Loren Inc. Case Study

Loren Inc.

Case Study

Organization Background:

Loren (Canada) is a Canadian subsidiary of a larger international chemical company including consumer and industrial products.  Over the years, the company established an excellent reputation for quality products and marketing effectiveness with a substantial growth in total sales and financial success.  Total Canadian sales were approximately $800 million after-tax profits were $40 million.  Raw material and packaging costs were about 50% of sales.  

Brent Miller, a recent business graduate, was given the task of seeking bids for the company’s annual hexonic acid requirements and to present a recommedation to his supervisor. The Purchasing Department is composed of twelve (12) well-qualified staff, including a number of engineering and business graduates at both the undergraduate and masters level. The department was headed by a director who reported to the president. The hexonic acid contract would not only have to be approved by Brent Miller’s immediate supervisor but also the director of the department.

Loren Inc. has a well-established purchasing department with clear objectives.  Over the years the purchasing department had established a single-bid policy, long-term supplier relations, assured supply for all possible types of market conditions, multiple sources when its possible and no supplier switching when it’s possible.

Hexonic Acid was a major raw material in a number of Loren product. Loren expected to use approximately 3,000 tons of hexonic acid in the following year.  The requirements for the past year amounted to 2,750 ton has been supplied by Canchem and Alfo at 60 to 40 percent, respectively.  

Defining the Issue

The main issue for Loren Inc. (Canada) is which suppliers should be recommended for the hexonic acid supply contracts. This entails an anlysis of the bids to determine any possible issues in order to provide a recommendation in line with the purchasing policies of the company.

The policies and practices in place to be satisfied are as follows;

• Single bid policy, best bid on the first submission and suppliers to live with the consequences of their bid.
• Long term supplier relations to be developed.
• Reliability of supply in all market conditions.
• Multiple supply sources where possible to lower the risk of falling foul of market conditions.

Further issues to be resolved related to the manner of how the bids were submitted and analyzing the data in relation to each company to determine the overall value of each bid taking into consideration.

• If the second bid of Canchem should be allowed to stand for consideration
• Past history with the suppliers
• Supplier capacity
• Reliability of supplier.
• Choosing between domestic and non-domestic suppliers.

Analyzing Case Data

Loren (Canada) had invited 4 companies to submit bids for the annual contract to supply their hexonic acid requirements with the supply of material to commence August 1.  The recently appointed raw material buyer, Brent Miller is required to prepare a recommendation based on the bids and the Loren purchasing polcies, practices and objectives. Four suppliers, Alfo, Canchem, Carter Chemicals, and American Chemical Inc (AMCHEM) were sent inquiries to have their bid submitted by June 7, 4:oo PM.

Hexonic acid is a major raw maerial in a number of Loren products. Previous year purchases amounted to 2,750 ton with the coming years requirements expected to increase to 3,000 ton. The availability of the material in the market was difficult to predict and due to the production process yielding both hexonic and octonic acids the demand for either product influenced the market.

2 years previous, due to strong demand in European and Japanese markets there had been major shortages of hexonic acid. This followed a period of depressed prices which resulted in capacity expansions by suppliers being delayed due to the unfavorable market conditions. Both Loren’s suppliers at the time were in production transitions with Alfo between their shut down Windsor plant and pending Quebec plant while Canchem were experiencing coversion problems to accommodate recent chemical improvements. This coupled with their parents companies in the US facing a high demand resulted in both companies putting Loren on allocation although through much effort this obstacle was overcome. The surge in demand resulted in a price increase which fell withing the conditions of the contract but was still more economical than importing off shore material.

The past year contracts were in place with both Canchem and Alfo for 60% and 40% of the supply total with prices per ton from each at $1,384 and $1,292 respectively. This fell in line with the preference for multiple sources in the procurement process. For the coming year Brent felt optimistic that the hexonic acid cycle had turned around with the current demand being for octonic due to the booming paint industry resulting in increasing inventories of hexonic acid which may lead to a buyers market.

With the potential for a buyers market and the interest from potential bidders Brent decided to issue the hexonic acid enquiry to the four suppliers he though had the best chance of quoting competitively on the needs of the Hamilton plant.

The four suppliers who were provided the same information to bid are:

ALFO

Alfo is a Canadian supplier and had been supplying Loren (Canada) for many years with 40% of Loren’s raw material being supplied currently.  Although Alfo struggled 2 years previously during the upsurge in demand, their new plant has the capacity to supply the entire new hexonic requirements of 3,000 tons alone.  

During the meeting between Mr. Baker (Alfo sales representative) and Brent, Mr. Baker informed Brent that he was aware of the low-priced hexonic acid on the European market, and made sure to emphasize that it would be uncompetitive in the Canadian market after the cost of duty and freight were added.  Alfo quoted a price of $1,296 per ton and the same contactual conditions as under the current 1 year contract.

CARTER CHEMICALS LTD

Carter Chemicals Ltd. is the Canadian distributor of Michigan Chemical which is located in the U.S.  Michigan Chemical had a good record with Loren (U.S.).  As per record, they supplied close to 99 percent of its commitment in the recent period of shortage. Carter submitted a price of $1,268 per ton with a minimum order requirement of 750 tons on a year long contract.