QUANTITY SYSTEM WHEN SUPPLY IS FROM CHINA
D (Daily Demand) = 100 unit
S (Ordering & shipment cost IN Rs.) = 65000
C (Unit Cost in Rs.) = 4200
I (Average inventory holding cost) = 20% of average inventory investment
P (Annual consumption in units) =Daily demand x No. Of days in year
= 100 x 365
= 36500

Q (Economic Order Quantity in units) =Sqrt ((2 x S x P)/(C x I))

= 2377
Annual Total Cost: = Basic cost + Procurement cost + Carrying cost
Basic cost (Rs.) = Unit cost x Annual consumption
= 4200 x 3650 = 153300000
Procurement Cost (Rs.) = (Ordering cost per order x Annual consumption)
Ordered quantity
= (65000 x 36500)
2377
= 998223
Carrying Cost (Rs.) = (Inventory carrying cost in decimal x Unit cost x Order quantity)
2
= (0.2 x 4200 x 2377)
2
= 998223
Annual Total Cost (Rs.) =153300000 +998223 + 998223 =155296447
'm (minimum stock in units) = 5 day demand
= 5 x 100 = 500
L (Lead time in days) = 21
C (Daily consumption in units) = 100
Re-Order Level (Units) = m + LC

= 500+21 x 100
=2700
M (Maximum stock in Units) = minimum stock + economic order quantity
= 500+ 2377
= 2877
(A) FIXED ORDER QUANTITY SYSTEM WHEN SUPPLY IS FROM LOCAL
SUPPLIER
D (Daily Demand in Units) = 100
S (Ordering & shipment cost in Rs.) = 250000
C (Unit Cost in Rs.) = 4200 x 1.02 = 4284
I (Average inventory holding cost) = 20% of average inventory investment
P (Annual consumption in Units) =Daily demand x No. Of days in year
= 100 x 365
= 36500
Q (Economic Order Quantity in Units) =Sqrt ((2 x S x P)/(C x I))
= 1459
Annual Total Cost: = Basic cost + Procurement cost + Carrying cost
Basic cost (Rs.) = Unit cost x Annual consumption
= 4284 x 36500 = 156366000
Procurement Cost (Rs.) =

(Ordering cost per order x Annual consumption)

Ordered quantity

= (250000 x 365000)
14595
= 625232
Carrying Cost (Rs.) = (Inventory carrying cost in decimal x Unit cost x Order quantity)
2
= (0.2 x 4284 x 14595)
2
= 625232
Annual Total Cost (Rs.) =156366000+ 625232+625232 =157616464
'm (minimum stock in units) = 5 day demand
= 5 x 100
= 500
L (Lead time in days) = 7
C (Daily consumption in units) = 100
R (Review time Days) = 30
Re-Order Level (Units) = m + LC
= 500+7 x 100
=1200
M (Maximum stock in Units) = minimum stock (Units) + economic order quantity\
= 500+ 1459
= 1959

(B) FIXED ORDER INTERVAL SYSTEM WHEN SUPPLY IS FROM CHINA

Review Period (Days) = 30
Lead Time (Days) = 21
Average monthly consumption (Units) = 30 x 100 = 3000
(m) Minimum Stock =Safety Stock (Units) = 5 days demand
=5 x 100 = 500
(M) Maximum Stock = minimum stock +review time stock + Lead time stock
(R) Review Stock (Units) = 30 x 100 = 3000
(L) Lead Time Stock (Units) = 21 x 100 = 2100
(P) Stock at the time of review (Units) = 500
M=m+R+L
M = 500 +3000+2100 = 5600
Re Order quantity (Units) = Maximum stock Stock held at the time of review
= 5600-500 = 5100
Average Inventory (Units) =0.5 x (minimum stock + maximum stock)
= 0.5 x (500+5600) = 3050
Annual Inventory cost (Rs.) =0.2 x 3050 x 4200 = 2562000
Annual Ordering Cost (Rs.) = 150000
Annual Procurement cost (Rs.) = (0.25 x 65000 x 365)/30
= 197708
Annual Total Cost: = Basic cost + Procurement cost + Carrying cost
Annual Basic cost (Rs.) = Unit cost x Annual consumption
= Rs.4200 x 36500 = 15330000

