2013
Global Procurement
at BP
Risk Analysis and Mitigation Strategies
INFO 335-501
Written by:
Calvin Easley
Angela Keenan
Kelsey McKechnie
Allison Pelzel
Wesley Wheeler
TABLE OF CONTENTS
Executive Summary......................................................................................................................... 4
Introduction .................................................................................................................................... 5
Analysis ........................................................................................................................................... 5
Financial Health ........................................................................................................................... 5
Short Term Solvency or Liquidity Ratios ................................................................................. 5
Long Term Solvency or Financial Leverage Ratios .................................................................. 5
Asset Use or Turnover Ratios.................................................................................................. 6
Profitability Ratios................................................................................................................... 6
Quality.......................................................................................................................................... 7
Working Life ............................................................................................................................ 7
Fuel Efficiency ......................................................................................................................... 7
Total Recordable Incident Rate .............................................................................................. 8
Overall Quality Results ............................................................................................................ 9
Acquisition ................................................................................................................................... 9
Acquisition Cost ...................................................................................................................... 9
Transportation ...................................................................................................................... 11
Weighted Total for Acquisiton .............................................................................................. 11
Ownership.................................................................................................................................. 12
Training ................................................................................................................................. 12
Overhaul................................................................................................................................ 12
Preventive Maintenance ....................................................................................................... 14
Warranty ............................................................................................................................... 15
Total Maintenance Rankings................................................................................................. 16
Post-Ownership ......................................................................................................................... 16
Total Cost of Ownership ............................................................................................................ 17
ReciproCo .............................................................................................................................. 17
Shin Yin Breeze Works .......................................................................................................... 18
Complete Compression Industries ........................................................................................ 18
Global Procurement at BP | Executive Summary 1
Machine Pack Systems .......................................................................................................... 18
Starke Ausstatten Inc. ........................................................................................................... 19
Total Cost of Ownership Results ........................................................................................... 19
Risk Assessment ............................................................................................................................ 19
Labor Strikes .............................................................................................................................. 19
ReciproCo and Machine Pack Systems ................................................................................. 20
Shin Yin Breeze Works .......................................................................................................... 20
Complete Compression Industries ........................................................................................ 20
Starke Ausstatten Inc. ........................................................................................................... 20
Varying Business Culture ........................................................................................................... 21
Bribes .................................................................................................................................... 21
Child Labor ............................................................................................................................ 21
Leverage of Power ................................................................................................................ 21
Women.................................................................................................................................. 22
Currency Fluctuation ................................................................................................................. 22
Shin Yin Breeze Works .......................................................................................................... 23
Complete Compression Industries ........................................................................................ 23
Starke Ausstatten Inc. ........................................................................................................... 23
Reliability of Products and Services ........................................................................................... 23
Managerial ................................................................................................................................. 24
Company Visits ...................................................................................................................... 24
Outsourcing ........................................................................................................................... 25
Quality Control ...................................................................................................................... 25
Contract ..................................................................................................................................... 25
Risk Mitigation .............................................................................................................................. 25
Recommendation.......................................................................................................................... 26
Supplier Selection ...................................................................................................................... 26
113 Horsepower Unit ............................................................................................................ 26
552 Horsepower Unit ............................................................................................................ 26
Global Procurement at BP | Executive Summary 2
Type of Contract ........................................................................................................................ 26
Global Procurement at BP | Executive Summary 3
EXECUTIVE SUMMARY
BP is an oil company that historically leased the compressors used in its Southern Wyoming
field. However, BP realizes this is not the best financial option and is currently looking into
options of purchasing these compressors. To begin this transition, BP believes it would be best
to buy only 200 compressors as a trial to feel out the supplier. If all goes well, BP will slowly buy
the rest and stop the leases all together. BP needs 145 units of the 113 horsepower compressor
and 55 units of the 552 horsepower compressor. After narrowing down the options of
suppliers, BP sought out bids from five companies to compare based on criteria determined by
BP: assurance of supplier, quality, safety/service, innovation, cost, and risk. Of the five
companies BP chose, two were domestic and the others were international, located in Canada,
Germany, and China. When considering which company would be the best partner for this
business negotiation, all six of these vital criteria were taken into consideration. Weights were
assigned so these, as well as other aspects deemed appropriate, would ensure optimal relations
and to secure BP’s reputation.
Global Procurement at BP | Executive Summary 4
INTRODUCTION
BP America has expressed the need to develop a global sourcing strategy for the procurement
of a new compression package. BP is re-evaluating its supply base for these compression
packages, considering both domestic and international suppliers. Since quality of the
compressors, inconsistent lead times, and repeated failures in compressor performance have
been a problem in the past, BP requires all new compression packages to meet specific
technical requirements. The Global Procurement and Supply Chain Management (PSCM) team
assigned to this task has been given a deadline of six months to select a new supplier and award
a contract.
