In this assignment, you will analyze various suppliers and select an optimal supplier based on a real-world supply chain management case study. Review Case 12-1, "Loren Inc.," on pages 354–358 of yo
Case 12–1
Loren Inc.
On June 15, Brent Miller, raw materials buyer, had to prepare his recommendation for Loren’s annual hexonic acid requirements. Four suppliers had submitted substantially different bids for this annual contract to commence August 1. Brent knew his recommendation would involve a variety of policy considerations and wondered what his best option would be.
COMPANY BACKGROUND
Loren (Canada) was the Canadian subsidiary of a larger international chemical company. The company sold both consumer and industrial products and had over the years established an excellent reputation for quality products and marketing effectiveness. This was evidenced by a substantial growth in total sales and financial success. Total Canadian sales were approximately $800 million and after-tax profits were $40 million. Raw material and packaging costs were about 50 percent of sales.
PURCHASING
Brent Miller, a recent graduate of a well-known business school, knew that purchasing was well regarded as a function at Loren. The department was staffed with 12 well-qualified persons, including a number of engineering and business graduates at both the undergraduate and master levels. The department was headed by a director who reported to the president. It was organized along commodity lines, and Brent Miller had recently been appointed raw materials buyer reporting to the manager of the chemicals buying group. The hexonic acid contract would have to be approved by his immediate supervisor and the director of the department.
Brent was aware that several Loren purchasing policies and practices were of particular importance to his current hexonic contract decision. The purchasing department had worked very hard with suppliers over the years to establish a single-bid policy. It was felt that suppliers should quote their best possible offer on their first and only quote, and all suppliers should be willing to live with the consequences of their bid. Long-term supplier relations with the best possible long-term opportunities were considered vital to the procurement strategy. Assured supply for all possible types of market conditions was also of prime concern. Multiple sources were usually favored over single sources where this appeared to be reasonable and where no strong long-term price or other disadvantages were expected. Frequent supplier switching would not be normal, although total volumes placed with suppliers might change depending on past performance and new bids. Brent recognized that any major departure from traditional practice would have to be carefully justified. Exhibit 1 shows the four prime objectives of the purchasing department and Exhibit 2 contains excerpts from the company’s familiarization brochure for new suppliers.
EXHIBIT 1 Purchasing Objectives
The basic objectives for the Loren purchasing department are:
A) Assurance of Material Availability. The major objective of purchasing must be the guarantee of sufficient supply to support production requirements.
B) Best Value. Loren recognizes that value is a combination of price, quality, service, and that maximum profitability can only be obtained through the purchase of optimal value on both short- and long-term basis.
C) An Ethical Reputation. All dealings must respect all aspects of the law and all business relationships must be founded on a sound ethical approach.
D) Gathering of Information. Purchasing involves a constant search for new ideas and improved products in the changing markets. A responsibility also exists to keep the company informed on industry trends including information on material supply and costs.
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EXHIBIT 2 Excerpts from Brochure for New Suppliers
The purpose of the information contained herein is to give our suppliers a better understanding of certain policies and practices of Loren. We believe it is important that we understand our suppliers and, in turn, that they understand us. As you know Loren believes in free enterprise and in competition as the mainspring of a free enterprise system. Many of our basic policies stem from a fundamental belief that competition is the fairest means for Loren to purchase the best total value. However, the policies and practices we want to outline here for you relate to Loren’s business ethics and the ethical treatment of suppliers. In brief, fair dealing means these things to us:
1. We live up to our word. We do not mislead. We believe that misrepresentations, phantom prices, chiseling, etc., have no place in our business.
2. We try to be fair in our demands on a supplier and to avoid unreasonable demands for services; we expect to pay our way when special service is required.
3. We try to settle all claims and disputes on a fair and factual basis.
4. We avoid any form of “favored treatment,” such as telling a supplier what to quote to get our business or obtaining business by “meeting” an existing price. In addition, all suppliers that could qualify for our business are given identical information and an equal opportunity to quote on our requirements.
5. We do not betray the confidence of a supplier. We believe that it is unethical to talk about a supplier with competitors. New ideas, methods, products, and prices are kept confidential unless disclosure is permitted by the supplier.
6. We believe in giving prompt and courteous attention to all supplier representatives.
7. We are willing to listen to supplier complaints at any level of the buying organization without prejudice concerning the future placement of business.
We also do not believe in reciprocity or in “tie-ins” which require the purchase of one commodity with another.
We believe that supplier relationships should be conducted so that personal obligations, either actual or implied, do not exist. Consequently, we do not accept gifts and we discourage entertainment from suppliers. Similarly, we try to avoid all situations which involve a conflict of personal interest.
HEXONIC ACID—RECENT MARKET HISTORY
Loren expected to use approximately 3,000 tons of hexonic acid in the following year. Requirements for the past year amounted to 2,750 tons and had been supplied by Canchem and Alfo at 60 and 40 percent, respectively.
