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10 point font, single spaceRead the provided case study and answer the following question:What needed to be done in terms of reorganizing the project to emphasize quality and sustainability? case_2_esquel_culture_case_copyedited_and_revised_march_24_2019.pdf Unformatted Attachment Preview UST-UNEDITED CENTER FOR MARKETING AND SUPPLY CHAIN MANAGEMENT SURI GURUMURTHI RONALD LAU Esquel Group: Fostering a Culture of Excellence It is not that we don’t care about profits. Our focus, however, is on creating value. —Teresa Yang, Vice Chairman of Esquel Group1 In the summer of 2017, Teresa Yang, Vice Chairman of Esquel Group, found herself confronting a thorny technical problem within the nascent Integral project in Guilin, China. More than simply a technical one, this issue threatened to question the very core of Esquel’s self-defined 5E Culture (ethics, environment, exploration, excellence, and education) and its commitment to sustainability and social responsibility. The Integral project was conceived in 2012 as the newest manufacturing site for Esquel’s yarnspinning and garment-manufacturing operations, with initial capital outlay of RMB2bn (or USD300mn). The explicit purpose to locate and build this new plant was to showcase Esquel’s value system to its internal and external stakeholders. This was to be done by designing and running textile and garment assembly operations in one of the most beautiful regions of China, in ways that preserved the delicate local ecology. The campus and operations were designed to upgrade the skill and competence of employees while providing the safest and most wholesome working environments possible for the 2,500 employees at the site. The technical issue had surfaced in a recent meeting the leadership team (including Chairman, CEO, and Teresa herself) had with the General Manager of the Integral project, Bruce Lin,2 who had been heading the construction and development efforts at the site. The foundations of several buildings on the Integral campus were showing defects that, while not critical at this stage, could prove potentially problematic in the decades to come. The foundation issues also threatened to hamper the quality of operations by making the floor uneven and unsuitable for high-precision equipment and operations. While the current state of the foundation would pass local building codes 1 2 Interview with authors, August 2018. Some names have been masked to ensure anonymity. This case was prepared by Professor Suri Gurumurthi and Professor Ronald Lau solely as a basis for class discussion. The authors may have disguised certain data to protect confidentiality. Cases are written in the past tense; this is not meant to imply that all practices, organizations, people, places or facts mentioned in the case no longer occur, exist or apply. Cases are not intended to serve as endorsements, sources of primary data, or illustration of effective or ineffective handling of a business situation. The authors thank Ms. Teresa Yang, Ms. Bessie Chong, Mr. Wesley Choi, and Mr. Edgar Tung, among many other executives at Esquel for their helpful comments and inputs. To order copies or request permission to reproduce materials write bmcase@ust.hk or visit www.bm.ust.hk/cbcs. © 2019 by the Hong Kong University of Science and Technology. This publication may not be digitized, photocopied or otherwise reproduced, posted, or transmitted without the permission of the Hong Kong University of Science and Technology. Last edited: 20 February 2019 HKUST Business School Thompson Center for Business Case Studies and requirements and, hence, would pass inspection by local authorities, the foundation would still fall short of Esquel’s internal standards for safety and quality of operations. Even more troubling to the leadership team was that the early warning signs and risk indicators of these foundation defects either were completely ignored or, even worse, were not communicated to the leadership team in a timely manner. If they had been identified and surfaced earlier, the remedial measures would have been far less expensive and less disruptive to the overall project plan. The leadership team rightfully saw this as a communications and management failure. More broadly, these defects and the subsequent communication failure showed that there was still a gap between how the company’s 5E Culture was framed or stated by the leadership team, and how it was practiced in these newer locations. The leadership team perceived this delay in disclosing material risks to the project as an ethical failure, while also damaging and counter to the central philosophy of the Integral project. The leadership team then chose Teresa in late 2017 to assume a more direct role to address the immediate issue of improving the technical and managerial performance of the construction and development efforts at the Integral site. To initiate further soul searching, an internal review was first conducted within the leadership team. This was followed by a joint review with the senior management teams and, finally, with the frontline employees. The aim was to understand how to translate the company’s high standards and commitment to its culture of excellence to the realities of high-pressure projects and operations on the ground. Esquel Group The Esquel Group was founded in 1978 in Hong Kong and had become the world’s largest premium woven-cotton shirt manufacturer, with 57,000 employees across four continents. Esquel operated as a vertically integrated textile and apparel business and its manufacturing footprint started all the way from high-quality cotton farming, ginning, yarn spinning, weaving or knitting, and extended to apparel assembly and packaging. It manufactured and supplied over 110 million shirts a year for the world’s top brands including Tommy Hilfiger, Hugo Boss, Ralph Lauren, Lacoste, and Nike. In recent years, Esquel had also repositioned and introduced its own brands, PYE and Determinant, for retail and distribution at the higher end of the Asian market. The company was completely owned and controlled by family. The leadership team mainly comprised key family members such as Marjorie and Teresa as well as outside hires, including the CEO, John Cheh. Esquel’s vertically integrated garment manufacturing was based predominantly in China, particularly at its Gaoming plant in southern China, a few hours by ferry from the corporate headquarters in Hong Kong. The extra-long staple (ELS) cotton production, ginning, and spinning operations were conducted in the northwestern Xinjiang Province of China. The Gaoming operations were the most extensive and included a specialty yarn-spinning mill, fabric