Cutting and Polishing Centers
The Four C’s – Cut, Color, Clarity, and Carat weight – are used to further classify
diamonds at a production facility, located in cities like Dubai, New York, Johannesburg,
Hong Kong, London, Tel Aviv, Antwerp, and Mumbai. Diamond defects and errors can take
many forms in this industry: impurities, optical flaws, mixed colors, crystal flaws, cutting
mistakes, and non-ethical diamonds. The cutter must decide how best to cut the rough
diamond to remove defects, keep the most carat weight possible, and make the diamond as
perfect as possible.
Normally, by the end of this stage one-half to two-thirds of the rough diamond is
waste. For example, a ten-carat rough diamond might result in a three- to five-carat diamond
7
*This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management,
Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication
may be reproduced, stored in a retrieval system, or transmitted in any form or by any means – electronic,
mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @
January, 2015, Fort Myers, Florida.
that can be set in customer jewelry. Much of the waste is used in industrial diamond
applications or by the cutters themselves for cutting and polishing.
During the Great Recession smaller diamond cutters and polishers went out of
business while larger firms gained market share. Cutting and polishing costs-per-carat range
from about $100 in Antwerp, New York, and Tel Aviv; to $10 to $50 in India, China, and
Thailand. The quality of a rough diamond can be enhanced or hindered by the way the rough
diamond is cut and polished. High-quality rough diamonds of over 20 carats almost always
go to the world’s best cutters and polishers.
Trading Centers
A current industry trend is the consolidation of cutting and polishing with trading
centers into a “diamond hub” in cities like New York, Tel Aviv, Antwerp, Dubai, and
Mumbai. Major producers like DeBeers sell most of their diamonds based on long-term
contracts to a select group of buyers and sellers. Long-term contracts provide price and
demand stability, predictable buyers and sellers, and large sales volumes. Trading centers
and producers are sometimes accused of forming price-controlled cartels by holding back
diamond stocks (reserves) to maintain retail prices. Another way to limit supply in the global
diamond market is for major producers to sell diamonds only to their “site holders.” A site
holder can be a company or individual who can only buy direct from major producers. If all
reserves of diamonds were released, supply would greatly exceed demand, and diamond
prices would plummet.
However, new sales channels are emerging that take advantage of Internet capabilities
such as on line auctions and virtual sales platforms. Sales take many forms such as face-toface negotiations, take-it-or-leave it on line offers at fixed prices, live on line auctions with
multiple bidding rounds, and time limited on line auctions. In addition, physical diamond
auctions take place at Sotheby’s and Christie’s.
Jewelry Manufacturing
Manufacturing transforms cut, polished, and graded diamonds into customer jewelry. Often
a custom setting for the stones includes pouring hot metal into a ring or jewelry mold; and/or
metal machine fabrication, milling, and polishing. Standard diamond ring production
8
*This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management,
Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication
may be reproduced, stored in a retrieval system, or transmitted in any form or by any means – electronic,
mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @
January, 2015, Fort Myers, Florida.
exhibits both job and flow shop characteristics while custom jewelry is a job shop. Diamond
defects can be hidden by the clever design of customer jewelry. Here the jewelry artist or
customer designs how the finished diamond will be displayed. Over $50 billion in value is
added at the jewelry manufacturing and retail store stages.
Retailing
In the diamond value chain, Tiffany & Company and Cartier are two examples of luxury
goods retailers that enjoy high margins. The price per carat (value) of a typical diamond
usually increases eight to ten times from mining to retail store as each stage of the value
chain adds its profit margin. After the original sale, most diamonds don’t wear out so they
are resold (recycled) many times within the value chain. The “diamond is forever” slogan
also applies to generating repeat sale profits.
To further complicate customer- and trading-center buying decisions, diamond buyers
must cope with whether the diamond is synthetic. In one audit by the International
Gemological Institute with a sample of 1,000 stones over one-half were found to be synthetic
diamonds. Moreover, the synthetic diamonds had human-engineered flaws to make them
appear as natural stones. Only expert gemologists with special equipment can tell the
difference between a natural and synthetic stone.
From the viewpoint of natural diamond producers, synthetic diamond pollution is an
ever-increasing industry problem. A four-carat synthetic diamond might sell for a few
hundred dollars. In addition, synthetic diamond producers argue their diamonds are brighter
and clearer than natural stones, and the only true ethical diamonds.
The Kimberley Process Certification Scheme (KPCS)
A multitude of industry-related associations, governments, and corporations have
adopted quality and sustainability standards, trade regulations and laws, and certification
programs to ensure no conflict or blood diamonds enter their value chain. But diamond
traceability along the value chain is very poor. Few diamond producers or retailers actually
investigate the route their diamonds take along the supply chain. Diamond smugglers and
corrupt governments often certify diamonds without complete investigations while worker
exploitation and environmental pollution continues.
9
*This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management,
Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication
may be reproduced, stored in a retrieval system, or transmitted in any form or by any means – electronic,
mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @
January, 2015, Fort Myers, Florida.
In 2003 in Kimberly, South Africa the KPCS was designed to certify rough diamond
shipments as “conflict-free” and prevent conflict diamonds from entering the value chain.
This initiative has been somewhat successful but fake KPCS certification documents have
been found throughout the value chain. A recent initiative is to etch a serial number on each
non-conflict diamond with a laser that is not visible to the human eye. The KPCS process is
criticized for focusing on front-room customer perceptions, not back-room supply chain
practices.
10
*This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management,
Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication
may be reproduced, stored in a retrieval system, or transmitted in any form or by any means – electronic,
mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @
January, 2015, Fort Myers, Florida.
Note: The instructor must assign the case question(s) below depending on what topics you
have covered, what the instructor wants to emphasize, and whether the questions are for
individual or team assignments or a capstone course project.
Case Discussion Questions and Chapter
I. Chapter 1: Operations Management and Value Chains
- Use one of the three value chain frameworks discussed in this chapter to
characterize the diamond value chain. How does this value chain gain a customer?
How does it create value? How does it keep a customer? - Research what major diamond producers are doing regarding social, environment,
and financial sustainability practices. Visit corporate annual reports, for example.
Provide two or three examples. - Write a short two-page paper on “blood diamonds” and/or “ethical diamonds.”
Define each and explain the positives and negatives for this social sustainability
issue. What should be the role of diamond producers? What is the role of
operations managers in this industry?
Chapter 2: Measuring Performance in Value Chains - What is the value of a loyal customer for a billionaire who frequents Hudson
Jewelers every February given the following information? She buys jewelry for her
extended family every other year when they visit Naples. Assume the following:
Customer retention rate – 80%
Contribution Margin = 0.55
Price per purchase = $200,000
Chapter 3: Operations Strategy - Define and draw the customer benefit package and state Hudson Jewelers’ strategy;
rank order its competitive priorities, order qualifiers, and order winners; and state
the ways they gain competitive advantage. - Evaluate a customer’s retail store experience in terms of search, experience, and
credence attributes. Provide some examples and explain why they can be classified
as search, experience, and credence attributes. - Define in detail the attributes of “value” when buying and co-designing a $50,000
11
*This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management,
Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication
may be reproduced, stored in a retrieval system, or transmitted in any form or by any means – electronic,
mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @
January, 2015, Fort Myers, Florida.
wedding ring. What creates a buying experience that would delight the customer?
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