The PSCM team must develop a detailed procurement proposal to replace the currently
installed 200 old, underperforming reciprocating compressor units with new, more reliable and
standardized units. The team will utilize BP’s global supply chain process to ensure appropriate
risk management practices will be used, resulting in the selection of a capable and competent
supplier with no compromise to safety and operational risk.
The PSCM team’s strategy in approaching the potential supplier analysis consisted of a weight
and ranking system. The team decided on categories that were determined relevant, and gave
each category a percentage weight, depending on its importance to the decision of selecting a
new supplier. For example, quality and ownership costs were each given 30%, while acquisition
costs were given 25% of the total weight. These categories had sub-categories, which were also
given a percentage weight to total the category’s weight. Each attribute for each supplier (e.g.,
TRIR, lead time, and transportation costs) was given a ranking of 1 through 5, with a higher
score indicating a more preferable supplier. Each attribute ranking for each company was then
multiplied by the percentage weight. Every weighted category was added up for each company
to determine its final score. The chosen suppliers were based upon these final scores.
ANALYSIS
FINANCIAL HEALTH
SHORT TERM SOLVENCY OR LIQUIDITY RATIOS
Current ratio = Current Assets / Current Liabilities
Quick ratio = (Current Assets – Inventory) / Current Liabilities
Cash ratio = Cash / Current Liabilities
Net Working Capital = Net Working Capital / Total Assets
LONG TERM SOLVENCY OR F INANCIAL LEVERAGE RATIOS
Total debt ratio = Total Liabilities / Total Assets
Debt to Equity ratio = Total Debt / Total Equity
Global Procurement at BP | Introduction 5
Equity Multiplier = Total assets / Total Equity
ASSET USE OR TURNOVER RATIOS
Inventory turnover = Cost of Goods Sold / Inventory
Days’ sales in Inventory = 365 Days / Inventory Turnover
Receivables turnover = Sales / Accounts Receivable
Days’ sales in receivables = 365 Days / Receivables Turnover
Net Working Capital (NWC) turnover = Sales / Net Working Capital
Total asset turnover = Sales / Total Assets
PROFITABILITY RATIOS
Profit margin = Net Income / Sales
Return on Assets (ROA) = Net Income / Total Assets
Return on Equity (ROE) = Net Income / Total Equity
ReciproCo
Financial Ratios
Shin Yin
Breeze
Works
Complete
Compression
Industries
Machine
Pack
Systems
LIQUIDITY RATIOS
Current Ratio
1.5307
0.9504
1.8672
2.9398
Quick Ratio
1.0081
0.9133
1.1372
1.9298
Cash Ratio
0.0588
0.5502
0.2841
0.4728
Net Working Capital
0.0849
-0.0242
0.2341
0.4128
LONG TERM SOLVENCY or FINANCIAL LEVERAGE RATIOS
Debt Ratio
0.6199
0.4929
0.5579
0.3797
Debt to Equity Ratio
1.6306
1.0935
1.2622
1.0548
Equity Multiplier
2.6306
2.2187
2.2625
2.7782
ASSET USE or TURNOVER RATIOS
Inventory Turnover
4.1815
25.2577
4.1218
1.9054
Days' Sales in Inventory
87.2894
14.4510
88.5546
191.5638
Receivables Turnover
5.7372
5.3625
5.1615
2.0428
Days' Sales in Receivables
63.6198
68.0657
70.7164
178.6724
Net Working Capital
Turnover
6.1171
-24.2475
4.3896
1.3786
Total Asset Turnover
0.5191
0.5880
1.0278
0.5691
PROFITABILITY RATIOS
Profit Margin
-0.1185
0.0626
0.0336
0.0996
Return on Assets
-0.0615
0.0368
0.0345
0.0567
Return on Equity
-0.1619
0.0817
0.0780
0.1575
Starke
Ausstatten
Inc
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Global Procurement at BP | Analysis 6
QUALITY
The quality of the compressors manufactured must be considered. The compressors must meet
or exceed the appropriate standards set not only by BP, but also by other organizations that are
involved in this industry.
WORKING LIFE
These compressors have to be durable. The working life, in hours, of each compressor is
extremely important. It is neither worth the time nor the money of BP to purchase under
contract compressors that do not have a long working life. The weight given to the working life
is 5% of the analysis.
R ECIPRO C O
The working life of ReciproCo’s compressors is 169,680 hours.
