A COLLABORATIVE AGREEMENT AT I.M.C. Mr. Jim Burton, supply manager of Indiana Ma

Question

A COLLABORATIVE AGREEMENT AT I.M.C.
Mr. Jim Burton, supply manager of Indiana Manufacturing Company (I.M.C.) was offered a
collaborative agreement by Indiana Aluminum Company (I.A.C.). I.M.C. was a manufacturer of
car hoist machinery. The agreement would enable I.M.C. and its suppliers to purchase aluminum
at specified pricing and terms. I.M.C. had thirty days to accept or reject the offer.
General Company Background
I.M.C. had developed a good reputation for producing car hoist equipment. Its total sales in the
last twelve months, from both its domestic and international distributors, were approximately $50
million. I.M.C., in its seventeenth year of operation, had seen its sales increase steadily over the
last twelve months and it expected sales to continue to increase. Its total annual purchase of
aluminum was approximately $27 million.
Supply Management’s Source Selection
The Indiana Aluminum Company (I.A.C.), one of eight suppliers of aluminum to I.M.C., supplied
approximately 70 percent of I.M.C.’s aluminum needs. I.M.C. had purchased aluminum from
I.A.C. for all seventeen years of its existence. Mr. Burton believed that while individual suppliers
might at any one time provide the best pricing, delivery, quality or service, I.A.C. had
consistently provided the best overall combination of these requirements. All aluminum suppliers
were highly competitive and were always seeking to increase their share of I.M.C.’s business.
Failure to receive a share of I.M.C.’s business at one point in time had not deterred them from
seeking an increase in that share at the next opportunity. I.M.C. had recently considered reducing
the number of its aluminum suppliers to one prime and two to three backup suppliers, solely for
the purpose of efficiency. It had good working relationships with all of these suppliers. It had no
annual requirements contracts or fixed price agreements with any of them, nor had it ever had any
discussions with any of them to do so. Mr. Burton believed, but had not verified the fact, that no
such agreements existed in the industry. All of I.M.C.’s buying of aluminum had been on the spot
market, based solely on quality, pricing, and delivery available on any particular day.
I.M.C. had four fabricator subcontractors that also independently purchased aluminum
from one or all of its eight possible aluminum suppliers. The amount of aluminum purchased by
I.M.C. and its four suppliers totaled approximately 1,700,000 pounds per year. Currently, two of
the fabricators purchased all of their aluminum from I.A.C. while the other two purchased
between 30 percent and 50 percent from I.A.C.
The Collaborative Agreement
I.A.C. had approached I.M.C. with a proposal to enter into its first-ever collaborative agreement.
In this agreement, I.M.C. would be offered a firm, fixed price of $1.02 per pound for the
aluminum it purchased over the next twelve months. The current price of aluminum on the open,
highly competitive market was $0.98 per pound. The market is volatile. The price of aluminum in
the last six months had been as high as $1.12 per pound. The price was $1.30 per pound eighteen
months earlier. While there was no guarantee that prices would go either up or down in the next
twelve months, Mr. Burton expected the prices to rise since current prices were the lowest he had
experienced in his five years with I.M.C. In the event of a major price change during the
agreement period, I.A.C. would agree to renegotiate, although not necessarily change, the
established prices.
In addition, I.A.C. would, at no cost, agree to put I.M.C.’s part numbers on its (I.A.C.’s)
computer to ensure a more efficient ordering system.
Marketing to Subcontractors
Another condition of this collaborative agreement is that I.M.C. had to try to convince its four
fabrication subcontractors to purchase all of their aluminum from I.A.C. Their guaranteed annual
pricing per pound would be the same as I.A.C.’s. Additionally, I.A.C. would maintain inventory
for these subcontractors in order to minimize their inventory investment. If a subcontractor were
to agree to use I.A.C. as its single source for aluminum, it would receive the benefits noted, but
there would be no punitive action in the event of their failure to do so. The subcontractors would
have no individual contracts to sign.
An additional incentive for I.M.C. to accept this agreement is that I.M.C. would receive a
$0.02 rebate for all combined purchases by them and the four listed subcontractors if such annual
I.M.C.-related purchases exceeded 500,000 pounds. I.A.C. would regularly monitor and report to
I.M.C. the amount of all such purchases.
Special Conditions
I.A.C. did not want the subcontractors to receive and, in fact, did not want them even notified of
the existence of the rebate incentive. Since they were the ones proposing this offer, I.A.C. did not
believe that I.M.C. should question other suppliers as to their willingness to enter into the same or
similar agreement.
I.A.C. allowed I.M.C. 30 days to respond. Jim Burton, therefore, had to recommend to
I.M.C.’s president whether or not this agreement was in I.M.C.’s best interest.
1. Are any ethical or legal issues involved in I.A.C.’s proposal? Discuss.
2. How should Burton analyze the proposal? Is this a true collaborative arrangement?
Adapted from a case copyrighted by the Institute for Supply Management (formerly the National
Association of Purchasing Management). Reprinted by permission. Robert C. Ashby, C.P.M.,
CPCM wrote this case during one of the ISM-sponsored case writing workshops

Explanation / Answer

1.Yes, there are ethical issues involved in IAC’s proposal when we consider the additional rebate offered by I.A.C. if the total I.M.C purchase exceeds 500000 pounds. The special conditions set by I.A.C to provide $0.02 rebate for all combined purchase include that the subcontractors should not be notified of the existence of the rebate incentive. Since there is no need for individual contracts to be signed by the subcontractors and there are no punitive actions if they fail to use I.A.C as a single source of Aluminum, there are no legal issues involved. But there are ethical issues when I.M.C hides the information from subcontractors and are provided Aluminum at a higher price than I.M.C. and the total benefit of the purchase is enjoyed by I.M.C. The ethical issues are related to price discrimination and breaking of trust among the parties involved in a business.

2. Burton should analyze all the positives and negatives of the proposal before taking a decision. The decision is actually more beneficial to I.A.C as the complete business of I.M.C. may purchase Aluminum from I.A.C and the rebate offered would be very less significant compared to the relationship between the sub contractors and I.M.C. If I.M.C do not inform regarding the rebate offered by I.A.C to the subcontractors, it will provide more profit to I.A.C. since they can sell the material to the subcontractors at higher price. If I.M.C can convince the subcontractors to buy from I.A.C it will be more beneficial to I.A.C. If we consider the benefits of I.M.C there are more risks involved here than benefits and the deal may affect the long term relationship with the subcontractors and may result into conflicts in future when they come to know about the rebate proposal and the terms involved. I.M.C may lose trust of the subcontractors who are integral part of their business. There are chances of price decrease also in future. Hence this is not a true collaborative arrangement as the significant benefits goes to only I.A.C.

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