Procurement Cost per review (Rs.) = 25 % of procurement cost

= 0.25 x 650000 = 16250
Annual procurement cost = (Procurement cost per review x No. of days in Year)
Review period
= (16250 x365)/30 =197708
Annual Ordering Cost (Rs.) = 150000
Total Annual Ordering & Procurement cost (Rs.) = 197708 + 150000 = 347708
Carrying Cost (Rs.) = Inventory carrying cost in decimal x Unit cost x Avg. Inventory
= (0.2 x 4200 x 3050) = 2562000
Annual Total Cost (Rs.) =153300000 +347708 + 25 62000=156209708
(B) FIXED ORDER INTERVAL SYSTEM WHEN SUPPLY IS FROM LOCAL
SUPPLIER
Review Period (Days) = 30
Lead Time (Days) = 7
Average monthly consumption (Units) = 30 x 100 = 3000
Minimum Stock =Safety Stock (Units) = 5 days demand
=5 x 100 = 500
Maximum Stock = minimum stock +review time stock + Lead time stock
M=m+R+L
(R) Review Stock (Units) = 30 x 100 = 3000
(L) Lead Time Stock (Units) = 7 x 100 = 700
(P) Stock at the time of first review (Units) = 500
M = 500 +3000+700 = 4200

Re Order quantity (Units) = Maximum stock Stock held at the time of interview
= 4200-500 = 3700
Average Inventory (Units) =0.5 x (minimum stock + maximum stock)
= 0.5 x (500+4200) = 2350
Administrative Cost per review (Rs.) = 25 % of initial cost
=0.25 x 25000 = 6250
Annual Administrative cost (Rs.) = (6250 x 365)/30 = 76042
Additional Monitoring cost (Rs.) = 150000
Annual Total Cost (Rs.) = Basic cost + Procurement cost + Carrying cost
Basic cost (Rs.) = Unit cost x Annual consumption
=.4284 x 36500 = 157616464
Annual Total ordering & Procurement Cost (Rs.) = 150000 + 76042 =226042
Carrying Cost (Rs.) = Inventory carrying cost in decimal x Unit cost x Avg. Inventory
= (0.2 x 4284 x 2350) = 2013480
Annual Total Cost =156366000+226042+2013480=158605522

FIXED ORDER QUANTITY SYSTEM

DESCRIPTION
CHINASUPPLIER
LOCAL SUPPLIER
Unit cost (Rs.)
4200
4284
Daily Demand (Units)
100
100
Annual Consumption (Units)
36500
36500
Ordering cost & Procurement 65000
25000
cost per order (Rs.)
Lead Time ( Days)
21
7
Lead time stock (Units)
2100
700
Minimum stock (Days)
5
5
Minimum stock (Units)
500
500
Economic Order Quantity
2377
1459
(Units)

Annual Basic cost (Rs.)

Annual Procurement cost (Rs.)
Annual carrying cost (Rs.)
Annual total cost (Rs)
Minimum stock (Rs)
Lead stock (Units)
Reorder level (units)
Maximum Stock (Units)

153300000
998223
998223
155296447
500
2100
2600
2877

156366000
625232
625232
157616464
500
700
1200
1959

FIXED ORDER INTERVAL SYSTEM

DESCRIPTION
CHINASUPPLIER
LOCAL SUPPLIER
Minimum stock (Units)
500
500
Review stock (Units)
3000
3000
Lead stock (Units)
2100
700
Stock at review (Units)
500
500
Minimum stock (Units)
5600
4200
Average Inventory (Units)
3050
2350
Reorder Quantity (Units)
5100
3700
Additional Monitoring cost
150000
150000
(Rs.)
Procurement cost per review
16250
6250
(Rs.)
Annual procurement cost (Rs.) 197708
76042
Total ordering & procurement 347708
226042
cost (Rs.)
Annual basic cost (Rs.)
153300000
156366000
carrying cost (Rs.)
2562000
2013480
Other cost (Rs.)
2909708
2239522
Annual total cost (Rs.)
156209708
158605522
On comparison of the Total annual cost Rohit present the procurement by Fixed Order
Quantity System from the china Supplier and Management approved the same.

