P ART #B02326620 On April 19, 2006 Mr. Walter A. Walsh, Heartland and Company, S

ID: 420867 • Letter: P

Question

PART #B02326620

On April 19, 2006 Mr. Walter A. Walsh, Heartland and Company, Supply Management Manager, met with one of his buyers, Ms. Olivia Newcomb, in his Corporate Home Office. They discussed her Midwest & Company cost reduction goals for bearing #B02326620. After the meeting Mr. Walsh asked himself “What premium should we pay a supplier that performs at a higher level and how should we allocate the business among suppliers that perform at different levels?”

Company Background

Founded in 1875, Heartland & Company was one of the United States’ oldest industrial organizations. It manufactured agricultural, construction, and commercial and consumer lawn care equipment. Midwest did business in over 100 countries and had sales in excess of of $US12 billion.

Part #B02326620

Part #B02326629 was a bearing that was purchased from two suppliers, New England Works and Midwest Bearings. This bearing was used in a wide range of Heartland products. Annual usage was steady, averaging 500,000 bearings per year. The price of this bearing was approximately $US3.00. Both suppliers sold Heartland substantial amounts of bearings in many types and sizes. The total amount spent (annual spend) on bearings at Heartland & Company during 2005 had been approximately $US90 million.

Supplier Performance

Heartland & Company evaluated its suppliers on five dimensions. They were quality, delivery, cost management, technical support, and wavelength. The overall evaluation of a supplier was determined by its score on its lowest performing dimension. The evaluation system and the evaluations of New England Works and Midwest Bearings are summarized as Exhibit 1.

The New England Works Advantage

While both suppliers offered excellent quality, New England Works rated higher in delivery, technical support, and wavelength. Mr. Walsh felt that these advantages were largely due to a highly trained sales force comprised of professionally trained engneers. It responded well to Heartland’s technical needs in the areas of product and process improvements. These improvements resulted in substantial efficiency gains to Heartland in the areas of product redesign, product simplification, and savings in assembly costs. Rough estimates by Mr. Walsh placed these gains in the range of $US500 thousand to $US1.0 million per year. Total bearings purchases from New England Works in 2005 were approximately $US20million.

The Midwest Bearing Advantage

Midwest Bearings rated higher in cost management. Their ability to reduce costs enabled them to consistently quote lower piece prices, usually about 2% less than New England Works. Total bearings purchases from Midwest Bearings in 2005 were approximately $US8.5 million.

Simultaneous Goals

Heartland & Company placed a high priority on developing long-term relationships with suppliers that met its performance goals. On the other hand, Heartland pursued an aggressive program of annual cost reduction. There was no specific company policy that provided guidance on how to manage trade-offs between these two goals.

The Problem

How should Hearland allocate its business for part #B02326620 between New England Works and Midwest Bearings?

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PART #B02326620

Exhibit 1

PART #B02326620 SUPPLIER EVALUATONS

Dimension New England Works Midwest Bearings

Quality………………..Partner……………………..Partner

Delivery………………Partner……………………..Approved

Cost Management…….Key…….…………..………Partner

Technical Support…....Partner….…………………..Approved

Wavelength…………..Partner………………...……Key

Overall………………..Key…………………………Approved

NOTES:

1. Abbreviated Dimension Definitions

Quality: Based on rejects per 1,000,000 supplied pieces of all items purchased.

Delivery: Based on supplier meeting delivery dates and quantities

Cost Management: Based on cost management initiative, cost reduction activity, cost index performance, performance during new programs, and global competitiveness.

Technical Support: Based on supplier ability to provide a wide range of technical support at all stages of supply.

Wavelength: based on supplier overall attitude, responsiveness, attention to detail, and communication performance.

Overall: Based on the supplier’s lowest performance in any dimension.

2. Supplier Performance Rating Scale

HIGHEST LOWEST

Partner (P) Key (K) Approved (A) Conditional (C)

QUESTIONS:

1. Develop weights for the five supplier rating dimensions shown in Exhibit 1. Please

briefly explain the basis for these weights.

2. Make a case for pricing preferences that favor highly rated suppliers, such as New

England Works. Make a case for not granting price preferences for highly rated

suppliers. What would you recommend? Why?

3. How should Heartland & Company minimize it total cost of acquisition for part #B02326620 and similar items? Please briefly explain

4. How should Heartland & Company allocate its annual purchase of part #B02326620 between New England Works and Midwest Bearings? Please briefly explain your rationale.

Explanation / Answer

Answer:1

Weightages for the five supplier rating dimensions shown in Exhibit 1 are as below

Dimension

Weightage

Basis for Rating

Quality

0.28

Quality is also get higher weightage because quality is very important and quality level of the parts needs to be maintained. Quality is the dimension which is going to make the future progress of the company.

Delivery

0.32

Delivery should be given the highest rating, because delivery will ensure the right functioning of the planned schedules of the company.

Cost Management

0.24

Cost management get slightly lower rating than delivery or quality as its preferences is lower compared to both deliver and quality, but it is still essential and highly important dimension as it helps in achieving the desired profit level and revenues for the business. Cost Management will have direct impact to the revenue and profit of the business.

Technical Support

0.07

Technical support will have low rating compared to other top three dimensions, as it is not so much value addition for the business, it is important but not much value addition to the business.

Wavelength

0.09

This is also important but not very much and high value addition for the business. This will help in maintaining better communication response treatment etc. which is now days a basic expectation from any supplier. We would like to keep it at rating around 1.