Reference no: EM133576226
Tibo's Supply Chain Practices: Survival of the Fittest
FittestMaking Phones in ChinaTibo Inc. is an American consumer electronics company. Its most popular and flagship product isthe V10 smartphone. The first generation Tibo V10 was introduced in 2011, and the company willbe launching a new generation of the V10 soon. In 2020 alone, Tibo sold more than 140 millionV10 smartphones and the model has easily become the most popular smartphone in the world.Tibo became the world's largest technology company as a result of a strong network of suppliers.For ten years, Tibo has been using China-based company Wolftan, the world's largest contractmanufacturer, to assemble almost all its V10 smartphones. None of the 140 million V10smartphones sold in 2020 were manufactured in the U.S., while 85 percent were assembled inChina. The relationship between both companies has been mutually beneficial, until recently.China has long been a popular choice for many companies outsourcing their manufacturing.Goods can usually be assembled or completely built for a relatively low cost. Wolftan employsover 120,000 factory workers to make Tibo's new phones at its factory in Songxia, China. Wolftanhas been in the world news lately after several incidents of dangerous and unethical labourpractices were reported. The company has been accused of low wages, excessive overtime anddangerous and unsanitary working conditions for its workers. Wolftan has repeatedly denied theallegations. Although Wolftan also manufactures electronic products for other consumer brands,as a high profile technology giant, Tibo has received the most attention. The alleged negligentlabour practices at Wolftan have led news reporters to bring to the public's attention to otherpractices by Tibo, and now the entire company faces a public relations and supplier relations crisis. The Media ReportsTibo CEO Chez Goodman has assembled a team of executives to discuss the strategies forresponding to the press reports and alleviating the challenges now being felt by Tibo. He has asked for the input of several executives, including Virginia Chin, a spokeswoman for Tibo, and Terry Valdez, Tibo's chief procurement officer. The highlights of the media reports on Tibo included the following points:
Tibo outsourced over 800,000 jobs in 2020, taking jobs away from thousands ofAmericans.• Tibo's aggressive supply chain practices have forced Chinese suppliers to find cheaperways to do things and push their workers to work faster and longer.• Although Tibo has implemented a supplier code of conduct, there have been severalviolations by Chinese suppliers like Wolftan, and Tibo has been slow in responding.Wolftan has been disputing the allegations, but photographs and videos have beensurfacing on social media worldwide.The team discussed each point during the meeting and decided that they mostly reflected thetruth, but only in a negative way. At the next press conference, Virginia would be responsible forturning these points into a positive outlook for consumers around the world. Virginia needed morebackground information to prepare for the press conference. The team discussed the backgroundfor each point and brought up the following facts.Bring Back the Jobs to the U.S.Chez advised that he was speaking to someone at a private dinner function and someone elseoverheard him say, "The factories in China produce our phones really quickly and on a muchlarger scale. It just makes sense for us, as not only do we source most of our assembly jobs fromChina, but most of the parts needed to make the V10 are from China. The jobs won't be comingback to America any time soon." This statement was later reported to the media.The decision-making process used a few years ago to outsource the manufacturing andassembling of Tibo's products to suppliers in China was justified. Tibo saves over USD 20 billiona year in labour costs by going to China. The average daily manufacturing wage in the U.S. isUSD 39, whereas in China it is USD 3. Terry purchases high quality products for 10 percent ofwhat he would have to pay for these products in the U.S. There is little to no issue with findinglabour in China, as many people are looking for work. Moreover, there is a good and large supplyof the raw materials needed to make the V10 already in China. Practically, all the factories thatmake different components for the phones are located close to each other.Supply Chain PracticesThe allegations in the media that Tibo has been putting suppliers through rigorous selectionmethods may be attributed to suppliers needing to be specific and detailed in their price quotesto Tibo. All suppliers must state how the manufacturer came up with the quote. For example, forpart suppliers, each manufacturer must specify how much every part costs to assemble, howmany workers are needed to make the parts and how much the estimated labour costs are. Tibo'sfinance and procurement team then calculates how much Tibo will pay the supplier for each part.Also, Terry only institutes long-term contracts with parts suppliers to reduce costs. He has manysuppliers lined up and can switch between them as needed.Supplier Code of ConductThe press reports of labour issues at Wolftan are damaging, but to date the sales of the V10 havenot significantly declined. If the allegations are true, Wolftan is going against the establishedsupplier code of conduct, which was developed to ensure compliance with acceptable worker.
conditions at supplier facilities. Each supplier must agree to meet the standards established inthe Supplier Code of Conduct & Responsibility Standards. Audits of suppliers are donecontinually. Chez has been thinking of ways to manage the complaints, but has not yet developedan acceptable course of action. There has been a lot of tension in the company, as other membersof the executive team want to see the factory conditions improved for the workers, but do not wantto jeopardize the relationship Tibo has with its suppliers.The DecisionAfter all the background information was discussed, Chez and Terry decided to continueoperations with Wolftan for the next few months. To diversify Tibo's supply chain risk, Terryplanned to start new contracts with two other manufacturers to make and assemble severalversions of the V10. Chez was concerned about finding new suppliers, especially with the launchof the new generation of V10 coming up. This could turn out to be expensive and difficult. Heinstead wanted Terry to reduce the number of Tibo's key suppliers from a hundred to twenty-fourto force them to offer better prices to remain on Tibo's supplier list. Chez also decided Tibo shouldcontinue to find its own parts rather than use another company to source them. The process theyhad in place was working and would not change. Terry thought he already had tight control onthe suppliers and, even though Tibo is committed to ethical manufacturing practices, thecompany's bottom line is still important.Learning OutcomesThis case study relates to the following learning outcomes from the module InternationalProcurement in the course Global Value Chain:• Follow a strategic global sourcing process, using effective international businesspractices, to source raw materials and/or product components or to outsourcemanufacturing or services offshore.• Develop and maintain positive supplier relationships.
Case Study Questions
Terry considered adding two new contract manufacturers to Tibo's supply chain.
a) What are the benefits and costs of having new suppliers at Tibo?
b) What steps would Chez and Terry have to take to ensure Tibo exercised due diligencebefore contracting these two new international manufacturers?
2. According to the Nine Supplier Interaction Model, which two groups of suppliers couldWolftan fit into best? Give at least two reasons for your answer.
3. Chez wants to reduce the number of Tibo's key suppliers. What are the advantages anddisadvantages of reducing the number of Tibo's key suppliers?
4. Members of Tibo's executive are hesitant to respond to the allegations of labour abuse inthe Chinese factories as they do not want to jeopardize the relationship with the suppliers.What could happen if Tibo takes a more active stance to compel companies like Wolftanto improve working conditions and reduce overtime for factory workers?