A PROBLEM OF PRICE Sue Jones sat at her desk reflecting on a pricing problem. Sue was a graduate of State University, wh

[answerhappygod]

A PROBLEM OF PRICE
Sue Jones sat at her desk reflecting on a pricing problem. Sue
was a graduate of State University, where she majored in materials
management. Since joining the small manufacturing firm of Prestige
Plastics in Des Moines, she had been promoted from assistant supply
manager to supply manager. She was responsible for buying the
chemicals used in producing the firm’s plastic products.
Sue was really perplexed by a particular procurement involving
the purchase of X-pane, a chemical that was formulated specifically
for Prestige Plastics. Thirty-one days ago, she forwarded a request
for bids to six suppliers for Prestige’s estimated annual
requirement of 10,000 drums of X-pane. Yesterday morning, Sue
opened the five bids that had been received. The bids, F.O.B. Des
Moines, were as follows:
Greater Sandusky Chemical Chicago Chemical Co. Tri-Cities
Chemical
St. Louis Industries
St. Paul Plastics
Price per drum ($) 312 297 323 332 340
Total price ($) (for estimated annual requirement of 10,000
drums)
3,120,000 2,970,000 3,230,000 3,320,000 3,400,000
The Chicago Chemical Company was low bidder for the fifth
straight year. On the face of it, a decision to award the annual
requirements contract to Chicago Chemical looked obvious. The day
after the bid opening, the sales engineer from Greater Sandusky
Chemical threw Sue a ringer. He said that no one would ever be able
to beat Chicago Chemical’s price. His firm estimated that setup
costs associated with producing X-pane would be approximately
$750,000. He went on to say that due to the uncertainties of
follow-on orders, his firm would have to amortize this cost over
the one-year period of the contract to preclude a loss.
Sue checked with the other unsuccessful bidders. They said
substantially the same thing: $700,000 to $850,000 in setup costs
were included in their prices.
Next, Sue looked at the history of past purchases of X-pane. She
saw that on the initial procurement five years ago, Chicago
Chemical’s bid was $202 per barrel, $3 lower than the second lowest
price. Since that time, bid prices had increased, reflecting cost
growth in the materials required to produce X-pane. Each year,
Chicago Chemical’s prices were $3 to $15 per drum lower than those
of the unsuccessful competitors.
Sue knew from her supply management course at State University
that when five prerequisites were satisfied, under most conditions,
competitive bidding normally resulted in the lowest price. She also
knew that it was important to maintain the integrity of the
competitive bidding process. But Sue felt a strong sense of
uneasiness. Something did not seem right.
Under what conditions does competitive bidding normally assure
the buying manager of obtaining the lowest possible price?
Based on the case, define the “competitive bidding trap.” Under
what conditions may a buying firm fall into the “competitive
bidding trap”?
Which situation existed at Prestige Plastics for
the first contract? Why?
Which situation existed at Prestige Plastics for
the current buy? Why?
Describe three approaches to overcoming Sue’s pricing problem.
Support with a quantitative analysis.