10/16/2018 Supplier Selection at

Casturn Systems

61910037 Shubham Chauhan

61910069 Adarsh Kumar
Group 8 61910194 Soham Agnihotri
61910816 Santosh Shrinivas Parsewar
61910828 Anand Sharma
1) What are the drivers for successful usage of e-RAs?

e-Reverse Auctions is tool where suppliers bid for business with buyers by lowering their bid
prices on products that the buyers are willing to procure. These auctions are designed for
facilitating re-sourcing options for buyers in order to enable efficient procurement. This tool
helps buyers to identify competitive suppliers and achieve cost savings in their sourcing
activities. The following are a few aspects that might be considered as important for driving
a successful reverse auction:

▪ Complexity of the part being sourced: Reverse auctions are usually preferred in cases
where the parts to be sourced are simple.
▪ Number of suppliers of the part and their qualifications: The suppliers (both their number
and qualification) participating in the auction plays an important role as this determines
the competitiveness of the bidding activity.
▪ Supplier relationship: The relationship with incumbent suppliers may add complexity to
the bidding process. Auctions may sometimes have a negative effect on supplier
relationship. This may result low number of participants in the auction.
▪ Cost for switching from existing supplier: The switching costs should be low enough to
justify the cost savings expected from sourcing from a new supplier. The complexity of
approval process for the new supplier may diminish the cost benefits resulting from low
cost of sourcing.
▪ The format of auction: The platform of auction and the parameters that the buyers set can
affect the level of competition and participation in the auctions. Few of the parameters that
the buyers set could be Price Visibility, Rank Visibility, Auction Duration, etc.

2) Can e-RAs be used for sourcing highly engineered parts?

It is recommended that e-RA be used for re-sourcing of relatively simple parts and
commodities. Highly engineered parts have relatively high complexity and may lead to
unsuccessful auction. The following are a few disadvantages of using e-RA for sourcing highly
engineered parts:

▪ Low participation: There might be very few suppliers producing highly engineered parts.
This would result in low participation and competitiveness in the auction.
▪ Parts not getting approved: Complex engineering parts may have specifications which are
not clearly understood by the suppliers. The criticality and specifications of these parts for
 buyers and the inability of suppliers to meet these standards would result in the parts not
being approved eventually. Some suppliers might increase the price once they understand
the criticality of part after the auctions thus nullifying cost advantage.
▪ High switching costs: Critical parts would require elaborate testing and approval process
form OEMs. This can result in significant costs for switching from an existing supplier
who is providing parts according to specifications.
▪ Damaging supplier relationship: There might be a threat of straining the long term existing
relationship between buyers and suppliers if the supplier has developed engineering
capability for servicing specific needs of the buyer.

3) What are the benefits and disadvantages of the re-sourcing process in Figure 1? Are there
any improvements that should be made to the current practices within Global Supply
Management?

Benefits Disadvantages
- Structured framework for evaluation of - Long and time-consuming process from
new suppliers identification to implementation
- Effectiveness in ensuring reliable - Complications for getting approval from
supplies of critical parts multiple stakeholders
- Ability to warrant quality as per OEM - High cost disadvantage if the part fails
specifications technical evaluation (or any other
- Participation of all stakeholders in the subsequent step).
approval process - Might negatively impact supplier
relation

Opportunities for improvement:

▪ Casturn can possibly modify the process for re-sourcing of simple parts. This might help
to reduce approval time and cost disadvantage for supplier selection and switching.
 ▪ Part designs can be made simpler as suppliers have repeatedly complained about designs
that were very difficult to manufacture. Simpler designs would help reduce the costs. It
would also increase the number of suppliers to choose from.
▪ Casturn currently procures from a large number of suppliers. It would help if they
consolidate the number of suppliers among different geographies to generate aggregation
benefits.

4) Which parts (if any) should be taken to electronic reverse auction?

The decision should be based on the evaluation that whether any significant cost benefits are possible
with the reverse auction. For this, we will use the difference between the total landing cost and the
validation cost. The difference is also adjusted for present value and probability of clearing the
validation. If this difference is positive, then inviting those suppliers for reverse auction would be
beneficial. Refer below the broad summary of the analysis performed.

Part Type: Spool Part Type: Pin

Is difference greater Is difference greater
Challenger Challenger Location Challenger Challenger Location
than validation cost than validation cost
Smith Precision North America N Browne North America Y
HNC Eastern Asia N Xi Lifao Eastern Asia Y
F. Decolletage Western Europe N Zhang Eastern Asia Y
Zhang Eastern Asia N HNC Eastern Asia N
Lifang Eastern Asia N F. Decolletage Western Europe N

Part Type: Sleeve

Is difference greater
Challenger Challenger Location
than validation cost
HNC Eastern Asia Y
GlobalTools Eastern Asia Y
Bangalore Machining South Asia Y
Richner Western Europe N
Zlotski Tech Eastern Europe Y
Comcastings North America Y

Refer to annexure-1 for details of calculations.

5) What is the optimal setup for electronic reverse auctions?

a) What should be the duration of the auction event?

The duration of the auction event shall be at least 6 hours to at max 24 hours. This will allow
sufficient time for the suppliers to enter their bid values and validate that their bid is consistent with
contract terms. The suppliers also need some time to rework on their costing in case they wish to
decrease the cost when learned from their rank from auction. This is especially important for some
 customized items for which the cost drivers are complex. Therefore, a window of 6 to 24 hours
depending the complexity of the item shall be provided for auction.

b) Should the bid be on piece price or total cost?