mills, two garment production factories, R&D facilities, and an accessories factory [see Exhibit 1]. The Gaoming complex also included an independent company-run power plant that not only supplied a portion of the operation’s energy but, more importantly, provided a steady and low-cost supply of steam for the fabric production process. A highlight of the Gaoming complex was the wastewater treatment facility that allowed Esquel to set up fabric mills at that location. The company also had multiple garment production factories close to Shanghai as well as some facilities in Vietnam, Malaysia, Sri Lanka, and Mauritius. For the most part, these facilities outside of China served a historical purpose of managing quota restrictions for export to the United States and 2 HKUST Business School Thompson Center for Business Case Studies Europe. The company aimed in the long run to double its investment in China, counter to the prevailing trend among garment manufacturers to relocate to lower-cost regions of Asia and Africa. “Making a Difference” at Esquel Over the years, Esquel gradually expanded its scope of operations from manufacturing to a full range of activities, from cotton farming to retail business. This unique vertically integrated supply chain structure allowed Esquel to have complete control of the entire supply chain to ensure highquality products. To ensure all aspects of operations were consistent throughout, a strong corporate culture was needed and subsequently established to uphold Esquel’s value system and organizational effectiveness through a number of business and people practices. While competition in most of the apparel industry had been based on price, Esquel positioned itself as a quality vendor with a corporate mission of “making a difference” that emphasized operational excellence and corporate responsibility. This approach helped Esquel develop a strong business relationship with the more demanding customers and global brands. Esquel recognized people as the key to its business success. With its diverse operations in different regions in China and many countries, it had been a challenge to effectively share the company’s goals, beliefs, and expectations with the employees. Esquel valued talent and ensured that all employees were informed of the guiding principles of the 5E Culture [see Exhibit 2]. The 5E Culture was a set of guiding principles that captured the most important elements of the company’s business philosophy and values in five areas: ethics, environment, exploration, excellence, and education. By embracing the idea of “making a difference,” management at Esquel realized that it must strive for continuous improvement and for increased efficiency in the highly competitive apparel industry. However, no one in the organization should compromise those fundamental values as stated in the 5E Culture in a rush for financial returns. In addition, the company had instituted a Sustainability Council in 2013, comprising academic and internal company leaders, and had set out to systematically look for ways to have a positive impact on its people, products, the planet, and the community. The results had been impressive: Esquel demonstrated across-the-board reductions in energy consumption, water consumption, and effluent emissions [see Exhibit 3]. The press and the apparel industry had also recognized and commended Esquel for its positive contributions to its global workforce and local communities. Remarkably, all these efforts had been largely “win-wins” for the company, with the company booking significant cost savings and efficiency improvements along the way while growing the business considerably while doing so. The next challenge the leadership team set forth for the company was to make a bold statement on sustainable garment manufacturing in one of the most picturesque and unsullied regions of China: the town of Guilin, in Guangxi Province of southwest China. If the leaders could prove that one of the most polluting industries could establish large-scale operations and do so without impacting the environment, all the while defining a model for a sustainable supply chain for future generations of Chinese and global manufacturers, Esquel could set a precedent that would be a lasting and sustainable contribution to both its employees and to the industry. 3 HKUST Business School Thompson Center for Business Case Studies The Integral Project While the efforts at Gaoming and other facilities within the Esquel network had paid clear dividends and yielded significant results, the senior leaders at Esquel felt that the time had come to increase the stakes in the sustainability conversation. They felt that rather than making sustainability a key success requirement for its production processes and supply chain, the time had come for sustainability and environmental awareness to be a central objective for its supply chain. They wanted to change the perception of manufacturing as an industry that had been highly polluting and create a model factory that would demonstrate that production facilities and processes could be designed with sustainability as a central theme while achieving profitability and adding value to its community at the same time. To this end, Esquel had invested RMB2bn (or USD300mn) in 2015 in a new plant in the picturesque region of Guilin that featured advanced robotics and an ambitious zero-discharge production process. Esquel acquired a total of 57 hectares (or 140 acres) of land in Guilin in 2012, and construction on the new plant began in June 2015. The Integral concept aimed to bring together several themes borrowed from the Buddhist concept of the continuous pursuit of perfection: greenery in nature, a focus on culture and employee well-being, innovation, collaboration, care for the community, work-life balance, efficiency, excellence in quality, and sustainable development. For example, although the land acquired for the Integral project was left in such a poor state by the previous brick-making factory at the location, Esquel instituted measures to return the land to its natural state as a nesting spot for migratory cranes by allowing a fresh-water lake to form at the center of the site. For the factory itself, Esquel designed the facilities to operate with as much natural sunlight as possible and with recycled, locally sourced materials such as bamboo and green bricks (bricks that allow for more air flow and natural cooling and insulation). [See Exhibits 4 and 5 for some highlights from the Integral project site at Guilin, and the spirit of harmony underlying the Integral project.] The site was also meant to be a small-scale R&D center that focused on environmentally friendly natural dyes. The site had