Case Study 4: Supply Chain Process of Crocs Inc.

INTRODUCTION
Crocs, Inc. was established in 2002 in Colorado, USA and is today amongst the fastest growing
brands and companies in the world. The company started designing and manufacturing footwear
for all age groups under the Crocs brand, which are now sold in over 100 countries around the
world. The Crocs brand shoes feature the proprietary closed-cell resin, Croslite, a special kind of
plastic that softens up due to the body heat of the wearer resulting in a perfect fit and a high
degree of comfort. The innovative, trade secreted material has been considered as significantly
original in the footwear industry and the shoes unique looks and range of brightly coloured
designs have made Crocs highly favoured by people who are looking for comfortable,
lightweight, slip-resistant, and odour-free footwear. The phenomenal success of Crocs in a short
span of less than 10 years has been discussed widely, and besides the skyrocketing popularity of
the shoes, one of the main reasons behind this mindboggling growth has been the companys
efficient supply chain management. Until 2006, Crocs, Inc. had the highest gross profit margin in
the footwear industry at 56.5 % as compared to 43.7 % and 47.3 % by the giants of footwear,
Nike and Timberland respectively, and the sales revenues of the company are very likely to cross
the US $ 0.5 Billion.
The case study (Hoyt, D. and Silverman, A.) has discussed the astounding growth of Crocs, Inc.
and provides information on its highly flexible supply chain. Crocs showed that by being more
agile and by digressing from the traditional industry norms they could be more successful and
profitable than any other competitor (Hoyt, D. and Silverman, A., Exhibit 4, p.18). Their efficient
supply chain was an outcome of their CEO, Ronald Snyders, vision of meeting customers
demands by creating a hyper-efficient production and supply chain process that would enable the
company to produce and supply at short notices and thereby create a market leading advantage in
the industry. The text also mentions how the firm moved from contract manufacturing to
developing a more vertically integrated organisation and expansion through building
infrastructure and become a truly global company. It seemed that through vertical integration
(Harrigan, K. R.) Crocs had developed a perfect strategy to achieve cost leadership and
differentiation (Porter, M. E., 1998) and at the same time gain a high degree of control over their
entire value chain. Not only this, but with unimaginable growth Crocs was able to create
different market segments and also take a chance to foray into more traditional materials in
footwear and increasing their competitiveness in the industry.
However, I would like to mention that there is always scope for improvement and no strategy is
sacrosanct with the situation being faced in todays dynamic market conditions. The Crocs
supply chain has indeed been revolutionary in the footwear industry but it needs to evolve in
terms of the changes in the industry environment worldwide. The traditional and idealistic

thinking organisations have a lesser chance of survival in the long run. Changes in technology,
production and delivery processes, consumer demands, and even government policies require
that organisations focus on their core competencies rather than having a finger in every pie.
This paper has been structured to critically evaluate the footwear industry in generally and the
supply chain of Crocs Inc. (Appendix A) in particular and provides insights into possible
drawbacks and improvement areas in the strategy adopted by the organisation in the years
leading up to its present position. In the latter half, the paper describes my views on how Crocs,
Inc. can better their position in the footwear industry and become a more stable competitor to its
major challenges in the environment. I have used a number of theories and models, both in
analysing the system prevalent at Crocs, Inc. and in providing insights into how they can build
up on their successes and create a more stable and extended future for the company. Of course, it
cannot be claimed that this paper will provide a foolproof solution to the issues of todays
footwear industry and Crocs Inc in particular, but it does portray a different perspective
especially by providing arguments against vertical integration as a means to achieve competitive
advantage.
This paper contradicts the theoretically sound and widely accepted principle of vertical
integration to achieve competitive advantage. The paper highlights the probable drawbacks and
bottlenecks plaguing the supply chain of Crocs Inc. The paper begins with a brief overview the
footwear industry based on Porters Five Forces model (Porter, M.E., 1980) and introduces the
Crocs supply chain process. It explains how Crocs suffers from the Forrester Effect (Forrester,
J.W.) and using the 3PL (Christopher, M.) description the paper conducts a critical analysis of the
highly agile and vertically integrated supply chain environment of Crocs. Using the Fisher and
Kraljic models, I have demonstrated how the company can needs to revise its foundation in
developing a strategically sound supply chain process. Furthermore, the Japanese philosophy of
Kaizen (Imai, M.) and Kanban have been uniquely combined and later superimposed on the
Kraljic model to create an interestingly different perception of the supply chain integration. The
paper ends with recommendations adequately supported by the above theories/models and
indicates the existence of the possibility that vertical integration may not be the best approach
towards achieving competitive advantage in a highly dynamic industry.

