1) What happened during the auction? Explain your answer. ( Answer should consid
ID: 331136 • Letter: 1
Question
1) What happened during the auction? Explain your answer. (Answer should consider preliminary consideration on supplier initial bid)
2) At the end, do you think that using the eAuction for Malic Acid resulted in a good results for Betapharm? Explain why or why not.
Betapharnm Betapharm is one of the largest multinational pharmaceutical companies, having between 5% and 10% of the world's pharmaceutical market (including drugs in areas as anti-infectives, central nervous system, respiratory, and gastrointestinal/metabolics) The organization has recently centralized the procurement function, giving it all the responsibilities on the whole spending and categories for the company. For each purchased product, Betapharm has a sourcing group, a cross-functional team comprising representatives dealing with procurement, quality, technical, finance, and logistics. The sourcing group formulates the sourcing strategy for the product determining which mode of procurement is best for a given product, implementing the agreed-upon method, and ultimately selecting the preferred supplier The dilemma In December 2015, George Brannigan, vice president of Procurement, was preparing to meet with Doug Burke, director of eSourcing, and the sourcing groups for both global hotel contracts (led by Robert Houlihan) and malic acid, a raw material for Betapharm's new product Exelon (led by Michael Wilkenson). With the Emptoris ePass system in place and its reverse auction functionality, Brannigan wondered whether products as diverse as hotel contracts and raw materials could be sourced with this system. Although this would be discussed in the meeting, Brannigan wanted to be clear on the advantages and disadvantages of using ePass for these products prior to the discussion. Malic Acid for Exelon Malic acid is a key ingredient in a new drug called Exelon. Betapharm sources this ingredient from a supplier and further processes the ingredient at its own manufacturing facilities. Betapharm has been freely issuing a key raw material, referred to as malin, to Tao Pharmaceutical Processing Labs, its incumbent supplier: from the malin, Tao manufactures malic acid. As one of the leading suppliers to the pharmaceutical industry Tao provides a wide range of products and services during any stage of the drug life cycle. Thus, cost was not the most important issue when Tao was originally selected; in partclarTao has revealed a strategic partner in the development of Exelon, helping in developing the basic processes to convert malin into malic acid for use in Exelon. Betapharm's contractual obligation to Tao will end in two years, and now management is interested in securing a low-cost supplier for the malic acid: although happy with Tao, the 245 per kilogram charged by this supplier to convert malin into malic acid is considered too high. The new supplier should be subjected to a complete regulatory approval, which could take a couple of years; thus, if Betapharm is going to introduce a new supplier, a quick selection and certification, and a transfer of the conversion process in its site is mandatory. Additionally, it is imperative that Tao won't be informed about the search for a new supplier, as Betapharm does not want to risk its current supply base in any way. The strategy would have been the following: once selected and tested the new supplier, Betapharm would have approached Tao, allowing it to bid for future
Explanation / Answer
1. During the auction, the business to be bid on was increased from 650 KG to 20,000 KG of malic acid. Each of the bidders kept on decreasing their bid price till the auction was over. The initial range of sealed bids was 59-286 /KG. With the auction, the overall price range of bids changed to $70 - $120. Overall, everyone's bids saw a reduction except the supplier Chun Wu whose price bid increased from 57/KG to 70/KG.
2. Considering cost as the parameter, Betapharm would have selected Chun Wu as their supplier when sealed bids were given. During the sealed bids method, Chun Wu did not know the price quoted by other suppliers however Chun Wu could see price / Kg of malic acid quoted by each supplier during the auction. On the basis of this, Chun Wu quoted its lowest at $70 which was lesser than all other suppliers, but more than the initial sealed bid. Seeing Chun Wu's lower costs, other vendors kept on bidding lower to win the business, however, there was a point when Chun Wu's costs could not be matched.Further, Chun Wu had no incentive to lower costs per kg than $70 as other vendors were already outbid. Using the eAuction did not yield good results for Betapharma, again on the basis of cost, they will select Chun Wu. But now, Betapharam would pay $13 more per Kg compared to sealed bids.
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