Read the case and submit a group case report answering the following questions. Attach all supporting analysis to your group case report.

Supplier Selection at Casturn Systems (B): Strategic Implementation of Electronic Reverse Auctions

case W92C49 April 19, 2012

Published by WDI Publishing, a division of the William Davidson Institute (WDI) at the University of Michigan.

©2012 Damian Beil and Izak Duenyas. Richeek Maitra, Master of Supply Chain Management, University of Michigan Ross School of Business, and Anthony Tricozzi, Master’s of Industrial and Operations Engineering, University of Michigan, prepared this case under the supervision of Professors Damian R. Beil and Izak Duenyas. This case is for class discussion rather than to illustrate either effective or ineffective handling of a business situation. All names and data have been disguised for confidentiality.

Introduction

Despite two unsuccessful attempts to implement electronic reverse auctions as a standard approach within the Transmission Division’s Global Supply Management group, Miguel Haro, director of Control Systems was determined to give auctions a final but strong push. Two University of Michigan Master’s students, part of the Tauber Institute for Global Operations, had been in residency at Casturn and were going to be back from their diagnostic study of the supply chain the next day. Haro asked them to set up and pilot a process that would answer all the questions that he and his team had about successful implementation of electronic reverse auctions.

Haro noted that GCM Jeff Blake had recently started to market test a screw machine commodity part, and had collected quotes from numerous screw machine suppliers. Could this be the set of parts that the Tauber team used to finally prove that auctions could be successful at Casturn?

Blake was open to the idea, but had concerns that auctions were not appropriate for his commodity group, noting, “The screw machine commodity itself has a diverse range of parts with varying levels of complexity and value addition. For some of these complex parts (strategic materials), I’m not even sure that we even have more than one capable supplier to make an auction applicable. And some of my more commoditized parts (standard materials) with many capable suppliers are for legacy programs that have been around for over a decade. Is it even worthwhile to run all of these long-standing suppliers through an auction?”

Blake was worried that another unsuccessful application of auctions could permanently strain relations with his supply base: “If we run another set of auctions where Casturn does not move forward with part re- sourcing to the auction winner, it will certainly be a hit to my credibility with the suppliers and make it very challenging to maintain auctions as a sustainable re-sourcing tool.”

Despite these concerns, Haro decided that he was going to put all his weight behind the initiative and ensure it succeeded even if it was only to answer all the questions about how to run auctions.

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Supplier Selection at Casturn Systems (B) W92C49

Once the Tauber team arrived, Blake provided them with all of the quote data that had been obtained from the market test. He had been able to identify several suppliers and was relatively confident about their capabilities (data located in Exhibit 1).

Because the suppliers had only quoted for part manufacture and packaging, the team knew that eventually, if a re-sourcing business case were to be made, they would need to compare all quotes from a total-landed cost (TLC) basis. Casturn’s third-party logistics provider agreed to provide estimates of shipping costs for the expected package sizes, along with duty rates; the costs are shown in Exhibits 2 and 3 as a percentage of piece price.

After factoring in the logistics costs and duty rates with the competing supplier quotes, the team felt they had accurate TLC numbers to determine which suppliers would be appropriate to invite to auction. However, additional factors arose that they had not taken into consideration.

“The incumbent bids need to be adjusted,” said Blake. “If my incumbent supplier gives me a piece price concession today, that savings will hit the books immediately. On the other hand, if we move forward with a more competitive quote from a challenger, Casturn will not realize that savings until at least a year from now, after we begin the stages of the re-sourcing implementation.”

The Engineering department, which was already concerned about the suppliers clearing technical evaluations, was also concerned about the cost of validating the parts for the competing suppliers. “It doesn’t make sense for us to chase after $15,000 worth of savings for a part if the validation testing alone could cost $20,000,” said Head of Product Testing Suresh Venkataswamy.

To aid in the analysis, the Engineering department provided the team with estimated validation costs for technical evaluation for each part (see Exhibit 4). Based on interviews and previous data, the students also constructed a table that showed the probability of a supplier passing technical evaluation as a function of their scorecard rating (see Exhibit 5). Given these additional factors, the students set out to build their business case for what auction events to hold for which parts.

Haro added a final thought, “After our past missteps with electronic reverse auctions, we really need to build a convincing business case to approve running any future auctions at Casturn. Any mistake will certainly erode remaining support for auctions as a sourcing tool at Casturn.”

