Case No. 18 Bose Corporation-Final Exam in Logistics

Case No.18: Bose Corporation: The JIT II Program (A)

I. Case Background:
Bose Corporation was founded in 1964 by. Dr. Amar Bose, a professor of Electrical Engineering and Computer Science at the Massachusetts Institute of Technology, where Sherwin Greenblatt and Hose shared a love of music, but recognized that the high fidelity (hi-fi) products then available did not accurately reproduce sound Greenblatt become Bose Corporation’s first employee, the two planned to built a company based on innovations in acoustics and electronics. For three years, virtually all the company’s revenues were earned by developing portable battery operated equipment, hi-fi was considered “the hobby side of the business”. In 1968, however, Bose Corporation launched the 901 speaker, which incorporated proprietary Direct/Reflecting technology, simulating the feeling of live sound by radiating sound waves to the listener directly and via reflections off walls, ceilings, and doors. This speaker was a huge success, landed by a growing market of audio enthusiasts. Two years later Bose introduced the 501 speaker, which also had Direct/Reflecting technology but was half the size of the 901 speaker. In 1973, Bose introduced the 301 speaker, which produced true hi-fi sound but could fit on a bookshelf.
During the 1970’s, sales of Bose speakers grew rapidly, and Bose executives approached the Delco division of General Motors with a proposal to develop a car stereo that would produce exceptional sound. The Cadillac Seville first offered an option for a Delco-Bose sound system in 1982, by 1990 sound systems were available in cars made by General Motors, Honda, Acura, Audi, and Nissan.

Bose Strategy:

In 1990, Bose was privately held, with revenues estimated at $720 million. Amar Bose was chairman of the company, and Sherwin Greenblatt was president. Approximately one-third of the company’s sales were in Japan, one-third in Europe, and one-third in the United States. The company’s motto was “Better Sound through Research,” and Bose Corporation was widely considered the world’s largest manufacturer of component quality speakers.
The company’s mission, to “provide outstanding sound experience to everyone in the whole world”, was manifested in three aspects of the company’s strategy. First, the company constantly sought new markets around the world and had exceptional perseverance in opening markets. For example, Bose entered Japan in 1970 and weathered substantial losses as it tried to establish the Bose brand name among Japanese consumers. The company received its first order from the Japanese car manufacturer of component-quality stereo speakers in Japan (as well as in Holland, France, Australia, and other countries). Management at Bose believed that the desire for good sound was universal, and planned to continue opening new markets around the world.
Second, Bose Corporation sought broader channels of distribution. Originally, Bose speakers were sold exclusively in high-end specialty stores that served audio enthusiasts. Throughout the 1980’s, Bose added new channels, including electronics retailers including Lechmere, Circuit City, Sears, and Montgomery Ward. Also, Bose began to sell some products by direct marketing.
Third, the company produced systems as well as components. In the early days, true high-fidelity sound had been available only to consumers willing to invest time, money, and patience in their stereo systems. By 1991, consumers expected hassle-free sound and the market for integrated audio-systems and portable audio equipment grown to be more than twice as large as the market for separate audio components. Analysis expected the trend toward integrated systems to continue, driven by advances such as home theatre television, which linked big-screen video with surround-sound audio, or “plug and play” equipment, which required minimal setup by the consumer. In 1989, after 14 years of development, Bose had introduced the Acoustic Wave Music system incorporating speakers, an AM/FM receiver, and a cassette tape deck. The product was oriented towards the high end of the portable audio market.

Manufacturing at Bose:

