Sue Jones sat at her desk reflecting on a pricing problem. Sue was a graduate of

Question

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: Total price (S) (for estimated annual Price per Greater Sandusky Chemical Chicago Chemical Co. Tri-Cities Chemical St. Louis Industries St. Paul Plastics drum (3) 312 297 323 332 340 requirement of 10,000 drums) 3,120,000 2,970,000 3,230,000 3,320,000 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, S3 lower than the scond lowest price. Since that time, bid prices had increased, refleeting 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

Explanation / Answer

First Sue should find the Cost of Producing X-Pane, on basis of Market Research, She should then use the data to Compare Cost of X-Pane from Different Competitive Bidders, Some bids may be higher than other and some lower, But she has to check if its not too High or not too Low, if there are major variances, she should call for a rough bifurcation for reasons in differentiation.

In the Example, Chicago Chemical Co. does not Add Set up Costs, as per Knowledge from Other Bidders, She should try to find sources to get information from Chicago Chemicals as to Why Setting Costs are not Added, It could be that Chicago Chemicals May Provide a Bid cost on Relevant Costing Basis, to only cover its variable costs, or there could be another reason.

Second, If Chicago Chemicals is always Successgul in providing Lower bids than other Bidders, it could be that there is some glitch In the Internal Controls of the Bidding Process, due to which Chicago Chemicals, May reduce their Prices by a slight Margin from other bidders, Thus internal controls need to be closely monitored.

As its Said that Chicago always manages to provide the lowest bit, This this could be a major reason, as to the bid not being Fair to other bidders, if Chicago has the upper hand of manipulating the internal bid Process.

Third, Some bidders, may quote a higher amount due to allocation of Fixed costs to the product, The Highest bidder may have a faulty Allocation of Fixed costs to the Product, This can be determined only on case to case basis, also some bidders may have a higher profit margin.

The Highest Bidder here is St. Paul Plastics, Sue should try find from differences in the Other bids, as to what could be the components due to which St. paul is Charging Such an Amount, It could be due to Poor Management in St Paul Plastic or It could be due to Usage of superior quality of Raw materials.

Using these 3 approaches Sue, Could definitely, try to carry out a fair Bidding Process for X Pane.

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