EuroConstellation Electronics

"Welcome everyone. Robert, please turn on the televi- sion." Vice President of Global Procurement, Stefan Schrettle, started the meeting with these words. The com- ponents sourcing and procurement team had been hur- riedly assembled at Schrettle's request. Robert Schmidt walked to the control center of the rather cramped con- ference room and clicked the icons needed to project the BBC World News onto the screen at the front of the room. The face of a well-known anchorperson for the BBC filled the screen. While he talked, pictures of factory workers appeared.

The BBC had been repeatedly airing a special report focused on the working conditions at a large electronics sup- plier located in Mongolia, MongTronics. MongTronics had rapidly become one of the leading suppliers of electronic toys, subassemblies, and components to consumer goods manufac- turers around the world, including EuroConstellation Elec- tronics, the company that Robert worked for. The BBC was reporting that a worker at the MongTronics facility had com- mitted suicide a day earlier by throwing himself off the roof of the seven-story dormitory where workers were housed. Alarmingly, this was the ninth suicide at the factory in the past 12 months. A BBC correspondent was raising questions about the working conditions at MongTronics. Though the facilities were toured regularly by MongTronics' major customers, lit- tle was actually known about the policies and work practices employed at the company. The correspondent was interview- ing the general manager at the MongTronics plant. He had a concerned look on his face as he explained that worker safety and quality of life were important priorities for the company. The camera quickly cut to video of workers installing large nets around the dormitory walls to catch workers who might contemplate similar forms of suicide in the future.

After a few more minutes, Schrettle walked over to the control panel, turned off the projector, and raised the lights. He stated, "This is a serious situation, and we need to decide what, if anything, we can and should do about it. I'm put- ting Robert in charge of a task force to develop immediate responses to this situation, as well as a longer-term sourc- ing strategy for the parts we buy at MongTronics." As Mr. Schrettle spoke, the hairs on the back of Robert's neck stood up. He knew that this was an important assignment, and his first real opportunity to demonstrate his leadership skills. Since joining the company almost a year earlier, Robert had mostly been learning the ropes, as he participated in some sourcing trips to China and other locations in Eastern Asia.

Later that afternoon, Robert considered the facts that he had about the business that EuroConstellation did with MongTronics. EuroConstellation designed and assem- bled many different kinds of remote-controlled toys and equipment, including small robots, toy vehicles, and also monitoring and control systems for industrial equipment. Numbers from their ERP system showed that they had spent 25 million euros on purchases from MongTronics in the last year. MongTronics was their largest supplier, and this amount accounted for almost 30 percent of EuroCon- stellation's total materials purchasing spend. The items that EuroConstellation purchased included completely finished and packaged electronic toys (such as radio-controlled airplanes and cars), as well as a large number of subas- semblies and components that were assembled into fin- ished products by EuroConstellation's own factories. Low labor costs were the most attractive part of doing business with MongTronics. On average, Robert figured that his company was able to purchase items at about half the unit cost that they would pay from suppliers in Europe and the United States. Even after taking transportation and inven- tory costs into account, he figured that the Mongolian source still offered about a 30 percent cost advantage. On the other hand, labor costs were rising in the country; some analysts estimated that labor costs there would match those of low-cost Eastern European locations within five years.

As he dug into Internet and newspaper articles about MongTronics and the surrounding areas of Mongolia, Robert noted that most of the articles were quite positive regarding the economic benefits that the company had brought to a pre- viously depressed region of the country. Before the growth of MongTronics, the population in the area had very low stan- dards of living, at least from a Western perspective. Most people lived by subsistence farming or by raising horses. Many still lived as nomads in temporary shelters. Few individuals were educated beyond very basic levels. MongTronics had provided relatively high paying and stable employment for the people. In addition, it had built living quarters, a hospital, and schools for employees and their children.

Representatives from EuroConstellation had toured the MongTronics facility as recently as six months earlier. As Robert read the trip report written by the visiting team he noted that facilities were clean, processes seemed to be disciplined, and the workers seemed to be fairly satisfied with their conditions. In fact, the team had noted that the factory was a fine example of a lean operation.

Several questions floated around in Robert's head. How bad could this BBC report be for EuroConstellation? Was there a need for them to respond? How would continuing to do business with MongTronics affect them financially? Were there ethical issues to be considered too?

Questions

1. What are the possible ramifications of the BBC story for EuroConstellation's business prospects?

2. What is the socially responsible thing to do regarding future business with MongTronics?

3. Outline an action plan that Robert can give to his task force. What further information do they need? What actions, if any, should be taken immediately?