Case analysis

358 Purchasing and Supply Management

how Canchem’s second bid should be treated as part of his

hexonic acid contract deliberations.

QUOTE SUMMARY Brent prepared a quote summary to put all bids on an

equal footing (see Exhibit 4). To be able to compare

quotes fairly, it was necessary to examine the laid-down

cost of each of the four options. Brent realized he did not

have much time left and the unusual situation surround-

ing Canchem’s second bid gave him further concern.

Mr. Williams was expecting his written analysis and rec-

ommendation no later than June 17.

EXHIBIT 4 Quotation Summary: Hexonic Acid

Price

Spot Contract Terms

Alfo

Canchem

American Chemicals

Carter Chemicals (Michigan Chemical Material)

$1,296.00 / ton

Bid 1 $1,384.00 / ton

Bid 2 $1,192.00 / ton

$1,607.72 / ton

$1,268.00 / ton

$1,296.00 / ton

$1,384.00 / ton

$1,192.00 / ton

Min. 1,050 tons

$1,204.00 / ton

Min. 750 tons

$1,268.00 / ton

Min.2,250 tons

$1,192.00 / ton

Min. period: 1 year Min. volume: — Price protection: 90 days Notice: 15 days

Min. period: 3 years (Bid 2) Min. volume: 1,000 tons Price protection: 30 days Notice: 30 days

Min. period: 1 year Min. volume: Stated Price protection: Firm Notice: —

Min. period: 1 year Min. volume: 750 tons Price protection: 90 days Notice: 15 days

Case 12–2

Kettering Industries Inc. In late February, Victoria Jackson, supply manager at

Kettering Industries Inc. in Dayton, Ohio, needed to de-

cide which glass supplier(s) to choose. She was not sure

whether her past approach to buying glass would still be

appropriate in future.

KETTERING INDUSTRIES INC. Kettering Industries Inc. (KII) competed in the regional

window market in the Midwest home remodeling indus-

try. The plant initially manufactured low-cost products

such as storm doors, storm windows, school bus windows,

and low-end replacement aluminum windows. Over the

years, storm door and replacement aluminum window

production was eliminated and vinyl window production

was initiated. The 86,000 sq. ft. facility manufactured

vinyl windows (800/day), storm windows (200/day),

and school bus aluminum windows (50/day). A total of

160,000 windows was produced last year.

Sales were approximately $25 million. Sales of vinyl

windows were seasonal with primary demand in the

warmer months, from May to October. The company

sold its high-priced, high-quality vinyl windows through

a number of branches located across the Midwest. The

delivery goal to customers was 10 days from the date the

order was received at the plant.

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Chapter 12 Supplier Selection 359

In order to maintain competitiveness and increase re-

turns to shareholders, KII was committed to becoming a

world-class manufacturer. Programs were developed and

implemented to meet goals of improved quality, delivery

performance, customer responsiveness, and better engi-

neered products.

VINYL WINDOW PRODUCTION All production at KII was based on custom orders. Win-

dows were usually manufactured and shipped on the same

day, reducing the need for work-in-process inventory.

Due to cost and performance advantages of vinyl over

wood and aluminum windows, management projected

that demand would continue to grow, and production, as

measured by total blocks of glass used, would double over

the next five years. All of this growth was expected to be

in low energy glass windows.

Vinyl windows could be made with either clear glass

or low energy glass; both types of glass were available

in thicknesses of each 3 mm or 4 mm. Low energy glass

was a special glass with an invisible metal coating that

reduced penetration of infrared rays and decreased heat

loss. Currently, low energy glass windows accounted for

about 22 percent of the plant’s vinyl window production.

Low energy glass window production, as a percentage of

total vinyl window production, was increasing monthly.

