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Carestream Health Case Study

Carestream Health Case Study

Carestream Health Inc.: When Disruption Hits a Lean Supply Chain

In mid-October 2014, YJ Yang, Asia Pacific Lean Six Sigma director at Carestream Health Inc. (CHX) in Xiamen, was surprised when his colleague and long-time friend YI Zheng, logistics manager, declared, “We are in trouble now!”

Zheng had just received an email from Carestream Health Inc.’s (Carestream) U.S. subsidiary indicating that wide rolls of film, a key material needed for CHX production, would not arrive on time due to a labour dispute in the U.S. West Coast ports. Such a delay would lead to a shortage of raw materials, which would turn into a backlog of CHX deliveries to its customers. “We must look for some countermeasures immediately,” said Zheng. Yang knew about the labour dispute and its disruptive impact to transportation out of the United States. He knew that this backlog would be a test for CHX’s lean supply chain, something that he had never encountered before.

CARESTREAM HEALTH INC. (CARESTREAM)
Carestream was a medical devices manufacturer that was founded in 2007 by Onex Inc. after the acquisition of Eastman Kodak’s Medical Imaging Group. With about 50 per cent market share, Carestream became the world leader in X-ray film production, a significant segment of the medical devices industry. CHX was a wholly-owned subsidiary of Carestream and mainly supplied the Asia-Pacific market, which was growing at a rate of 10 per cent per year. CHX’s revenues were expected to exceed ¥2 billion in 2014 (see Exhibit 1).1

CHX had been vigorously implementing lean production since 2007. Yang, who was the head of Kodak’s lean manufacturing office before his tenure at Carestream, had led his team in learning lean production principles from Taiwanese and Japanese experts. At that time, the outside lean consultants taught only some basic lean principles and were not providing solutions directly; instead, the consultants suggested Yang and his team look for the solutions by themselves with guidance from the experts. This approach raised more challenges for the team and also provided more opportunities for the team to be creative and innovative.

Over the years, Yang and his team had accumulated a rich experience in lean production and established a
lean production system for CHX. To achieve the operational objectives of zero-accident safety, zero-defect quality, lowest cost, 100 per cent on-time delivery, and 100 per cent staff participation, CHX conducted on-time and automated production through standardized operations, on-site improvement activities, six sigma activities, stabilized operations, and leveled operations. As a result of these lean management efforts, CHX operations received numerous accolades in 2013—including a membership in the top 10 industrial enterprises in Xiamen and the top 300 industrial enterprises in the province of Fujian (Excerpt).

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OPMT 620 Case Study 2 – 15% for paper
The second Case Study is based on Carestream Health Inc.: When Disruption Hits a Lean Supply Chain,
found in your HBSP Coursepack. You must purchase the case study.
1. Analyze the company using the information from the case study and also from online sources.
2. Review the company’s business and competitors. Were other companies affected by the strike?
3. Was the company affected by the dock strikes last year? Has the company been affected by Covid-19? What happened?
4. What causes variation in the company’s supply chain?
5. What were the managerial problems caused by the labor strike? What are the company’s options? What is the feasibility of those options? Provide your reasoning.
6. If you were a manager in the meeting how would you decide when to use airfreight and how would you calculate the relative cost of airfreight vs. regular transport?

Carestream Health Case Study Analysis

Abstract

In October 2014, Carestream Health Inc. experienced a significant supply chain disruption occasioned by a labor dispute in most ports situated on the West Coast in the U. S. The work-to-rule slowdown had a substantial impact on the port operations, which exerted pressure on Carestream Health’s lean supply chain. First, the case study analysis presents an in-depth background of Carestream Health Inc. and its competitors (Agfa and Fuji). The review also evaluates the managerial causes, impact of the labor strike, and Covid-19 on the supply chain of CHX and other companies in the industry. The causes of the variations in CHX’s supply chain and the feasibility of alternative shipping options will be analyzed in the paper too. Finally, the relative costs of airfreight compared to regular transport were used to validate the decision to use air freight as the optimal solution for the transportation of the wide film rolls from the U.S to Xiamen.

Keywords: lean supply chain, air freight, six sigma, lean production system, labor dispute

Carestream Health Inc.: When Disruption Hits a Lean Supply Chain

Introduction

The ongoing labor dispute in the U.S West Coast Port’s had interrupted sea transport out of the U.S. to Xiamen. There would be a delay in Carestream Health’s receipt of wide film rolls, a primary raw material for production, from the U.S suppliers, which would lead to a shortage of materials and, ultimately, a backlog of deliveries to customers. Thus, there was a need to identify countermeasures to ensure a steady supply of film rolls, fulfill high demand from agents and end-users, and maintain the CHX market share. In a meeting, the management discussed the prospect of using alternative shipping options: East Coast ports and air freight. Air shipping was presented as a feasible but costly option as it was 9 to 10 times more expensive than the sea shipping. A consideration was possible chaos in the supply chain since the film rolls had been handed over to the ports and were unavailable for shipping. The U. S subsidiary’s production limit, CHX production needs, an accurate market demand were also used in reviewing the options. As a potential optimal option, the air freight’s critical aspects would be considered by assessing the timing, quantity, and best governing mechanisms for the utilization of airfreight.