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Supplier Selection at Casturn Systems (B) W92C49

Exhibit 1 Results of Screw Machine Market Test

PART NUMBER: 23400897

Part Type: Spool Annual Volume (Units): 575,000

Casturn Plant Location: Western Europe

INCUMBANT SUPPLIER: SWISS PRECISIONTEK Incumbant Location: Western Europe

Current TLC / Unit: $1.42

Challenger Challenger

Location

Bid

(Dollars/unit)

Scorecard

Rating Smith Precision North America 1.75 A

HNC Eastern Asia 1.22 A

F. Decolletage Western Europe 1.98 C

Zhang Eastern Asia 1.30 B

Lifang Eastern Asia 1.39 B

PART NUMBER: 24800873

Part Type: Pin Annual Volume (Units): 1,250,000

Casturn Plant Location: North America

INCUMBANT SUPPLIER: R. BURGER Incumbent Location: North America

Current TLC / Unit: $0.32

Challenger Challenger

Location

Bid

(Dollars/unit)

Scorecard

Rating Browne North America 0.19 B

Xi Lifao Eastern Asia 0.24 B

Zhang Eastern Asia 0.25 B

HNC Eastern Asia 0.29 B

F. Decolletage Western Europe 0.39 C

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Supplier Selection at Casturn Systems (B) W92C49

PART NUMBER: 24200675A

Part Type: Sleeve Annual Volume (Units): 600,000

Casturn Plant Location: Western Europe

Incumbent Supplier: Croquet Incumbent Location: Western Europe

Current TLC / Unit: $3.25

Challenger Challenger

Location

Bid

(Dollars/unit)

Scorecard

Rating HNC Eastern Asia 2.10 B

GlobalTools Eastern Asia 2.45 A

Bangalore Machining South Asia 2.60 B

Richner Western Europe 3.15 A

Zlotski Tech Eastern Europe 2.89 C

Comcastings North America 2.95 A

Exhibit 2 Logistics Cost Factors

DELIVERY TO North America Eastern Asia Western Europe

DE LI

VE RY

F RO

M North America 3% 9% 7% East Asia 9% 4% 8%

Western Europe 7% 8% 4%

South Asia 9% 7% 8%

Latin America 5% 10% 9%

Eastern Europe 8% 8% 4%

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Supplier Selection at Casturn Systems (B) W92C49

Exhibit 3 Duty Rates

DELIVERY TO North America Eastern Asia Western Europe

DE LI

VE RY

F RO

M North America 0% 15% 0% East Asia 3% 0% 5%

Western Europe 0% 15% 0%

South Asia 3% 15% 5%

America 0% 15% 9%

Eastern Europe 3% 15% 0%

Exhibit 4 Validation Cost

Supplier Location Validation Cost

(Dollars) North America 15000

Western Europe 21000

Eastern Europe 35000

South Asia 28500

Eastern Asia 24500

Latin America 32700

Exhibit 5 Probability of Clearing Technical Evaluation

Scorecard Grade Probability A 0.95

B 0.8

C 0.65

D 0.4

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Supplier Selection at Casturn Systems (B) W92C49

References 1 Beall, Stewart, et. al. “The Role of Reverse Auctions in Strategic Sourcing.” CAPS Research. (2003): 1–11. Web: 6 Apr. 2012. 2 Caniels, Marjolein C.J., and Erik M. van Raaij. “Do All Suppliers Dislike Electronic Reverse Auctions?” Journal of Purchasing &

Supply Management. Vol. 15, Issue 1. (March 2009): 12–23. Web. 6 Apr. 2012. 3 Jap, Sandy J. “An Exploratory Study of the Introduction of Online Reverse Auctions.” The Journal of Marketing. Vol. 67. (2003):

96–107. 6 Apr. 2012. 4 Rothkopf, Michael H., and Andrew B. Whinston. “On E-Auctions for Procurement Operations.” Production and Operations

Management. Vol. 16, Issue 4. (July-August 2007): 404–408. Web. 6 Apr. 2012. 5 Jap, Sandy J. “An Exploratory Study of the Introduction of Online Reverse Auctions.” The Journal of Marketing. Vol. 67. (2003):

96–107. 6 Apr. 2012.

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Supplier Selection at Casturn Systems (B) W92C49

Notes

This document is authorized for use only by Yanan Wu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

Established at the University of Michigan in 1992, the William Davidson Institute (WDI) is an independent, non-profit research and educational organization focused on

providing private-sector solutions in emerging markets. Through a unique structure

that integrates research, field-based collaborations, education/training, publishing,

and University of Michigan student opportunities, WDI creates long-term value for

academic institutions, partner organizations, and donor agencies active in emerging

markets. WDI also provides a forum for academics, policy makers, business leaders, and

development experts to enhance their understanding of these economies. WDI is one

of the few institutions of higher learning in the United States that is fully dedicated to

understanding, testing, and implementing actionable, private-sector business models

addressing the challenges and opportunities in emerging markets.

This document is authorized for use only by Yanan Wu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.