PURCHASING OF GLASS Last year, KII purchased a total of $1.15 million of

clear and low energy glass from four different suppli-

ers (Exhibit 1). Glass was purchased by the block with

each block consisting of 40 sheets for 4 mm glass and

50 sheets for 3 mm glass. Due to the nature of the glass-

cutting equipment that the company used, 3 mm glass had

EXHIBIT 1 Kettering Industries Inc. Last Year’s Glass Consumption

Supplier 3 mm Clear 4 mm Clear 3 mm Low

Energy 4 mm Low

Energy Total

Ross Industries

666 blks 541,090 $541,090

Clear View Distributors

94 blks 8 blks 110 blks 12 blks

77,812 5,618

234, 882 16,631 $334,943

Travers Glass Ltd.

104 blks 42 blks 36 blks

85,902 29,494

76,822 0 $192,218

West Bend Glass

36 blks 4 blks

0 0 76,046 7,073 $83,119

Blks Total $704,804 $35,112 $387,750 $23,704 $1,151,370

Clear Glass Total 872 blocks $739,916 Low Energy Glass Total 198 blocks 441,454 TOTAL 1,070 $1,151,370

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360 Purchasing and Supply Management

to be ordered in sheets of 720 3 960 and 4 mm glass in

sheets of 600 3 960.

Glass sheet order quantities were determined based on

historical usage reports and sales forecasts. In order to take

advantage of quantity discounts and obtain the best possible

price, Victoria usually ordered by the truckload. Truckload

size could vary between 8 to 18 blocks depending on the

capacity of the truck, the packaging, and weight restrictions.

The amount of glass that could be held in inventory

was constrained by a storage capacity of 32 blocks. Dur-

ing the past year, to maintain production during peak

periods (May through October), six blocks of glass per

day were required. Only 13 blocks of glass per week were

needed for the November through April period. Each

week an inventory count was undertaken so that orders

could be adjusted as necessary. Last year raw material

glass inventory turned about 14 times.

KII occasionally manufactured products using ob-

scure glass instead of clear or low energy glass. Rather

than stocking the obscure glass in inventory it was only

ordered as required.

SELECTING SUPPLIERS Victoria wanted one or more suppliers to be able to meet

forecasted needs. The company had set a goal of increas-

ing raw material inventory turns from 14 times a year to

30–35 times a year within two years. In addition to requir-

ing less working capital, increased inventory turns would

free up floor space that was needed for other production

activities. A Vendor Certification Program was also being

implemented to assist in the setup of long-term relation-

ships with suppliers in a partnership mode to encourage

delivery of on-time, zero-defect materials to the plant.

KII’s president had asked Victoria to research four

potential suppliers and recommend the arrangements the

company should make for purchasing glass. Victoria had

asked several suppliers to submit quotes, from which she

had narrowed the alternatives to three of last year’s sup-

pliers and one former supplier, Jackson Glass Co. She

summarized these quotes in her bid summary as shown

in Exhibit 2.

SUPPLIER ALTERNATIVES Ross Industries. Ross Industries was a glass manufac- turer that had provided KII with excellent service and good

quality glass for 20 years. Their low energy glass did not

meet KII’s testing standards and, therefore, mixed truck-

loads of clear and low energy glass were not possible. To

get the quoted 3 mm clear glass truckload price of $.3278/

sq. ft./blk delivered, a minimum of 12 blocks had to be

EXHIBIT 2 Bid Summary and Past Year Prices Paid (in dollars per square foot)

Clear Low Energy

3 mm (822 blocks 2400 ft2/bl)

4 mm (50 blocks 1600 ft2/bl)

3 mm (234 blocks 2400 ft2/bl)

4 mm (124 blocks 1600 ft2/bl)

Ross Ind. .3278 12 min .33 1 min [.3384]1

.4371

.44

Clear View .33 8 min [.3449]

.44 [.3489]

.8920 [.8900]

1.142 [1.135]

Travers .3172 12 min [.3445]

.4389 [.4389]

.8830 1.160

Jackson .33 6 min .44 1.092

West Bend2 0.8794

1 Brackets indicate last year’s actual prices. 2 Because West Bend Glass was a Canadian manufacturer and unable to price its glass competitively in the United States, it was not

asked to submit a quote for either clear glass for the current year.