It was well-recognized that speakers were among the most important parts of any audio system-if they were of poor quality, even the best sound systems would not produce high-quality sound. Speakers were judged on their ability to reproduce sound accurately, and sound reproduction depended on speaker design, the quality of materials used in construction, and careful attention to detail in production processes. Speakers were one of the most competitive segments of the audio business, with dozens of manufacturers in the United States, Europe, and Far East producing a diverse array of designs and technologies. Three subassemblies were the critical components of all speakers:
• Transducer
• Electronics
• The cabinet- the speaker’s exterior, the cabinet had to both direct sound waves from the speaker and be attractive in a home or car.
Bose headquarters were located 23 miles west of Boston in Framingham, Massachusetts. The company had three manufacturing facilities:
• Westboro, Massachusetts
• Ste-Marie, Quebec
• Carrick-Macross, Ireland
Due to the company’s rapid growth, two other manufacturing facilities were planned:
• Hillsdale, Michigan
• San Luis, Mexico
In addition, the increasing success in the Japanese market caused some managers to wonder whether a manufacturing facility would soon become necessary in or near Japan.
Corporate Procurement:
In 1990, Corporate Procurement at Bose purchased materials totalling $300 million. Corporate Procurement was headed by Lance Dixon, director of Purchasing and Logistics. Dixon reported to Tom Beeson, vice-president of Manufacturing.
The Corporate Procurement was responsible for locating new vendors and sourcing new parts. Vendors were typically involved early on in new product development efforts.
In 1990, four types of personnel were typically involved in the procurement process:
• Design engineer
• Materials planner
• Buyer
• Vendor salesperson
The new products group, who monitored the supplier base to find technologies and components, were at the heart of corporate procurement. Engineers developing new products relied on them to find components that could meet design, performance, and cost standards. New products also provided a conduit to incorporate vendor input in products under development.
Purchasing at Westboro:
Until 1988, no purchasing had been done by the plants, instead, all items had been purchased by corporate procurement but delivered to the plants. By 1990, purchasing at Bose Corporation was more decentralized. The plants in Westboro, Canada, and Ireland did their own day to day purchasing, typically against contracts negotiated centrally. It was expected that the planned facility in Michigan would also manage its incoming material flow.
Westboro spent about $140 million per year on items purchased from an active base of about 200 vendors. About 50% of the plant’s purchasing dollars were spent in five categories: electronic components, plastics, printing, corrugated boxes/packaging, and cables/cords. Purchasing was planned in a three-stage cycle:
Stage I: Business Planning
Stage II: Aggregate production planning
Stage III: Production scheduling
Westboro buyers preferred vendors who maintained a secure financial position, were located close to Westboro, could provide fast delivery, maintained consistent production processes, and provide good references through corporate procurement or other customers. The average lead time on purchase orders placed by Bose Corporation was four to six weeks, but one third of all purchase orders had less than 10 days lead time. About 35% of all orders were changed within 30 days after placement.

