Dehavilland Case Study

Executive Summary

Kim Tamar, the financial analyst for de Havilland Inc., is contemplating ways to improve production efficiencies by finding a new supplier to source their flap shrouds and bay doors for the Dash 8 aircraft. Their current supplier, Dollard Plastics, is refusing to lower their parts costs to help decrease de Havilland's manufacturing costs, therefore, the hunt for a more willing participant is on.

Tamar must report her findings to de Havilland's Source Selection Board (SSB) which requires prospective vendors to meet a set of established procurement standards and be sustainable for a long-term relationship. Nine bids have been submitted to de Havilland by eager suppliers and one from Morton Enterprises has come in significantly lower than their competitors. But beyond part cost reduction, de Havilland is concerned with Morton's sustainability as a supply partner. Morton did not include their financial statements with their tender and de Havilland is hoping that this is not an attempt to “buy” the contract. The next closest bids were from DAS Composites and Lakeside Industries who could have the potential to be more reliable with regards to quality and long term requirements than Morton.

Heading in to negotiations, de Havilland must be prepared to reach an agreement that would provide the greatest value in reducing their production costs of the Dash 8, while keeping their goal of long-term contracts in mind and reducing the numbers of vendors in which they deal with.

Issue(s) Identification

Immediate Issue

Even though Marton Enterprises have submitted a bid at a far lower price than any other supplier’s tenders, de Havilland must be confident that in the long-term Marton can be a sustainable supply partner.

Systemic Issues

1. De Havilland's SSB has stated clearly that they will not negotiate on price. Negotiations with Marton or any other potential vendor could be volatile based on this BATNA (Best Alternative to a Negotiated Agreement) from de Havilland.

2. Marton is interested in strengthening their reputation within the Canadian market so de Havilland must determine if the low price quote from Morton is realistic based on high efficiencies or due to low quality product standards.

3. Boeing who is a huge customer for Morton may see a potential deal with de Havilland threatening to their business and put pressure on Morton to squash the arrangement.

4. De Havilland must remain ethical while considering multiple offers from different suppliers. Trust issues could arise and poor public option would be unwelcomed.

5. Time is of the essence for de Havilland. Even though they have over a year to replace Dollard, negotiations can take some time and issues can transpire that would make reaching an agreement difficult.

Environmental and Root Cause Analysis

De Havilland is a successful manufacturer within the Canadian aircraft industry. Through acquisitions and mergers throughout the company's history their current procurement processes are the result of Boeing's ownership from 1986 to 1992. De Havilland follows systematic purchasing procedures for any new and expired material contracts which start as a requirement from the engineering and parts departments on to the Bidder Selection Board (BBS), then the Source Selection Board (SSB) and finally the negotiation team.

Currently, de Havilland is experiencing high manufacturing costs for their newest project, the Dash 8. The parts associated with the production of the Dash 8 represent 60-65% of their total manufacturing cost. In an effort to decrease these high expenditures de Havilland approached their current vendor of the flap shrouds and bay doors, Dollard Plastics, to supply these parts at a lower cost ensuring de Havilland remain competitive. Dollard Plastics, however, was not interested in negotiating to a lower price point. With this failed attempt, de Havilland is determined to find another source for the parts.

Within de Havilland's procurement strategy is the development of long-lasting relationships with their suppliers hoping that in turn, these loyal vendors can capture economies of scale and pass those savings along. Also, fewer suppliers to deal with equals less vendor monitoring and fewer price negotiations every time new items are required or an old contract expires. With that in mind, after receiving nine tenders from potential suppliers of the flap shrouds and bay doors one, Morton Enterprises, has come out on top with a far lower bid than the other eight. However, they did not include their financials with the bid and de Havilland may be negotiating this deal more with their holding company, Devon Holdings, than Morton themselves. Morton’s interest in seizing sales within the Canadian market may make them vulnerable to de Havilland interest in cost savings but, in turn, this could make reaching a mutually beneficial agreement possible. But without knowledge of Morton’s financials and facilities, de Havilland is most concerned with what they can expect from Morton in the long-run.

With no resolution from Dollard seeming feasible and Morton looking like the top runner, de Havilland is determined to find the cost savings they