Case 32 Kokko Foods

Page 76

Caroline Byrne, strategic sourcing manager at Kokko Foods in Philadelphia, Pennsylvania, wondered what she should do, if anything, about the most recent quote submitted by a supplier related to the acquisition of programmable logic controllers (PLCs). It was Friday, July 17, and she had just received a second unsolicited offer from Stephen West at McCaig Automation (McCaig) to reduce his prices.

THE PLC CONTRACT

Kokko Foods was a global manufacturer and marketer of branded consumer foods. Its principal markets were in the snack, cereals, and baking foods segments. Sales in the most recent year were $12 billion, and the company operated 49 manufacturing plants, with 36 located in the United States, 10 in the Asia/Pacific region, and three in Canada.

Corporate purchasing was located at the companys head office in Philadelphia, which was responsible for the acquisition of raw materials, ingredients, packaging, contract manufacturing, capital equipment, and information technology (hardware and software). Caroline managed the team responsible for the acquisition of capital equipment.

PLCs are industrial computers used to control manufacturing processes, such as assembly line equipment and robotic devices. Their rugged design allow PLCs to withstand operating conditions in an industrial environment, such as fluctuations in temperature, dust, and moisture.

The Kokko facility in Springfield, Missouri, was undergoing changes to its manufacturing operations, including the installation of new automated filling lines. Caroline was assigned to a cross-functional team responsible for sourcing the capital equipment for the project. The other two people on the team were from the Springfield plant: Kelly Ross, engineering manager, and Jennifer Stewart, plant manager.

On Monday, June 5, Caroline sent a request for quotation (RFQ) to three suppliers for PLCs that would be installed on the new equipment. Although the Springfield plant had a history of using McCaig PLCs exclusively, Caroline pressed Kelly and Jennifer to consider other suppliers. Based on her previous experience purchasing similar products, Caroline included HKH Group (HKH) and Ellis Controllers (Ellis) on the bid list. Both suppliers were large, well-established firms with proven technologies, and were able to supply product that met or exceeded specifications. Both HKH and Ellis PLCs were used at other Kokko plants, and Caroline did not expect any switching costs if either company was selected to provide controllers for the Springfield plant.

Page 77

Each company submitted bids on the June 30 RFQ deadline. Ellis had the lowest cost at $400,000, while McCaigs quote was $420,000 and HKH submitted a bid of $430,000. Caroline had a conference call with Kelly and Jennifer on Friday, July 7 to review the bids. Both Kelly and Jennifer were clearly disappointed that McCaig was not the lowest bidder. Kelly commented: The McCaig controllers have been reliable and worked well. Our technicians and operators are used to working with this equipment. With the millions of dollars that we are spending on new automation equipment, does it make sense to switch PLC suppliers for $20,000? However, Caroline stood her ground in the meeting, reminding both individuals that all three suppliers were qualified and the process established at the outset was to accept the bid with the lowest pricein this case Ellis.

The following Monday morning, July 10, Stephen West called Caroline to discuss his bid: I spoke to my manager, and we dont want to lose this business. So I wanted to speak to you before any decisions were made. We are prepared to reduce our prices by 15 percent, which represents a price of $355,000 for the entire package. I am sure you will find this an attractive proposal. I will send you the revised quote in an email later today.

Since Caroline had not communicated the outcome of the bid to either Ellis or HKH, she decided to call her contact at Ellis, John Ly, with whom she had a good working relationship. During their conversation on July 12, Caroline explained to John that she had received a revised bid from the incumbent supplier, which was considerably lower than his bid. Caroline indicated that under the circumstances she felt it was fair to allow John the opportunity to amend his price if he wanted to do so. Caroline did not divulge specifics of McCaigs pricing during the conversation. John thanked Caroline for the opportunity and responded the next day in an email offering a revised price of $350,000. Caroline called Kelly and Jennifer later that afternoon to update them on the developments and confirmed that she was prepared to award the contract to Ellis for $350,000 the following week.

THE NEW PROPOSAL

About 9:00 a.m. on Monday, July 17, Caroline received the following email, marked urgent, from Stephen West: After careful consideration, we would like to further amend our quote for the controllers for Springfield plant to $335,000. Kokko Foods is a valued customer and looks forward to a continued strong relationship. Caroline wondered, what, if anything, she should do about Stephens email.

1. What would you have done if you were Caroline and received an unsolicited revised bid from a supplier after the RFQ deadline?

2. Was it advisable for Caroline to entertain Stephen's revised bid despite the company's established procurement processes and her earlier communications with other suppliers?

3. If you were in Caroline's shoes and chose to inform Ellis about a "considerably lower" revised bid from another supplier, would you have provided specific pricing details? Why or why not?

4. In terms of strategic sourcing, would you prioritize long-term relationship building with suppliers even if it means accepting a bid that's not the lowest?

5. Knowing the history and performance of a supplier, like McCaig's reliability, would you have considered their bid more favorably, even if it wasn't the cheapest? Why?

6. Given the concerns of internal stakeholders, such as Kelly and Jennifer's preference for McCaig, would you have taken their feedback into consideration over procurement best practices and ethics? Why or why not?

7. Was it advisable for Caroline to structure the procurement process the way she did, and if not, how would you have modified it to ensure fairness, transparency, and ethical practices?