S HIN Y IN B REEZE W ORKS
The working life of Shin Yin’s compressors is 167,280 hours.
C OMPLETE C OMPRESSION I NDUSTRIES
The working life of Complete Compression’s compressors is 167,520 hours.
M ACHINE P ACK S YSTEMS
The working life of Machine Pack’s compressors is 168,720 hours.
S TARKE A USSTATTEN I NC .
The working life of Starke’s compressors is 169,200 hours.
W ORKING L IFE R ESULTS
ReciproCo has the highest working life of its compressors, with 169,680 machine hours. While
this is only 480 hours more than Starke Ausstatten’s compressor life, it is much more than the
other three options, making ReciproCo the clear winner in terms of working life.
FUEL EFFICIENCY
If the compressor cannot operate using fuel efficiently, then the fuel costs go up. The more
fuel-efficient the compressor is, the more BP will get out of the equipment. Fuel efficiency is
measured in MMBTU/hp-hr, or millions of British Thermal Units per horsepower hour. This is an
important factor for both the 113 horsepower and the 552 horsepower model compressors.
We decided fuel efficiency should carry a weight of 5% for each compressor model in our
analysis of the suppliers.
R ECIPRO C O
The fuel efficiency for the 113 horsepower model is .0096 MMBTU/hp-hr.
Global Procurement at BP | Analysis 7
The fuel efficiency for the 552 horsepower model is .00891 MMBTU/hp-hr.
S HIN Y IN B REEZE W ORKS
The fuel efficiency for the 113 horsepower model is .0095 MMBTU/hp-hr.
The fuel efficiency for the 552 horsepower model is .00925 MMBTU/hp-hr
C OMPLETE C OMPRESSION I NDUSTRIES
The fuel efficiency for the 113 horsepower model is .00902 MMBTU/hp-hr.
The fuel efficieny for the 552 horsepower model is .00858 MMBTU/hp-hr.
M ACHINE P ACK S YSTEMS
The fuel efficiency for the 113 horsepower model is .0095 MMBTU/hp-hr.
The fuel efficiency for the 552 horsepower model is .0089 MMBTU/hp-hr.
S TARKE A USSTATTEN I NC .
The fuel efficiency for the 113 horsepower model is .00968 MMBTU/hp-hr.
The fuel efficiency for the 552 horsepower model is .00937 MMBTU/hp-hr.
F UEL E FFICIENCY R ESULTS
Starke Ausstatten, Inc. manufactures the most fuel-efficient 113 horsepower model
compressor, while also having the most fuel-efficient 552 horsepower model compressor.
However, the differences in fuel efficiency for each model between all of the suppliers are very
small. Therefore, Starke Ausstatten is not a “definite” winner in this category.
TOTAL RECORDABLE INCIDENT RATE
Safety is the number one priority for BP in this case. The Total Recordable Incident Rate (TRIR),
established by the US Department of Labor, tells BP how safe the potential supplier is. Because
safety is so important, TRIR was weighted to make up 20% of the entire analysis. Using a
specific formula, the Occupational Safety and Health Administration calculates a company’s
TRIR and publishes the information. BP requires all suppliers to have a TRIR of less than 2.0 in
order to be considered. For this case, we averaged the TRIR given for each supplier over the last
three years (2009, 2010, 2011).
R ECIPRO C O
ReciproCo has a recent TRIR of .76, .63, .72 to average a TRIR of .70.
S HIN Y IN B REEZE W ORKS
Shin Yin has a recent TRIR of 2.15, 1.94, 2.21 to average a TRIR of 2.1.
Global Procurement at BP | Analysis 8
C OMPLETE C OMPRESSION I NDUSTRIES
Complete Compression has a recent TRIR of .86, 1.09, 2.0 to average a TRIR of 1.32.
M ACHINE P ACK S YSTEMS
Machine Pack has a recent TRIR of .54, .36, .45 to average a TRIR of .45.
S TARKE A USSTATTEN I NC .
Starke has a recent TRIR of .89, 2.23, 1.28 to average a TRIR of 1.5.
T OTAL R ECORDABLE I NCIDENT R ATE R ESULTS
Machine Pack Systems has the lowest average TRIR of .45, meaning that they have the least
amount of injuries and illnesses resulting in lost work, and fatalities on the job. This gives
Machine Pack a large advantage over the other potential suppliers.
OVERALL QUALITY RESULTS
Because the winners in each category are all so different, the categories were added together
all and multiplied by their respective weights to determine the quality winners. Machine Pack
had the highest weighted score for overall quality, with a score of 1.3 for the 113 horsepower
compressor, and 1.25 for the 552 horsepower compressor. This was well above most of the
competition, however ReciproCo did score 1.25 for the 113 horsepower compressor and 1.2 for
the 552 horsepower compressor.
