16.7 End-of-Topic Case: Lean-ing on a Pandemic

Marisol Gutierrez, the Chief Supply Chain Officer for Reddy Cabinets, had just left a meeting with the Wall Street analysts covering her company. As she sat down in front of her desk, she pulled up her company’s 2020 financial reports and strategic plans for 2021.

The Process

Approximately 80% of Reddy Cabinets’ inventory, especially their most popular upper mid-tier and value lines of cabinets, comes from Chinese manufacturers in the Pearl River Delta region. As far as their suppliers tell them, they typically buy softwood from Russia and Canada, and hardwood from Thailand and the U.S. Timbers are processed into wood boards, while woodchips and sawdust are compressed into particle boards and medium and high-density fiberboards and finished to look like wood. Wood boards are usually used for Reddy Cabinets’ upper and upper mid-tier products, while engineered wood boards are used in value products. Purchase orders from Reddy Cabinets buyers are typically shipped out in about 30 days, after which shipments arrive in containers—usually through one of the West Coast ports—in about another two weeks. Upon unloading, these containers arrive in their warehouses in 3 to 5 days. The other 20% of Reddy Cabinets’ other products, usually in the premium and ultra-premium lines, are sourced from domestic manufacturers using either American or Brazilian hardwood—not particle boards of any kind. These fully customized products are made-to-order, with the typical lead time being about two weeks in total. Of course, that was when everything was going smoothly.

Marisol furrowed her brow and her mind flashed back over the previous two years.

The Strike of the Unknown on Reddy Supply Chain

In late 2019, a mysterious illness in Wuhan, China, had begun its spread across the local population. Soon, the virus spread across the world to wreak havoc across the global supply chain. As countries closed borders, factories shut down and ports stopped loading and unloading containers. The global supply chain—a previously well-oiled machine—suddenly ground to a halt. Shortages sprouted everywhere: from toilet papers to masks, consumers were greeted with empty shelves and delayed deliveries. Who knew such a virus could spread so quickly?

Many companies bemoaned their predicament. Reddy Cabinets was no different. Chinese suppliers called to let Reddy Cabinets’ buyers know that government-mandated shutdowns would cause them to be unable to meet their supply contract. Approximately 60% of the ready-to-assemble cabinets that were shipped out just ahead of port shutdowns ended up sitting in containers just outside the Port of Long Beach, stuck along with 70 other container ships just waiting to be unloaded. Meanwhile, Reddy Cabinets’ domestic inventory dwindled.

Reddy Cabinets had long adopted Lean Six Sigma in their operational processes. From the CSCO on down, all managers had at least their Six Sigma green belt and higher. They had driven out waste wherever possible. Their inventory was only 60 days compared to the industry average of 108 days, while their average shipping time was only 2 to 7 days compared to the industry average of 10 days. Little surprise that the combination of excellent product quality, customer service, and low shipping times along with low inventory costs had resulted in Reddy Cabinets being by far the most profitable company among its peers.

With the pandemic raging, however, their inventory had dwindled from 60 days down to a dangerous 24 days. Even worse, inventory for some of the most popular products in their lineup were down to as little as 7 days. How could they have allowed themselves to be so short on inventory? Whispers within the company blamed the same philosophy that had made it so profitable to begin with: lean. At a time when their competitors had an abundance of inventory and were able to have a steady stream of revenue for the months ahead, Reddy Cabinets was starting to see a looming crisis: If things didn’t change, they would have to begin delaying shipments to their customers. For their most important customers, they would need to give hefty discounts to compensate for the delay. As economies opened back up in late 2020 as the pandemic began to subside, demand increase far outpaced Reddy Cabinets’ ability to get products into their warehouses. As a result, they had missed their revenue and profit forecast, and their stock price plummeted.

Complicating Factors: Sustainability

Reddy Cabinets hadn’t always relied so heavily upon their Chinese suppliers. In fact, they used to have suppliers in Southeast Asia, Central America, and South America. However, as a part of Reddy Cabinets’ comprehensive sustainability program deployed in 2010, ISO 14001 certification became an important criterion for their supply base. Only a few of their smallest suppliers outside of China were certified. Even worse, their random audits of suppliers in Central America showed lax labor ethics, while suppliers in South America were caught buying timber illegally logged from the Amazon rainforest.

After eliminating these suppliers, most of their remaining qualified suppliers were located in China. Over time, as their lean management programs further championed suppliers that offered the highest quality products at the lowest price, their suppliers in Southeast Asia simply could not compete against their Chinese suppliers. Reddy Cabinets hadn’t made a concerted effort to consolidate their supply base. In fact, they had a rather large number of suppliers relative to the number of their products; most of them just happened to be located in the Pearl River Delta region.

The Path Forward: How to Lean?

Marisol set aside the documents in front of her and began to dig into what her team could do to improve her company’s supply chain resilience. It had become obvious to her that the answer would require her team to reconsider their current approach to lean without outright abandoning it. After all, having too much inventory would tie up a lot of cash that could be used for other, more productive purposes. How could Reddy Cabinets strike the right balance between “just in time” and “just in case”?

Questions

1. Create a simple process map of how Reddy Cabinets currently gets their inventory from their suppliers. What are all the risk factors you can identify? What are their potential impacts on Reddy Cabinets’ supply chain?

2. What are the interactions between Reddy Cabinets’ approach to the Triple Bottom Line and lean that resulted in their current supply chain predicament? What are the tradeoffs they face as they attempt to address their supply chain risks?

3. What aspects of their “just in time” should they keep? Is it inevitable for Reddy Cabinets to compromise “just in time” in favor of “just in case”?

4. What aspects of “just in case” should Reddy Cabinets pursue? Would any aspect of their supply chain makeover compromise their “just in time” approach prior to the pandemic?

5. What changes to their financial performance should Reddy Cabinets present to Wall Street analysts? How can these changes be justified?