Please read the entire case that is below then answer these questions: What Moti

Question

Please read the entire case that is below then answer these questions:

What Motivated Sher-Wood to outsource its Manufacturing to suppliers inside or outside Canada in 2007 and 2011?

What decision factors changed between 2007 and 2011?

Which firm activities would be impacted by offshore outsourcing? How different were these influences between 2007 and 2011?

Should Sher-Wood outsource its remaining manufacturing to China? Will this solve Sher-Wood's concerns?

What alternatives exist? What are the pros and cons of each?

Case 1-1

Sher-Wood Hockey Sticks: Global Sourcing

In early 2011, the senior executives of Sher-Wood

Hockey (Sher-Wood), the venerable Canadian hockey

stick manufacturer, were pondering whether to move

the remaining high-end composite hockey and goalie

stick production to its suppliers in China. Sher-Wood

had been losing market share for its high-priced,

high-end, one-piece composite sticks as retail prices

continued to fall. Would outsourcing the production

of the iconic Canadian-made hockey sticks to China

help Sher-Wood to boost demand significantly? Was

there any other choice?

The History of Ice Hockey'

From the time of early civilization in places as diverse

as Rome, Scotland, Egypt and South America, the

"ball and stick" game has been played. The game has

had different names, but its basic idea has been the

same; the Irish, for instance, used the word "hockie"

to refer to the sport. Some reports trace the origins

of the game to 4,000 years ago, but it has survived

to the present.

he modem version of ice hockey emerged from

the rules laid down by two Canadians, James Creighton

and Henry Joseph, when they studied at McGill

University in the late nineteenth century. Their rules

were used in the first modem game, which was played

in Montreal, Quebec in 1875. In 1892, Canada's gov-

ernor general, Lord Stanley, introduced the game's

first national title, the "Lord Stanley's Dominion

Challenge Trophy," later simply referred to as the

Stanley Cup. In 1917, the National Hockey League

(NHL) was founded in Montreal.

Ice hockey found its way to the United States in

1893. By the early 1900s, it had also become preva-

lent in Europe. Ice hockey was played as a part of

the Olympic Summer Games for the first time in

April 1920 in Antwerp, Belgium.

By the late twentieth century, ice hockey repre-

sented an important source of national pride to Cana-

dians, and it had become popular in other countries

in the northern hemisphere, especially the United

States, Czech Republic, Finland, Russia and Sweden.

Ice Hockey Stick

In ice hockey, players use specialized equipment

both to facilitate their participation in the game and

for protection from injuries. The equipment can be

classified into five categories: goalie, head/face (hel-

met, neck guard), protective (shoulder pads, shin

pads, elbow pads, hockey pants and gloves), sticks

and skates. "Head-to-toe equipment suppliers" typi-

cally offered all equipment except for goalie equip-

ment. Among the five categories of equipment,

sticks and skates drove the industry, accounting for

almost two-thirds of global equipment sales.

A hockey stick is a piece of equipment used in ice

hockey to shoot, pass and carry the puck. It is corn-

posed of a long, slender shaft with a fiat extension

the flex characteristic of their wooden counterparts

could not be derived precisely, because the sticks

were produced using a high volume production pro-

cess that yielded sticks with variable flex properties

Basics of Hockey Equipment Industry

According to most industry analysts, the global

hockey equipment market was showing signs of

maturity, growing at just 1 to 2 per cent per annum.

The global hockey equipment market in 2010 was

$555 million, with skates and sticks accounting for

an estimated 62 per cent of industry sales.

Ice hockey equipment sales were driven primarily

by global ice hockey participation rates (registered

and unregistered). There were about 600,000 hockey

players in Canada in 2010. The number of registered

hockey players in Canada between the ages of 5

and 25 was expected to shrink by 30,000 players, or

5 per cent, over the next five years. Nevertheless,

some industry analysts believed that growth rates of

casual and unregistered hockey, participation, espe-

cially in the United States, as well as growth rates in

Eastern Europe (particularly Russia) and women's

hockey had exceeded that of the registered segment

as a whole. Other drivers of equipment sales in-

cluded demand creation efforts, the introduction of

innovative products, a shorter product replacement

cycle, general macroeconomic conditions and the

level of consumer discretionary spending.

