PRICING PROBLEM AT TIGER PLASTICS
After graduating from Auburn with a degree in Supply Chain Management, Sue joined Tiger Plastics, a small chemical manufacturer in Birmingham, Alabama. Her first position with the company was an assistant to a purchasing manager primarily focused on direct category research and planning. After two years of hard work in that job, she was promoted to a purchasing manager position with responsibility for buying chemicals used in producing the firm’s plastics products.
SITUATION: Sue sat at her desk reflecting on a sourcing problem. She was perplexed by a particular issue involving the purchase of a custom formulated ingredient named X-PAND which is used in the manufacture of plastic. The product was straightforward to manufacture and package so Tiger Plastics has approached this buy as a TRANSACTIONAL item and annually bids the contract on a price-only basis. As in previous years, Sue issued an RFQ to the five qualified suppliers requesting a pricing quote for the purchase of X-PAND for a one-year contract. All bid responses were to assume a requirement of 12,500 drums annually and were to delivered to the Tiger Plastics’ plant in Birmingham. Per the RFQ schedule, yesterday morning she opened the bid quotes and documented the following information:
X-PAND QUALIFIED SUPPLIER Price / Drum Delivery Charge
Alabama Chemical $ 312.00 $5.50 per drum
Rocket City Industries $ 297.00 $8.25 per drum
Mobile Plastics $ 323.00 $9.00 per drum
Quad-Cities Chemical $ 332.00 $8.50 per drum
Montgomery Supply, Inc. $ 340.00 $7.25 per drum
As can be seen, Rocket City Industries was the low bidder for the fifth straight year. On the face of the issue, the decision to award the business to Rocket City again seemed obvious. However, today the sales engineer from Alabama Chemical called and revealed some important information – Alabama Chemical nor any other of the qualified suppliers would ever be able to beat Rocket City’s pricing due to the one-time setup cost for producing the ingredient X-PAND which he estimated to be $750,000. He went on to say that with the uncertainty of obtaining follow-on orders, his firm would have to depreciate the setup cost over the life of the contract or 1 year which was included in the pricing. Sue checked with the other unsuccessful bidders and they all said essentially the same thing: $700,000 – $850,000 in setup cost was required to compete and that the pricing quote included this cost.
Sue has just completed a review of the purchase history of X-PAND. She noted that in the previous bid processes, Rocket City’s original bid (5 years ago) was $202.00 per drum, $3.00 lower than the second lowest price. Since then, bid prices had increased annually reflecting a cost growth in the materials required to produce the chemical ingredient. Each year, Rocket City’s prices were $3.00 to $15.00 per drum lower than those of the unsuccessful competitors.
Sue was sure that the fundamental requirements for a competitive bidding process had been satisfied yet she also wanted to make sure the integrity of the process was upheld and something in this situation did not seem right.
ASSIGNMENT: You are (in theory) to take on the duties and responsibilities of Sue. The assignment is to prepare a recommendation to your boss (the Purchasing Director) stating what Tiger Plastics should do next in placing the X-PAND ingredient business with a supplier. At a minimum, your response must include the following information.
• Define the current bidding situation and contrast it to the initial process five years ago (AS-WAS to AS-IS).
• Estimate is the contract cost differences to Tiger Plastics considering the RFQ bid conditions that are in-place.
• Re-examine the RFQ bids in-light of the new information concerning tooling cost. Does this change your thinking considering the profit motives of each qualified supplier?
• Define and recommend three alternative future (TO-BE) RFQ approaches to select the best supply source for the key ingredient X-PAND. You must provide a quantitative analysis for each alternative.
• Examine the current RFQ process for placing the X-PAND business and recommend changes (if any).
• Prepare a cover memo to the Purchasing Director defining Tiger Plastics’ options and recommendations. You must also prepare a Next Steps (action plan) supporting your recommendation.
All estimates must be prepared / calculated using an Excel spreadsheet which must be submitted with the report.
Case Analysis 2 Due Date: April 18, 2013