INDUSTRY ANALYSIS
Using the concept of Product Life Cycle (PLC) (Wasson, C.R.) (Appendix C), it could be said
that the footwear industry as a whole is at the saturation/maturity stage and is likely to
continue at this stage. Of course, it is unlikely that the demand for footwear will fall
considerably; there are chances that with the development of more durable and cheaper products,
the profitability of the industry will decline over the years. I have used the Five Forces Model
(Porter, M. E., 1980) to conduct an analysis of the global footwear market

Entry Barriers: The footwear industry seems to provide relatively easy entry for new players.
The cost advantages are low with a large number of players globally as well as locally. However,
the manufacturers have reasonably easy access to raw materials and have been able to achieve
economies of scale through outsourcing of production. Capital requirements are not too
demanding and so are the general governmental policies. Companies have been able to achieve
propriety over designs and styles and are in a position to consolidate their gains from the
industry.
Supplier Power: Most shoes are made from similar material with Crocs being the exception of
having propriety on the Croslite material with which its shoes are made. Due to wide availability
of raw material and a large number of suppliers, larger producers have been able to get better
prices as compared to smaller players. At the same time, switching costs for the firms are low
and as a result, the supplier power is not considerable.
Threat of Substitutes: Since entry barriers are low and switching cost are low substitutes are a
constant threat in the footwear industry. Moreover, the intense competition leads to lower prices,
which affects consumer choice. Companies have to continuously bare a trade-off between price
and performance. However, large players are in a position to achieve a higher MES (Minimum
Economic Scale), which might act as a barrier for substitutes.
Buyer Power: Customers are the most powerful in this highly competitive industry. Success is
dependent on the extent of penetration in to the market and achieving a balance between price
and quality. Moreover, footwear would be termed as innovative products and are subject to
frequent changes in trends and therefore, demands of the consumers. Once again, large players
are the ones to benefit due to availability of capital and resources to respond to market
conditions. Since buyers are likely to develop brand identity and loyalty, differentiation is very
important.
Rivalry: With easy entry and exit from the industry, a large number of players in the footwear
industry are intensely competing against each other to gain maximum market share and increase
their returns. However, industry growth is low and there is constant pressure on the firms to
lower prices. Differentiation is hard to achieve and low switching costs mean that the consumer
power is high and substitutes and knock-offs might eat into market share. The most important
aspect is of efficiency in supply chain and the delivery of products to the right place at the right
time. Most large companies have been successful due to superior supply chain processes.
The above five forces reflect that competition in the footwear industry is not related only to the
larger players. They jointly determine the industry competition and profitability and with many
commonalities amongst the players, there are very few crucial aspects that govern the strategy
formulation of these companies. Creating and developing an efficient and responsive supply
chain aimed at reducing costs seems to be one of the most vital components in the industry.

