Question

Henry Royce, purchasing agent for Pendleton Construction Inc is currently in the process of selecting a steel supplier/fabricator for a major highway project. Pendleton is one of the largest heavy-highway construction frims in the Midwest. The company builds bridges, high-rise office towers, power plants, goverment buildings and roads. Pendleton has a reputation for high-quality standards, on-time project completion and reasonable prices. The company has expanded rapidly during the past 20 years, keeping pace with the heavy highway sector.

Reinforced steel is used in almost all of Pendleton's projects. The steel itself is purchased from one of several large steel mills in the region. During the past 18 months, the fabrication (bending) required in preparation for steel placement had been done by Mohawk, a small local disadvantaged business enterprise specialty steel fabricator. Pendleton's total steel-bending requirement for the most recent fiscal year was approximately 5000 tons. Mohawk had charged identical prices per ton for both small and large steel fabrication jobs. Prior to bidding on a project, Royce requests a telephone quotation from Mohawk and the price per ton quoted is the same as the previous bid. Mohawk is also a supplier of specialty steel. Royce has an exlclusive agreement with Mohawk to supply specialty steel items on short notice. This arrangement has worked well for Pendleton. Mohawk also owns a major share in a detailing firm that did approximately 70% of the reinforced detailing work for Pendleton. According to Royce, Mohawk has done an excellent job supplying high quality specialty steel to Pendleton. At the same time, he stated Mohawks fabrication work was pretty good.

Recently Pendleton was awarded a mega highway project in southern Indiana that will require more than 9780 tons of reinforced steel for three consecutive years. Because of the size of the project, Royce decided to solicit quotes from other sources for fabrication work. However, Pendleton bid the project using Mohawk's fabrication estimates. Royce received three quotes for the fabrication work item. All three estimates were lower than Mohawk's bid quote. The quotes were $7, $8 and $9.50 lower than Mohawk's estimate. The company with the best estimate which was $9.50 lower than Mohawk's esitmate, had recently filed for bankruptcy. However, the remaining two suppliers check out as being well run and financially healthy. Baker Steel quoted a price that was $8 lower per ton F.O.B. the job site. Baker was a major steel fabricator located in Cleveland, Ohio, which is approximately 350 miles from the project site. The quote was made on the condition that all transport shipments be full loads, with no emergency short shipment transport charges. Royce had carefully checked out Baker's business capability and reputation and found that it had performed quite well throughout the Midwest.

Royce felt that he needed to make a rational decision. He now wondered if he should place that steel-bending contract with Baker or whether he should stay with the Mohawk bid. What are the implications of his decision?

Please answer the following 3 questions about this case...

As Henry Royce, which specialty fabrication supplier would you select for the newly awarded megaproject?

Explain your choice in detail.

Regardless of your choice, what would be the implications of not awarding the contract to Mohawk?

Answer 1

As Henry Royce I would select Mohawk as the supplier for the newly awaded project, the reasons being as follows:

- They have been supplying Royce from before and in such deals a factor of trust about performance is very important like delivering material on time, supplying quality product etc.

- Even though their prices are higher than other suppliers, yet they are qouting the same price for small and large steel fabrication jobs.

- They gave the same price on the new bid as the old project though bidding for the new project they could raise their prices from before.

- They are capable of supplying speciality steel items on short notice which the new suppliers have refused to do and is an essential need for the company.

- They have performed very good in both the special steel supply and fabrication jobs for the company.

The only point here that the new supplier stands strong is that their price is lower than Mohawk but in long term big project the other aspects are also considered and hold more importance than the cost part as if there are issues in quality or on time delivery, it may effect the business adversly.

The implications of not awarding the contract to Mohawk would be risking the long term relations with their old suppliers, quality of the product being recieved and on time delivery performance. These are areas where the new company needs to perform better than Mohawk as their price qouted is already less. But if after providing steel and fabrication jobs on lesser price they are not able to stand up to the mark of the quality required by Royce for the project execution than the price factor holds no importance whatsoever.