Relative to European football (soccer) or American

baseball, all of the equipment required to participate in

organized hockey was more expensive to purchase.

Outfitting a teenager or an adult to play recreational

hockey cost approximately $600. The equipment for

younger players was less expensive. However, nearly

40 per cent of all ice hockey players lived in homes where

the annual household income was more than $ 100,000 per year.

The hockey sticks endorsed by professional

hockey players enjoyed a strong position in the

hockey stick market. Children and amateur players

liked to have sticks embossed with specific players'

names. Hockey stick manufacturers typically paid

NHL players to use their sticks and provided the

players with custom designed sticks.

Competitor Brands and Strategies

Before a Montreal company began manufacturing

ice hockey sticks in the late 1880s, most players

made their own. By the early twenty-first century,

more than 20 brands of ice hockey sticks existed in

North America and Europe, and many of the smaller

equipment manufacturers had failed or been pun-

chased by larger competitors. The main brands were

Easton (Easton-Bell Sports), Bauer (Bauer Per-

formance Sports), CCM (Reebok-CCM Hockey),

Warrior (Warrior Sports), Sher-Wood (Sher-Wood

Hockey), Mission ITECH (acquired by Bauer) and

Louisville/TPS (acquired by Sher-Wood). Bauer,

CCM and Sher-Wood originated in Canada, and

Easton and Warrior originated in the United States.

Over 80 per, cent of the ice hockey equip-

ment market was shared by three major com

petitors: Bauer, Reebok (which owned both the

Reebok and CCM brands) and Easton, each of

which was a head-to-toe supplier offering . play-

ens a full range of products (skates, sticks and full

protective equipment). Moreover, Bauer and Ree-

bok also provided goalie equipment. The balance

of the equipment market was highly fragmented

with many smaller equipment manufacturers, such as

Warrior and Sher-Wood, offering specific products and

2010 were $280 million, and its key markets were

Canada, the United States, Scandinavia and Russia.

Varrior Sports concentrated on providing lacrosse

rid ice hockey equipment, apparel and footwear.

he company was dedicated to a core set of philosohies

and strengths: technical superiority, grassroots

iarketing, original and creative youthful expression,

d strong partnerships with retailers and suppli

rs. In 2011, Warrior offered 15 types of player and

oahe sticks.

Generally, hockey companies provided one type of

Dckey sticks at three different price points—junior,

itermediate and senior. The reference retail prices of

ie five competitors' best senior composite sticks vard.

The Bauer Supreme TotalOne Composite, Easton

tealth S19 Composite and Warrior Widow Compose

Senior were all priced at $229.99. The CCM U+

razy Light Composite and Reebok ilK Sickkick III

omposite came in at $209.99, while the Sher-Wood

90 Pro Composite was priced at $139.99.

Global Sourcing in the Hockey

Equipment Industry

Similar to other industries, the hockey industry

Eventually entered the global sourcing era. Global

sourcing is the process by which the work is

contracted or delegated to a company that may be

situated anywhere in the world.Sourcing activities

can be categorized along both organizational and

locational dimensions (Exhibit 2 lists several types

of global sourcing). From an organizational perspec-

tive, the choice between insourcing and outsourcing

involves deciding whether to keep the work within

the firm or contract it out to an independent ser-

vice provider. From a locational perspective, three

choices are available—onshoring (within the na-

tion), nearshoring (to a neighbouring country) and

offshoring (to a geographically distant country). To

optimize the overall benefits and hedge risks, com-

panies often seek to balance their global outsourc-

ing and insourcing activities. Exhibit 3 lists several

of the factors typically considered by manufactur-

ers faced with the decision of whether to onshore

insource or offshore outsource.