ACQUISITION
ACQUISITION COST
The change from leasing the compressor units with a low cost approach, to buying them has
made other factors more important to BP but acquisition cost still is important with a 25%
weight in our overall analysis. To break it down even more 15% of the weight went to product
cost, and 2% went to duties and customs.
R ECIPRO C O
The total acquisition cost per unit of the 113 HP compressor is $145,855.13. This includes the
product cost of $145,800.00, and the weight and freight cost of $55.13.
The total acquisition cost per unit of the 552 HP compressor is $608,486.63. This includes the
product cost of $608,400.00, the weight and freight cost of $86.63.
S HIN Y IN B REEZE W ORKS
The total acquisition cost per unit of the 113 HP compressor is $170,638.28. This includes the
product cost of $164,208.48, and the weight and freight cost of $354.09, and the duties and
customs cost of $6,075.71.
Global Procurement at BP | Analysis 9
The total acquisition cost per unit of the 552 HP compressor is $651,311.68. This includes the
product cost of $627,496.04, the weight and freight cost of $598.29, and the duties and
customs cost of $598.29.
C OMPLETE C OMPRESSION I NDUSTRIES
The total acquisition cost per unit of the 113 HP compressor is $138,553.39. This includes the
product cost of $138,443.14, and the weight and freight cost of $110.25.
The total acquisition cost per unit of the 552 HP compressor is $597,635.06. This includes the
product cost of $597,451.31, and the weight and freight cost of $183.75
M ACHINE P ACK S YSTEMS
The total acquisition cost per unit of the 113 HP compressor is $157,200.00. We did not include
the transportation cost in this because MPS is located so close it would have been negligible.
The total acquisition cost per unit of the 552 HP compressor is $624,900.00. We did not include
the transportation cost in this because MPS is located so close it would have been negligible.
S TARKE A USSTATTEN I NC .
The total acquisition cost per unit of the 113 HP compressor is $175,138.86. This includes the
product cost of $174,687.60, and the weight and freight cost of $451.26.
The total acquisition cost per unit of the 552 HP compressor is $619,949.60. This includes the
product cost of $619,217.12, and the weight and freight cost of $732.48.
Global Procurement at BP | Analysis 10
113 HP Acquisition Cost
Product Cost 113 hp
Package Unit
Duties and Customes
Weight and Freight Cost
Train
Truck
Boat
Acquisition Cost Per Unit
Total Acquisition Cost
$
145,800.00
$
$
$
$55.13
$55.13
$0.00
$0.00
$ 145,855.13 $
$ 21,148,993.85 $
552 HP Acquisition Cost
Product Cost 552 hp
Package Unit
Duties and Customes
Weight and Freight Cost
Train
Truck
Boat
Acquisition Cost Per Unit
Total Acquisition Cost
Shin Yin Breeze
Works
ReciproCo
608,400.00
$
$
$
$86.63
$86.63
$0.00
$0.00
$ 608,486.63 $
$ 33,466,764.65 $
Machine Pack
Systems
$
138,443.14 $
6,075.71 $
$354.09
$107.59
$0.00
$246.50
170,638.28 $
24,742,551.15 $
$
$110.25
$110.25
$0.00
$0.00
138,553.39 $
20,090,241.55 $
Complete
Compression
Industries
Shin Yin Breeze
Works
ReciproCo
$
164,208.48
Complete
Compression
Industries
627,496.04
Starke Ausstatten
Inc
157,200.00
597,451.31 $
23,217.35 $
$598.29
$181.79
$0.00
$416.50
651,311.68 $
35,822,142.48 $
$
$183.75
$183.75
$0.00
$0.00
597,635.06 $
32,869,928.30 $
174,687.60
$
n/a
$451.26
n/a
$227.01
n/a
$0.00
n/a
$224.25
157,200.00 $
175,138.86
22,794,000.00 $ 25,395,134.70
Machine Pack
Systems
$
$
Starke Ausstatten
Inc
624,900.00
$
619,217.12
$
n/a
$732.48
n/a
$368.48
n/a
$0.00
n/a
$364.00
624,900.00 $
619,949.60
34,369,500.00 $ 34,097,228.00
A CQUISITION C OST R ESULTS
Complete Compression Industries had the lowest per unit acquisition cost for the 113 HP
compressor as well as the lowest acquisition cost for the 552 HP compressor.
TRANSPORTATION
BP preferred using domestic suppliers because of lead-time and on time delivery record. This
was not one of BP’s main criteria though for choosing a supplier so we gave on time delivery
record a 4% weight and delivery lead-time received 4%.