The bid be on piece price vs total cost: In case the annual volume of components is fixed, then it the
bid on the total cost would be recommended. Because supplier might plan for better machineries to
gain economies of scale give the fixed volume. On the other hand, if the annual volume is not fixed,
the bid should be on the piece price. Because buyer may base his contract on the piece price to get
the advantage of varying quantity rather than getting fixed on a lump-sum cost.

c) Should the auction have a reserve price? Should that price be visible to suppliers?
The auction should have a reserve price. This is price shall the best price that buyer currently has,
and all the bid prices shall be compared with this reserve price. However, showing the reserve price
is like disclosing the willingness to pay to suppliers. Suppliers might take undue advantage of this
price and may hesitate to offer prices which are much lower than reserve price. Therefore, 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 it be a dynamic bidding event, or a single-shot (best- and-final) tender?

In general, the reverse should be a dynamic bidding. This would offer scope for suppliers to compete
for contract by lowering the prices. This process will benefit the seller. The single-shot tender carriers
its own advantages. The suppler who wants to win the bid would place his best foot forward given
that he has only one chance. But, if any supplier miscalculates the final bid value, then he will not
have a chance to correct its bid.
Annexure 1: Total landed cost analysis

Part Type: Spool

Casturn Plant Location Western Europe
Current TLC / Unit: $1.42
Annual Volume (Units) 575000
Current total cost $ 816,500
Discount factor
(assumed) 12%

Probability of Difference in cost at the

Total cost at Difference in Difference in cost at
Bid Scorecard Logistics Validation clearing TLC / begning of year Is difference greater
Challenger Challenger Location Duty Rates the ed of cost at the end the begning of year
(Dollars/unit) Rating Cost Factors cost technical Unit considering the prob. Of than validation cost
year of year (Discounted value)
evaluation clearing tech. validation

Smith Precision North America $ 1.75 A 7% 0% $ 15,000 0.95 $ 1.87 $ 1,076,688 $ (260,188) $ (232,310) $ (220,694.75) N
HNC Eastern Asia $ 1.22 A 8% 5% $ 24,500 0.95 $ 1.38 $ 792,695 $ 23,805 $ 21,254 $ 20,191.74 N
F. Decolletage Western Europe $ 1.98 C 4% 0% $ 21,000 0.65 $ 2.06 $ 1,184,040 $ (367,540) $ (328,161) $ (213,304.46) N
Zhang Eastern Asia $ 1.30 B 8% 5% $ 24,500 0.8 $ 1.47 $ 844,675 $ (28,175) $ (25,156) $ (20,125.00) N
Lifang Eastern Asia $ 1.39 B 8% 5% $ 24,500 0.8 $ 1.57 $ 903,153 $ (86,653) $ (77,368) $ (61,894.64) N

Part Type: Pin

Casturn Plant Location North America
Current TLC / Unit: $0.32
Annual Volume (Units) 1,250,000
Current total cost $ 400,000
Discount factor
(assumed) 12%
Probability of Difference in cost at the
Total cost at Difference in Difference in cost at
Bid Scorecard Logistics Validation clearing TLC / begning of year Is difference greater
Challenger Challenger Location Duty Rates the ed of cost at the end the begning of year
(Dollars/unit) Rating Cost Factors cost technical Unit considering the prob. Of than validation cost
year of year (Discounted value)
evaluation clearing tech. validation
Browne North America $ 0.19 B 3% 0% $ 15,000 0.8 $ 0.20 $ 244,625 $ 155,375 $ 138,728 $ 110,982 Y
Xi Lifao Eastern Asia $ 0.24 B 9% 3% $ 24,500 0.8 $ 0.27 $ 336,000 $ 64,000 $ 57,143 $ 45,714 Y
Zhang Eastern Asia $ 0.25 B 9% 3% $ 24,500 0.8 $ 0.28 $ 350,000 $ 50,000 $ 44,643 $ 35,714 Y
HNC Eastern Asia $ 0.29 B 9% 3% $ 24,500 0.8 $ 0.32 $ 406,000 $ (6,000) $ (5,357) $ (4,286) N
F. Decolletage Western Europe $ 0.39 C 7% 0% $ 21,000 0.65 $ 0.42 $ 521,625 $ (121,625) $ (108,594) $ (70,586) N

Part Type: Sleeve

Casturn Plant Location Western Europe
Current TLC / Unit: $3.25
Annual Volume (Units) 600,000
Current total cost $ 1,950,000
Discount factor
(assumed) 12%
Probability of Difference in cost at the
Total cost at Difference in Difference in cost at
Bid Scorecard Logistics Validation clearing TLC / begning of year Is difference greater
Challenger Challenger Location Duty Rates the ed of cost at the end the begning of year
(Dollars/unit) Rating Cost Factors cost technical Unit considering the prob. Of than validation cost
year of year (Discounted value)
evaluation clearing tech. validation
HNC Eastern Asia $ 2.10 B 8% 5% $ 24,500 0.8 $ 2.37 $ 1,423,800 $ 526,200 $ 469,821 $ 375,857 Y
GlobalTools Eastern Asia $ 2.45 A 8% 5% $ 24,500 0.95 $ 2.77 $ 1,661,100 $ 288,900 $ 257,946 $ 245,049 Y
Bangalore Machining South Asia $ 2.60 B 8% 5% $ 28,500 0.8 $ 2.94 $ 1,762,800 $ 187,200 $ 167,143 $ 133,714 Y
Richner Western Europe $ 3.15 A 4% 0% $ 21,000 0.95 $ 3.28 $ 1,965,600 $ (15,600) $ (13,929) $ (13,232) N
Zlotski Tech Eastern Europe $ 2.89 C 4% 0% $ 35,000 0.65 $ 3.01 $ 1,803,360 $ 146,640 $ 130,929 $ 85,104 Y
Comcastings North America $ 2.95 A 7% 0% $ 15,000 0.95 $ 3.16 $ 1,893,900 $ 56,100 $ 50,089 $ 47,585 Y