allocated space for a garden in order to grow natural dye plants. Other initiatives at the site included discussions with Peking University to study critically endangered species such as Chinese turtles. Integral was designed to be an eco-regeneration experiment to see how the site could welcome back several local species that were the victims of unsustainable development. The plant was to be engaged in yarn spinning and garment production [see Exhibit 6 for an overview of the basic spinning operations]. For the latter, the Integral concept aimed to replace traditional sewing machines that could do only one operation with one worker, with state-of-the-art internally engineered machines that could do multiple assembly steps with the same worker [see Exhibit 7]. The idea was to plan for and build a workforce for the future that was more highly skilled and more flexible. For example, at the spinning facility at the Integral site, Esquel had only two workers manning five spinning lines, only a fraction of the number that more traditional spinning operations needed. This was achieved with more automated machines and by spending more time, money, and effort on training younger technicians. The average worker at this new plant was expected to possess at least a college diploma or higher. For example, at the spinning operations, the scope of work was not only to produce the yarn, but also to maintain and reprogram the equipment on those lines. These workers were brought in and were involved right at the stage of installation of the machines by the machine vendors and experts, so they knew the ins and outs of the equipment and the technology. The paradigm was to mold the future 4 HKUST Business School Thompson Center for Business Case Studies Chinese labor force to be more flexible and productive, thereby reducing employee turnover and increasing empowerment and morale. Esquel also hoped to make the overall operations more productive, with only a third of the typical head count at a facility with comparable output capacity. Finally, the focus not only was on the manufacturing operations, but also on creating a healthy and wholesome work environment. For example, the dining hall was designed to provide more healthy and balanced food options for employees at a subsidized rate. Esquel was working with the local hotel and catering school to prepare menus that were at once different and healthier, and to hire chefs that knew not only how to cook but also how to manage the complex operations of serving 2,000 employees daily. The company had also developed an internal application for mobile devices, for ordering food in advance so as to minimize wait times at the dining facility. The hourlong lunch break was obviously precious for employees, and long wait lines at the dining facilities could be demoralizing. This application was also designed with the objective of reducing food waste with preorders. At an early stage of the development phase, however, Esquel was unable to find internally the key project manager with the commensurate experience and skills to manage such an ambitious venture. It was not often that the company had embarked on a project of this scale and ambitious scope. Hence, Esquel had to look externally for such a candidate, and eventually recruited Bruce Lin, a welleducated professional with significant international experience. Bruce also had considerable experience managing large and complex projects and had a reputation in the real estate and development world for delivering projects on time and within budget. Bruce also had considerable experience managing development projects in mainland China, but as the company eventually realized, the supply chain and vendor management skills required in the mainland were quite different from managing similar projects in Hong Kong. Hence, the company came to rely on the experience and expertise of their new recruit, Bruce, to guide them through this process. It also set up an organizational structure for the Integral project, comprising several senior managers located at the Guilin site, who supported and reported to Bruce. These managers had several years of experience at Esquel and were well immersed in Esquel’s 5E Culture. Furthermore, top leadership in Hong Kong also set up a dual-reporting structure for these Guilin-based senior managers, whereby they not only would report to Bruce but had the authority and access to report to top leadership in Hong Kong. Top leadership paid frequent visits to the Guilin site, at times devoting more attention to the Integral project than to other facilities and plants in the Esquel network. Finally, Bruce and the senior managers working on the Integral site were called to Hong Kong at periodic intervals to brief the top leaders on the status and progress of work on the Integral site. Construction Problems at the Integral Site In mainland China, the bidding process for contracts and the vendor commitments were notoriously opaque, with initial schedule and cost estimates that were overly aggressive. Changes to the scope and cost were almost guaranteed after the fact, with both vendors and project owners tacitly padding their own plans to account for these changes. Strict supervision was also required of the outsourced construction activities, with vendors often loath to report accurate progress of the project. The construction process required that the design, architecture, building permits from local authorities, and the bidding for contracts and materials from vendors be completed before major building activities could begin. Building and construction were not the core competence for Esquel, since the company did not build new plants regularly and the senior leadership team was not 5 HKUST Business School Thompson Center for Business Case Studies technically versed enough in the subject to have discovered this problem earlier. The company did have some operational managers in other locations within the Esquel network who had some limited experience in construction of those plants and who were well immersed in the company’s 5E Culture. Vendors were selected for cost and time considerations, rather than for scope, and on the basis of the overall quality standards required by the leadership team. Furthermore, in many cases, the lowestcost construction contract bids were selected, rather than on an overall balanced scorecard of vendor attributes. While this caused some concern for the Esquel leadership team, which wanted an equal emphasis on quality, Bruce reassured them that this was the norm in the construction industry. Bruce asserted that vendors in China expected the scope and requirements to shift and that they wou ... Purchase answer to see full attachment