Brent Miller is one of the suppliers tasked to give recommendations to Loren Inc. about their yearly hexonic acid necessities. His recommendations will require some policy adjustments. Loren Inc. is a Canadian subsidiary of a bigger global chemical company. Brent Miller is the buyer of the raw materials,and he reports to the Loren Inc. manager. The company has a single-bid policy that has existed for years. Loren’s demand for hexonic acid has increased. Alfo supplies 40 percent while Canchem supplies 60 percent.

Hexonic acid is a chief raw material in the production of Loren Inc.products. Currently, its necessities have increased.Alfo has started a new plant and could supply all the capacity Loren Inc. requires at even a lower price than Chem. Hexonic acidis produced along with octanoic acid. Octonic acid demand has increased and resulted in lower prices for hexonic acid.A lot has changed in the market and would be reflected in the supplier bids. On 14^th May, Brent sent hexonic acid inquiries to two American companies, and also Canchem,andAflo.

Mr. Baker from Aflo contacted Brent and explained they their unfilled capacity at their new Quebec City plant. Their quotation was the same as in previous years. They charged $1,296 per tonne. Michigan Chemical reached out to Brent and would contend and be represented by their Canadian distributor- Carter Chemical. They quoted $1,268 per tonne.Michigan Chemicalhad a good track record and kept 99 percent of the commitment to Loren(US) duringthe hexonicacid shortage. Mr. Aldert from Canchem contacted Brentbrought the quotation with the same steady price. They later quoted $1,192 per ton for a three-year contract. AMCHEM contacted Brent with their quotations. Their new Cleveland plant had an unfilledcapacity,and they also offer very competitive prices. Upon researching Brent discovered thatAMCHEM had previously supplied them with hexonic acid.All the same, during the hexonic acid shortageAMCHEM had fallen short of their commitmentto supplying Loren (US).

Problem

Over the years, Loren’s purchasing department worked hard and established a single-bid policy with its suppliers. The supplier is required to quote their best feasible offer,and they should live with the outcomes of their bid.

Recommendation

A single-bid policy is not a good idea for getting the best deal and quality even though it helps establish a lasting supplier relationship. The supplier should be able to negotiate with the company because some raw materials are seasonal. Raw materials may be cheap during a particular season because of their immense availability.  Contrarily, when the raw materials are scarce, their prices skyrocket. Manufacturers charge ridiculous prices for the raw materials because of the intense demand and low supply of the products. The supplier may suffer a great deal when the raw materials are scarce and also enjoy when they are in abundance. It leaves it to the supplier to carefully forecast and plan. The market has a lot of indefinite forces affecting it. The availability of hexonic acid is hard to predict.

It is crucial for Loren Inc. and the supplier to negotiate the contract during such times to fully meet their needs.

• Loren Inc. should include a clause to allow the supplier to renegotiate its quotation during a hexonic acid shortage. They should clearly outline what should happen if the supplier cannot keep the commitment of the contract.

Problem

Some companies are not able to keep their commitment during shortages. For instance, AMCHEM placed Loren(US) in allocation duringa shortage of hexonic acid.

Recommendation                                                             

Brent should carefully look at the supplier’s history(Queensland Government, 2017). He should check what they did during the shortages period. He should analyze whether they were able to keep all their commitments during the shortages. After researching on the history, he should not contact companies that were unable to keep up to 95% of their commitment as it would have serious implications on production.

• The company policy should clearly state the repercussions of the supplier’s failure to keep its

Strategy

Loren Inc. should contract Canchem for three years and give them 40 percent capacity. They should also contract Carter Chemicals for one year and give them 40 percent capacity. Finally, they should contract Alfo and give them 20% capacity of supply.

Problem

It is difficult to predict the availability of hexonic acid in the market. There are rampant shortages ofhexonic acid.

Recommendation

Loren Inc. should not have a single supplier. Loren currently has two major suppliers. They should have at least three suppliers.The most reliable supplier should supply the biggest capacity ofhexonic acid. Thecontract should be designed that way in a descending order where the least reliable supplier supplies the least capacity of the acid. During shortages, if a supplier is unable to keep the commitment, their supply capacity should be allocated to the most reliable supplier at the moment. The supply chain should be flexible to allow such changes in case of shortages.

Strategy

Figure 1 Source: IOP Science

As you can see from the figure above, hexonic acid is a critical raw material. Loren Inc. requires it to produce most of its products. It, therefore, has high vulnerability and supply risk(Frenzel, Kullik, Reuter &Gutzmer, 2017).Loren Inc. needs to come up with a risk mitigation plan. The plan should include financial hedges, operational hedges, and price increase controls. Price controls should involve strong negotiation and analytical skills.

Problem

The demandforhexonic acid is influenced by the demand of octonicacid thus affecting the price of hexonic acid. Octonic and hexonic acids are produced together. A rise in demand for one product leads to a decrease in the price of the other and vice versus. For instance, the increase in demand foroctonic acid from the booming paint industry resulted in lower prices of hexonic acid. Therefore, it is difficult to predict the price of hexonic acid.

Recommendation

• Track price changes. The prices of both octonic and hexonic acids should be monitored(Leybovich, 2015). It will give insight into price fluctuations, discount policy,andsupplier cost management.

Strategy

The supplier should take advantage of the low prices due to the high demand foroctonic acid. They should buy in bulk during such times. They should ease up on buying when the costs are high.

References

Leybovich, I. (2015). How to Cope with Unpredictable Raw Materials Costs. Retrieved from https://news.thomasnet.com/imt/2012/06/05/how-to-cope-with-unpredictable-raw-materials-costs

IOP Science. (2017). Raw material ‘criticality’—sense or nonsense?. Retrieved from https://iopscience.iop.org/article/10.1088/1361-6463/aa5b64

Frenzel, M., Kullik, J., Reuter, M., &Gutzmer, J. (2017). Raw material ‘criticality’—sense or nonsense?. Journal Of Physics D: Applied Physics, 50(12), 123002. doi: 10.1088/1361-6463/aa5b64

Queensland Government. (2017). Choosing suppliers for your business | Business Queensland. Retrieved from https://www.business.qld.gov.au/starting-business/planning/suppliers/finding-suppliers/choosing