Please thoroughly study Chapters 7, 8 and 5 and carefully read the case, Caledon Concrete Mixers, in your book (pp. 194-196) . You are required to answer the following discussion questions. In addition, each student must comment on at least four other students initial post and/or other student comments.

a. What are your impressions of the supplier evaluation criteria used by Sarah? What changes would you suggest?

b. As Sarah Jenkins, what recommendations would you make regarding the selection of a gearbox supplier? Be prepared to justify your recommendation.

Is cartes, ut Sarah was aware that COM The relationship with CCM and BGK dhack ng and Supply Management Case 7-2 Caledon Concrete Mixers As Sarah Jenkins, materials manager Caledon Concrete was in supply, where combining purchases between the two Mixers, ended her conference call with on Del Rosario operations for some products had yielded significant in from corporate purchasing, she wondered what recommen: ke Del Rosario, purchasing manager in the corponte pe dations she should make regarding the selection of a gearbox chwing group in Chicago. was responsible for coordinating supplier. The corporate purchasing group in Chicago was purchasing between the Caledon and St. Louis plants vocating switching to a new supplier, but Sarah remained Sarah Jenkins was responsible for material manage concerned about the risks of ending a long-term supply ar ment at CCM. An MBA graduate from the Ivey Business rangement with a key supplier. It was now December the School, Sarah had worked at CCM for more than 20 years Bed and she wanted to make a final recommendation before Reporting to the general manager, her responsibilities in the plant shut down for the annual Christmas holiday break. cluded logistics and transportation, purchasing.Imettory control, and production planning. Her counterparts in CALEDON CONCRETE MIXERS nance and accounting, quality, operations, sales, HR, and engineering rounded out the senior management team Located north of Toronto, Canada, in Caledon, Ontario, Caledon Concrete Mixers (CCM) was a manufacturer THE GEARBOX of truck- mounted concrete mixers. Founded in 1910, the company employed 140 people in its 150,000 square foot While the concrete mixer truck was in operation, it was plant, including 100 unionized hourly workers, and had necessary to continuously rotate the load to prepare the annual sales of approximately 525 million. Nearly 40 per concrete and avoid consolidation. The gearbox was local cent of company sales were exported mainly to the United ed at the bottom of the large mixing drum and was used to transmit torque from the hydraulic motor drive shaft CCM had a strong reputation for quality and service in which rotated the drum. The gearbox also permitted the the industry. It operated as a private business until 2003. operator to adjust the speed and direction of the rotation when it was purchased by Illinois Machinery Corporation The gearbox was one of approximately 150 comp (IMC), IMC was a global manufacturer and marketer of nents that CCM used for the assembly of their concrete access equipment specialty vehicles, and truck bodies mixers. The gearbox used by CCM came in two vara for the defense, concrete placement, refuse hauling, and tions, depending on the model of the concrete mixer. Each fire and emergency markets. Annual revenues in the most pearbox cost approximately $3,600 and volumes at CCM current fiscal year were 59 billion and IMC had approxi- ranged from 950 to 1.100 units per year. mately 18,000 employees Concrete mixer transport tracks were designed to mix CURRENT SUPPLY ARRANGEMENT concrete and haul it to the construction site. Customers typically specified the truck model which was ordered CCM and the St. Louis operation both used BGK Gmbil from the original equipment manufacturer. CCM fitted the as the single source for yearboxes. BGK was a large dove vehicle with the concrete mixing equipment, which includ. sified German manufacturing company with ed a large drum and discharge system. Systems were cus enues of 12 billion euros. The division that supplied tomized based on vehicle size lex. 2-6 ans, discharge produced gearboxes for industrial applications in system (front or rear), and capacity (maximum capacity to range of industries, such as material handling op carry 14 cubic yards of payload) energy and mining. The company had a reputation for her IMC had an operation in St. Louis de manufactured a quality and reliability, although its products were pically milar product line to CCM under a different brand more expensive than those of their competition with wal revenues approximately date the Canadian plant. Aldough IMC operated under a decentralized model than 30 years. BGK offered a standardne year ago CCM and the St. Louis operation cooperated in areas of engi neering purchasing and sales while operating experienced by the quality problems and with prate leadership team. One key area for wynergies were penerally wanted to performance of the product Chapter 7 Quality 195 IMC had also used BGK as their single supplier for many years. At the time of the acquisition of CCM, the IMC pur distribution capabilities, including lead times and North chasing group was surprised to leam that CCM had a better American warehousing arrangements. Delivery would be FOB the London and St. Louis facilities price for its gearboxes Prices for both CCM and IMC were IGR Industries was an Italian company, but its manu- aligned following the completion of the acquisition in 2003 facturing operations were mainly in Eastern Europe and Despite the long history with BGK both CCM and IMC Asia. Revenues for IGR were approximately 1.5 billion had become increasingly unhappy with the service and re euros, with sales concentrated primarily in Europe and sponsiveness of the