^{Cityof Granston}

On November 25, Ted Barton, the new purchasing manager at theCity of Granston in Canada, was considering a contract extensionfor two years for the supply of mineral aggregates (rock, sand, andgravel). The contract had to be signed within a week.

CITY OF GRANSTON

The City of Granston had an annual budget of $700 million andemployed 9,000 people. There had been a steady population increaseover the past two decades. The purchasing department consisted ofthree support staff, six buyers, and a manager. City budgets wereusually adjusted annually to cover the cost of inflation.

THE aggregate industry

The city purchased about $3 million worth of aggregates for roadconstruction and repairs and construction projects. The localmineral aggregate sector consisted of three major extracting andprocessing companies—Lamoulin, Richmond, and Atlantic—and severalsmaller ones. Lamoulin and Atlantic owned the two dominant concreteproduction facilities.

The local aggregate industry was near capacity with majorconstruction projects underway and increased demand in exportmarkets.

Aggregate purchasing

A request for quotation had been issued in 2000 for a three-yearagreement for the supply of aggregates, with prices firm for thefirst three years. If the parties agreed, a two-year option wasavailable, with prices being subject to inflation.

Lamoulin and Richmond were the only two bidders and eachreceived about half of the total contract with each bidder quotingfor separate components of the total aggregate contract (SeeExhibit 1).

Exhibit 1: A selection of mineral aggregates supplied byLamoulin and Richmond

Description	Original Price	Current Price	New Price Request	City Requirement (metric tons)
Screening *	9.80	9.59	9.78	3,000
Crushed rock *	8.80	8.57	8.74	6,500
Drain rock **	12.20	11.88	12.11	3,000
Tailings **	8.00	7.80	7.95	75,000
Mulch **	7.10	6.98	7.12	250,000
Prices include delivery and are in $Cdn based on annualestimated requirements. * Lamoulin ** Richmond

On November 25, both Lamoulin and Richmond sent notice that theywere willing to extend the current three-year contract to fiveyears. Both wanted an increase of 2 percent to cover the increasedcost of doing business. The suppliers were referring to theConsumer Price Index (CPI) clause in the agreement for the pricereviews. This clause allowed the supplier an annual price increasebased on the change of CPI. According to the city engineers’department, both suppliers had performed reasonably well during thepast three years. Because of a significant slump in the localconstruction industry, both suppliers had voluntarily lowered theirprices by about 3 percent after year one of the contract.

However, in the past few months the local economy had shownsigns of revival.

Ted Barton

Ted Barton had become purchasing manager for the City ofGranston after having worked in private industry as a supplymanager for several decades. He had been selected because thecity’s administrators wished to integrate supply better into theoverall decision processes and to help search for better value forthe taxpayers’ dollars. Shortly after arriving on his new job, TedBarton hired a part-time professional to help him develop bettermetrics for the city’s supply function. One of the metrics thatconcerned Ted was the city’s price performance. Thus, he developeda representative basket of 128 city requirements for which theamount used appeared to vary little from year to year. For thisbasket he asked his assistant to develop a price index, going backthree years, starting with a base of 100.0 (see Exhibit 2).

Exhibit 2: City of Granston price index for a 128-item basket ofcity requirements

Year	3 Years Ago	2 Years Ago	1 Year Ago	Current Year
				Q-1	Q-2		Q-3
Cost of supplies (basket of goods)	100.00	91.99	94.46	94.77		94.10		96.14

Ted’s assistant also developed a list of key cost indicatorsbased on published indices from a variety of sources (see Exhibit3).

Exhibit 3: Selected list of key cost indicators

Key Indicators	3 Years Ago	2 Years Ago	1 Year Ago	Current Year
				Q-1	Q-2	Q-3
Business prime rate (%)	7.00	6.88	4.25	4.75	5.00	5.00
CPI	111.40	114.70	116.20	121.90	122.00	122.20
Fats & oils	161.82	165.38	194.44	218.99	221.02	236.98
Raw industrials	258.06	235.55	231.72	258.69	260.01	269.91
Textiles	236.39	230.50	221.41	234.29	241.01	239.83
Diesel fuel	50.36	52.56	54.34	65.04	56.41	58.69
Coarse road salt	57.28	52.91	52.91	52.91	52.91	52.91
Natural gas	4.50	6.08	3.82	6.22	6.00	5.96
Copper (US$ per ton)	1788.00	1578.00	1559.00	1663.00	1641.00	1753.00
Metals subindex	236.06	193.55	178.92	201.50	207.09	218.15

The decision

Ted Barton wondered whether any of the metrics he had recentlydeveloped were relevant for his decision on whether to extend thecurrent mineral aggregates contract.

Since a significant number of existing city contracts were alsoof the multiyear, extendable type, he believed his actions on theaggregate contract might have a bearing on how to deal with otherrequirements. Having only one week left, he wondered what actionsto take.

Questions

1. What evidence exists in this case of potential suppliercollusion?
2. How does a purchaser know he or she is getting a fair price ina bid situation?
3. Why would suppliers voluntarily lower prices on a fixed pricecontract?
4. Is it reasonable to adjust price based on a general inflationindex?
5. How should the performance of a public buying office bemeasured?
6. How useful are weighted indices for measuring purchasingperformance?
7. Are there any other issues that you identify?