Comparing the PLC Curve of Crocs with the industry curve, it would be wise to put Crocs at the
stage of competitive turbulence as suggested by Wasson (Appendix C). The uniqueness of the
Crocs clogs and the overwhelming popularity of the products indicate that there is quite some
time for Crocs to reach the maturity stage, even when the industry in general is not performing so
well. Crocs Inc.s main focus has always been better supply chain coordination and to garner
opportunities to differentiate its products from those already available in the market. Crocs
seemed to have adopted a global logistics strategy (Christopher, M.) in that it had focused
factories manufacturing shoes to cater for certain markets; its inventories were centralised and it
followed a system of localisation, generic levels of semi-finished inventories and small orders
from suppliers/distributors. In order to supplement this system, Crocs had in place capacity and
capability to meet changing market demands at short notice. In general, Crocs had a very agile
supply chain process in place and that the firm understood the customers needs and changes in
the market trends. Crocs clearly understood the dynamic nature of the footwear industry where a
product might no longer be in fashion the following year, and developed the ability to produce
additional stocks in the same season, thereby creating a competitive advantage through a more
agile and market responsive supply chain (Fisher, M., 1997). The company had maintained
cordial working relations with its retailers and distributors and they worked with stores and
retailers for promotion of their products at trades shows and public events. Ronald Snyder, the
President and CEO had aimed to achieve a simultaneous global launch of all its products right
from the beginning and had structured the organisation of the company to be sustainable in such
conditions and be able to thwart the competition before they got a chance to react. In view of this
expansion and with the aim of meeting the customers needs, Crocs decided to move away from
contract manufacturing (3PL) to a more vertically integrated organisation where they had better
control over their activities.
DISCUSSION
At this point it would be interesting to explain the situation faced by Crocs using the Forrester
(Bullwhip) Effect (Appendix D). Crocs has historically chased demand since its inception and
hence felt the need for excess capacity to react quickly to market demands. They obviously
considered its supply chain to be highly effective and in fact they did prove themselves to be
correct for a few years. Theoretically Crocs could have continued to achieve success at this had
they been able to meet all customer orders in every season.
What they failed to realise was that customer demand is rarely perfectly stable and it becomes
essential for every business to come up with accurate demand forecasts. As mentioned earlier in
the industry analysis, the customer power is very strong and it was necessary for Crocs to
stretch its perception of customer demand as far as possible. Usually, companies resort to holding
reserve stocks due to overcome forecasting errors but that is not the case with Crocs. They
believe in holding excess capacity and their ability to produce the required stock as and when
required. In my opinion they were not entirely correct! Misperceptions of the stakeholders risk
and time delays caused panic ordering by suppliers due to unfulfilled market demand.

Forecasting errors and constantly changing inventory control strictures created variations in lead
time and replenishment of stocks.

Outcome of the Forrester Effect

It seems that there was a misalignment in the corporate strategy and the supply chain strategy
adopted by Crocs. In 2002, when the company was established it was obvious that it had
centralised operations since its market was limited. As it began to grow the firm expanded
globally and chose to enter contract manufacturing and be able to make the products available
faster and economically. However, the company found that the 3PL system was not effective and
so it began to consolidate its assets and create a closely integrated organisation. In doing so
Crocs got too involved in managing the external resources and process and lost focus on its key
areas of operation and as a result this affected its competitive advantage. At this rate Crocs is
well on its way to moving into the Stuck in the Middle position (see diagram on this page)
with reduced profitability and limited alternatives for growth and survival in a highly
competitive industry. Mentioned below are some of the points that explain how Crocs
competitive advantage was affected and why it makes more sense for Crocs to implement a 3PL
system rather than focus only on a vertically integrated firm.

Adopting a 3PL system: The 3PL is ideal for companies like Crocs that have wide and complex
distribution networks. It would be agreed that the distribution network and the supply chain
network of Crocs, although revolutionary in its own sense, was considerably complex and
stretched a bit too much. Their Denver facility, for example, was highly underutilised as it
catered to only the smaller retailers in the Americas and shoes were sent there from
manufacturing plants that were in Italy and China. Until recently, their compounding activities
were concentrated in Italy and that again was a highly centralised and uneconomical.
Porters Competitive Advantage Matrix

