Maxwell Stevens, sales representative for Specialty Engineering Services (SES), felt uneasy as he drove to his appointment at Boston Aerospace Group (BAG). In the past, sales deals with BAG has proceeded smoothly. Oftentimes competitors were not even invited to bid on the BAG business. Nathan Benson, purchasing agent at BAG, claimed that was because no competitor could match SES's product quality.

But this contract negotiation was different. Several weeks before the contract renewal talks began, Benson had announced his plan to retire in 6 months. SES management quickly promoted Tyler Pinto as Benson's successor. Although Pinto had been relatively quiet at the previous two meetings Stevens sensed that it would not be business as usual with Pinto. While the contract decision ultimately depended on Benson's recommendation Stevens felt Pinto might pose a problem.

Pinto, 35, had worked for a Fortune 500 firm following completion of his undergraduate degree in operations management. While with the Fortune 500 firm Pinto had become extensively involved with JIT and quality programs. He had returned to school and earned an MBA with a concentration in purchasing and logistics. Eager to make his mark Pinto had rejected offers to return to large corporations and instead accepted BAG's offer in inventory management.

BAG, an original equipment manufacturer (OEM) for the US aerospace industry makes a wide variety of plastic products for airframe applications. When Pinto began working with BAG's inventory management he applied the 80/20 rule, illustrating to management that 80 percent of BAG's business was related to 20 percent of its product line. Over the next 3 years, as contracts expired with customers and suppliers Pinto trimmed BAG's product line. BAG management was impressed with the positive impact on BAG's profits as unprofitable contracts and products were discarded. A trimmer product line composed primarily of faster-moving products also resulted in higher inventory velocity.

So when Benson announced his retirement plans, management immediately offered Pinto the position. After taking a few days to review BAG's purchasing practices Pinto felt he could make an impact. He accepted managements offer. As he learned his way around the purchasing department Pinto tried to stay in the background, but he soon found himself questioning many of Benson's practices. He particularly distained Benson's frequent "business lunches" with long-time associates from BAG's suppliers. Despite these feelings Pinto made an effort to not be openly critical of Benson. Such efforts did not, however, prevent him from asking more and more questions about BAG's purchasing process.

Benson, for his part, felt his style had served BAG well. Prices were kept low and quality was generally within established parameters. Although Benson typically maintained a wide network of suppliers, critical materials were sourced from a limited number of them. In those cases contract bids were a ritual, with the winner known well in advance. SES was one such winner. Its polymers were a critical feedstock material to BAG's manufacturing process. When Benson began sourcing from SES nearly 15 years ago, there was no question that SES's polymers were the best of the market. BAG's production managers rarely complained about production problems caused by substandard polymers. Benson reasoned that the fewer complaints from manufacturing the better.

"Hi, Max! Come on in! Good to see you. You remember Tyler Pinto, don't you?"

Steven's spirits were buoyed by Benson's cheery greeting.

"Absolutely! How are you Tyler? Coming out from the old horse's shadow for a bit now?"

Pinto politely smiled and nodded affirmatively. Light banter continued as the three moved down the hallway to a small conference room.

"Well great news, Max, SES has the contract again!" Benson paused, then continued, "But there's going to be a slight modification. Instead of the traditional 2-year contract we're only going to offer a 1-year deal. Nothing personal, just that management feels it's only fair to Tyler the last contracts I negotiate be limited to a year. That way he doesn't get locked into any deals that might make him look bad!" Benson roared with laughter at his last comment.

"It is certainly no reflection of SES" Tyler interjected. "It simply gives me a chance to evaluate suppliers in the coming year without being locked into a long-term contract. If my evaluation concerns with what Mr. Benson has told me about SES I see no reason that our successful relationship won't continue."

"Entirely understandable" replied Max as his mind pondered the meaning of Pinto'sevaluation. "I'm confident you'll find SES's service and product every bit as good as Nate has told you."

Following the meeting Benson invited Stevens to join him for a cup of coffee in BAG's lunchroom. Pinto excused himself, saying he had other matters to attend to.

As they enjoyed their coffee Benson sighed, "You'll be seeing some changes coming, Max. The best I could do was get you a year"

"I'm not sure I understand. As far as I know BAG's never had a major problem with SES's products"

"We haven't" Benson replied. "At least not under the guidelines I hammered out with management. But there will be some changes by next year."

"Such as?"

"Well, you remember when I started buying from SES? You were the leaders, no question about it. Now I knew some other suppliers had moved up since then but I figured, hey, if it ain't broke don't fix it! As long as SES's price was in line, I knew I wouldn't have any troubles with manufacturing. Less headaches for me. Now it turns out Pinto has some other ideas about purchasing. I can tell you for a fact that he's sampled several lots of SES feed-stock. He's also invited other potential suppliers to submit samples. The long and short of it is that there's not much difference between SES and the competition in terms of product."

"I still don't clearly understand the problem, Nate."

"In Pinto's terms, product merely becomes a 'qualifying criterion.' If everyone's product is comparable, especially in something such as polymer feedstock, how do you distinguish yourself? Pinto claims companies will need to demonstrate something called 'order winning criteria' to get our business in the future."

