Major Facts

I. Major Facts

* Microcomp, Inc., a manufacturer of handheld computer devices is developing a new product which requires a state-of-the-art microprocessor. The manufacture of this input will be outsourced.

* There are four suppliers from which to choose from and the capability and price of Wedge Computer, Inc.'s microprocessor appears to be superior.

* A cross-functional team representing Microcomp visited Wedge's facility to assess their capability to deliver 100,000 microprocessors per over the next three years. All of the cross-functional team members gave glowing reports save for the finance representative's report. Wedge's future cash flow and solvency is questionable.

* Wedge's product is clearly excellent and their capabilities are also excellent. The price of the input is 10% lower than the next lowest price offered by a supplier.

* Wedge Computers Inc. is clearly highly leveraged. The average collection period of their accounts receivable is much longer than the industry average which compounds their financial issues. It is entirely possible that they will have serious cash flow issues before the proposed 3 year contract is fulfilled.

* Wedge recently invested over $5 million to increase plant capacity from 400,000 units per year to 600,000 units per year. The production manager was particularly impressed with their new equipment.

* I have taken the liberty of presenting a table of the industry averages of some key financial ratios and the corresponding ratios of Wedge Computers, Inc.'s. The table is below.

II. Major Problem

1. Should and/or how should, Microcomp, Inc. proceed with a supplier who provides a superior product at a lower price, but is experiencing financial issues?

III. Possible Solutions/Alternatives

1. Insist on having a team from Microcomp, Inc. come into Wedge and help them improve their average collection period on their accounts receivable. The team can also assist Wedge in any other financial areas that they can and Microcomp can use Wedge as a single-source supplier under those terms. This solution could improve Wedge's financial situation so they could stay cash positive through the life of the contract. Microcomp would gain the benefit of using Wedge's excellent product and they would gain the benefits of using a single source for a key component in a new product. If Wedge cannot supply the contracted parts Microcomp would be placed in an extremely precarious position. Microcomp will have to invest additional resources which will raise the TCO of the microprocessors, but the additional investment should further improve the relationship.

2. Under this proposed solution Microcomp would have the same team come in with the same objectives, but Microcomp would source 70%-80% of the inputs from Wedge and the remainder from another supplier. Again, Microcomp's team could improve Wedge's financial situation, but Microcomp could mitigate some of the risks of using a single supplier in poor financial condition.

3. Microcomp could source about 60% of the inputs from Wedge. The remainder of the necessary inputs would be supplied from two of the other suppliers to be split up so that one supplier supplies 15% of the inputs and the other supplies 25% of the inputs. No team would be sent to Wedge to assist them with their financial performance. Under this scenario Microcomp still sources the majority of the inputs from Wedge, who has the best product and price. Microcomp will not have to commit additional resources to Wedge. The risk of Wedge not fulfilling the contract is mitigated by having two relationships with different suppliers who could possibly fill the orders vacated by Wedge.

4. Wedge Computers, Inc. could be deemed too risky and they could be removed from consideration at all, and other suppliers could be investigated and chosen to supply the part. This would mean that their excellent input at an excellent price would not be used at all. This could hurt any future relationship that Microcomp may have or wish to have with Wedge. However, the risk would be reduced by using another supply source.

5. Microcomp could vertically integrate by buying one of the potential supplier's companies. The company that just entered the market, Baker, may be an excellent candidate. This part is a critical part and Microcomp could clearly benefit in some ways from controlling the production of this critical part. Microcomp is clearly in a dynamic industry with rapid technological innovations taking place. Microcomp would have to determine if this move would fit with their long-term strategic goals and if the purchased business could adapt with the industry.

6. Microcomp could reduce the contract length from 3 years to 1 year. No team from Microcomp would be sent to Wedge to help improve their financial performance.