Free up resources: Crocs had a large sum of money tied up in its assets. The high ROA of the
company in 2007 at 34 % (Hoyt, D. and Silverman, A., Exhibit 4, p.18) will most likely see a dip
as the company acquires more assets in its quest to centralise its operations. Moreover, relative to
the amazing figures shown by the growth in revenue, the returns on assets are modest. In order to
meet demand at short notice, Crocs had created excess capacity of one million pairs of shoes and
that would have held up valuable financial resources of firm. Shifting of moulds and equipment
from one factory location to another was also not very cost-effective. Moreover, with changing
trends and frequent new designs the costs and delays of developing moulds were significant.
Through outsourcing, Crocs will be able to reduce capital expenditure and the same could be put
to better use in product development, customer relationships and marketing. Even if Crocs had
excess capacity, then it could easily least it out for its own production requirements if the same
was not being utilised optimally.
Cost advantage: In my opinion, Crocs lost its cost advantage by reverting back from contract
manufacturing to owned-manufacturing. The emergence of knock-offs in large numbers may be
reasoned as an outcome of this move. Crocs had outsourced its manufacturing to China and
Mexico and after a few years they had their own manufacturing facilities. However, it seems

probable to argue that in trying to achieve higher profit margins and creating a better supply
chain model, they overlooked the important facts of creating entry barriers and maintaining their
cost advantage. It can be said that the large number of knock-offs (Oakland Tribune) have dented
the uniqueness of Crocs and in spite the difference in quality the lower price of the Crocsduplicates have made a large number of customers switch brands. As discussed earlier, customer
power is very strong in the footwear industry and as a result, Crocs shoes have come to be
considered as a commodity rather than a differentiated product.
Core competencies: The main advantage of adopting a 3PL system is that the firm is able to
concentrate on its core competencies. Although Crocs supply chain model is considered to be
revolutionary, it does not help the company in improving and maintaining its core competencies.
It is a plausible argument that had Crocs not been involved in owned-manufacturing, it could
have utilised the same resources for better development of its products and ensuring that cheap
knock-offs do not harm its market share. Although there has not been any significant change in
the market share of the inventory turnover of the companys products is lower than the industry
average and its stock prices have taken a hard beating on the stock market.
Inventory management: The inventory turnover ratio of Crocs has been considerably below the
industry average in spite of high profit margins (Hoyt, D. and Silverman, A., Exhibit 2, p.16 and
Exhibit 4, p.18). Moreover, there has been a steady rise in the levels of inventory, which were
nearly three times the total fixed assets of the company (Hoyt, D. and Silverman, A., Exhibit 2,
p.16) Although termed as highly flexible and revolutionary, the Crocs production model and
inventory management have not been able to keep up with the market demands in recent times. It
seems that the Crocs management is unwilling to adopt a more supplier friendly system of
inventory management, one that is being followed by others in the industry. As a result, it has
been facing difficulties with supplies in Europe and the US. It was recently reported that Crocs
inventory levels are well above the appropriate levels and that this has become an issue of
concern for the company (www.ap.org). It could also be said that the Crocs supply chain, in
trying to be agile was not able to be maintain its lean profile, which led to high fixed costs and
low inventory.
Another drawback that could be attributed to the supply chain model was that Crocs might be
considered as conservative to some extent. In view of the fundamental basis of being flexible and
highly responsive to market demands, Crocs was not willing to change its supply chain model as
per the requirements of the suppliers or even as per the changes in its organisational structure. In
this sense, it is comparable to the traditional approach adopted by Marks and Spencer (Harrison,
A. and Pavitt, J.).
In view of the issues that have been brought to light in the existing supply chain of Crocs Inc., it
may be suggested that Crocs carry out an internal alignment of its system and then move towards
creating better integration between the internal and the external systems.