Carestream Health Case Study Analysis

Company Profile: Carestream Health, Inc.

Carestream Health Inc. previously Eastman Kodak Medical Image Group, is one of the independent subsidiaries of Onex Corporation (Canada) with core operations in the Asia-Pacific markets. Carestream (Xiamen) is a medical device producer that was established in 2007 after Kodak Health Group’s acquisition by Onex Corporation for $2.550 billion (Kodak Health Group, 2007). The firm is situated in Xiamen, China, with operations in the Biotechnology Products Manufacturing Industry. The core products are laser printers, DryView laser imaging films, digital radiography, computed radiography, and other medical imaging systems (Lahman, 2015).  At the end of the fiscal year 2019, the company reported revenues worth $ 1.9 billion and had a workforce of 4, 400 employees in all locations (Annual Report, 2019). Today, the company is a world leader in the production of X-Ray films with more than 50% market share as it has been growing at a CAGR of 10% annually.

Competitors Profile

Carestream Health Inc.’s main competitors in the Asia-Pacific markets are Agfa and Fuji. If Carestream Health Inc. ran out of the wide film rolls following the labor dispute in U.S ports, the two competitors would grow their market share (Vachon et al. 2019). Hence, the CHX competition had not been affected by the strike in the West Coast Ports. First, Agfa-Gevaert Group has over 150 years’ experience in innovations and technology leadership for imaging products. The Group is in charge of developing, producing, and distributing a wide array of digital and analog imaging systems as well as technological solutions for the printing and health care industry and industrial applications (Burley & Ryerson Image Centre, 2012). Fujifilm Holdings Corporation (Fujifilm) is pioneering multinational photography, printing, imaging, and biotechnology firm with its headquarters in Tokyo (Komori, 2015). Since 1934, Fuji has leveraged IT and imaging to attain an international presence in graphic arts, healthcare, optical medical devices, and highly functional materials.

Interruptions in the Supply Chain

In October 2014, the Carestream Health Inc.’s supply chain was interrupted due to the labor dispute that occurred in the West Coast Ports that handle 50% percent of the U.S exports and imports business by sea. The labor strike was later escalated when the dockworkers lowered their pace since the total hour handling was reduced from 25 -35 containers to 10-18 containers (Soergel, 2016). As a result, the bulk of sea shippers faced problems in shipping merchandise. In 2020, the COVID-19 pandemic has also led to interruptions within the global supply of both medical and pharma supplies due to longer national lockdowns (Bonadio et al. 2020). Due to the disruptive effect of the labor slowdown in transportation, there would be a delay in the shipment of the wide film rolls from the West Coast ports to Xiamen, which in turn would lead to a shortage of raw materials and production delays.

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Variations in the Supply Chain

The CHX supply chain’s variation was occasioned by the CHX’s lean production needs, U.S suppliers’ production limits, assessment of market demand, timing, and recurrent future demand. Since 2007, CHX has been actively implementing lean production, and over the years, the company has acquired rich experience and formed a robust lean production system. The lean management efforts adopted by CHX included standardized operations, six sigma activities, stabilized operations, levelled operations, and on-site improvement activities (Chopra, 2020). Owing to lean management expertise, CHX made constant improvements and innovative solutions in its supply chain by ensuring that the inventories of both materials and products were maintained at low levels. For instance, the company maintained its wide rolls inventory levels at low levels since the days in supply inventory was below 50 days. The delay was a test to the CHX’s effective lean production and surge in the days in supply inventory.

Managerial Problems

The Labor Strike

Lean fundamentally means manufacturing with no wastes, and most companies have used the principles of lean manufacturing to dramatically enhance production processes (Zylstra, 2013). The slowdown in the West Coast Ports had disrupted the sea transport to Xiamen, which would result in delays in production and a massive backlog of product deliveries to the agents and end-user health facilities. The CHX supply chain interruption posed a massive threat to the company’s lean production as it would lead to a shortage of raw materials and, subsequently, production delays. Also, there was the likelihood of loss of market share to the competition.

The lean principles have provided substantial gains for the company and its employees in terms of high motivation, customer satisfaction and, ultimately, the bottom line. Even though the implementation of lean production has reaped benefits for CHX, it has also generated several challenges for management. The first problem is the hefty expenses incurred in purchasing the right equipment and updating the production line (Wilson, 2015). In this case, CHX will be forced to incur additional expenses by shipping the film rolls via air, which could erode the margins. The other costs incurred the surge in cutting scrap rate and decline in equipment activation.