As early as the 1980s, western sports equipment

manufacturers, such as Nike and Reebok, started to

outsource the manufacture of sporting goods, such

as running shoes, to Asia. Nevertheless, before the

year 2000, hockey companies preferred insourc-

ing over outsourcing and executed this strategic

focus through organic growth, strategic acquisi-

tions and establishing company-owned factories in

other countries; for example, Easton and Warrior

had factories in Tijuana, Mexico. During the past

decade, the hockey industry began to outsource. In

2004, Bauer Nike Hockey shut down or downsized

three plants in Ontario and Quebec, eliminating

321 manufacturing jobs. The company outsourced

about 90 per cent of its production to other makers

in Canada and the rest to international suppliers.

From 2002 to 2008, Reebok-CCM closed five

plants in Ontario and Quebec and outsourced man-

ufacturing to other countries, eliminating about

600 manufacturing jobs. Easton and Warrior also

outsourced part of their manufacturing to Asia

but still kept their factories in Mexico. The capac-

ity of Warrior's Mexican factory was estimated to

be 4,000 composite sticks per week produced by

250 employees in 2008. (Exhibit 1 lists the manu-

facturing sites associated with several of the lead-

ing hockey stick brands.)

Global manufacturing outsourcing was char-

acterized by some drawbacks. It separated manu-

facturing activities from R&D and marketing

activities and challenged a company's ability to co-

ordinate initiatives between these functions, such

as product innovation, designing for manufactur-

ability, supply chain efficiency and quality con-

trol. Especially in offshore outsourcing, cultural

differences caused miscommunication, technology

I

9

This paragraph is summarized from Masaaki Kotabe,

Global Sourcing

Strategy: R&D, Manufacturing, and Marketing Interfaces

(New York:

Quorum Books, 1992.)

distance necessitated extra training, and geographic

distance resulted in extra lead time or cycle time.

9

In March 2010, Bauer Hockey recalled 13 models of

junior hockey sticks, manufactured outside of Canada,

due to excessive lead levels in the sticks' paint that was

detected by public health officials in random testing.

Offshore outsourcing also threatened to nega-

tively impact a company's public image if it re

-

duced domestic employment. In November 2008,

UNITE HERE

10

launched a national campaign to

persuade Reebok to repatriate the production of its

hockey equipment and jerseys.

Additionally, global economic dynamics, such

as changing labour costs, raw material costs and

exchange rates, introduced new uncertainties into

global sourcing. Exhibit 4 lists a sample of com-

parative labour rates prevailing in Canada, the

United States, Mexico and China. In 2011, the Bos-

ton Consulting Group (BCG) concluded that with

Chinese wages rising and the value of the Yuan

Reebok designed and produced a stick for him that 18 to 24 months.

By the end of 2010, Sher-Wood had a graphite shaft and wooden blade,

but the look provided 27 types of player and goalie sticks of a one-piece. In November 2008, Reebok issued a press release announcing that Spezza would start Although Sher-Wood had targeted various NHLusing their sticks, ". . . we are excited to work with Jason, not only on marketing initiatives, but also on the research, design and development of future Reebok hockey equipment.

By May 2008, Sherwood-Drolet had filed a design for high-end players and mainly provided

proposal to its creditors under the Bankruptcy and custom products from a cosmetic standpoint. For

In September 2008, Sher-Wood purchased the tured most of their composite hockey sticks. Sher

hockey novelty and licensed assets of Inglasco. In Wood's plant manufactured the remaining high-end, December that same year, it purchased TPS Sports Group, a leading manufacturer and distributor of about 100,000 units annually, with 33 workers in hockey sticks and protective equipment. Sher-Wood transported TPSs assets from Wallaceburg and on investment of the fixed cost in Canada was low. Strathroy, Ontario to Quebec, consolidated three Executives believed that they needed to provide companies and invested an additional $1 .5 million a competitive

Production

As of March 2011,' Sher-Wood produced sticks and marketing efforts. These approaches called for (sticks, shafts, blades), protective equipment low cost production as well as decent quality. To

(gloves, pants, shoulder pads, elbow pads, shin reduce the cost and fully utilize the facilities, they

pads), goalie gear (goalie pads, catcher, blocker, could outsource the remaining production to the

knee protector, arm and body protector, pants) partner based in Victoriaville and move facilities

, and other accessories (pucks, bags, puck holders, mini sticks, bottles, carry cases) for ice hockey. The company also sold some equipment and accessories for street hockey (goalie kit, sticks, pucks, balls), as well as sports novelties for hockey fans.