Overall ReciproCo has the best on-time delivery record combined with the delivery lead-time.
ReciproCo
On-time Delivery
Record
Delivery Lead Time
98%
2 days
Shin Yin Breeze
Works
92%
22 days
Complete
Compression
Industries
96%
4 days
Machine Pack
Systems
96%
2 days
Starke Ausstatten Inc
95%
15 days
WEIGHTED TOTAL FOR ACQUISITON
Global Procurement at BP | Analysis 11
Using the weighted total for acquisition, the best selection based on acquisition cost per unit
for the 113 HP unit alone would have been Complete Compression Industries. CCI received 1.13
out of the 1.25 points for the 113 HP unit.
ReciproCo
Weighted Rankings 113 HP
Total Acquisition Cost 15%
Duties & Customs 2%
On time Delivery Record 4%
Delivery Lead Time 4%
Total Acquisition Weight 25%
0.6
0.1
0.2
0.2
1.1
Complete
Shin Yin
Machine Pack
Starke
Compression
Breeze Works
Systems
Ausstatten Inc
Industries
0.3
0.75
0.45
0.15
0.02
0.1
0.1
0.1
0.04
0.16
0.16
0.08
0.04
0.12
0.2
0.08
0.4
1.13
0.91
0.41
Using the weighted total for acquisition, the best selection based on acquisition cost per unit
for the 552 HP unit alone would have been Complete Compression Industries. CCI received 1.13
out of the 1.25 points for the 113 HP unit.
ReciproCo
Weighted Rankings 552 HP
Total Acquisition Cost 15%
Duties & Customs 2%
On time Delivery Record 4%
Delivery Lead Time 4%
Total Acquisition Weight 25%
0.6
0.1
0.2
0.2
1.1
Complete
Shin Yin
Machine Pack
Starke
Compression
Breeze Works
Systems
Ausstatten Inc
Industries
0.15
0.75
0.3
0.45
0.02
0.1
0.1
0.1
0.04
0.16
0.16
0.08
0.04
0.12
0.2
0.08
0.25
1.13
0.76
0.71
OWNERSHIP
TRAINING
Overall, training costs are either $100,000 or $200,000. The differentiating factor between the
costs is if the suppliers are international or domestic. The cost differences fall to the fact that
trainers would have to travel further distances, and would likely need to stay longer to ensure
they had adequately trained the employees. The equipment is essentially the same, meaning
the training will be relatively standard, making the training cost a non-differentiating factor. It is
also a one-time fixed cost.
OVERHAUL
The potential for both the 113 hp compressor and 552 hp compressor over the 5 years of
ownership is relatively low. As such, overhaul cost accounts for only 6% of the overall analysis.
R ECIPRO C O
Global Procurement at BP | Analysis 12
The total overhaul cost per unit for 5 years of ownership for the 113 hp compressor is
$126,425. This includes the overhaul cost per unit per overhaul for 5 years of ownership
($91,425) and the overhaul downtime cost ($35,000).
The total overhaul cost per unit for 5 years of ownership for the 552 hp compressor is $56,875.
This includes the overhaul cost per unit per overhaul for 5 years of ownership ($16,875) and the
overhaul downtime cost is ($40,000).
S HIN Y IN B REEZE W ORKS
The total overhaul cost per unit for 5 years of ownership for the 113 hp compressor is
$144,620.17. This includes the overhaul cost per unit per overhaul for 5 years of ownership
($94,620.17) and the overhaul downtime cost ($50,000).
The total overhaul cost per unit for 5 years of ownership for the 552 hp compressor is
$73,999.13. This includes the overhaul cost per unit per overhaul for 5 years of ownership
($18,999.13) and the overhaul downtime cost is ($55,000).
C OMPLETE C OMPRESSION I NDUSTRIES
The total overhaul cost per unit for 5 years of ownership for the 113 hp compressor is
$157,351.06. This includes the overhaul cost per unit per overhaul for 5 years of ownership
($117,351.06) and the overhaul downtime cost ($40,000).
The total overhaul cost per unit for 5 years of ownership for the 552 hp compressor is
$72,926.20. This includes the overhaul cost per unit per overhaul for 5 years of ownership
($22,926.20) and the overhaul downtime cost is ($50,000).
M ACHINE P ACK S YSTEMS
The total overhaul cost per unit for 5 years of ownership for the 113 hp compressor is
$135,625. This includes the overhaul cost per unit per overhaul for 5 years of ownership
($89,625) and the overhaul downtime cost ($45,000).
The total overhaul cost per unit for 5 years of ownership for the 552 hp compressor is $66,050.
