Dan Summerfield just recently took over as director of purchasing for Great Western University. Great Western spent roughly $400,000 a year for the purchase of various kinds of plumbing supplies. These supplies included such items as pipe, tees, elbows, and many small plumbing repair parts. However, they also included some expensive items such as large valves and water heaters. Because its plumbers were poor planners, Great Western maintained approximately a $240,000 inventory of plumbing supplies in its stores stem. The university purchased its plumbing requirements from four plumbing supply houses.

Mr. Summerfield believed that if the university could consolidate its plumbing purchases with a single supplier who could supply all its needs, Great Western could save money two ways: first, by getting lower prices, and second, by reducing inventories. Within the geographical area where Great Western is located, there were two very large plumbing suppliers and six small plumbing suppliers. Mr. Summerfield visited each and carefully reviewed its managerial, technical, and financial capabilities.

The closest plumbing supplier to Great Western University was Bumble Bee Plumbing Services. This company was owned by the Bee family, and last year sales were roughly $64 million. Although Bumble Bee had many warehouses and offices throughout the state, one of its largest outlets was in Red City, just a few miles from Great Western. In fact, it was so close to the university that the plumbers regularly went there to pick up plumbing parts and participate in the free coffee and soft drinks Bumble Bee made available for its pick-up customers.

Bumble Bee was managed by Mr. John Bee, age 74 and senior member of the Bee family. John Bee had worked in the family business since he was fifteen years old. His desk was located just inside the front door of the company's largest branch, where he was readily available to all who wanted to see him. Also, as he stated, "From here I can keep an eye on everything going on in the business.” When questioned about the size of Bumble Bee's inventory by Dan Summerfield, Mr. Bee stated that he didn't know the exact size because he used no formal inventory control system, but he figured the inventory to be about $80 million, or a little over a year's supply of everything. Bumble Bee had excellent young managers, but for the most part Mr. Bee would not let them manage. For example, the purchasing manager told Dan Summerfield that only a few months ago, he showed Mr. Bee a plan for reducing inventory by $20 million with little or no loss in customer effectiveness or product cost. Mr. Bee would have none of the plan. The company's controller told Summerfield that Bumble Bee's financial position was unbelievable. The "Old Man" had no interest in financial

ventures outside the company, and for years he had just let its cash position grow until it now exceeded $30 million in cash assets. Total liabilities were less than $4 million.

After proposing an annual contract with Bumble Bee, Mr. Summerfield was told by Mr. Bee that his firm never sold for less than wholesale list price, and it would not sell to Great Western for anything less than that. With great pride Mr. Bee stated that Great Western might pay a little more for material from Bumble Bee, but his company never would be out of anything Great Western might need. Although Mr. Bee would not reduce prices to get an annual contract, he would give daily delivery service to Great Western in consideration for such a contract. Mr. Summerfield estimated that daily delivery from Bumble Bee's huge back-up inventory would permit him to reduce his own inventory from the present $240,000 to $80,000.

The largest plumbing supplier in Great Western's area was Automated plumbing Supply. This was a widely held corporation with a staff of professional managers, the majority having been trained in well-known graduate schools of business. Automated's sales throughout the state last year totaled $100 million. Automated's closest outlet to Great Western was 12 miles away in the city of Dumbarton. That branch was not large; however, it could be resupplied daily from Automated's large central warehouse in the city of Field. Field is a large industrial center about 30 miles from Great Western.

Automated had experienced rapid growth during the past ten years, its compounded growth rate being approximately 20 percent per year. Members of the management team at Automated pointed with pride to their new computer, which was located at their headquarters in Field. The computer, in addition to providing reports to guide the company's overall operations, controlled the inventory in all twelve Automated branch warehouses. By use of the computer, Automated was able to turn its inventory roughly five times per year, which meant it had on hand about $20 million of inventory at all times. Mr. Summerfield was told that stock-outs averaged about 5 percent. However, use of the computer might lower the percentage of stock-outs for the specific items Great Western buys. Automated's management was superb. Their capability and drive really impressed Summerfield. The management was young, aggressive, and very knowledgeable concerning the company's problems, how they could be solved, and where they were trying to take the company. Because of the company's rapid growth, finances in terms of accounting ratios appeared weak. Summerfield commented on this fact to the financial vice president. The latter readily admitted the weakness, explaining how the company planned to handle its finances to assure continued rapid growth. So sure of ultimate success were the managers that all had agreed to relatively low salaries with high stock options. This faith removed Summerfield's doubts.

Because of Automated's efficient operations, the company felt able to offer Mr. Summerfield a very attractive discount schedule, averaging 15 percent below wholesale list price, if he would sign a year's contract to purchase all his plumbing supplies from Automated. Under the contract, Automated would deliver twice a week. Mr. Summerfield believed that semiweekly deliveries and a 5 percent stock-out level at Automated would enable him to reduce his inventory from $240,000 to $160,000.

The other plumbing supply firms in the area typically had sales of less than $4 million. Some of these firms had only one office, but others had several branches. All of them were owner-managed and prided themselves on their “personalized” service. Several of these firms offered Mr. Summerfield a flat 25 percent discount if he would sign up with them. Typically, these firms had average stock-out levels exceeding 10 percent. Each of these firms could deliver only once weekly to Great Western. Therefore, Summerfield could not reduce his inventory meaningfully, if at all, were he to contract with one of the smaller firms. However, the substantial 25 percent discount was attractive and interesting to Summerfield.

In the table below, do a cost analysis of the situation, comparing the 3 possible suppliers. Assume that the cost to Great Western of holding inventory is 40% per year of the average dollar value of inventory. Hint: a factor is something like the cost of holding inventory. Compare that cost for the situation for each supplier

Factors	Bumble Bee	Automated	Other Firms
Total Cost

In the table below, compare other factors that you consider important in deciding which supplier to use. In the left column, write in a factor, and then in the other columns immediately to the right, write in the position of each company for that factor. An example is given. Make a copy of this sheet if you need more space.

Factors to consider	Bumble Bee	Automated	Other Firms
Free coffee and drinks	yes	no	Don't Know

What would be your solution to this supplier selection problem? Explain and justify your plan

Answer rating: 100% (QA)

The table is given below Factor Bumble bee Automated other supply firms Discount on wholesal... View the full answer