American Airlines, Inc. (AA) is one of the world’s largest airlines. Its core business is passenger transportation but it has other vital ancillary functions that include full-truckload (FTL) freight shipment of maintenance equipment and in-flight shipment of passenger service items that could add up to over $1 billion in inventory at any given time. AA receives numerous bids from suppliers in response to request for quotes (RFQs) for inventories. AA’s RFQs could total over 500 in any given year. Bid quotes vary significantly as a result of the large number of bids and resultant complex bidding process. Sometimes, a single contract bid could deviate by about 200 percent. As a result of the complex process, it is common to either overpay or underpay suppliers for their services. To this end, AA wanted a should-cost model that would streamline and assess bid quotes from suppliers in order to choose bid quotes that were fair to both them and their suppliers.

Questions for Discussion
1. Besides reducing the risk of overpaying or underpaying suppliers, what are some other benefits AA would derive from its “should be” model?
2. Can you think of other domains besides air transportation where such a model could be used?
3. Discuss other possible methods with which AA could have solved its bid overpayment and underpayment problem.