Carter Systems Canada, Inc.

Carter Systems Canada, Inc.1

Mr. Travis received a purchase request from the operations manager for 12,000 GMT-680 housing assemblies. The engineering department had made the necessary design changes submitted by GM. One month ago, a purchase order for a similar design for the same auto platform was $27.88 per unit for 8,000 units.
BACKGROUND

Mr. Travis, the supply manager at Carter Systems Canada, was responsible for the purchase of the GMT-680 housing assembly. The GM-680 housing assembly was the major component part for automobile seat warmers for the GM luxury product line. Seat and steering wheel warming technology is complex and the manufacturing process is wrought with quality problems. It is not unusual to receive a sourcing shipment with a yield of 70 percent good housing assemblies. The source of the quality variation was traced to the numerous engineering changes that were submitted by the auto manufacturers. In other words, each new housing assembly purchase represented a new design. Mr. Travis found it useful, therefore, whenever he was required to issue a request for quote (RFQ) for housing assemblies, to make an estimate of the probable cost of the item from historical costs of similar equipment and from his experience with previous cost-adjusted engineering changes. He would estimate the new housings by adjusting the previous housing assembly cost with the new design estimated costs. This analytical approach required Mr. Travis to use his engineering and business school skills. This way he was well prepared to better evaluate the supplier quotes. This approach also could result in more effective negotiation sessions with successful suppliers. Mr. Travis determined the change in materials costs by analyzing the engineering changes. See Table C10.1.

TABLE C10.1
Engineering Changes

Mr. Travis realized that prospective suppliers for the procurement would include a group different from his usual suppliers and decided for that reason to make an extremely careful estimate of the probable cost.

After analyzing the engineering changes, Mr. Travis used his business skills to prepare the estimate shown below. The engineers’ estimate generated by Mr. Travis will serve as a baseline for the negotiations process. As shown below, the estimated price is $28.26.

Meanwhile, requests for proposals were sent out to 12 suppliers. Mr. Travis received eight responsive quotes, of which three were in the range from $29.78 to $33 per unit, and three ranged from $35.60 to $42.00. The last two bids were $22.14 and $24.68. Mr. Travis evaluated each supplier’s cost breakdown with the others and compared each cost with his estimated costs. Mr. Travis was impressed with the quality of the two proposals that came in below his estimate and was surprised that both firms had each supplied similar housings during the past year. Both companies were well-established component engineering companies with good reputations for satisfactory performance on previous contracts. The cost breakdowns for the two low proposals are reproduced in Table C10.2.

TABLE C10.2 Cost Breakdowns

After investigating the cost breakdown, Mr. Travis wondered why the other five responsive quotes were significantly higher than the Bell and D&G quotes. He decided to call San Onofre Technologies (SOT) to discuss their $29.78 quote. After his conversation he reevaluated the SOT quote. The SOT cost breakdown is given below:

Questions:
1.    How does the cost breakdown of the previous orders and Mr. Travis’ estimate differ? What can be inferred about the nature of the new product from the cost breakdown estimation?
2.    How can each item of a cost breakdown be interpreted in regard to each other and the quoted company? Of all the cost breakdown items, which items are more important and open to negotiation?
3.    What factors might have caused the variance between D & G Technologies’ quotation and Mr. Travis’ estimate? Between D & G Technologies’ quotation and Bell Systems’ quotation? Between SOT and the two lowest quotes?
4.    In light of your answer to the above question, what conclusions can you draw concerning (a) the reliability and usefulness of cost estimates made by the buyer, and (b) the value to be gained from the comparison of one supplier’s quotation with the others?