1. Why might negotiation be favored over competitive bidding in certain procurement situations?
2. Considerations of Epsilon's alternative proposal:
b. Assuming Ruhling is now interested in a requirements contract, how should Ruhling proceed with the bidding/award process?
c. What would you do if you were the decision-maker at Ruhling (don't sit on the fence)?
3. Comment on the practice of dual sourcing when part of the requirement is produced internally. Relate this to the advantages and disadvantages of a 100 percent requirements contract. (i.e. develop both the pros and cons of dual sources and the pros and cons of requirements contracts).
(Scenario details below.)
RUHLING MANUFACTURING COMPANY
Cyrus Ruhling founded the Ruhling Manufacturing Company in 1901. Until 1915, the firm made electric motors. In 1915, Mr. Ruhling was persuaded by the War Department to take on several defense contracts. Ruhling expanded rapidly. After World War I, Ruhling found itself the possessor of much excess capacity. Cyrus decided to cater to the small but growing home appliance industry. Today, Ruhling is one of the nation's largest appliance manufacturers.
Although appliances account for all the firm's sales, a small electric motor capacity has been retained, partly for historic purposes and partly to protect against unforeseen contingencies. Whenever feasible, Ruhling follows a dual sourcing policy. In some cases, three sources may be under contract.
Last month, purchasing issued an invitation for bids for 11/32 horsepower motors for a six-month period. Ruhling's estimated price for the motors was $29.00. The quantity estimated was 48,000 motors over the six-month period. Orders were to be placed daily through the firm's automated material requirements planning system, with deliveries to be within one week of release of an order.
Three days ago, the bids were opened. They were as follows:
Able Electric $30.00
Beta Products $28.00
Gamma Manufacturing $32.00
Delta Electric $29.25
Epsilon Products $30.00
Today, prior to the award of a purchase order, Epsilon Products contacted the buyer and submitted an alternative proposal. Under the proposal, Epsilon would reduce its bid to $23.75 if Ruhling would agree to purchase all its requirements for this size motor from Epsilon for a period of one year. Ruhling would be free to release delivery quantities at its own convenience and Epsilon would guarantee to meet them within three days. Epsilon would carry three months of normal inventory (24,000 motors) and would increase its capacity if demand warranted.
Note: Requirements Contracts provide for the purchase from one supplier of all of a buyer's requirements, for a stipulated time period, for specified materials or services for a designated operation or activity. Requirements contracts typically are used in applications such as the support of a firm's automotive repair shop, with parts being purchased from a specific parts dealer during the life of the contract. To be certain that this type of contract is both legal and mutually satisfactory, the contract should provide for a minimum quantity the buyer is committed to take, and it should stipulate that neither party can terminate the contract during its life, as long as performance is satisfactory and as long as the buyer's requirements continue to exist. Without such provisions, requirements contracts have been found to be unenforceable.