Megan Mondale recently joined the supply department of Cupertini Industries (CUP
ID: 369797 • Letter: M
Question
Megan Mondale recently joined the supply department of Cupertini Industries (CUPERTINI ). Megan had been a supply manager in a machine shop in the nearby town of Clarence. While at the machine shop, she completed her MBA degree with a major in supply chain management. Her new job with CUPERTINI resulted in a handsome increase in salary and a great potential for promotion. Megan’s first assignment at CUPERTINI was supply manager for all purchased components for CUPERTINI ’s line of power mowers. Megan’s new boss and the individual responsible for hiring her was Gayton Lowery, the supply manager.
Megan received as her first major buying assignment the purchase of a metal housing for a 19-inch power mower. Her previous experience had given her a familiarity with drawings and specifications, particularly as they were related to sheet metal work. She was not disturbed at all by the magnitude of the assignment. It involved not only a high-priced assembly, but also a major investment in tools. Megan requested advice from Mr. Lowery as to those sources that could fabricate the housing at low cost. Mr. Lowery gave her the names, addresses, and contacts for four companies currently in the business of manufacturing this type of product, and recommended that they be sent drawings and specifications.
On receipt of the drawings, all the potential suppliers visited Miss Mondale to make sure that all the details were understood and to offer helpful suggestions as to ways in which the housing could be made at a lower cost. In the meetings that ensued, both Miss Mondale and Mr. Lowery discussed the details with the suppliers and the design engineer. At that time it was pointed out very clearly by Miss Mondale that this housing purchase was highly competitive, that other sources were also quoting on the same drawings and specifications, and that the power mower was a low- profit-margin item. Accordingly, the company was forced to make every conceivable effort by negotiation of design and price to purchase the housing at the rock-bottom price. She also pointed out that there would be substantial volume over a period of twelve to eighteen months, which
should make the business very attractive. In a few days following these separate meetings, quotations were received from the suppliers. Miss Mondale carefully reviewed them, with the resultant determination on her part to place the business with the lowest bidder who apparently would meet all the drawing and specification requirements. The low bidder, the Bullworth Iron Works, quoted $19.56. The next lowest bidder, the Madison Machine Company quoted $19.80. The other two companies were over $21.00 and were not given any consideration by Miss Mondale.
In the course of a discussion about the placement of this business, Miss Mondale was quite surprised to find that Mr. Lowery did not consider that the business was ready for placement. He contended that the price of $19.56 was too high, and that the business should really be placed with the Madison Machine Company. Miss Mondale argued with Mr. Lowery that, inasmuch as the suppliers had been told that they must bid at the lowest possible price, they had negotiated out all of the design features possible. The price must be right. She saw no reason for procrastination or further discussion. Mr. Hack-man, on the other hand, calmly stated that they were now in a position for the first time really to negotiate the purchase and that Miss Mondale should go back to the low bidders and tell them that their prices were too high and that they should submit new quotations. Miss Mondale stated that she was of the opinion that this was unfair to the Bullworth Iron Works. She felt the quotations were already based on the suppliers making a fair profit and that such a quotation might injure their opportunity to negotiate further business with these suppliers. Mr. Lowery agreed that any company that does not receive the business is apt to be unhappy regardless of the circumstances, but he would not agree that the question of profit should concern the buying firm. After all, no consideration was being given to the profitability of the power mower, which had already been clearly defined as marginal.
Mr. Lowery further explained to Miss Mondale that it was highly desirable for the business to be placed with the Madison Machine Company as the Bullworth Iron Works was already making all the other mower housings. Unless the company provided some split of the business, it would lose its negotiating effectiveness for future business (it being accepted by the suppliers that no one but the Bullworth Iron Works could get business from Cupertini Industries). Mr. Lowery further explained that the company was not in a position to pay Madison more than Bullworth and that the negotiations should be conducted to ensure not only that Madison Machine Company received the business but that it was the low bidder. The degree of determination on the part of Mr. Lowery that this must be true, and the lack of acceptance by Miss Mondale of the fact that it either could or should be done, resulted in Mr. Lowery taking over the completion of the negotiations with both the Bullworth and Madison companies.
The net result of this second-look negotiation was that the business was placed with the Madison Machine Company at a price of $18.60. The initial and revised bids are as follows:
Initial bid
Bullworth Iron Works $19.56 Madison Machine Co. $19.80
Second bid
Bullworth $18.75 Madison$18.60
Change
Bullworth–$0.81 Madison–$1.20
Miss Mondale was very upset on two counts: Her supervisor had proved that additional costs could be taken out of the part, and supplier relations had apparently not been damaged or disturbed.
1.Why was Mr. Lowery able to reduce the price? How did he know that a reduction was possible?
2.Did Miss Mondale employ competitive bidding or negotiation in getting the bids from the suppliers?
3.Can this type of buying/bidding approach be broadly applied to all commodities and industries?
4.Do you believe that either Miss Mondale or Mr. Lowery were right in disregarding the high initial bids submitted by the third and fourth companies?
5.Would you say whether supplier relations were damaged or disturbed
Explanation / Answer
1.
Mr Lowery was able to further negotiate as the market was competitive, he could indirectly provide insider information to reduce the bids to lure the vendors to go for the contract.
He played the card of providing more value to the vendor and in turn reduce dependence on one vendor and reduce the price.
He had enough experience and was the decision maker. So was more empowered and aware of the outcome.
2. Miss Mondale employed competitive bidding, without any negotiation and just fulfilling the requirements.
3. No here the market was competitive and the vendors bargaining power was low, in most cases the bargaining power and position to negotiate need not be so skewed.
4.Though the practice is common to disregard the initial high bids and consider the low ones for further negotiations but there is high chance particularly in this market scenario that the other vendors could have reduced their bids as well. So they should also have been considered in the negotiations phase.
5.Yes supplier relations were slightly disturbed as there was renegotiating for the final bid.but the impact was minimal as it was based on lower bids and each party had opportunity to win it.