The company introduced new sticks twice a would be more advantageous to stay in China from

; year—in May/June and at the end of October. The. life cycle of a product line in the market was about 18 to 24 months. By the end of 2010, Sher-Wood

had a graphite shaft and wooden blade, but the look

provided 27 types of player and goalie sticks.

of a one-piece. In November 2008, Reebok issued

Thirteen of them were wooden.

.

Although Sher-Wood had targeted various NHL

players in order to support the credibility of the

Jason, not only on marketing initiatives, but also on

brand, the company mostly targeted junior teams,

; AAA teams and a couple of senior leagues. Sher

only conducted a low volume of custom a design for

high-end players and mainly provided proposal to its

creditors under the Bankruptcy and custom products from a

cosmetic standpoint. For example, personalizing the graphic or

colour of the sticks.

In 2010, Sher-Wood sales volume for sticks produced

in Sherbrooke dropped almost 50 per cent compared to 2009.

Its Chinese partners manufactured

composite sticks and goalie foam sticks,

about 100,000 units annually, with 33 workers in

the factory and seven staff in the office. The return

on investment of the fixed cost in Canada was low.

Executives believed that they needed to provide

a competitive retail price to boost the demand. To

do so, they also needed to afford retailers a higher

margin than their competitors did so that retailers

would help with product presentations in stores

As of March 2011,' Sher-Wood produced sticks

and marketing efforts. These approaches called for

low cost production as well as decent quality.

o

(gloves, pants, shoulder pads, elbow pads, shin

reduce the cost and fully utilize the facilities, they

pads), goalie gear (goalie pads, catcher, blocker,

could outsource the remaining production to the

knee protector, arm and body protector, pants)

partner based in Victoriaville and move facilities

,

and other accessories (pucks, bags, puck holders,

there. However, according to regulations in Que-

I

mini sticks, bottles, carry cases) for ice hockey.

bec, Sher-Wood did not have enough latitude to

The company also sold some equipment and acces-

move or sell the equipment to their subcontractor

.

sories for street hockey (goalie kit, sticks, pucks,

in Quebec. They also considered backshoring the

balls), as well as sports novelties for hockey fans.

manufacturing out of China. They concluded that it

The company introduced new sticks twice a

would be more advantageous to stay in China from

;

year—in May/June and at the end of October. The

both cost reduction and R&D standpoints.

Chinese Partners' Condition and Collaboration

Sher-Wood's suppliers were located in Shanghai,

Shenzhen and Zhongshan City near Hong Kong.

They were producing tennis and badminton rackets,

developing the expertise in composite technology

and relevant sporting goods production. Sher-Wood

began to cooperate with them about 10 years ago

when it started selling composite sticks. For years,

these suppliers manufactured one-piece and two-

piece composite hockey sticks for hockey compa-

nies around the world. Gradually, they accumulated

manufacturing capacity and R&D capability. Sher-

Wood's main supplier in Zhongshan City oper-

ated two shifts for 10 hours a day, six days a week.

Their annual capacity was more than 1 million units.

Moreover, they possessed an R&D team with 10 to

15 engineers, which was able to produce a prototype

within one day with full information. On the con-

trary, it would cost Sher-Wood four to five months

with a team of two to three engineers to produce a

similar prototype. More importantly, as a conse-

quence of their long-term cooperation, the main sup-

plier had developed a certain feeling about hockey so

that language and cultural barriers were not problems

any more. "They were becoming a partner, rather

than one section within the supply chain," said Eric

Rodrigue, Sher-Wood's marketing vice president.

Sher-Wood and its Chinese supplier partner

needed to collaborate closely. On one hand, Sher-

Wood had to send their experts to China to coach

the partner about how to produce sticks according

to their specifications. On the other hand, although

Sher-Wood and the partner had similar on-site

labs to conduct product tests, Sher-Wood mainly

focused on the feeling of the stick, that is, the re-

production of how the slap shot, passes, reception,

etc., would feel when a player placed his or her

hands a certain way on the stick. Sher-Wood also

conducted tests on ice with professional players,

something their supplier could not do.

