On April 19, 2008, Walter A. Walsh, Supply Management Manager for Heartland &

Company, met with one of his buyers, Olivia Newcomb, in his office. They discussed her

Heartland & Company cost reduction goals for bearing #B02326620. After the meeting

Mr. Walsh began wondering if changes should be made to the way suppliers were being

evaluated, if price premiums should be paid to suppliers for performing at a higher level

and how business should be allocated among suppliers performing at different levels.

These were issues needing further consideration.

Founded in 1875, Heartland & Company is one of the U.S.

s oldest industrial organizations. It manufactures agricultural and construction equipment as well as commercial and consumer lawn care equipment. Today, Heartland & Company does business in over100 countries and had sales in excess of U.S. $12 billion in 2007.

Bearings 2 Bearings are devices that allow constrained relative rotation or linear movement

between two parts. The purpose of bearings is to allow motion with a minimum of fric-

tion. Friction creates heat and wear of adjoining parts. Bearings are commonly found in

furniture drawers, all types of engines and at the intersection of moving mechanical parts.

An example of primitive bearings is the use of tree trunks laid down under heavy stones

in prehistoric times. Two common types of bearing include roller (cylindrical roller) bear-

ings and ball (spherical roller) bearings. Bearings can range in size from nearly microscopic

(watch bearings) to very large (wheel bearings on large earthmovers).

Many of Heartland & Companys products require bearings. Consequently, they spent

approximately U.S. $90 million on bearings in 2007. Applications of bearings at

Heartland included small (approximately 0.75 inches/19 mm) in lawn care equipment

through large (over 15 inches/384 mm) in large agricultural and construction equipment.

The firm has a continuing value analysis/value engineering program that, over the years,

has standardized bearings in a wide range of products and applications. The results of

bearing standardization include increased interchangeability among designs, reductions

in repair parts system-wide inventories and increased buying leverage with suppliers. As

a result, the annual requirements at Heartland for some of their standardized bearings

were in the hundreds of thousands.

Part #B02326620

One of Heartlands bearings, part #B02326620, was currently being purchased from

two suppliers, New England Works and Midwest Bearings. This bearing was used in a

wide range of Heartland products. Annual usage had been steady, averaging 500,000

bearings per year. The price of this bearing was approximately U.S. $1.00.

Supplier Performance

Heartland & Company evaluated its suppliers on five dimensions. As shown and

defined in Table 1, they were quality, delivery, cost management, technical support and

wavelength. The overall evaluation of a supplier was determined by its lowest scoring

dimension. The evaluation system and the 2007 evaluations of New England Works

and Midwest Bearings are summarized in Table 1.

The New England Works Advantage

While both suppliers offered excellent quality, New England Works was rated higher

in delivery, technical support and wavelength. Walter Walsh felt that these advantages

were largely due to a highly skilled sales force comprised of professionally trained engi-

neers at New England Works. The company responded well to Heartlands technical

needs in the areas of product and process improvements. These improvements resulted

in substantial efficiency gains to Heartland in the areas of product redesign, product sim-

plification and assembly costs. Rough estimates by Mr. Walsh placed these gains in the

Table 1

Dimension New England Works Midwest Bearings

Quality Partner Partner

Delivery Partner Approved

Cost Management Key Partner

Technical Support Partner Approved

Wavelength Partner Key

Overall Key Approved

Notes:

Dimension Definitions

Quality: Based on rejects per 1,000,000 supplied pieces of all items purchased.

Delivery: Based on supplier meeting delivery dates and quantities.

Cost Management: Based on cost management initiative, cost reduction activity, cost index performance,

performance during new programs and global competitiveness.

Technical Support: Based on supplier ability to provide a wide range of technical support at all stages of supply.

Wavelength: based on supplier overall attitude, responsiveness, attention to detail and communication performance.

Overall: Based on the supplier

s lowest performance in any dimension.

Supplier Performance Rating Scale

Highest Lowest

Partner Key Approved Conditiona

range of U.S. $500,000 to U.S. $1 million per year. The total of all bearing purchases

from New England Works in 2007 were approximately U.S. $20 million.

The Midwest Bearing Advantage

Midwest Bearings was rated higher than New England Works in the cost management

dimension. Their ability to reduce costs enabled them to consistently quote lower piece

prices, usually about 2 percent less than New England Works. The total of all bearing

purchases from Midwest Bearings in 2007 were approximately U.S. $8.5 million.

Simultaneous Goals

Heartland & Company placed a high priority on developing long-term, close working

relationships with suppliers that met its performance goals. On the other hand,

Heartland also pursued an aggressive program of annual cost reduction. Currently,

there was no specific company policy providing guidance on how to manage trade-offs

between these two goals. Perhaps factors other than price (such as delivery, cost manage-

ment, technical support and wavelength described in Table 1) should be considered

when comparing competitors

quotes, especially if this reduced Heartland

s long-term

costs of acquisition due to the value added by the non-price factors. For example,

would a price quote from New England Works be preferable even if it was higher than

the price quote from Midwest Bearings, provided New England Works

performance was

higher in the non-price factors? And if so, what sort of price premium would be

justified?

The Problems

Olivia Newcomb and Walter Walsh had to make decisions regarding three related but

conflicting issues. First, the supplier evaluation process emphasized the lowest perfor-

mance on one dimension even though suppliers were evaluated on five dimensions, as

shown in Table 1. They needed to consider whether or not a different supplier evaluation

system would make it possible to better evaluate the strengths and weaknesses of alter-

nate suppliers. Second, Heartland & Company had two often-competing goals, namely

developing long-term supplier relationships and generating annual cost reductions.

There was no clear guidance as to which goal was more important or how they could

be considered together. The final problem was how to allocate the business for part

#B02326620 between New England Works and Midwest Bearings. Included in this prob-

lem was the question of whether to pay a price premium and/or give volume preferences

to suppliers that provided better overall performance, or to emphasize price over non-

price considerations. The following discussion questions focus on these problems.

1.What are the advantages of basing a supplier,s overall evaluation on its lowest

performance on one of the five dimensions (Quality, Delivery, Cost Management,Case 10 Heartland & Company 53 Technical Support and Wavelength)? What are the disadvantages? Overall, do you think that basing a supplier's overall evaluation on its lowest performance on one dimension is a good idea or not? Why or why not?

2.Develop importance weights for the five supplier rating dimensions shown in

Table 1. Should these weights be equal? Briefly explain the basis for these weights.

3.Develop a weighted-point system for evaluating Heartland & Company bearings

suppliers. Please keep in mind that (a) the sum of these five weighted dimensions

must add to 100 points, and (b) Heartland & Company has the current goals of

developing long-term relationships with suppliers and generating cost reductions.

4.Make a case for paying a price premium that favors a higher overall rated supplier,

such as New England Works. Make a case for not granting a price premium for a

higher-rated supplier. Which wouldyou recommend? Why?