January 8, 2008
PART #B02326620
On April 19, 2006 Mr. Walter A. Walsh, Heartland and Company, Supply Management
Manager, met with one of his buyers, Ms. Olivia Newcomb, in his Corporate Home
Office. They discussed her Midwest & Company cost reduction goals for bearing
#B02326620. After the meeting Mr. Walsh asked himself “What premium should we
pay a supplier that performs at a higher level and how should we allocate the business
among suppliers that perform at different levels?”
Company Background
Founded in 1875, Heartland & Company was one of the United States’ oldest industrial
organizations. It manufactured agricultural, construction, and commercial and consumer
lawn care equipment. Midwest did business in over 100 countries and had sales in excess
of of $US12 billion.
Part #B02326620
Part #B02326629 was a bearing that was purchased from two suppliers, New England
Works and Midwest Bearings. This bearing was used in a wide range of Heartland
products. Annual usage was steady, averaging 500,000 bearings per year. The
price of this bearing was approximately $US3.00. Both suppliers sold Heartland
substantial amounts of bearings in many types and sizes. The total amount spent
(annual spend) on bearings at Heartland & Company during 2005 had been
approximately $US90 million.
Supplier Performance
Heartland & Company evaluated its suppliers on five dimensions. They were quality,
delivery, cost management, technical support, and wavelength. The overall evaluation of
a supplier was determined by its score on its lowest performing dimension. The
evaluation system and the evaluations of New England Works and Midwest Bearings are
summarized as Exhibit 1.
The New England Works Advantage
While both suppliers offered excellent quality, New England Works rated higher in
delivery, technical support, and wavelength. Mr. Walsh felt that these advantages were
largely due to a highly trained sales force comprised of professionally trained engneers.
It responded well to Heartland’s technical needs in the areas of product and process
improvements. These improvements resulted in substantial efficiency gains to Heartland
in the areas of product redesign, product simplification, and savings in assembly costs.
Rough estimates by Mr. Walsh placed these gains in the range of $US500 thousand to
$US1.0 million per year. Total bearings purchases from New England Works in 2005
were approximately $US20million.
This case was written by Dr. Michael A. McGinnis, C.P.M., Penn State University New Kensington Campus. It was
prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or
ineffective handling of a managerial situation. The author has disguised names and other identifying information to
1
protect confidentiality.
The Midwest Bearing Advantage
Midwest Bearings rated higher in cost management. Their ability to reduce costs enabled
them to consistently quote lower piece prices, usually about 2% less than New England
Works. Total bearings purchases from Midwest Bearings in 2005 were approximately
$US8.5 million.
Simultaneous Goals
Heartland & Company placed a high priority on developing long-term relationships with
suppliers that met its performance goals. On the other hand, Heartland pursued an
aggressive program of annual cost reduction. There was no specific company policy that
provided guidance on how to manage trade-offs between these two goals.
The Problem
How should Hearland allocate its business for part #B02326620 between New England
Works and Midwest Bearings?
_______________________________________________________________________
PART #B02326620
Exhibit 1
PART #B02326620 SUPPLIER EVALUATONS
Dimension
New England Works Midwest Bearings
Quality………………..Partner……………………..Partner
Delivery………………Partner……………………..Approved
Cost Management…….Key…….…………..………Partner
Technical Support…….Partner….…………………..Approved
Wavelength…………..Partner………………………Key
Overall……………..Key…………………………Approved
NOTES:
1. Abbreviated Dimension Definitions
Quality: Based on rejects per 1,000,000 supplied pieces of all items purchased.
Delivery: Based on supplier meeting delivery dates and quantities
Cost Management: Based on cost management initiative, cost reduction activity,
cost index performance, performance during new programs, and global
competitiveness.
Technical Support: Based on supplier ability to provide a wide range of technical
support at all stages of supply.
Wavelength: based on supplier overall attitude, responsiveness, attention to detail,
and communication performance.
Overall: Based on the supplier’s lowest performance in any dimension.
2. Supplier Performance Rating Scale
HIGHEST
Partner (P) Key (K) Approved (A)
LOWEST
Conditional (C)
2
QUESTIONS:
1. Develop weights for the five supplier rating dimensions shown in Exhibit 1. Please
briefly explain the basis for these weights.
2. Make a case for pricing preferences that favor highly rated suppliers, such as New
England Works. Make a case for not granting price preferences for highly rated
suppliers. What would you recommend? Why?
3. How should Heartland & Company minimize it total cost of acquisition for part
#B02326620 and similar items? Please briefly explain
4. How should Heartland & Company allocate its annual purchase of part #B02326620
between New England Works and Midwest Bearings? Please briefly explain your
rationale.