Moreover, with young, passionate and knowledge-

able new managers in management and marketing,

company executives thought they were ready to meet

the extra cost and effort in market collaboration be-

tween Sher-Wood, the partner in China and retailers.

Company executives were concerned with rising

labour costs, material costs and the currency exchange

rate in China. Nevertheless, the overall cost of man-

ufacturing in China was still lower than the cost in

Quebec. They estimated that cost reduction was 0 to

15 per cent per unit depending on the model, with

good quality and fast turnaround time. Moreover,

some industries such as textiles had started to relocate

their manufacturing to new emerging countries, such

as Vietnam and Cambodia, for low labour and equip-

ment costs; however, there was no R&D advantage in

composite materials in these alternative locales.

Executives were also concerned with other is-

sues. First, although the main supplier was able

to produce customized sticks for an NHL player

within 24 hours, the shipping was quite expensive

from China to Quebec. Second, the main supplier

used to produce huge volumes fast but without

product personalization. Third, the game of hockey

was perceived as a Western cultural heritage sport,

so anything relevant to hockey which was made in

China had the potential to negatively influence the

market perception. However, all their competitors

had outsourced manufacturing to China for years.

. The Challenge

In early 2011, the question for Sher-Wood senior ex-

ecutives was how to boost their hockey stick sales.

They believed that they should cope with this chal-

lenge by providing sticks with better quality, better

retail price and better margin for retailers. They won-

dered whether they should move the manufacturing of

the remaining high-end composite sticks to their sup-

pliers in China or whether there was any alternative.

If they decided to shift their remaining manufac-

turing outside of the company, they needed to deal

with a variety of issues. To fully utilize the facilities in

Sherbrooke, they needed to move equipment to China,

which was difficult and time-consuming because of ex-

port regulations. To set up the manufacturing machines

and guide the manufacturing team, they would need

to send experts there. To complete the coming hockey

season between September and April but still imple-

ment the decision, they needed to plan every phase pre-

cisely. They also needed to figure out what to say and

do about the 40 affected employees. Many had worked

for Sher-Wood for more than 30 years, and their aver-

age age was 56. How could this be communicated to

the public? They needed to make a final decision soon.

Explanation / Answer

What Motivated Sher-Wood to outsource its Manufacturing to suppliers inside or outside Canada in 2007 and 2011?

2007:

·        Sales of one million wooden and 350000 composite sticks in 2006.

·        Predicted high growth in its composite stick business in terms of volume and profitability

·        By outsourcing wooden and high end models, core focus on the company is narrowed to improvements in the quality of composite stick

2011

·        Decline in sales volumes of sticks by 50% in 2010

·        Regain demand by offering a competitive retail price over its rivals

·        Plan to reduce cost and optimization of resources by shifting operations to Quebec

What decision factors changed between 2007 and 2011?

In 2007 Sher-wood main decision was based on the high end composite sticks, they also looked to outsource since demand was high.

In 2011 the decision factor was based on how to boost their hockey stick sales

Which firm activities would be impacted by offshore outsourcing? How different were these influences between 2007 and 2011?

Offshore activities will impact a firm`s activity by loss control of supply chain efficiently.

In 2007 outsourcing played a positive role because it reduce cost and increase production.

In 2011 due to outsourcing, Sher-wood had to decide whether they should move the manufacturing of high end composite sticks to their supplier in China

Should Sher-Wood outsource its remaining manufacturing to China? Will this solve Sher-Wood's concerns?

Sher-Woods should not outsource the remaining to China because it will be difficult and expensive to move equipment to China, it will also affect the employees they have worked for so long in the company.

What alternatives exist? What are the pros and cons of each?

Using manufacturing facilities in closer countries that even though the cost if higher than China but they are closer so the net cost is similiar but with quicker responses, for example Mexico provide free trade agreements and protection of intellectual property.

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