This includes the overhaul cost per unit per overhaul for 5 years of ownership ($16,050) and the
overhaul downtime cost is ($50,000).
S TARKE A USSTATTEN I NC .
The total overhaul cost per unit for 5 years of ownership for the 113 hp compressor is
$105,407.23. This includes the overhaul cost per unit per overhaul for 5 years of ownership
($65,407.23) and the overhaul downtime cost ($40,000).
Global Procurement at BP | Analysis 13
The total overhaul cost per unit for 5 years of ownership for the 552 hp compressor is
$61,955.57. This includes the overhaul cost per unit per overhaul for 5 years of ownership
($16,955.57) and the overhaul downtime cost is ($45,000).
O VERHAUL R ESULTS
Complete Compression Industries has the lowest total overhaul cost per unit for 5 years of
ownership for the 113 hp compressor at $157,351.06. ReciproCo has the lowest total overhaul
cost per unit for 5 years of ownership for the 552 hp compressor at $56,875.
ReciproCo
Shin Yin
Breeze
Works
0.24
0.12
0.06
0.18
0.30
0.30
0.06
0.12
0.18
0.24
Total overhaul cost per unit
for 5 years of ownership (113
hp package)
Total overhaul cost per unit
for 5 years of ownership (552)
hp package
Complete
Starke
Machine
Compression
Ausstatten
Pack Systems
Industries
Inc
PREVENTIVE MAINTENANCE
Preventive maintenance is the main differentiating factor between the five suppliers’
compressors. As such, it accounts for 13% of the total analysis.
R ECIPRO C O
The maintenance cost per unit for 5 years of ownership for the 113 hp and 552 compressors is
$90,750. This includes 10 days of required maintenance days per unit per year at $1,815 per
day for 5 years.
S HIN Y IN B REEZE W ORKS
The maintenance cost per unit for 5 years of ownership for the 113 hp and 552 compressors is
$139,052.20. This includes 14 days of required maintenance days per unit per year at $1,986.46
per day for 5 years.
C OMPLETE C OMPRESSION I NDUSTRIES
The maintenance cost per unit for 5 years of ownership for the 113 hp and 552 compressors is
$105,813.50. This includes 13 days of required maintenance days per unit per year at $1,627.90
per day for 5 years.
M ACHINE P ACK S YSTEMS
The maintenance cost per unit for 5 years of ownership for the 113 hp and 552 compressors is
$73,500. This includes 12 days of required maintenance days per unit per year at $1,225 per
day for 5 years.
Global Procurement at BP | Analysis 14
S TARKE A USSTATTEN I NC .
The maintenance cost per unit for 5 years of ownership for the 113 hp and 552 compressors is
$104,533. This includes 10 days of required maintenance days per unit per year at $1,900.60
per day for 5 years.
P REVENTIVE M AINTENANCE R ESULTS
Shin Yin Breeze Works has the lowest maintenance cost per unit for 5 years of ownership at
$139,052.20.
ReciproCo
Shin Yin
Breeze
Works
0.52
0.13
Maintenance cost per unit for
5 years of ownership
Complete
Starke
Machine
Compression
Ausstatten
Pack Systems
Industries
Inc
0.26
0.65
0.39
WARRANTY
The extended warranty cost accounts for only 6% of the overall analysis.
R ECIPRO C O
The total extended warranty cost per unit for the 113 hp compressor is $10,800. This includes
36 months at $300 per month.
The total extended warranty cost per unit for the 552 hp compressor is $18,000. This includes
36 months at $500 per month.
S HIN Y IN B REEZE W ORKS
The total extended warranty cost per unit for the 113 hp compressor is $27,848.54. This
includes 48 months at $580.18 per month.
The total extended warranty cost per unit for the 552 hp compressor is $46,414.22. This
includes 48 months at $966.96 per month.
C OMPLETE C OMPRESSION I NDUSTRIES
The total extended warranty cost per unit for the 113 hp compressor is $10,490.04. This
includes 36 months at $291.31 per month.
The total extended warranty cost per unit for the 552 hp compressor is $17,483.40. This
includes 36 months at $485.65 per month.
M ACHINE P ACK S YSTEMS
Global Procurement at BP | Analysis 15
The total extended warranty cost per unit for the 113 hp compressor is $14,700. This includes
42 months at $350 per month.
The total extended warranty cost per unit for the 552 hp compressor is $25,200. This includes
42 months at $600 per month.
S TARKE A USSTATTEN I NC .
The total extended warranty cost per unit for the 113 hp compressor is $14,040. This includes
36 months at $390 per month.
The total extended warranty cost per unit for the 552 hp compressor is $23,400. This includes
36 months at $650 per month.