RECOMMENDATIONS

In my opinion, what is required to be done is to achieve better integration of the supply chain at
Crocs Inc. On applying the Kraljic Model, I observed that Crocs needs to have a balance between
vertical and horizontal integration rather than being on a single extreme. Assuming that the
production process and the raw material required by Crocs to produce its clogs are relatively
simple.
Of course, this is only an illustration and this is what my seriously limited knowledge in shoe
making could conjure in terms of the Kraljic matrix for Crocs. Notwithstanding this ignorance, it
can be noted that the Leverage Items and the Strategic items are likely to affect Crocs Inc. more
than the items on the bottom row. Consequently, it may be recommended that Crocs strives to
achieve vertical integration on the items on the top row and similarly, it may outsource/contractout the Non-critical and Bottleneck items. In doing so, Crocs should be careful in selecting the
suppliers for its raw materials and be able to achieve competitive pricing. As for the machinery
and equipment, the firm might find it more suitable to procure it on behalf of the contract
manufacturer rather than relying on the latter. Strategically, it should try and find suppliers for
leverage items that are closer to the manufacturing facilities otherwise, the transportation costs of
raw materials might outweigh the benefits of the same. On the other hand, Strategic items should
be kept under the direct control of the Crocs management as the moulds and compounding are
the two key advantages that Crocs has over its competitors. Non-critical items like colours and
replacement parts should be given to 3PL organisations and so should the bottle neck items.
Point to be noted here is that since the actual production of the products can be outsourced to
countries with low labour costs, the labour is termed as a bottleneck item. Similarly, warehousing
would become the contract manufacturers worry and Crocs need keep only limited warehousing
facilities under its direct control.
Other improvements in the supply chain could be brought about by adopting the Kaizen and
Kanban system in conjunction. This is not to say that these could act as replacements or
alternatives to the Kraljic model. Where the Kraljic model shows us an approach to supply chain
integration, Kaizen and Kanban (HBR on Supply Chain Management) provide us the means to
maintain and continuously improve the supply chain process. Kaizen (Imai, M.) is based on five
basic elements (Teamwork, self-discipline, high morale, quality and suggestions for
improvement), and provides three key factors that will help Crocs achieve reduced wastage and
inefficiency, improved internal working environment and standardisation across the whole
organisation. On the other hand, there is a need to establish a demand-driven supply chain
capable of reacting to actual customer requirements, which can be met through the concept of
Kanban. Considering the successful implementation of this model by Wal-Mart, Crocs can

establish an EPOS system to regulate replenishment and delivery from the distribution centres to
the stores and from the suppliers to the Crocs distribution centres. This creates a more accurate
and clear picture of customer demand and inventory management throughout the supply chain.
This can create better inventory positioning at lower costs and an IT based infrastructure
providing flexibility and higher value for the customers. These two methods offers the right
solution for Crocs to work towards a supply chain system that is agile as well as lean, which is a
better balance than the current system that is highly agile and less lean. GE had a similar process
in place which was known as the Quick Response Program (Bartlett, C.A. and Wozny, M.), and it
helped GE cut down production cycle in half and reduce inventory costs by more than 20%. The
financial implications for Crocs by implementing the prescribed system are evident.
Furthermore, I can superimpose the Kaizen-Kanban combine on to the Karljic matrix and it may
be inferred that Crocs needs to be lean for the processes it controls itself (Leverage and Strategic
items) and be agile for the items that are being outsourced (Non-critical and bottleneck items).
Besides the above, rather than depending on its own estimates of stocks, Crocs can use the
Kanban system to provide a more accurate and real-time information about replenishment
schedules, which will improve the efficiency of the production and inventory management
processes.
Another important area where I feel Crocs Inc. could have faltered is in their ability to
distinguish their products as either innovative or functional (Fisher, M.) (Appendix E).
According to Fisher, it is very important to match the supply chain with the type of product that
the company has. And based on this type, the supply chain of the firm will be efficient or
responsive. This is similar to what I have mentioned earlier in relation to the Kaizen and Kanban
system and their correlation to the Lean and Agile supply chain systems. However, the
underlying area according to Fishers model is the classification of the product. I would like to
agree with Fisher here and elaborate this more specifically concerning the Crocs supply chain
process. As recommended earlier, Crocs should aim to achieve a combined vertical and
horizontal integration; vertically integrated for the critical and strategic processes and
horizontally integrated for the non-critical and bottleneck processes. Similarly, Fishers model
applies here in that the final product of Crocs Inc., their shoes, will be the innovative product,
characterised by changing fashion trends, consumer demands, and new designs and therefore,
Crocs should adopt a more responsive supply chain (may also be termed as Agile). On the other
hand, the critical and strategic processes involving the procurement of its secret raw materials
and moulds would be mentioned under functional products. As a result, Crocs should develop a
more efficient supply chain for these products.
In relating this to the changes required in Crocs supply chain management it can be termed as
the need for incremental change rather than undertaking transformational change. It is, after all, a
change in the work culture of Crocs that is being suggested here and the aspect of change
management cannot be overlooked at this point. If Ron Snyder is himself not convinced about
this need for change he will not be able to implement the same through the organisation. It makes

me consider that applying the Eight Steps of Leading Change (Kotter, J.P.) would bring about a
wonderfully methodical implementation plan of the proposed incremental change in the supply
chain process at Crocs Inc.

