Pendleton Construction, Inc. Henry Royce, purchasing agent for Pendleton Construction, Inc., is currently in the process of selecting a steel supplier/fabricator for a major highway project.
Pendleton Construction, located in Bloomington, Indiana, is one of the largest heavy highway construction firms in the Midwest. Additionally, the company builds bridges, high-rise office towers, power plants, government buildings, and roads. Pendleton has a reputation for high-quality standards, on-time project completion, and reasonable prices. The company has expanded rapidly during the past 20 years, keeping pace with the heavy-high way sector.
Reinforced steel is used in almost all of Pendleton's projects. The steel itself is purchased from one of several large steel mills in the region. During the past 18 months, the fabrication (bending) required in preparation for steel placement had been done by Mohawk, a small local disadvantaged business enterprise (DBE) specialty steel fabricator. Pendleton's total steel-bending requirement for the most recent fiscal year was approximately 5,000 tons. Mohawk had charged identical prices per ton for both small and large steel fabrication jobs. Prior to bidding on a project, Royce requests a telephone quotation from Mohawk, and, invariably, the price per ton quoted is the same as the previous bid. Mohawk is also a supplier of specialty steel. Royce has an exclusive agreement with Mohawk to supply specialty steel items on short notice. This arrangement has worked very well for Pendleton. Mohawk also owns a major share in a detailing firm that did approximately 70 percent of the reinforced detailing work for Pendleton. According to Royce, Mohawk has done an excellent job supplying high-quality specialty steel to Pendleton. At the same time, he stated that Mohawk's fabrication work was pretty good.
Recently, Pendleton was awarded a mega highway project in southern Indiana that will require more than 9,780 tons of reinforced steel for three consecutive years. Because of the size of the project, Royce decided to solicit quotes from other source for the fabrication work. However, Pendleton bid the project using Mohawk's fabrication estimates. Royce received three quotes for the fabrication work item. All three estimates were lower than the Mohawk's bid quote. The quotes were $7, $8, and $9.50 per ton lowers than the Mohawk estimate. The company with the best estimate, which was $9.50 lower than Mohawk's estimate, had recently filed for bankruptcy. However, the remaining two suppliers checked out as being well run and financially healthy. Baker steel quoted a price that was $8 lower per ton F.O.B. the job site. Baker was a major steel fabricator located in Cleveland, Ohio, which is approximately 350 miles from the project site. The quote was made on the condition that all transport shipments be full loads, with no emergency Short shipment transport chargers. Royce had carefully checked out Baker's business capability and reputation and found that it had performed quite well throughout the Midwest.
Royce felt that he needed to make a rational decision. He now wondered if he should place the steel-bending contact with Baker or whether he should stay with the Mohawk bid. What are the implications of his decision?