Please, besides answering the questions at the end, it would be very nice to see an Immediate Issue / Concerns / Recommendation.

Case Beta Surgical - The Competitive Bidding Trap

Frank had been working for two years now in the buying department of Beta Surgical. They produced a line of low-cost single use surgical instruments for hospitals, doctors and dentists. He had worked his way up from the position of expeditor, which he had taken just out of college, and was now a full-fledged buyer with responsibility for about six million dollars per year of raw materials and supplies for manufacturing. With a college diploma in Supply Chain Management it was a junior position for him to start at, but Beta Surgical was a fast growing company located close to his hometown.

Things had worked out well for him and with his determination to continue towards certification with Supply Chain Canada, he felt one day he could be senior buyer or even better. He was known to be very conscientious with his work and constantly searched for ways to save the company money.

THE CURRENT SITUATION

Thirty days ago, Frank had sent a request for quotations to number of potential suppliers of a special instrument lubricant that Beta Surgical used to treat all their surgical instruments prior to sterilization and packaging. Beta Surgical used an autoclave to sterilize their instruments and this can be very corrosive, even for stainless steel. To protect and lubricate the instruments they soaked them for a few minutes in a water-oil mixture. During sterilization, the water was boiled off the surface of the instruments and a very fine layer of oil remained.

It seemed that for a small number of companies, mixing oil and water was easy to do, since Frank had received four quotes to provide approximately 10,000 gallons of the mixture per year. Earlier this week he had opened the quotes on the specified date and found that once again Mississauga Mixers had won the bidding process by a significant margin. The quotes FOB Beta Surgical were as follows:

Company	Price per Gallon
Dunville Lubricants	$27.04
Mississauga Mixers	$25.94
Mixers Blend-it	$28.40
Solutions New	$29.46
York Chemical

At work, the next day Frank was talking to Phil, a friend from Engineering, and he asked the question, "Just exactly how do you get oil and water to mix?" His friend smiled and said, "Oh, are you getting some more instrument milk? That is what we call the stuff used to protect the instruments during sterilization. It looks like milk. But, dont try to drink it.

Frank felt that it was now okay to talk in general about the bids. All the bids had been opened and company policy would not allow any further bids to be accepted. "Yes, I just opened four legitimate bids and Minnesota Mixers was lowest again for the fourth year in a row. Aren't the other companies interested in our business?"

Phil explained that he had worked on the instrument lubricant when they first piloted an in-house experiment on reducing corrosion within the package, The key component was a high-shear pump, also known as a homogenizer, Also, not keeping the stuff around forever, but getting freshly mixed lubricant every month prevented separation of the oil and water. The company had decided to have the lubricant made by a specialty supplier due to the cost of equipment and the need for production space. Phil was just getting up to leave the table but added, "The equipment to make that stuff in the volume we need costs about $50,000 and I'll bet that we requested dedicated equipment that could not be used to mix other non-medical product."

When Frank returned to his office, he went to the commodity file on instrument lubricant and found the original quotes for the product. Four years ago, Mississauga Mixers had won the bidding with a quote of $24.57; the next closest bid was $24.63. This seemed reasonable with a factor for slight inflation since then. He did not see any information on setup costs for the production and asked the senior buyer, Gerard Sentall, if he could remember anything about the original bids, "Yes, we did not separate the setup and per unit costs of the instrument milk. We felt it was outside our realm of expertise and left this up to the supplier. Are some of the quotes out of line?"

Frank explained that the quotes were all very consistent, perhaps too consistent.

Next he informed the other bidders of their failure to win the bidding again, and then confirmed the price with Minnesota Mixers. The sales rep from Dunville Lubricants was vocal about losing again and the effort that he had put into giving his lowest possible price

The Dunville Lubricants representative stated, Im sorry, but the way you send out for new quotes every years does not assure us of future business. I have to include a one-year write of equipment in my price. We included a set-up of $51,500.00. Perhaps we could renegotiate under different terms. After all, you will probably be using instrument milk for the next few years.

Frank informed him of the policies of Beta Surgical that he had to honour regarding competitive bidding and that everyone was treated equally. Frank, however being to wonder about the one-year term for instrument lubricant contracts. He wondered if the competitive bidding trap had something to do with all of this.

CASE ANALYSIS

Questions to consider

1. What condition made competitive bidding not work in this case?
2. Was competitive bidding a good method to use for the first contract for instrument lubricant?
3. What target price should Frank aim for the next time he asks for quotations on instrument lubricant? Should he use a method other than price per gallon?
4. Suggest a pricing strategy for Frank to use next time he asks for quotations.