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Case Study: How to Deal with Hidden Problems without Irritating the Dragon

by on March 1, 2010
Executive Summary:
When increasing costs of outsourcing to a Chinese manufacturer cut into Joy Play’s net revenues, Director Steve Wang was tasked by the CEO to look into the issue. When Steve looked deeper than the surface, he found some lurking problems that required a delicate touch, lest relations with Super-Toy, their manufacturer, became strained—or worse.

Key Points:
• Super-Toy Manufacturer costs 20% less than its American competitors
• Joy Play’s revenues decline by 12% in one quarter due to a poor economy and increasing manufacturing costs
• Steve is tasked by the CEO to investigate the revenue leakage and has to assemble a team
• In addition to energy costs, labor improvements, exchange rates, etc., the team found evidence of abnormally high employee turnover, suspiciously similar imitation products, and evidence of decreasing established quality assurance standards.
• In a discussion with the CEO, Steve was then tasked with validating the evidence and preparing a proposal for the CEO regarding how he should handle the Super-Toy relationship

-Po-Chun Liao, Meng-Chi Lee

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From → Coursework

3 Comments
  1. Executive Responses:

    Bryce Smart
    Project Manager
    T-Mobile
    Contact Information: (425)383-7391; bryce.smart@t-mobile.com

    I think there’s a lot of potential in this case. I especially like the idea of how to deal with someone who is divulging company secrets and violating contract terms. I think the approach was entirely wrong, though, as you’re proposing corporate espionage and unethical behavior. That alone could completely undermine the relationship. Doing something like that would lead to a lawsuit and criminal case for Steve and his team in a Chinese court. Given the political intricacies, a conviction and harsh sentence, including possible execution (as financial fraud can result in a capital case in some circumstances), if Super-Toy found out. You’ll need to look at alternate ways to get this information, without espionage and without secrecy. Here are some ideas:

    Do your own QA inspections at your own warehouse and invite a Super-Toy executive to come out to personally see the defects that got past his people.
    Hire a competitive intelligence firm to do some research on what your competitors’ strategies are and then double-check out the parity toys align with their overall strategy.
    Do a detailed comparison of their products to yours and check patents and copyrights. If your patents/copyrights were filed first and their product is less than 20% difference, it’s a copyright infringement and you can sue the other company and shut down their product line operations. Additionally, during an investigation like that, investigators can be dispatched to the facility with authority to review processes and determine if secrets were being shared at that location. In this way, the focus stays on the illegal behavior of the competitor and does not constitute an “attack” against their partner.
    Hire a professional negotiator and initiate a revision of the current contract agreement to become a flat-rate fee with Super-Toy, allowing Joy Play to stop paying training fees. With the training costs shifted back to Super-Toy’s heads, they’ll be more careful about employee retention and the skill level will go up, resulting in fewer defects.
    In all of these ways, you’re attacking each problem. As the problems are being resolved, the two CEOs should be talking and including their respective relationship managers to establish a strategy to prevent similar issues from arising in the future. If there was divulgence of company secrets, then maybe Joy Play should consider suing Super-Toy for lost revenue and find a different supplier. This would establish them as “not to be trifled with”. Some actions, like divulging secrets, are serious enough that trust cannot or should not be restored…

  2. Executive Responses:

    Christopher Rivinus
    Manager
    Corporate Knowledge Program at Parsons Brinckerhoff
    Contact Information: (212)465-5539; rivinus@pbworld.com

    The answer is for Alex, not Steve, to fly out and have a meeting with the CEO. This shows respect and the relative importance of addressing the issues in addition to respecting the imprtance of the relationship between the two companies. And you want to do this NOW, before there is concrete evidence about who knows what and for how long. Talking about the problems before qualifying and quantifying the cause gives the CEO of Super-Toy a chance to play ignorant, correct the problem and save face. I would have Alex push for the following in a private meeting with the CEO of Super-Toy over dinner and drinks:

