Case Studies- Seats for the Executives and Pricing can be Problematic
Case Sutdy 1: Seats for the Executive Question
SEATs for the Executive Questions
In June 2002, Tom Dewey, supply manager for Builder’s Bank, Inc.’s (BBI) New York office, wanted to resolve a set of problems arising from the purchase of eighty chairs for the executive boardroom.
General Company Background
BBI was a large international bank with operations throughout the world. It had recently purchased an office building and had hired the well-known architect Peter Tropper to do the major design and renovation plans.
The Supply Department
The supply department in the New York office was responsible for all local purchases, in addition to a few major purchases for the international offices. The bank did not have an approved supplier list; an invitation to bid was an indication that the potential supplier was considered qualified.
The architectural firm of Peter Tropper was hired to redesign the entire building, including the selection of furniture. Once the design was completed, a working group, including the president and vice president, had approved the design, including selection and color for all major furniture. The supply department did not participate in this process.
In June 2001, Peter Tropper sent a specification sheet to the supply department for all purchases, which included model number and manufacturer. Suppliers would bid on the same manufacturer, with no substitutions allowed. Although the department had the option to split the order between suppliers, Tom Dewey decided to order through a single source.
In late June, the working group asked Tom Dewey to submit a budget of what the bank would have to spend to complete the renovation during fiscal 2002. Therefore, in early July, Tom Dewey submitted a request for proposal (RFP) to ten potential suppliers, all of which responded.
When the bids were received in mid-August, the working group reviewed the bids and rejected them as being too high. The working group and Peter Tropper agreed to a scaling down of the work proposed. A week later, Tom Dewey sent new specifications to the same ten suppliers, of which eight responded. The low bid on the RFP was $1.3 million, submitted by ABCO Furniture, a large local furniture dealer. In September, the working group authorized Tom Dewey to purchase major furniture and the chairs for the executive boardroom totaling $400,000.
Chairs for the Boardroom
Among the items on the RFP were eighty leather chairs for the executive boardroom. These chairs had a single pedestal and a fixed jury base, which would not allow the chairs to rock or swivel. Twelve of the chairs, costing $1,500 each, required installation in concrete, with the remaining sixty-eight chairs, costing $1,300 each, having bases that could be installed on wood flooring. The RFP made no mention of installation.
In February 2001, ABCO Furniture informed Tom Dewey that the chairs were ready.
Since the boardroom was still under construction, he arranged to have ABCO store the chairs, with the agreement that he honor the invoice in March. The invoice was paid in late March and ABCO stored the chairs until they were delivered on the morning of April 22, 2001. When the chairs were delivered, the construction manager talked with Peter Tropper regarding installation. The construction manager told Tom Dewey that the architect had said he would give detailed drawings regarding installation of the chairs, although the drawings had not been received. When Tom Dewey asked Peter Tropper about the problem, Peter indicated that Supply, having bought the chairs, was responsible for installation. Peter Tropper also stated that he had informed Supply, by letter in late March, that Supply was responsible for installation. At the instruction of Tom Dewey, ABCO hired a local installer to install the chairs. The installer had seen neither the chairs nor the boardroom before. The installer arrived late on the 22d and discussed the installation procedure with the construction manager. They concluded that they would use expansion bolts in the concrete and wood screws in the platforms. Both the construction manager and the installer agreed that long lag screws could not be used since the platforms were elevated, with electrical conduit underneath.
After installing a few chairs on the morning of April 23d, the installer and construction manager concluded that the wood screws would not hold. Since the chairs were rigid, the smallness of the diameter of the base was insufficient for the torque applied to the base when the chair was used. Since no adequate support was designed into the floor when the room was remodeled, other support alternatives had to be evaluated.
The construction manager contacted the field representative of Peter Tropper and explained the problem. Peter Tropper indicated that toggle bolts were required. As a check on the architect, the construction manager called the furniture manufacturer in Pennsylvania. The call provided no additional information. The manufacturer’s service representative stated that since they were not directly involved, they were unable to make suggestions. The representative did state, off the record, that the base was too small for the chair.