"I still don't see a problem. We have our reviews with BAG ever year. Our service performance has always been found to be acceptable"

"True. But acceptable according to my guidelines. Let me throw a number at you. On average BAG schedules delivery 10 days from date of order. I count on-time delivery as plus or minus 2 days from scheduled delivery date. That's a 5-day service window. BAG's minimum service threshold within this 5- day window is 95 percent. SAS had a 96.2 percent record last year using my window. Do you know what Pinto is talking?

"Probably 3?"

"Exactly. And do you know what SES's performance is if we use a 3-day service window?"

"No, Nate, I really don't."

"Well, Max, sorry to tell you it's 89.7 percent. Worse yet, with Pinto not only will the window decline but also the threshold level will be bumped up to 96 percent. And, that's only going to be for the first 3 years after I retire. After that Pinto is shooting for exact day delivery only with 96.5 percent service capability. Right now using exact day SES only has 80 percent flat. You aren't even close to being in the game"

"So we've got a 1-year contract essentially to demonstrate that we can deliver service as well as product?"

"You understand the problem now."

Polymer feedstock production requires a mixture of chemical compounds. SES's manufacturing process relies heavily on six principle compounds (A-F). SES's current procurement policy is to source each of these compounds from three sources determined through an annual bidding process. Typically the firm with the lowest price is considered the best bid. The top bid receives 60 percent of SES's business while the other two firms received 25 percent and 15 percent, respectively. Management feels this policy protects SES from material shortages and unreasonable price increases.Table 1indicates the current compound suppliers and their performance statistics (percent of business, delivery time from order date, fill rate). SES currently uses the following performance criteria:

1. Delivery of A: On-time considered 4 days from date of order 2 days.
2. Delivery of B: On-time considered 4 days from date of order 2 days.
3. Delivery of C: On-time considered 4 days from date of order 2 days.
4. Delivery of D: On-time considered 5 days from date of order 2 days.
5. Delivery of E: On-time considered 6 days from date of order 2 days.
6. Delivery of F: On-time considered 6 days from date of order 2 days.
7. Minimum acceptable fill rate on all compounds is 92 percent.

The manufacture of polymer feedstock is highly standardized. SES has continually invested in technologically advanced manufacturing equipment. As a result SES can quickly change processes to manufacture different polymers.

TABLE 1Performance Statistics of Compound Suppliers

Chemical Compounds

Supplier A B C D E F

Company 1 60% 60% 15% 15%

3-8 days 2-9 days 5-8 days 6-9 days

93% 94.5% 92% 94%

Company 2 25% 25% 15% 15%

4-6 days 3-4 days 2-4 days 2-4 days

95% 96% 98% 98.7%

Company 3 15% 15% 25% 25%

2-5 days 2-4 days 5-9 days 4-6 days

95.5% 98% 97.5% 98.7%

Company 4 60% 60%

4-9 days 2-9 days

96.5% 97%

Company 5 60% 60%

4-7 days 4-6 days

98.3% 97%

Company 6 25% 25%

3-6 days 3-5 days

98.4% 96%

To avoid material shortages and thereby maximize production, SES normally maintains a 7-day supply of each compound. An earlier attempt at JIT manufacturing was abandoned after SES experienced material shortages and production shutdowns. As a result, the manufacturing department is opposed to any reimplementation of JIT-type concepts.

The manufacturing department is electronically linked to the procurement and marketing/sales departments. Marketing/sales receives customer order by phone or facsimile. The orders are then entered into the information system. This allows manufacturing to monitor incoming material shipments as well as schedule production runs. Under this system most customer orders are produced within six to eight days of order.

Following production, orders are immediately sent to a warehouse a short distance from SES. At the warehouse shipping personnel verify manufacturing tickets, match the manufacturing ticket with the purchase order, and prepare shipping documents. Once the shipping documents are completed, the order is prepared for shipment (e.g., 1 palletized1 shrink-wrapped and labeled). Once a shipment is labeled, delivery is scheduled. Three to six days normally lapse from the time an order leaves manufacturing until it is shipped from the warehouse.

Market distribution is divided between the private SES truck fleet and common carriers. The majority of SES customers are within a two-hundred mile radius. SES trucks service these customers via twice a week delivery routes. Customers beyond this delivery zone are serviced through common carriers; delivery time fluctuates according to location and distance but rarely exceeds six days from time of shipment.

Questions:

1. Diagram the SES/BAG supply chain. What stages are adding value? What stages are not?
2. Using the primary SES suppliers (60 percent of business) what is the minimum performance cycle for the supply chain diagrammed above? What is the maximum?
3. Can the performance cycle be improved through the use of 25 percent and 15 percent suppliers? What trade-offs must be made to use these suppliers?
4. If you were Maxwell Stevens, what changes would you make in SES operations? Why? What problems do you foresee as you try to implement these changes?
5. Assuming you can make the changes mentioned in question 4 how would you "sell" Tyler Pinto on BAG's next bid? What will likely be the "qualifying criteria" and "order winning criteria"? Will these change over time? What does this suggest about supply chain management?