Another problem is the outlays for labour since the implementation of changes required by lean production necessitates the use of temporary labour at the onset. The final problem is the opposition that could arise from change by adopting new practices and processes, which can be hard for some of the employees and management. The case study cites that changing to the airfreight will lead to excessive use of labour, which will increase the labour expenses and generate management problems. Hence, there was an urgent need to identify countermeasures to address the management problems while ensuring a steady supply of film rolls, fulfil high demand from agents and end-users, and maintain the CHX market share.

Airfreight versus Sea Freight Options

In a subsequent emergency meeting, the management discussed the prospect of using alternative shipping options: sea or air. The choice between airfreight and sea freight usually depends on the content, weight, size, and weight of the shipment as well as how fast the company needs the merchandise (Morana, 2018). Just like during the non-pandemic and labour dispute period, sea freight is usually far cheaper, particularly for larger shipments such as the wide rolls of film. Furthermore, sea freight prices are less volatile than the air freight, and novel expedited sea freight services can also offer quicker transit times (George, 2013). The first option was using air freight to ship the film rolls via air freight. The second option was using sea via East Coast Ports and West Coast Ports. The labour dispute had escalated into a slowdown, which led to a substantial reduction in handling to 10-18 containers. The West Port was still operational, but there were delays in handling the shipment. To counter the delay, part of the shipment could be shipped via the East Ports in Canada or Mexico.

The Feasibility of the Air Freight Option

The air freight was faster than the sea, but it was more costly than the sea option. In addition to higher transport and other costs associated with changes in the shipping plan and program cuts, the use of air transport would lead to a decline in equipment activation, surge in cutting scrap rate, excessive labour, and added managerial issues. The maritime transport portion of the CHX supply was an estimated 17 days, whereas the airfreight option was only seven days. Hence, there would be a further reduction in the company’s day sales inventory from 50 days to 40 days. The labour dispute had coincided with the higher demand from the company’s external downstream supply chain. Despite the higher costs, the use of the airfreight would lead to faster production, minimal waste, prompt deliveries, and higher revenues.

Conclusion

Air shipping was presented as a feasible but costly option as it was 9 to 10 times more expensive than the sea shipping. However, airfreight was the optimal solution since the CHX used a lean production system with low inventories of raw products. The decision to use airfreight was based on the fact that the raw materials would be delivered to Xiamen within seven days, which would guarantee an adequate supply of materials and eliminate any possible backlog of deliveries or loss of business the competition. The relative costs of airfreight versus regular sea transport would be calculated based on the business opportunities that would be lost like market or losses accrued from an interruption in production like unused capacity (Christopher, 2016). Overall, air freight use would be used as a temporary measure to ship the film rolls to support timely production and delivery to customers while safeguarding the large market share.

References

Bonadio, B., Huo, Z., Levchenko, A. A., Pandalai-Nayar, N., & Centre for Economic Policy Research (Great Britain),(2020). Global supply chains in the pandemic. London: Centre for Economic Policy Research

Burley, R., & Ryerson Image Centre (Toronto, Ont.). (2012). The disappearance of darkness: Photography at the end of the analog era. Princeton Architectural Press.

Christopher, M. (2016). Logistics & supply chain management: Pearson.

Chopra, S. (2020). Supply chain management: Strategy, planning, and operation. Pearson Education Limited.

George, R. (2013). Ninety percent of everything: Inside shipping, the invisible industry that puts clothes on your back, gas in your car, and food on your plate. New York, NY: Metropolitan Books.

Kodak’s Health Group (2007, January 10). Kodak to Sell Health Group to Onex for up to $2.55 billion.https://web.archive.org/web/20071013211309/http://kodak.com/eknec/PageQuerier.jhtml?pq-path=2709&gpcid=0900688a8064b37b&ignoreLocale=true&pq-locale=en_US&_requestid=405

Komori, S. (2015). Innovating out of crisis: How Fujifilm survived (and thrived) as its core business was vanishing. Stone Bridge Press.

Lahman, S. (2015, January 16). Lahman: Carestream our best-kept secret.https://www.democratandchronicle.com/story/money/columnist/lahman/2015/01/23/lahman-carestream-rochesters-best-kept-secret/22241797/

Morana, J. (2018). Logistics. London, UK: ISTE, Ltd.

Onex Corporation. (2019). Annual Report. https://www.onex.com/static-files/1088c10b-71e9-4e65-b6c5-587d68b95d3a

Soergel, A. (2016, February 23). Economy Still Reeling from West Coast Slowdown. https://www.usnews.com/news/articles/2016-02-23/a-year-later-west-coast-labor-disputes-cost-still-unresolved.

Vachon, S., Zhiduan X, & Gao, D. (2019). Carestream Health Inc.: When Disruption Hits a Lean Supply Chain. Ivey Business School Foundation.

Wilson, L. (2015). How to implement lean manufacturing. New York: McGraw-Hill.

Zylstra, K. D. (2013). Lean Distribution: Applying lean manufacturing to distribution, logistics, and supply chain. Hoboken, N.J: Wiley.

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