    1. Set a time to examine the defective products together – just Alex and the CEO and talk about the problems in private. Ask the question, “How did these items get through the quality inspection process? Do we need to change it?” Let the other CEO determine if any changes are needed and allow time for changes to be made, whether I know about them or not.
    2. Come prepared to convince the CEO of Super-Toy that you could double your sales if the quality problems decreased and if you could just reduce the counterfeit sales. Let him know that a doubling of sales would not lead Alex to reduce the cost per unit ordered by Joy Toy. Negotiate a per unit cost for a series of dramatic unit sales increase and then enlist the CEO’s help in trying to shut down or at least reduce the counterfeiter’s activity. This enables the CEO again to save face and to either stop supplying the couterfeiter directly with product, or to work with authorities to try and figure out who’s doing the counterfeiting.
    3. After both issues 1 and 2 have been negotiated and both Alex and the CEO of Super-Toy have sobered up – maybe the next day while Alex is getting a tour of the factory floor – address the issue of employee turnover. Work to establish an employee retention program whereby both the employee in question and Super-Toy get a bonus every year after 2 years that the employee stays with the company. The employees with the company are then pulled into a program where they mentor new employees and create a sense of team accomplishment and pride.
    4. I would set up a follow up meeting in 4 months which invites the CEO of Super-Toy out to Joy Toy, all expenses paid.

    Then after I get back, I would ask Steve to make sure there is a robust secret shopper program in place to constantly monitor the quality of the products. I would also work to monitor rate of counterfeit sales and ask HR to keep track of training costs. Simultaneously I would begin to work on at least 2 alternative manufacturer relationships. If acceptable levels of improvement haven’t happened by the time the CEO of Super-Toy visits in four months, I would begin to play a bit more hardball and make suggestions that if improvements aren’t made immediately that a Joy Play may have to take a different direction with manufacturing. It is important at this meeting to be open to any additional information that the CEO of Super-Toy has in terms of the problems his company is facing making corrections. However, it is also important to understand that this relationship cannot hold Joy Play hostage.

  3. Student Response:
    Brian Chen, Deepti Shah, Thomas Wang

    It seems that Joy Play has a very strong partnership with Super-Toy and the former doesn’t want to break this kind of relationship. Personally, we think, the advantages of Super-Toy years ago have disappeared for whatever reasons. If Super-Toy no longer helps to create competitive edges for Joy Play, the partnership is no longer meaningful. There are tons of toy manufacturers in China. We don’t see any reason why Joy Play should stick to this one. However, since the special relationship between the two (Joy Play even covers the training cost for Super-Toy, which is very rare in outsourcing partnerships), we suppose Joy Play don’t want to break up with Super-Toy for a certain reason.
    The next step Alex definitely should ask Steve to do is to host a meeting with Super-Toy to express the Joy Play’s concerns. Obviously, the current situation of the partnership has pushed Joy Play to a very difficult position. It is necessary to let Super-Toy understand that Joy Play partners with Super-Toy for a reason (creating competitive edges for Joy Play). So far, Joy Play has been playing the role in the partnership too softly. Unless the partnership ends up with a win-win situation, it would be very difficult for either company to maintain the relationship.
    On the meeting, Joy Play should show Super-Toy what has been found out in the previous investigation and propose improvement in Super-Toy’s management in terms of the three major problems.
    1. Lack of loyalty
    There are lots of reasons why a worker at Super-Toy would leave the company, but we think the most important reason is the pay and benefits that Super-Toy offers. Workers who receive a monthly salary of $150 do care a lot about a $25 raise. Meanwhile, Super-Toy, who spends $80 per month to train those workers, should definitely provide at least the same salary rate as its competitors or even better. To those workers, they really care little about the training. If the fund is restricted, we would rather decrease the training cost because skills required for these workers are repetitive. (Workers can definitely acquire the skills over time, although they might be less productive at the very beginning.) Meanwhile, training contracts should be signed between the company and the trainee. This could make sure that the workers work for the company for at least a certain period of time after they receive the training.
    2. Counterfeit Products
    Counterfeit products are very common in China. Companies who spend a lot of money on R&D may find their products were counterfeited soon after or even before their launches to the market, especially in these labor-intensive industries, such as toy manufacture. Of course Joy Play should use legal method to protect itself, but sometimes it is not very effective or financially feasible. Beside the legal method, Joy Play may also try to work with Super-Toy to reduce the R&D lifecycle to speed up the product launches. Meanwhile to increase the technological threshold of productions, if that is possible, will also help to minimize the possibility of being counterfeited. Last but not least, both companies should eliminate internal information leakage by employing non-disclosure agreement (NDA) and severe punishment on relevant personnel if any leakage is confirmed.
    3. Quality Assurance (QA)
    Joy Play definitely should start to do QA by itself as what most outsourcers do. There is no reason to skip the process even Super-Toy has its

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