supplier and its apparent unwillingness Asia. It had a good reputation for quality, claiming that to react to their concerns. Strong economic expansion in its failure rate was 1.0 percent. IGR did not currently sup- Asia created increased demand for BGK gearboxes and the ply product to North America, but proposed setting up a company was unable to expand capacity to keep pace with distribution facility in the Missouri region as part of their increasing sales. It had been hampered by a combination of propocal. Under this arrangement, IGR promised just-in- restrictive labor rules in Germany regarding overtime and a time delivery to IMC and two-day delivery to CCM. IGR steel shortage two years prior quoted a price of $3,400, with an annual adjustment for Second, BGK did not have distribution operations in currency fluctuations between the U.S. dollar and the curo. North America. Gearboxes were shipped via ocean freight and steel pricing. It also offered a five-year warranty and and lead times to the Caledon plant ranged from three to five 30-day payment terms, months. As a result. CCM was forced to keep a three- month Moretti SpA was also an Italian manufacturer with supply of safety stock inventory on hand. Even with this pre sales of approximately 1 billion euros. It had operations in caution, supply shortages had threatened plant shutdowns 18 countries, including the United States. Approximately on several occasions during the previous two years. With five years ago Moretti had experienced a quality problem 50 percent of CCM's sales coming from four customers. with its gearbox, involving an oil leak. The oil leak prob- changes in customer orders could have a significant effect lem became a major issue as contractors had become in on demand and inventories. To add to Sarah's frustration.creasingly sensitive to potential environmental problems BGK shipped only full container loads of 50 units, whereas at construction sites. However, according to company of production in some months was as low as 20 units. ficials the oil leak problem had since been addressed and Lastly, customer expectations for warranty and service the company claimed that independent testing indicated a were increasing, yet BGK was unwilling to extend its war defect rate of 1.5 percent of its product after three years of ranty coverage without an increase in price. The supplier operation. Moretti quoted a price of $3.200, with an an- referenced its quality data, which boasted the lowest fail nual adjustment for currency fluctuations between the US ure rate in the industry at 0.5 percent. However, as margins dollar and the curo. The company also offered a five-year on CCM's products shrank and customer demands grew, Warranty and a consignment inventory arrangement. Under Sarah and her peers in the purchasing organization at IMC the consignment inventory system, Moretti would own the had become frustrated by the lack of responsiveness from inventory a CCM and IMC until the gearboxes were as their supplier and decided to test the marketplace sembled into the vehicle, at which point an invoice would be issued, with a 30-day payment term. BGK's proposal was to extend the current supply ar SUPPLY OPTIONS rangement, which included a price of 53.000 that was sub- The decision was made in September to solicit RFQs for ject to annual adjustments and a standard one-year war the combined gearbox volumes of CCM and IMC. Sarah ranty. Lennart Wagner, the sales representative for BGK led the RFQ process and identified five potential suppliers, indicated that the company was not prepared to set up a including BGK two of which were not invited to partici- North American distribution facility. He indicated to Sarah pate because they currently supplied product exclusively to that BGK was the world leader in gearboxes, and the high Asia. The two new firms asked to participate were Moretti quality of their product should represent a significant sell SpA and IGR Industries. ing feature of CCM's concrete mixers. The RFQ specified a five-year contract for 100 percent of volumes for CCM and IMC, representing an annual vol THE SUPPLIER SELECTION DECISION ume of 2.800 to 3.300 units per year. Each supplier was asked to submit quotes in U.S. funds that included stable Sarah had developed a supplier evaluation framework pricing for the term of the contract, warranty terms, and that ranked each supplier in eight areas: price, warranty 196 Purchasing and Supply Management Moretti EXHIBIT 1 Supplier Evaluations 140 IGR BGK Value Rating Score Rating Score Rating Score 7 8 105 120 15 9 135 5 7 25 35 5 7 35 3 180 609 20 7 10 4 40 8 80 8 10 2 20 10 100 7 15 3 45 8 120 7 105 10 5 50 8 80 8 80 5 7 35 7 35 7 35 380 750 680 8 Evaluation Criteria Price Warranty Lead time Inventory cost Logistic Distribution Order flexibility Payment terms Supplier financial stability 80 70 90 (e.g. length of warranty), lead time, inventory costs As Sarah reviewed the data in the supplier evaluation leg.. holding costs and need for safety stock), logistics/framework, she wondered if it adequately represented the distribution (e.g. , North American distribution capabili trade-offs among the three supply alternatives. Based on ties), order flexibility (e... ability to make changes to her analysis. IGR Industries would become the new gear orders), payment terms, and supplier financial stability box supplier which would mean ending their relationship Each criterion was assigned a weight and suppliers were with a supplier that had lasted more than three decades evaluated on scale of 1 (poor) to 10 (excellent). Exhibit I She needed to finalize her recommendation before a provides a breakdown of Sarah's rankings for the three planned conference call with Jon Del Rosario and the head suppliers of purchasing at the IMC in St. Louis the following weck