Sourcing Dilemma at Rank Machine Tools 1 Rank Machine Tools, Limited (RMT) is a pioneering company that made special purpose machinery for the cotton spinning and weaving industries. They had 3 plants for making machine tools that were in Pune (west zone), Manesar (north zone), and Rourkela (east zone). Each of these plants currently sourced their components from local incumbent suppliers. Nagaswamy, the Chief Procurement Officer (CPO) of RMT was asked by the top management to identify product components that can be centralized for sourcing. The idea was to post to the selected components for electronic reverse auction for a contractual term of 5 years, in order to obtain superior value for money. Based on the initial analysis, Nagaswamy identified 3 product components viz. spindle, pin, and bracket that offered some promise. Nagaswamy obtained an informal quotation from different vendors for these three products. All the data pertaining to these three products as collected by Nagaswamy are given in Exhibits 1, 2, and 3 respectively. Please note the data pertaining to the incumbent supplier is given on the basis of total landed cost (TLC). The quotations obtained from the potential challengers were in cost / unit, which excluded logistics costs and applicable excise duty for delivery to the respective RMT plants. The costs associated with transportation and the applicable excise duty for inter-state goods movement is given in Exhibits 4 and 5 respectively. Nagaswamy also carried out an initial survey of these vendors from secondary data to rate them on their technical ability to manufacture a particular product and assigned a rating for them in a 4-point A, B, C, D scale. These 4-point ratings are associated with a probability of clearing the technical evaluation and this information is given in Exhibit 6. Of course only after inspection of the vendor facilities, can RMT determine whether a particular vendor clears the technical evaluation exercise. The fixed one-time cost for inspection of a vendor facility, by location is given in Exhibit 7. This inspection exercise needs to be done once at the start of the contract, to onboard a vendor (anyone other than the incumbent) for sourcing any component for the contractual term of 5 years. Nagaswamy was wondering which all among these three products should be recommended for electronic reverse auction and what is the range of expected cost savings for each of these products.

\begin{tabular}{|c|c|c|c|c|c|c|} \hline Part Name & Spindle & & Note* T & LC= Total La & anded Cost & \\ \hline Annual Volume & 570,000 & Units & & & & \\ \hline Plant Location & Pune, West Zone & & & & & \\ \hline Incumbent Supplier & Mojo Mechanics & & & & & \\ \hline Supplier Location & Nasik, West Zone & & & & & \\ \hline Current TLC / Unit & 1.42 & & & & & \\ \hline Challenger Suppliers & Location & Quotation Unit Price & Rating & North Zone & East Zone & West Zone \\ \hline Shiva Precision & Kanpur, North Zone & 1.75 & A & & & \\ \hline HMT & Kolkata, East Zone & 1.22 & A & & & \\ \hline Decagon & Baroda, West Zone & 1.98 & C & & & \\ \hline Saha & Odisha, East Zone & 1.3 & B & & & \\ \hline Pradhan Holdings & Odisha, East Zone & 1.39 & B & & & \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|} \hline Part Name & Pin & & & \\ \hline Annual Volume & 1,250,000 & Units & & \\ \hline Plant Location & Manesar, North Zone & & & \\ \hline Incumbent Supplier & Hero & & & \\ \hline Supplier Location & Rohtak, North Zone & & & \\ \hline Current TLC / Unit & 0.32 & & Note T & LC = Total Landed Cost \\ \hline Challenger Suppliers & Location & Quotation Unit Price & Rating & \\ \hline Vaishno Metals & Chandigarh, North Zone & 0.19 & B & \\ \hline Kumar Fabrications & Odisha, East Zone & 0.24 & B & \\ \hline Saha & Odisha, East Zone & 0.25 & B & \\ \hline HMT & Kolkata, East Zone & 0.29 & B & \\ \hline Decagon & Baroda, West Zone & 0.39 & C & \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|} \hline & & \multicolumn{3}{|c|}{ DELIVERY TO PLANT IN } \\ \hline & & North Zone & East Zone & West Zone \\ \hline & North Zone & 3% & 9% & 7% \\ \hline & East Zone & 9% & 4% & 8% \\ \hline & West Zone & 7% & 8% & 4% \\ \hline & South Zone & 10% & 7% & 8% \\ \hline & Srilanka & 15% & 10% & 9% \\ \hline & Central Zone & 8% & 8% & 4% \\ \hline \end{tabular} Logistics costs for transportation between locations, given as a % of the unit cost of the product. \begin{tabular}{|c|c|c|c|c|} \hline & & \multicolumn{3}{|c|}{ DELIVERY TO PLANT IN } \\ \hline & & North Zone & East Zone & West Zone \\ \hline & North Zone & 0% & 15% & 0% \\ \hline & East Zone & 3% & 0% & 5% \\ \hline & West Zone & 0% & 15% & 0% \\ \hline & South Zone & 3% & 15% & 5% \\ \hline & Srilanka & 10% & 15% & 9% \\ \hline & Central Zone & 3% & 15% & 0% \\ \hline \end{tabular} Inter state excise duty for goods movement, specified as % of the unit cost of a product Probability of Clearing Technical Evaluation \begin{tabular}{|c|r|} \hline Rating & Probability \\ \hline A & 0.95 \\ \hline B & 0.8 \\ \hline C & 0.65 \\ \hline D & 0.4 \\ \hline \end{tabular} Fixed Costs Incurred for Inspection of Vendor facilities in a particular location, irrespective of the product \begin{tabular}{|l|r|} \hline \multicolumn{1}{|c|}{ Supplier Location } & Inspection Cost \\ \hline North Zone & 15,000 \\ \hline West Zone & 21,000 \\ \hline Central Zone & 35,000 \\ \hline South Zone & 28,500 \\ \hline East Zone & 24,500 \\ \hline Sri Lanka & 32,700 \\ \hline \end{tabular}