Prestige plastics (PP) pricing problem - Case Study Example

Major Facts Sue, being a graduate majored in materials management, discovered a pricing problem while working at a manufacturing firm named Prestige Plastics (PP) operating as a supply manager. Her job description consisted of purchasing chemicals for the firm’s plastic productions. The problematic chemical purchase for Sue was that of a chemical called X-pane made specifically for PP. A bid for this chemical was forwarded to six suppliers with an annual requirement of 10,000 drums. The Chicago Chemical Company bid the lowest.

Greater Sandusky Chemical said it was impossible to bid that low based on approximate production costs of $750,000 amortized over the one-year contract to reduce loss. Other bidders agreed with this statement. Sue assessed that over the years bidding prices did increase reflecting cost growth. She knew something was wrong but also wanted to maintain the competitive bidding process. Major Problems The major problem consists of the cost growth required to produce the chemical X-pane increasing each year adversely affecting the competitive bidding process.

The approximate setup cost of 750,000 for producing x-pane seems to be an issue with buyers in seeing this return over a one-year contract. Possible Solutions/Alternatives A. One alternative would be for Sue to work with the engineering department and assess if there is a better cost efficient chemical that gives the same product results as X-pane that is already on the market for purchase. B. Another alternative would be to reduce the estimated annual requirement of purchase and expand it over a longer period of time.

Instead of the required purchase of 10,000 drums a year it can be pushed back to 10,000 drums in 19 months. C. Finding a more cost efficient product that produces the same result and expanding the purchase contract to 10,000 drums within a 19 month period would produce the best results. D. The advantage of finding a cost friendly chemical would decrease costs for the manufacturing firm and increase production from eager buyers. The disadvantage of this would be that the new chemical would not meet the standards set by X-pane.

The advantages of increasing the contracts purchase period would allow for buyers to make a greater profit which would be pleasing for them and increase production for the company in the long run. The disadvantage of this would be that PP would not make as much money as it would if it kept the original contract in place. Choice and Rationale I chose choice B. Expanding the purchase contract would be more cost efficient than taking time to search for a new product and gambling on those results.

Questions 1. Usually when five prerequisites are satisfied the buying manager can be assured of obtaining the lowest price. 2. According to the case a buying firm may fall into the “competitive bidding trap” when one company bids lower but increases its bid over time to produce an appearance of a demand but then the hidden fluctuated production costs over time decreases the demands for other competitors. This can create a blind spot in thinking that production is going well and not considering extra costs as time procures.

Sue saw the fact that the Chicago Chemical Company placed a low bid for five years straight but failed to realize that the competitive market was decreasing which essentially decreases production. 3. During the first contract at Prestige Plastics Chicago Chemical’s bid was $202 per barrel which was $3 lower than the second lowest price. Each year Chicago Chemical’s prices were $3 to $15 lower than the lowest bid. This could be a strategic move played by the bidders making it seem like a competitive market while reflecting cost growth in materials required to get Prestige Plastics to offer a better deal in order to keep competitive bidding active. 4. During the current buy things seemed good for Prestige Plastics with Chicago Chemical giving the lowest bid but the other competitors were not satisfied with growing production costs.

They felt the competition was unfair to them