W ARRANTY R ESULTS
Shin Yin Breeze Works has the lowest total extended warranty cost per unit for the 113 hp
compressor at $27,848.54. Shin Yin Breeze Works has the lowest total extended warranty cost
per unit for the 552 hp compressors at $46,414.22.
ReciproCo
Shin Yin
Breeze
Works
Complete
Starke
Machine
Compression
Ausstatten
Pack Systems
Industries
Inc
Total extended warranty cost
per unit (113 hp unit)
0.30
0.06
0.24
0.12
0.18
Total extended warranty cost
per unit (552 hp unit)
0.24
0.06
0.30
0.12
0.18
ReciproCo
Shin Yin
Breeze
Works
1.60
0.43
TOTAL MAINTENANCE RANKINGS
Total Maintenance Weighted
Rankings
Complete
Starke
Machine
Compression
Ausstatten
Pack Systems
Industries
Inc
0.98
1.25
1.29
POST-OWNERSHIP
In the information we were given, they gave the value of the compressors after a 5 year
working life. It was said to be at a 60% value of original cost. To plan that out into other years,
Global Procurement at BP | Analysis 16
like 3, 7, or 10, which was our other calculation, we performed some basic simple math to
determine the salvage value since no actual depreciation rate was given. So, if the compressor
lost 40% within the first 5 years of its useful life, we assumed that it decreased every year by
8%, 40% ÷ 5 years = 8%. Thus, to find the salvage value at any point in the products life, you
would simply multiply the years it has been in use by the 8% found and then subtract that from
the original purchase cost.
YEAR 1
YEAR 2
YEAR 3
YEAR 4
YEAR 5
113:
552:
113:
552:
113:
552:
113:
552:
113:
552:
$145,800 – ($145,800*.08*1) = $134,136
$608,400 – ($608,400*.08*1) = $599,728
$145,800 – ($145,800*.08*2) = $122,472
$608,400 – ($608,400*.08*2) = $511,056
$145,800 – ($145,800*.08*3) = $110,808
$608,400 – ($608,400*.08*3) = $462,384
$145,800 – ($145,800*.08*4) = $99,144
$608,400 – ($608,400*.08*4) = $413,712
$145,800 – ($145,800*.08*5) = $87,480
$608,400 – ($608,400*.08*5) = $365,040
Using this chart, you can see the pattern that would continue out until the remaining value was
equal to 0 or it depreciated to its predetermined salvage value.
TOTAL COST OF OWNERSHIP
The present value of all future cash flows was calculated using an interest rate of 8%. This
interest rate was derived from the interest rate BP used in the 2012 financial statements.
RECIPROCO
0
Acquisition Cost
Purchase Price
Transportation Cost*
Duties and Customs
Demmurage
Total Acquisition Cost
Ownership Cost
Training and Commissioning Cost
Preventive Maintenance Cost
Overhaul Cost
Downtime Cost
Extended Warranty Cost
Total Ownership Cost
Post-Ownership Cost
Salvage Value
Total Post-Ownership Cost
Total Cost of Ownership
1
ReciproCo
2
3
4
5
$ (145,800.00)
$
(55.13)
$
-
Present Value
$ (145,800.00)
$
(55.13)
$
$
$ (145,855.13)
$ (100,000.00)
$ (18,150.00) $ (18,150.00) $ (18,150.00) $ (18,150.00) $
$
$
$
$
(18,150.00)
(91,425.00)
(35,000.00)
(10,800.00)
$ (100,000.00)
$ (72,600.00)
$ (62,222.32)
$ (23,820.41)
$ (7,350.30)
$ (265,993.03)
59,537.42 $ 59,537.42
$ 59,537.42
$ (352,310.74)
Global Procurement at BP | Analysis 17
SHIN YIN BREEZE WORKS
0
Acquisition Cost
Purchase Price
Transportation Cost*
Duties and Customs
Demmurage
Total Acquisition Cost
Ownership Cost
Training and Commissioning Cost
Preventive Maintenance Cost
Overhaul Cost
Downtime Cost
Extended Warranty Cost
Total Ownership Cost
Post-Ownership Cost
Salvage Value
Total Post-Ownership Cost
Total Cost of Ownership
1
ShinYin Breeze Works
2
3
4
5
$ (164,208.48)
$
(354.09)
$ (6,075.71)
Present Value
$ (164,208.48)
$
(354.09)
$ (6,075.71)
