11 Case Study Sampson Products

SAMPSON PRODUCTS CASE STUDY Presented By Amit Ahlawat (19) Anand G (21) Arpit Goyal (34) Dinesh Khanwelkar (44) Gaurav Hegishte (52) Keerthi (66)

Description of Case Study 

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Sampson product corporation - major manufacturer of electrical equipment with average sales of $400 million In 1990, Sampson Products was awarded a contract of $20 million to manufacture motors from General company with offering lowest price in bidding

Sampson’s Before tax profit is 9% of the $20 million contract

Description of Case Study (Cont.) 

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General Company sells small rotor shafts to Sampson Product from its machine shop division Indication of U.S. Government might restrict nonmilitary applications to conserve supplies of military use Though impressed by the shaft performance Mr. George Smithe, Director of purchases Sampson, decided to look for suppliers including General and to

Description of Case Study (Cont.) 

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The highest bid is from General company for the motor shafts The President of General company threatened Mr. Smithe of canceling the long term contract If General doesn’t get the new contract of manufacturing rotors for Sampson

Reasons against awarding the contract to General According to Mr. George Smithe…… 

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No economic basis for General to insist on a premium price, General attempting to take advantage of motor purchase to obtain higher price for shafts Reciprocity shows difficult administrative and control problems

Reasons against awarding the contract to General According to Mr. George Smithe…… 

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If Sampson pays premium prices for purchase materials for no reason then they lose reputation as well as sales to their buyers who are not their suppliers Sampson sales motors to General at the best value in the best price, so it would be difficult for General to discontinue their $20 million contract with Sampson

Cont.. 

Lastly, being in a long term relationship Smithe asked President of General to reconsider the price of their bids and send it again

Material in question ? 

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Rotor shafts used in small high-speed motors Shafts are made of special alloy which is in very short supply High probability that govt might restrict use of alloy for nonmilitary application to conserve supplies for military use

Further ... 

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Rotor shaft can make or break a motors performance especially in high speed small motors Sampson has 100 million revenue from small motors sale 1/4th of total revenues Sampson has four competitors of equal size in above segment

Kralijic Matrix Low Supply Chain Difficulty

High Supply Chain Difficulty

Low Strategic Importance

Commodity materials

Bottleneck materials

High Strategic Importance

Leverageabl e materials

Direct/core competency materials

Strategic Partnership with Suppliers Other suppliers are not yet tested for delivery and quality General may terminate contract , there is a clause

Questions What are the basic policy issues in this situation? Analyze and discuss each of them.  What actions should Smithe take? Why? 

Question 1 

What are the basic policy issues in this situation? Analyze and discuss each of them.

Basic Policies: • Reciprocity • Supplier Relations Purchasing Strategy & Procedures

Policies Involved - Reciprocity Reciprocity: This action involves giving preferential treatment to suppliers that are also customers of the buying organization.

Why Purchasing avoids it

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Why Sales prefers it

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Restricts competition among potential  Purchasing patterns give idea about sales suppliers potential  Difficult to negotiate with the buyer  Readily available customer  Legal aspects – Proofs to show that there is  Helps to increase & retain company’s market no intent to restrict competition and no threatreciprocity for economyhas (anti competitive act).obligation many companies adopt the policy Though lots of legal 

that say’s in essence: "When important factors such as quality, service, and price are equal, we

Policies Involved - Reciprocity Case Perspective: 

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Though president concludes that this is a purchasing problem involvement of Purchasing and marketing makes it top management’s problem. President of Sampson should consider the concerns of both purchasing and sales along with their weightage to the companies objective and then take proper decision. If management believes that it can expand sales permanently and add to the firm's profit legally by practicing reciprocity, then this is the decision management should make. Conversely, if management believes that profit will be increased by buying without the constraints of reciprocity, then that is the policy management should adopt.

o c es nvo ve  – upp er Relations  

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Doing business for a while New contract in place Smith should have asked the existing supplier before going for competitive bidding Lack of courtesy and professionalism Two meetings made the things worse

o c es nvo ve  – upp er Relations 

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Potential Relationship problem with the new three firms and the market in general Inviting bid again from General only another problem If general bids lowest, ethical issues Firms reputation as “unethical price buyer”

Policies Involved –

Purchasing Strategy & Procedure 

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Why did Smithe request competitive bids for the new shaft job in the first place? Sampson's contract renewal/sourcing analytical procedures may not be as thorough and as stringent as they should be. Should have negotiated directly with General to add the new job onto the old contract

Question 2 

What actions should Smithe take? Why?

Decision to be taken  

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Going forward Smithe should take the following decisions The worst thing that can happen to Sampson at this point is General motors can cancel the contract of purchasing motors from Sampson. The probability for this to happen is very less, reason being General motors was vey much satisfied with the quality and the attractive price of the motors being supplied to GM. Cancelling the contract  with Sampson will be a costly move for GM, as it is difficult to get a supplier like Sampson. Nevertheless, Smithe should first talk with Sampson's sales personnel responsible for motor sales to General. He should apprise these individuals of the recent scenario, so they can plan their approach to insure retention of the motor business with General.

 What actions should Smithe take? Why?

Decision to be taken (Contd…) 

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Based on his previous actions, Smithe really has no viable alternative other than awarding the new shaft contract to the lowest qualified bidder. In all likelihood, this  will increase Sampson's shaft costs, compared with the possibility of negotiating the new contract with General originally. However, the multiple sourcing arrangement  will provide the advantages and additional source reliability that accompany the multiple sourcing approach. It is unlikely that General will cancel the existing contract, simply because it represents an attractive piece of business for five years and the machine shop division currently needs the business. Even if the contract were cancelled, Smithe easily could resource with his new supplier or with one of the other bidders

Decision to be taken (Contd…) 

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It may be difficult to accomplish, but Smithe is obligated to attempt to improve his relationship with the General organization. The approach he takes will depend significantly on the personality  of the individual he chooses to deal with, and also on General's attitude toward the entire situation after the dust has settled. Since the existing contract still has approximately five years to run, it is imperative that Smithe try to mend his broken fences to the extent possible.

 What actions should Smithe take? Why?

Decision to be taken (Contd…) 

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It is clear that Sampson's procedures used in supplier selection and contract renewal (including the use of price analysis and cost analysis) must be reviewed carefully .  A good set of procedures in this regard, properly utilized, should ensure that this type of blundering, poorly conceived sourcing practice does not happen again.  Whether Smithe will recognize the need for this type of procedural improvement is problematic. If he does not, perhaps his president  will generate enough heat as a result of this embarrassing situation to make Smithe aware of this important need.

 What actions should Smithe take? Why?

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