Case Study:

JAM Electronics Service Level Crisis

(Based on Simchi-Levi etal, 2000)

JAM Electronics is a manufacturer of products such as industrial relays. The company

has five manufacturing facilities in different countries in the Far East with headquarters in
Seoul, South Korea.
JAM USA is a subsidiary of JAM Electronics and was established in the Unites States in
1978. The US subsidiary provides distribution and service functions in this country. It has
a central warehouse in Chicago that serves two types of customers: distributors and
original equipment manufacturers (OEMs). Distributors typically hold inventory of JAM’s
products and supply them to their clients as needed. OEMs use JAM’s products to
produce different types of items such as automatic garage door openers.
JAM Electronics produces about 2,500 different products all of them manufactured in the
Far East. Finished products are stored in a central warehouse in Korea and are shipped
from there to different countries. In particular, items sold in the United States are
transported by ship to the warehouse in Chicago.
In recent years, JAM USA has seen a significant increase in competition and huge
pressure from its clients and distributors to improve service levels and reduce costs.
Unfortunately, as Al Rub, the inventory manager, points out, “the service level right now
is at an all-time low. Only about 70% of all orders are delivered on time. On the other
hand, inventory keeps piling up, mostly of products that are not in demand.”
In a recent meeting with Chan Moon, the president of JAM USA; Ken Hall, vice president
and general manager; and Li Chan, a representative of the Korean headquarters, Al
pointed out several reasons for the low service level.

1. Difficulty forecasting customer demand. Indeed changes in the economy,

customer behavior and other factors have a major impact on demand, and these
are quite difficult to predict.

2. Long lead time in the supply chain. A typical order placed by the warehouse in
Chicago will arrive in about 6-7 weeks. There are 2 primary reasons for the long
lead time. First, there is a week of processing time in the central distribution
center in Korea; second, the ocean transit time is very long.

3. The large number of SKU handled by JAM USA. As pointed out earlier, JAM USA
distributes about 2,500 different products, ranging from small relays to large
programmable controllers, to its customers.

4. The priority given the US subsidiary by headquarters in Seoul. An order from

Korean or Japanese clients receives a higher priority over an order received from
the United States. Thus the lead time to the US is occasionally much longer than
7 weeks.

To illustrate the difficulty in forecasting customer demand, Al provided a graph (see

below) that showed monthly demand information for item XXX, a relay product used in
the manufacture of refrigerators. As the graph shows, variability in demand is very high;
demand changes from month to month and is difficult to predict what customer demand
will be even when sophisticated forecasting techniques are used.
Ken, the general manager, was very critical of Ken’s analysis. He pointed out that if long
lead time is an issue then JAM USA needs to reduce it, perhaps by using other means of
transport. Ken however was unsure of the impact of this change on the overall supply
chain. He pointed out that “transport costs will surely go up but where are the savings?”
The meeting ended with a decision to establish a task force headed by Ken to address
the service level crisis.
As Al left the meeting, he could not help but think that many companies must be facing
similar problems-high demand variability, long lead-times, unreliable supply processes,
and a large number of SKUs. What is the competition doing to cope with these
problems?

Monthly demand for item XXX

250

200
Demand in '000

150

100

50

0
Apr May Jun Jul Aug Sep Okt Nov Dec Jan Feb Mar
Months 1997-1998

Tasks:

1. Summarize the problem JAM is facing.

2. Map the logistics process showing the supply chain relationships.

3. What actions could be undertaken, that help to solve the problem?

4. What do you think about Ken’s statement about the possible use of different
means of transport: “transport costs will surely go up but where are the savings?”

Good luck!