The impact of LCC sourcing in combination with high customer service on inventory performance - A case study of a global company sourcing from China

Examensarbete för masterexamen
Master Thesis
Management and economics of innovation (MPMEI), MSc
Grönlund, Emma
Sjöberg, Andrea
Ståhlberg, Carolina
The company Focal has as part of the Focal Group’s unified cost rationalization strategy, started to outsource parts of their production to low cost countries. This strategy transformation has entailed new challenges for Focal, since low cost country sourcing (LCC sourcing) entails longer lead times, reduced flexibility, and increased uncertainty. These challenges are amplified by the fact that the competitive strategy of Focal has remained unchanged. The organization is still offering their customers a broad range of high quality products with a delivery time of just one day. With this new supply chain strategy in combination with the remained competitive strategy, Focal has experienced problems regarding inventory performance. They are struggling with excess stock as well as backlogs and lost sales at the same time. The company therefore has a desire to understand what factors are driving inventory and how the inventory performance can be improved. The case study of this research is the supply chain between Focal and its largest Chinese intra-group supplier, Supplier X. This study aims to evaluate how Focal’s LCC sourcing strategy in combination with its competitive strategy affects its inventory performance, in order to provide suggestions of how to improve the performance. In order to realize the purpose, two research questions has been formulated; What are the major drivers affecting Focal’s inventory performance? and How can the inventory performance at Focal be improved?. Based on these questions, empirical data has been collected mainly through extensive interviews during a field study. During the field study the researchers spent eight weeks at Focal in Australia, one week at Supplier X in China, and one week at the Focal Asia Pacific headquarters in Hong Kong. The data was then analyzed by using an analytical framework consisting of drivers of inventory, developed during the theoretical study of this research. Six main factors; lead times, uncertainties, forecast, lack of coordination and information sharing, service level, and product range, have been identified as drivers of inventory at Focal. The factors affect inventory both directly and indirectly, as a result of their interdependence. The six factors can be divided into two clusters adhering to the company’s LCC sourcing- and competitive strategy respectively. Focal’s use of a LCC sourcing strategy increases the lead times but also contributes to increasing supply and demand uncertainties, lack of information and coordination as well as poor forecast accuracy. Focal’s competitive strategy, consisting of a large product range in combination with a high generalized service level for all goods, amplifies the effect of the four factors that are driven by LCC sourcing. In order for Focal to improve its inventory performance the company is recommended to initially focus on reducing the lead time from Supplier X. This as the supply lead time is identified as the main driver of inventory both individually but also since the lead time amplifies the effect of the other drivers. Focal is further recommended to develop a closer relationship with Supplier X in order to reduce uncertainties and improve coordination within the supply chain. Moreover, the company is recommended to review the competitive strategy and differentiate the offered service level for the products as well as evaluating the size of the offered product range.
Transport , Övrig industriell teknik och ekonomi , Transport , Other industrial engineering and economics
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