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Chapter 12 Supplier Selection 361

ordered at one time. If quantities of less than 12  blocks

were ordered, the delivered price was $.33/sq. ft./blk. The

Ross plant was located 150 miles from Dayton and lead

time was one week. They had access to an associated sup-

plier in Illinois as an alternate source of glass if they were

unable to meet KII’s demands.

Clear View Distributors. Clear View Distributors was a small local glass distributor that had supplied KII for three

years. They had provided consistent, on-time delivery of

low energy glass. They had also built sealed units for KII,

but there had been problems with some units. Both clear

glass (made by Ross Industries) and low energy glass (made

by West Bend Glass) were available on a mixed eight-block

truck. Delivery was available daily, if requested, and they

were willing to stock inventory for KII.

Travers Glass Ltd. Travers Glass Ltd. was a glass dis- tributor about twice the size of Clear View Distributors.

They had provided KII with service for 15 years and had

been an excellent backup service for Ross Industries. They

offered clear glass (made by Jackson Glass Co.) at the

lowest delivered price of $.3172/sq. ft./blk in a straight or

mixed truckload of at least 12 blocks with low energy glass

(made by West Bend Glass). The quote for 4 mm clear

glass was $.4389/sq. ft./blk. For low energy glass their

quote was $0.6734/sq. ft./blk for 3 mm and $0.9512/sq. ft./

blk for 4 mm glass. Clear glass made by Ross Industries

was also available at a higher price than the clear glass

made by West Bend Glass. Their distribution centre was

located 135 miles from Dayton. Lead time was two to three

days and they could deliver three to four times a week.

They were willing to stock inventory for KII.

Jackson Glass Co. Jackson Glass Co. was a glass man- ufacturer that had been one of several suppliers to KII in

the past. They were very interested in doing business with

KII again. Their glass quality was good and they would

supply 3 mm clear glass at a delivered price of $.33/sq.

ft./blk for a minimum order of six blocks. Jackson’s quote

for 4 mm clear glass was $.44/sq. ft./blk. Their low energy

glass would require KII’s testing lab’s approval. The

Jackson distribution center was located about 130  miles

from Dayton and lead time was one week. They were

aligned with a Canadian supplier that could provide an

alternate source of glass if required.

Now that she had gathered the necessary information,

Victoria needed to proceed with her analysis. She knew

that she would have to make her recommendation soon.

Case 12–3

Plastic Cable Clips

In mid-September Robyn Pemberton, purchasing officer

in the laundry division of Fisher & Paykel Limited, lo-

cated in Auckland, New Zealand, was wondering which

procurement option made most sense for the plastic cable

clips requirements for the new line of washing machines.

THE LAUNDRY DIVISION Fisher & Paykel Limited was the largest home appliance

manufacturer in New Zealand with sales of its major ap-

pliances amounting to $135,000,000 and total sales of

$270,000,000 for the fiscal year ending March 31, includ-

ing $36,000,000 of export sales and royalty income. It

comprised eight operating divisions, one of which was the

laundry division employing over 500 people to produce

washing machines and dryers. Currently, the laundry divi-

sion produced about 50,000 washing machines, solely for

the domestic market.

THE NEW WASHING MACHINE For the last two years, the laundry division had been devel-

oping a new line of automatic washing machines. The plan-

ning and development of the new machine was conducted

by a seven-person committee of engineers, production, and

marketing people as well as a purchasing coordinator.

The new machine, designed entirely by F&P, used

electronic controls. It was believed to be technologically

advanced by world standards. Its manufacturing process

would be highly automated, featuring considerable part

rationalization and cost reduction over the old production

line. In fact, maintaining costs at the lowest possible level

was one of the key priorities of the planning committee.

With good opportunities for export and royalty in-

come, the laundry division hoped to produce between

75,000 and 100,000 new washing machines a year. How-

ever, 50,000 machines were planned for the first full year

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