Comment on the practice of dual sourcing

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Reference no: EM133200698

Case Study: The Ruhling Manufacturing Company

Cyrus Ruhling founded the Ruhling Manufacturing Company in 1901. Until 1915, the firm made electric motors. In 1915, Mr. Ruhling was persuaded by the Department of Defense to take on several defense contracts. Ruhling expanded rapidly. After World War I, Ruhling found itself the possessor of much excess capacity. Cyrus decided to cater to the small but growing home appliance industry. Today, Ruhling is one of the nation's largest appliance manufacturers.

Although appliances account for all the firm's sales, a small electric motor capacity has been retained, partly for historic purposes and partly to protect against unforeseen contingencies. Whenever feasible, Ruhling follows a dual sourcing policy. In some cases, three sources may be under contract.

Last month, supply management issued an invitation for bids for 11/32-horsepower motors for a six-month period. Ruhling's estimated price for the motors was $29. The quantity estimated was 48,000 motors over the six-month period. Orders were to be placed daily through the firm's automated material requirements planning system, with deliveries to be within one week of release of an order.

Three days ago, the bids were opened. They were as follows:

Able Electric: $30.00
Beta Products: $28.00
Gamma Manufacturing: $32.00
Delta Electric: $29.25
Epsilon Products: $30.00
Today, before the award of a purchase order, Epsilon Products contacted the supply manager and submitted an alternative proposal. Under the proposal, Epsilon would reduce its bid to $23.75 if Ruhling agreed to purchase all its requirements for this size motor from Epsilon for a period of one year. Ruhling would be free to release delivery quantities at its own convenience, and Epsilon would guarantee to meet them within three days. Epsilon would carry one month of normal inventory (8,000 motors) and would increase its capacity if demand warranted.

Should Epsilon's alternative proposal be considered?

Comment on the practice of dual sourcing when part of the requirement is produced internally. Relate this practice to the advantages and disadvantages of a 100 percent requirements contract.

Reference no: EM133200698

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