Hexonic acid was a major raw material in a number of Loren products. Its requirements had grown steadily over the years and were expected to remain significant in the years to come. The availability of this material in the marketplace was difficult to predict. The process by which it was produced yielded both hexonic and octonic acids and the market was, therefore, influenced by the demand for either product.
Two years previously there had been major shortages of hexonic acid due to strong European and Japanese demand. Furthermore, capacity expansions had been delayed too long because of depressed prices for hexonic and octonic acid over the previous years. During this period of shortage, both of Loren’s suppliers, Alfo and Canchem, were caught by the market upsurge. Alfo had just shut down its old Windsor plant and had not yet brought its new Quebec City plant up to design capacity. At the same time, Canchem was in the midst of converting its process to accommodate recent chemical improvements, and they, too, found themselves plagued with conversion problems. Both companies were large multiplant companies in Canada and had supplied Loren for many years. The parent companies of both Alfo and Canchem had been faced with too high a demand in the United States to be able to afford any material to help meet the Canadian commitments of their subsidiaries. As a result, both Canadian suppliers were forced to place many of their customers on allocation. However, through considerable efforts both were able to fulfill all of Loren’s requirements. The increased prices charged throughout this period
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EXHIBIT 3 Hexonic Acid—Purchase History
Period
Total Volume Purchased
Canchem Percent Delivered/Cost
Alfo Percent Delivered/Cost
Three years ago
1,800 tons
50% $828 / ton
50% $828 / ton
Two years ago
2,200 tons
50% $1,176 / ton
50% $1,084 / ton
Last year
2,750 tons
60% $1,384 / ton
40% $1,296 / ton
fell within the terms of the contracts and were substantially lower than those that would have been incurred if Loren would have had to import offshore material. Quotations on such imports had revealed prices ranging from $1,920 to $2,880 per ton.
The past year was relatively stable with both producers running almost at capacity. Loren again had contracted its requirements with Alfo and Canchem, both of whom continued to perform with the same high quality and service to which Loren had become accustomed over the years.
For the past year, Brent’s predecessor had recommended a split in the business of 60 percent to Canchem and 40 percent to Alfo based on a number of factors. Important to the decision at the time was the start-up of the new Alfo plant. Alfo’s quotation of $1,292 per ton delivered offered a lower price per ton than Canchem’s at $1,384 per ton, but it had been uncertain whether the new plant would be able to guarantee more than 40 percent of Loren’s hexonic acid requirements. Currently, however, Alfo had brought their plant up to capacity and could certainly supply all of the 3,000 tons required, if called on (see Exhibit 3 for a recent history of hexonic acid purchases).
Brent thought that recently the hexonic acid cycle had turned around. Hexonic acid demand had eased and now it was octonic acid that was in high demand by the booming paint industry. Recent plant expansions by a number of suppliers had been completed. The overall result seemed to be a building of excess hexonic acid inventories. Brent believed this would be reflected in a buyer’s market in the coming year and looked forward to aggressive quotes from all potential sources.
MEETINGS WITH HEXONIC ACID SUPPLIERS
An important part of the buyer’s job at Loren was to become an expert in the materials purchased. Among other things, this meant keeping an open ear to the market and building strong relationships with suppliers. It was the buyer’s responsibility to assure that all information between buyer and seller would be completely confidential. The director of purchasing believed it was important to build a reputation so that suppliers could trust Loren purchasing personnel. On May 14, Brent sent out the hexonic acid inquiry to the four suppliers he believed had a chance of quoting competitively on the needs of the Hamilton plant. The two current Canadian suppliers, Alfo and Canchem, were included as well as two American companies. The deadline for bids was June 7 at 4 p.m. Brent knew that on receipt of the inquiry, supplier sales representatives would be eager to discuss it. Actually, he had two contacts before the inquiry was sent out.
MEETING WITH ALFO
Mr. Baker, sales representative of Alfo, met with Brent on April 20. He said that Alfo had unfilled capacity at its new Quebec City plant and he appeared eager to receive an indication of Loren’s future hexonic acid requirements. Mr. Baker informed Brent that he was aware of low-priced hexonic acid on the European market, but also made sure to emphasize that it would be uncompetitive in the Canadian market after the cost of duty and freight were added. Brent said it was a published fact that inventories were building in the United States as other hexonic acid users showed signs of easing their demands.
The meeting ended with the assurance from Brent that Mr. Baker would again receive an invitation to quote on the next period’s business.
PHONE CALL BY MICHIGAN CHEMICAL
Mr. Wallace, sales representative of Michigan Chemical, assured Brent over the telephone on April 30 that his company would be a contender this year. He said that Michigan Chemical would be represented by their Canadian distributor, Carter Chemicals Ltd., located in Niagara Falls, Ontario. Brent remembered that Michigan Chemical had a good record with Loren (U.S.). According to the U.S. raw materials buying group, Michigan Chemical had supplied close to 99 percent of its commitment in the recent period
