10/16/2018
Supplier Selection at Casturn Systems
1) What are the drivers drivers for successful usage of of e-RAs?
e-Reverse Auctions is tool where suppliers bid for business with buyers by lowering their bid prices on products that the buyers are willing to procure. These auctions are designed for facilitating re-sourcing options for buyers in order to enable efficient procurement. This tool helps buyers to identify competitive suppliers and achieve cost savings in their sourcing activities. The following are a few aspects that might be considered as important for driving a successful reverse auction: ▪
Complexity of the part being sourced: Reverse auctions are usually preferred in cases where the parts to be sourced are simple.
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Number of suppliers of the part and their qualifications: The suppliers (both their number and qualification) participating in the auction plays an important role as this determines the competitiveness of the bidding activity.
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Supplier relationship: The relationship with incumbent suppliers may add complexity to the bidding process. Auctions may sometimes have a negative effect on supplier relationship. This may result low number of participants in the auction.
buyers and the inability of suppliers to meet these standards would result in the parts not being approved eventually. Some suppliers might increase the price once they understand the criticality of part after the auctions thus nullifying cost advantage. ▪
High switching costs: Critical parts would require elaborate testing and approval process form OEMs. This can result in significant costs for switching from an existing supplier who is providing parts according to specifications.
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Damaging supplier relationship: There might be a threat of straining the long term existing relationship between buyers and suppliers if the supplier has developed engineering capability for servicing specific needs of the buyer.
3) What are the benefits and disadvantages of the re-sourcing process in Figure 1? Are there any improvements that should be made to the current practices within Global Supply Management?
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Part designs can be made simpler as suppliers have repeatedly complained about designs that were very difficult to manufacture. Simpler designs would help reduce the costs. It would also increase the number of suppliers to choose from.
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Casturn currently procures from a large number of suppliers. It would help if they consolidate the number of suppliers among different geographies to generate aggregation benefits.
4) Which parts (if (if any) should should be taken to electronic electronic reverse auction? auction? The decision should be based on the evaluation that whether any significant cost benefits are possible with the reverse auction. For this, we will use the difference between the total landing cost and the validation cost. The difference is also adjusted for present value and probability of clearing the validation. If this difference is positive, then inviting those suppliers for reverse auction would be beneficial. Refer below the broad summary of the analysis performed.
Part Type: Chall en enge r
Spool C ha hal le le ng nge r Location
Part Type: Is difference greater than validation cost
Challenger
Pin Challe ng nge r Lo Location
Is difference greater than validation cost
customized items for which the cost drivers are complex. Therefore, a window of 6 to 24 hours depending the complexity of the item shall be provided for auction.
b) Should the bid be on piece price or total cost? The bid be on piece price vs total cost: In case the annual volume of components is fixed, then it the bid on the total cost would be recommended. Because supplier might plan for better machineries to gain economies of scale give the fixed f ixed volume. On the other hand, if the annual volume is not fixed, the bid should be on the piece price. Because buyer may base his contract on the piece price to get the advantage of varying quantity rather than getting fixed on a lump-sum cost.
c)
Should the auction have a reserve price? Should that price be visible to suppliers? The auction should have a reserve price. This is price shall the best price that buyer currently has, and all the bid prices shall be compared with this reserve price. However, showing the reserve price is like disclosing the willingness to pay to suppliers. Suppliers might take undue advantage of this price and may hesitate to offer prices which are much lower than reserve price. Therefore, reserve price would be used only by buyer to compare the auction quotes to finally decide whether to award a contract or not and should not be disclosed to bidders.