The installer, even after installing the toggle bolts, discovered that the chairs were still coming loose. In addition, the expansion bolts, installed in the concrete, would also eventually work loose. However, with the upcoming board meeting on May 6, 2001, the construction manager and installer agreed that the chairs could be used temporarily. The supplier, after discussing installation costs with the installer, told Tom Dewey that the current bill for setting up the chairs would be around $4,000. However, for the installer to do the job correctly would cost an additional $15,000.
The May 6 board meeting went smoothly, although many board members noted the instability of the chairs. In June, the executive directors expressed concern over the need to fix the chairs—and quickly. However, Tom Dewey’s frequent discussions with Peter Tropper had yielded no results. The installer billed ABCO Furniture at the end of May. In late June, Tom Dewey received a bill from ABCO for the installation of the chairs, and a copy of the invoice received by ABCO from the supplier. Tom Dewey recognized that BBI had not allowed for any additional installation costs and wondered what the best way to resolve the problem would be.
1. What alternatives are open to Tom?
2. What is the best course of action now?
3. Who is responsible for the present situation?
4. What should Tom have done to avoid the present situation?
Case Study #2- Price can be Problematic
Please read the following case study and answer the questions at the end.
Sue Jones sat at her desk reflecting on a pricing problem. Sue was a graduate of State University, where she majored in materials management. Since joining the small manufacturing firm of Prestige Plastics in Des Moines, she had been promoted from assistant supply manager to supply manager. She was responsible for buying the chemicals used in producing the firm’s plastic products.
Sue was really perplexed by a particular procurement involving the purchase of X-pane, a chemical that was formulated specifically for Prestige Plastics. Thirty-one days ago, she forwarded a request for bids to six suppliers for Prestige’s estimated annual requirement of 10,000 drums of X-pane. Yesterday morning, Sue opened the five bids that had been received.
The bids, F.O.B. Des Moines, were as follows:
Price per drum ($) Total price ($) for est. ann req of 10,000 drums)
Greater Sandusky Chemical 312 3,120,000
Chicago Chemical Co. 297 2,970,000
Tri-Cities Chemical 323 3,230,000
St. Louis Industries 332 3,320,000
St. Paul Plastics 340 3,400,000
The Chicago Chemical Company was low bidder for the fifth straight year. On the face of
it, a decision to award the annual requirements contract to Chicago Chemical looked obvious. The
day after the bid opening, the sales engineer from Greater Sandusky Chemical threw Sue a ringer.
He said that no one would ever be able to beat Chicago Chemical’s price. His firm estimated that
setup costs associated with producing X-pane would be approximately $750,000. He went on to
say that due to the uncertainties of follow-on orders, his firm would have to amortize this cost
over the one-year period of the contract to preclude a loss.
Sue checked with the other unsuccessful bidders. They said substantially the same thing:
$700,000 to $850,000 in setup costs were included in their prices.
Next, Sue looked at the history of past purchases of X-pane. She saw that on the initial
procurement five years ago, Chicago Chemical’s bid was $202 per barrel, $3 lower than the
second lowest price. Since that time, bid prices had increased, reflecting cost growth in the
materials required to produce X-pane. Each year, Chicago Chemical’s prices were $3 to $15 per
drum lower than those of the unsuccessful competitors.
Sue knew from her supply management course at State University that when five
prerequisites were satisfied, under most conditions, competitive bidding normally resulted in the
lowest price. She also knew that it was important to maintain the integrity of the competitive
bidding process. But Sue felt a strong sense of uneasiness. Something did not seem right.
1. Under what conditions does competitive bidding normally assure the buying manager of obtaining the lowest possible price?
2. Based on the case, define the “competitive bidding trap.” Under what conditions may a buying firm fall into the “competitive bidding trap”?
3. Which situation existed at Prestige Plastics for the first contract? Why?
4. Which situation existed at Prestige Plastics for the current buy? Why?
5. Describe three approaches to overcoming Sue’s pricing problem. Support with a quantitative analysis.