De Havilland Essay

Executive Summary De Havilland is a major player the Canadian aircraft manufacturing industry. Founded in 1928 by a British company, De Havilland has had multiple acquisitions by various organizations including the government. As of 1992, the organization was co-owned by the government of Ontario with 49% shares and Bombardier Inc. with 51%. The company’s strategic goal is to keep their competitive advantage by focusing on cost reduction through negotiating long-term contracts with various vendors to capture economies of scale as well as set a fixed cost to secure price stability. Although de Havilland’s existing flap shroud supplier was unwilling to accept the renegotiated 25% discount to the current price, the company had more than a year’s inventory left with the contract expiring in 1993. De Havilland decided that it would be appropriate to solicit suppliers. Nine submissions were received, with the cost difference between the lowest and highest bid at $2,061,180. Based on the information provided it was evident that Marton Enterprise had the most attractive proposal. Issue Identification Long Term – Strategic * Contract between de Havilland and Dollard Plastics of Montreal, Quebec for flap shrouds for Series 300A airplane will be expiring at the end of 1993. * Dash 8 airplane represented 60-65 per cent of de Havilland’s total manufacturing costs * De Havilland buyer tried to negotiate 25% discount from Dollard, but was rejected * De Havilland’s BSB is trying to implement cost reduction strategy by: * Partnering with smaller base of vendors to capture economies of scale * Commit to long-term contracts for a span of five years with firm, fixed prices Environmental and Root Cause Analysis Founded in 1928 by a British company, De Havilland has become a significant part of the Canadian aircraft manufacturing industry. As of 1992, the organization was co-owned by the government of Ontario that held 49% of the shares and Bombardier Inc. owning the remaining 51%. With multiple acquisitions by various companies and the government over the past half-century, the organization has implemented several activities into their operations. These activities implemented in different stages of the supply chain have successfully provided versatility in satisfying customers’ needs, from procurement to production. During Boeing’s ownership, de Havilland experienced tremendous evolution in their corporate processes. In particular the purchasing cycle is a noteworthy system developed during this time. In Exhibit 1 of the case study the diagram demonstrates the step-by-step procurement process the company goes through when it encounters a design change/new design, requiring sou rcing of a new part that has not been previously purchased before. Parties that are involved are mainly composed of representatives from Finance and Material departments. The level of management involvement depended on the size of the contract. De Havilland’s current issue was selecting a new vendor to source flap shrouds from. Dollard Plastics, a company based in Montreal, Quebec has been supplying flap shrouds for their Series 300A airplane, but their contract was about to expire at the end of 1993. With parts costs of the De Havilland’s Dash 8 accounting for 60-65% of the organization’s total manufacturing costs, the purchasing department attempted to request a 25% discount from Dollard as a strategy for cost reduction. However, their request for a lower price was rejected. With the failed renegotiation, the procurement process had to move back to bidder selection board stage. In addition to the cost reduction strategy mentioned earlier, de Havilland’s objective was to partner with a smaller base of vendors to take advantage of economies of scale. They would like to establish long-term cooperative contracts (i.e. five years) with fixed pricing so frequent negotiations won’t be necessary . Based on the nine RFQ submissions from various vendors, Marton Enterprise Inc. offered the lowest prices. With the comprehensive data and additional information that Kim Tomar obtained, it was evident there was great potential in a long-term business partnership with Marton. The difference between Dollard and Marton’s normalized bids total for the program was a whopping $2,061,180 ($2,810,174- $748,994), which could be a substantial saving amount de Havilland would be making. Marton has stated in their pricing proposal that their bid is a stand-alone pricing. This could mean it would be difficult for de Havilland to discuss a lower price than the proposed. The vendor has also stated from past history material costs typically increased 4% to 6% per year, and with that assumption which they have accounted they are willing to enter into a firm fixed price proposal with de Havilland from August 1992 to July 1997. Although Marton’s initial bid amount is quite attractive, de Havilland will have to take into account the possibility of Marton overstating their position in order to acquire the bid. This may become a strategic barrier that could become costly down the road. Another reason for such a significantly lower price offered by Marton could be the fact they may be compromising the quality of the materials or services. Lastly, it could just plainly be that Marton operates more efficiently than other vendors, thus able to incur higher savings. Whatever the case may be, de Havilland should conduct a thorough quality analysis of vendor production to determine whether Marton’s quality and cost levels are aligned with de Havilland’s expectations. Based on the reviews of past purchasing trends, forecasts conducted by representatives from the Finance and Material department, the Bidder Selection Board should have an idea of how much the parts should cost and if the prices submitted are realistic. De Havilland should also keep the other vendors who offered close bids in consideration (i.e. DAS Composites and Lakesides Industries). These bids would help in the negotiation process in strategically obtaining a potential value. With Kim Tomar’s recommendation to the Source Selection Board, SSB should establish low, target and authority price levels for one or more of the vendors and see which group provides the best offer. In terms of power relationships, it seems like it is a fairly level playing ground for both de Havilland and Marton. Based on the comprehensive data provided by Marton and the side documents obtained by Tomar it seems like Marton’s well-prepared proposal has gained them a high amount of seller power in the negotiation. At the same time, with the favorable bids de Havilland received from other vendors, they would be able to use those bids to help negotiate a good deal. At the bottom line though, it depends on how much power each company has to make decisions or if both would require approval from the parent companies. Alternatives Alternative 1 – Select Marton Enterprise as vendor based on analysis conducted for negotiation Advantages: Â  1. Lowest bid out of all nine bid submissions, providing substantial savings in manufacturing costs, more than the original targeted 25% discount 2. Establish a long-term contract with fixed pricing reducing the need for renegotiations 3. Potential for long-term relationship that would greatly improve operational efficiencies Disadvantages: 1. Quality and service might be compromised to reap savings 2. Puts de Havilland at risk if partnership with Marton is a poor decision (poor quality, service), may cause ripple effect 3. No BATNA in case negotiation does not succeed with Marton Enterprise Alternative 2 – Select Marton Enterprise, DAS Composites, and/or Lakeside Industries as vendors for negotiation . Advantages: 1. Provides a BATNA in case negotiation with Marton Enterprise fails 2. May open up other opportunities with sourcing of other parts 3. Can be used as a good negotiation tool Disadvantages: 1. Time consuming, may require more management involvement in the beginning to make decision Recommendation Based on the comprehensive data provided by Marton and the additional information that supports the credibility of the company, it would be best for De Havilland to select Marton Enterprise as vendor based on analysis conducted for negotiation. Implementation 1. After all the analysis and normalization has been conducted, de Havilland should inform Marton that they have been selected as the potential flap shrouds vendor. 2. As a team from the source selection board that is made up of Finance, Materials, Engineering and higher management personnel, they should meet with representatives from the other party to discuss the finer details of the agreement 3. They should review the proposal once again as a group and make modification of estimates 4. With a lawyer present, write out the outline of the contract 5. Once a draft has been made, each party should review it and schedule a time to meet again to sign the contract 6. Supply of flap shrouds will commence Monitor and Control De Havilland should assign staff from the source selection board that is already familiar with the vendor’s representatives to meet with the other party for periodic meetings. These meetings will allow both groups to review the progress, discuss issues that may have arise, and perform periodic quality assurance checkups/inspections. These periodic performance reviews and audits would confirm vendor compliance based on the agreement. References * Module 2 Procurement_Candidate Manual 2013 1.0.pdf * Module 2 Readings Manual 2013 1.0.pdf