Annexure 1: Total landed cost analysis Part Type: Casturn Plant Location Current TLC / Unit: Annual Volume (Units) Current total cost Discount factor (assumed)
Spool Western Europe $1.42 575000 $ 816,500 12%
C ha hal le le ng ng er er Lo ca cat io io n
Bid (Dollars/unit)
Smith Precision HNC F. Decolletage Decolletage Zhang Lifang
North America Easte rn A sia We ste rn Europe Easte rn A sia Easte rn A sia
$ $ $ $ $
Part Type: Casturn Plant Location Current TLC / Unit: Annual Volume (Units) Current total cost Discount factor (assumed)
Pin North America $0.32 1,250,000 $ 400,000
C ha hal le le ng ng er er
1.75 1.22 1.98 1.30 1.39
Bid (Dollars/unit)
Browne Xi Lifao Zhang HNC F. Decolletage Decolletage
North America Easte rn A sia Easte rn A sia Easte rn A sia We ste rn Europe
$ $ $ $ $
Part Type: Casturn Plant Location Current TLC / Unit: Annual Volume (Units) Current total cost Discount factor (assumed)
Sleeve Western Europe $3.25 600,000 $ 1,950,000
C ha hal le le ng ng er er
HNC GlobalTools Bangalore Machining Richner Zlotski Tech Comcastings
A A C B B
7% 8% 4% 8% 8%
0% 5% 0% 5% 5%
$ $ $ $ $
15,000 24,500 21,000 24,500 24,500
Probability of clearing technical evaluation 0.95 0.95 0.65 0.8 0.8
TLC / Unit
$ $ $ $ $
1.87 1.38 2.06 1.47 1.57
Total cost at the ed of year
Difference in cost at the Difference in Difference in cost at begning of year cost at the end the begning of year considering the prob. Of of year (Discounted value) clearing tech. validation
$ 1,076,688 $ 792,695 $ 1,184,040 $ 844,675 $ 903,153
$ $ $ $ $
(260,188) 23,805 (367,540) (28,175) (86,653)
$ $ $ $ $
(232,310) 21,254 (328,161) (25,156) (77,368)
$ $ $ $ $
(220,694.75) 20,191.74 (213,304.46) (20,125.00) (61,894.64)
Is difference greater than validation cost
N N N N N
12%
C ha hal le le ng ng er er Lo ca cat io io n
C ha hal le le ng ng er er
Scorecard Logistics Validation Duty Rates Rating Cost Factors cost
0.19 0.24 0.25 0.29 0.39
Scorecard Logistics Validation Duty Rates Rating Cost Factors cost B B B B C
3% 9% 9% 9% 7%
0% 3% 3% 3% 0%
$ $ $ $ $
15,000 24,500 24,500 24,500 21,000
Probability of clearing technical evaluation 0.8 0.8 0.8 0.8 0.65
TLC / Unit $ $ $ $ $
0.20 0.27 0.28 0.32 0.42
Total cost at the ed of year $ $ $ $ $
244,625 336,000 350,000 406,000 521,625
Difference in cost at the Difference in Difference in cost at begning of year Is difference greater cost at the end the begning of year considering the prob. Of than validation cost of year (Discounted value) clearing tech. validation $ 155,375 $ 138,728 $ 110,982 Y $ 64,000 $ 57,143 $ 45,714 Y $ 50,000 $ 44,643 $ 35,714 Y $ (6,000) $ (5,357) $ (4,286) N $ (121,625) $ (108,594) $ (70,586) N
12%
C ha hal le le ng ng er er Lo ca cat io io n
Bid (Dollars/unit)
Easte rn A sia Easte rn A sia South Asi a We ste rn Europe Easte rn Europe N th A i
$ $ $ $ $ $
2.10 2.45 2.60 3.15 2.89 2 95
Scorecard Logistics Validation Duty Rates Rating Cost Factors cost B A B A C A
8% 8% 8% 4% 4% 7%
5% 5% 5% 0% 0% 0%
$ $ $ $ $ $
24,500 24,500 28,500 21,000 35,000 15 000
Probability of clearing technical evaluation 0.8 0.95 0.8 0.95 0.65 0 95
TLC / Unit $ $ $ $ $ $
2.37 2.77 2.94 3.28 3.01 3 16
Total cost at the ed of year $ $ $ $ $ $
1,423,800 1,661,100 1,762,800 1,965,600 1,803,360 1,893,900
Difference in cost at the Difference in Difference in cost at begning of year Is difference greater cost at the end the begning of year considering the prob. Of than validation cost of year (Discounted value) clearing tech. validation $ 526,200 $ 469,821 $ 375,857 Y $ 288,900 $ 257,946 $ 245,049 Y $ 187,200 $ 167,143 $ 133,714 Y $ (15,600) $ (13,929) $ (13,232) N $ 146,640 $ 130,929 $ 85,104 Y $ 56,100 $ 50,089 $ 47,585 Y
