Supplier Selection at Casturn Systems (B)

1. Exhibits provided in the case suggest that there are three parts that were considered
for the auction. Which of these three parts should be taken to auction?
Ans – In general, parts which have simpler specifications, have high supplier base, high
competition among the suppliers could be taken to the auction. In this case, the decision
of which parts to be taken to reverse auction should be based on whether there are any
significant cost benefits possible with reverse auction. The cost benefit can be calculated
as Net savings after the validation cost and the expected savings adjusted after the
probability of clearing the validation. If the Expected savings are positive, then inviting
those suppliers for reverse auction would be beneficial. Based on this analysis, ‘Pin’ and
‘Sleeve’ could be procured through e-RA (Please refer to the excel sheet for detailed
analysis)
Spool Pin Sleeve
Challenger To be taken to Auction? Challenger To be taken to Auction? Challenger To be taken to Auction?
Smith Precision No Browne (Max Savings) Yes HNC (Max savings) Yes
HNC No Xi Lifao Yes Global Tools Yes
F. Decolletage No Zhang Yes Bangalore Machining Yes
Zhang No HNC No Richner No
Lifang No F. Decolletage No Zlotski Tech Yes
Comcastings Yes

2. How should the ranks of the suppliers participating in the auction be determined?
Ans - The process for supplier selection is a problem-solving process, which covers the
works of problem definition, formulation of criteria, qualification and choice. The ranks
of the suppliers participating in auction cab be determined by a combination of below
factors
1) Bid: The most important cost parameter of the resourcing process is the cost at which
supplier us willing to sell parts to Casturn Systems.
2) Logistics Cost factors & duty rates: logistics cost and Duty rates when added to bid
cost will give the Total landed cost for the Casturn systems. TLC will be the actual cost
for the Company and savings will be determined by the TLC.
3) Probability of clearing technical evaluation: After calculating the savings from TLC,
the expected monetary payoff can be determined by multiplying probabilities with the
probability of clearing technical evaluation. The expected monetary payoff is the
expected payoff by factoring in the probability of a particular event.
4) Validation cost and Expected Savings: After calculating Expected monetary payoff,
the suppliers can be ranked by comparing the validation cost and expected monetary
payoff. Higher positive difference between Expected payoff and Validation cost will
result in a higher rank for that particular supplier.
In addition to the above criteria explained in the case, following criteria can also be taken
into consideration to mitigate the supply chain risks in case of foreign suppliers –
1) Availability of the technological base
2) Availability of the skilled labour force
 Supplier Selection at Casturn Systems (B)
3) Volume flexibility
4) Location of supplier in a country having low country risk, e.g. Political risk, currency
5) Effectiveness in protecting the buyer’s proprietary information
6) Certifications of the supplier etc
Instead of making the decision based on only on the experiences and intuition,
multiple criteria decision making or multiple attributes decision making
(MCDM/MADM) can be used to deal with the ranking of the suppliers. It evaluates
suppliers on multiple conflict criteria. Analytical Hierarchy Process (AHP) or
TOPSIS can be used. The suppliers are rated on a scale on all the criteria and AHP or
TOPSIS will give the ranking of them based on the ratings and cost benefit analysis

3. What operational parameters should be used for the e-RA? For example, should it
be a single shot tender or dynamic bidding event?
Ans - The following operational parameters can be used for the e-RA –
a. What should be the duration of the auction event?
The optimum duration of the event should not be so low that it leads to suppliers
making errors and should not be so high that it loses the attention of suppliers. It
should also factor in the time difference for bidding parties from different parts of the
world. Thus, duration anywhere between 30 mins to 24hrs is good enough for
bidding.
b. Should it be a dynamic bidding event, or a single-shot (best-and-final) tender?
In general, reverse bidding should be dynamic. However, for the parts which are not
strategic in nature and are low price is the major factor in the evaluation, dynamic
bidding should be used. For the strategic decisions, single shot tender can be the best
choice as. The supplier who would want to win the bid would place his best foot
forward given that he has only one chance. The Due importance will be given to other
aspects such as cycle time, technical evaluation and not just the price here.
c. Should the auction have a reserve price? Should that price be visible to suppliers?
The auction should have reserve price which will be the best price that the buyer
currently has. All the bid prices shall be compared with the reserve price. However,
Suppliers might take advantage of making the reserve price public to them and may
hesitate to offer prices which are much lower than reserve price. Hence, reserve price
would be used only by buyer to compare the auction quotes to finally decide whether
to award a contract or not and should not be disclosed to bidders.
d. Should the bid be on piece price or total cost?
If the annual volume of the buyer is fixed, it can be bid on the total cost as supplier
would plan better to gain more profits for themselves and hence offer competitive bid.
If annual volumes are not fixed, the bid should be on piece price as it will give buyer
a a better understanding of the cost structure of the supplier.
e. Should the incumbent be invited for the auction or not?
Unless there are problems with existing supplier and buyer is looking forward to
change them, incumbents should be invited to the auction. It can help in re-
establishing the market price. For ex, it is given in the case that in case of changing
 Supplier Selection at Casturn Systems (B)
the suppliers, the savings will only realize after a year whereas if the price can be
negotiated with the incumbent, the savings will hit the books immediately.