CONCLUSION
As seen from the above discussion, Crocs revolutionary supply chain might have been so
only for a short period of time. The current strategy at Crocs Inc. has led to inefficient production
and excessive inventory due to inaccurate forecasts of customer demand. To add to this, the
Forrester effect explained above leads to stock-outs, sub-optimal utilisation of resources, poor
customer service and financial costs all along the supply chain. To stretch this a bit further, the
damage to the stakeholder image and loss of loyalty can lead to greater losses for the
organisation.
Of course, the company has continued to show increasing profit quarter after quarter but it has
lost the faith of the stockholders in the market and with increasing competition, Crocs needs to
alter its stance. The focus on core competencies, demand-driven supply chain and adding value
to the end user is what Crocs needs to work at to improve its market position. Taking cues from
Porter, it would be wise for Ron Snyder to rework Crocs approach towards gaining a
competitive advantage through a Hybrid supply chain process combining both agility and
leanness. Although Crocs did eventually shift to an IT based inventory management and planning
process, it could have performed much better had it implemented this earlier. Moreover, referring
back to Kotter, the change in corporate culture is also an area which Crocs could benefit from by
being more flexible and reactive to market trends and consumer/supplier requirements.
Finally, it may seem like a wild jumble of words in explaining the complex structure of the
supply chain process. But this is the reality. It must be appreciated that supply chains cover
multifarious activities and processes and with ever increasing developments in technology and
methodologies, it is more likely to get even more challenging in the days ahead. From the above
discussion, I would sound wise in admitting that there cannot be a one single solution to all the
supply chain worries at Crocs Inc. or for any organisation for that matter, especially in a dynamic
industry like footwear. It is also easy to argue that the prevailing supply chain of Crocs is
successful, merely based on the fact that Crocs Inc. is still performing better than its competitors
and has shown consistent growth in the last few years. The bottom line here is to be able to
understand the unpredictable nature of the industrial environment and how important it becomes
for every firm to strike a balance between all internal and external processes. There is little doubt
that most managers around the world are continuously trying to improve their supply chain
efficiencies and controlling costs. However, the question remains as to how many of these
managers are taking into consideration the end user; the consumer, and actually attempting to
arrive at more accurate forecasts?

The following extract throws light on the importance of forecasting in inventory management
and supply chain efficiency for Crocs and explains why the contents of the preceding pages
makes sense.
The 10Q Detective questions the ability of management to calculate sufficient inventory levels,
as the company failed to anticipate the higher-than-expected demand for the Mammoth (new
fleece-lined Crocs) during the holidays (and had to air freight in a good deal of products,
resulting in some gross margin pressure).
However, should Crocs miscalculate demand for its footwear, the carrying costs of bloated
inventory levels-warehousing, distribution, work-in-progress and finished goods-will come back
to haunt management, especially if prices start to fall (customer discounts or forced liquidation
of excess inventories) for some of its fad footwear.
Source: http://seekingalpha.com, David J. Phillips, Crocs: Bloated Inventory Caused Stock Slide,
10Q Detective.
Appendix A
Supply Chain of Crocs Inc. (recreated)

Adapted from Hoyt, D. And Silverman, A. (2007), Crocs: Revolutionizing an Industrys Supply
Chain Model for Competitive Advantage, Stanford Graduate School of Business, and Case GS57.

Appendix B
Porters Five Forces Framework for Industry Analysis

Source: www.valuebasedmanagement.net

Appendix C
Product Life Cycle Stages (Wasson)

Source: www.altera.com

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14. http://articles.moneycentral.msn.com
15. http://money.aol.com
16. www.crocs.com