The Evolution of JIT II

In the early 1980’s, shortly after he had been hired by Bose, Lance Dixon requested that Corporate Procurement’s budget be increased significantly to add more experienced buyers, upgrade the department’s information systems, and develop global sourcing programs. Dixon promised a one-year payback on the funds requested, but his request was turned down because company resources were focused on efforts in Japan. As the company grew, Dixon found that every year he needed more people in procurement, and every year at budget time he fought with management over staffing levels.
Dixon and Joe Giordano, vice-president for Finance, developed an alternative solution put purchasing its “profit center mode”. Wherever Dixon could drive expenses below standard costs, he would be allowed to reinvest half the savings back into the department’s budget. If Dixon did not generate any savings, Corporate Procurement would maintain a level budget. As Dixon said, “I can get the people I need to do the job and not add anything to the payroll.”
Dixon also instituted a program to pay cash incentives to buyers. Anytime buyer saved the company money on purchased items, the buyer received a cash reward, typically $100 to $300. This arrangement was patterned after incentive programs commonly found in sales departments. Awards were given for keeping monthly expenditures under standard cost, for unique ideas that led to cost savings, and for other exceptional efforts.
In 1990, Dixon proposed to change the relationship between Bose and certain vendors under a program he called “JIT II.” Under JIT II, a vendor representative (the “rep”) would replace the vendor salesperson, the Bose buyer, and the Bose materials planner and would be authorized to decide what, when, and how much to order for a particular range of products or services. Reps would determine order quantities, placing orders to their companies supply Bose without Bose carrying unnecessary inventory. Reps would also provide engineering expertise in their commodity area and help solve problems on the production floor, much as a Bose facility and would. The reps would be stationed full-time at a Bose facility and would be empowered to use the Bose computer systems, but would be hired, evaluated, and paid by the vendor.
Dixon had recommended the commodity areas of plastics and printing as initial candidates for the JIT II program. Plastics in 1991, Bose Corporation expected to spend close to $14 million on purchases of plastic components. Producing plastics to meet Bose quality standards required considerable experience and skill. Bose used 10 vendors for plastics, the top five vendors received 6% of the dollar volume Dixon recommended G&F Industries to be a JIT II vendor in plastics.
G&F’s headquarters and plant were located in Sturbridge, Massachusetts. about 40 miles west of Bose headquarters. The company employed about 60 people and had total annual revenues of $12 million. Of G&F’s 50 active customers, Bose was the largest account, providing about $2.1 million in annual revenues. The plastics components sold to Bose typically generated 10% before tax profit margin. G&F was owned by John Argitis, who served as president and CEO. Argitis had 15 years experience molding plastics parts at American Optical in 1978 he moved to G&F as vice-president, and in 1986 he purchased the company.
G&F specialized in the production of injection molded plastic parts. In injection molding, pellets of plastics resin were heated to liquid state; the liquid was then injected into a mold where it solidified in the shape of the mold’s interior. A typical injection of molding machine cost up to $200,000, molds to $75,000- $150,000. Molds were made to produce a part of a specific size and shape, although minor alterations were possible. Molds were typically paid for and owned by the customer.
On any particular job, set-up costs of injection molding could often be greater than the cost of machine operations. Set-up timers averaged four hours to change resin colors (keeping the same resin materials), six hours to change molds, and 17 hours to change molds, colors, and resin materials. The set-ups were performed by highly skilled technician who were supervised by plastics engineers, after set-up, machine operation required less skill.
Even if G&F became the JIT II vendor for plastics, if was not clear that G&F would supply all the Bose plants. The facilities planned in Michigan and Mexico would use considerable volumes of plastics, particularly in speaker enclosures for Michigan. The two facilities could either source locally, or use parts that were purchased by Corporate Procurement but shipped directly to the plants.

Plants Materials:

Printed materials included items such as instruction booklets, warranty cards, and promotional materials. In 1990, each Bose department sourced its own printed materials, with 12 vendors supplying printed materials to Bose Corporation. Dixon was concerned that the current decentralized arrangement allowed vendors to charge each manager different price according to that manager’s price sensitivity, and wished to established United Printing as a JIT II vendor, United received only 12% of the company’s overall printing business in 1990, so this would necessitate centralizing the procurement of printed materials. Dixon was concerned that the individual departments might object.
The Management of JIT II:
Neither Beeson nor Dixon was sure that vendors would be interested in participating in JIT II. A qualified rep might cost the vendor $80,000 per year (fully loaded). Dixon and Beeson planned to approach United after they knew whether G&F would participate.
Even if G&F did agree to participate, several issues remained to be resolved. Dixon felt that vendor representatives should be treated, in every respect, as Bose employees- to be listed in Bose telephone directories and have access to all Bose facilities, people, and computer systems. However, several Bose managers had voiced concerns about this arrangement. Some buyers felt that certain information, such as quantities and prices of parts bought from other vendors, should remain confidential-at least to provide an advantage during negotiations.
In the past, vendor’s representatives had typically worn badges that identified them as vendors, and were permitted access only to approved locations within Bose facilities. Dixon proposed changing the policy, he advocated that the reps for BIT II vendors are issued badges just like Bose employees and be free to come and go as they close.
There was also debate about how to ensure that vendors supplied goods at fair prices over the course relationship. Dixon felt that the company’s previous purchases in a given category provided experience to evaluate vendor prices, but others argued that inflation or changes in raw material prices could quickly render this information obsolete. Finally, although Dixon wished to start the program with G&F and United; formal criteria for determining when and with whom to establish JIT II relationships had not been developed.
Finally, there were questions how long a JIT II relationship would last in a company growing as rapidly as Bose. As Tom Beeson said: “There’s always a conflict between purchasing and manufacturing, Lance wants to buy everything and I want to make everything. However, I don’t want vendors assuming responsibility for what we should be doing ourselves. Does the JIT II program facilitate the process of moving into self-control or does it delay that process?”