$
$ (170,638.28)
$ (200,000.00)
$ (27,810.44) $ (27,810.44) $ (27,810.44) $ (27,810.44) $
$
$
$
$
(27,810.44)
(94,620.17)
(50,000.00)
(27,848.54)
$ (200,000.00)
$ (111,241.76)
$ (64,396.89)
$ (34,029.16)
$ (18,953.25)
$ (428,621.07)
44,703.01 $ 44,703.01
$ 44,703.01
$ (554,556.34)
COMPLETE COMPRESSION INDUSTRIES
0
Acquisition Cost
Purchase Price
Transportation Cost*
Duties and Customs
Demmurage
Total Acquisition Cost
Ownership Cost
Training and Commissioning Cost
Preventive Maintenance Cost
Overhaul Cost
Downtime Cost
Extended Warranty Cost
Total Ownership Cost
Post-Ownership Cost
Salvage Value
Total Post-Ownership Cost
Total Cost of Ownership
Complete Compression Industries
1
2
3
4
5
$ (138,443.14)
$
(110.25)
$
-
Present Value
$ (138,443.14)
$
(110.25)
$
$
$ (138,553.39)
$ (200,000.00)
$ (21,162.70) $ (21,162.70) $ (21,162.70) $ (21,162.70) $ (21,162.70)
$ (117,351.06)
$ (40,000.00)
$ (10,490.04)
$
$ (200,000.00)
$ (84,650.80)
$ (79,867.16)
$ (27,223.33)
$ (7,139.34)
$ (398,880.63)
47,111.04 $ 47,111.04
$ 47,111.04
$ (490,322.99)
MACHINE PACK SYSTEMS
Global Procurement at BP | Analysis 18
0
Acquisition Cost
Purchase Price
Transportation Cost*
Duties and Customs
Demmurage
Total Acquisition Cost
Ownership Cost
Training and Commissioning Cost
Preventive Maintenance Cost
Overhaul Cost
Downtime Cost
Extended Warranty Cost
Total Ownership Cost
Post-Ownership Cost
Salvage Value
Total Post-Ownership Cost
Total Cost of Ownership
1
Machine Pack Systems
2
3
4
5
$ (157,200.00)
$0.00
$
-
Present Value
$ (157,200.00)
$
$
$
$ (157,200.00)
$ (100,000.00)
$ (14,700.00) $ (14,700.00) $ (14,700.00) $ (14,700.00) $
$
$
$
$
(14,700.00)
(89,625.00)
(50,000.00)
(14,700.00)
$ (100,000.00)
$ (58,800.00)
$ (60,997.27)
$ (34,029.16)
$ (10,004.57)
$ (263,831.00)
64,192.61 $ 64,192.61
$ 64,192.61
$ (356,838.39)
STARKE AUSSTATTEN INC.
0
Acquisition Cost
Purchase Price
Transportation Cost*
Duties and Customs
Demmurage
Total Acquisition Cost
Ownership Cost
Training and Commissioning Cost
Preventive Maintenance Cost
Overhaul Cost
Downtime Cost
Extended Warranty Cost
Total Ownership Cost
Post-Ownership Cost
Salvage Value
Total Post-Ownership Cost
Total Cost of Ownership
1
Starke Ausstatten
2
3
4
5
$ (174,687.60)
$
(451.26)
$
-
Present Value
$ (174,687.60)
$
(451.26)
$
$
$ (175,138.86)
$ (200,000.00)
$ (20,906.60) $ (20,906.60) $ (20,906.60) $ (20,906.60) $
$
$
$
$
(20,906.60)
(65,407.23)
(40,000.00)
(14,040.00)
$ (200,000.00)
$ (83,626.40)
$ (44,515.06)
$ (27,223.33)
$ (9,555.39)
$ (364,920.17)
71,333.67 $ 71,333.67
$ 71,333.67
$ (468,725.37)
TOTAL COST OF OWNERSHIP RESULTS
Total Cost of Ownership
RC
SBW
CCI
MPS
SA
$ (352,310.74) $ (554,556.34) $ (490,322.99) $ (356,838.39) $ (468,725.37)
RISK ASSESSMENT
LABOR STRIKES
In general, the oil and gas field does not have a high amount of labor strikes as an industry. Not
to say there has not been any, but usually, workers are fairly and decently paid and work in
companies whom have strict safety regulations to protect the well-being of its employees. The
Global Procurement at BP | Risk Assessment 19
risk and concern depends on the country with which you are dealing and how involved the
unions are there.
RECIPROCO AND MACHINE PACK SYSTEMS
Both of these companies are based in the United States. With labor strikes, they would be the
most transparent with this issue. Also, strikes in United States are not common. There are some
from time to time, but the latest big one was in 1997 and was with UPS, according 24/7 Wall
Street.
SHIN YIN BREEZE WORKS
In the past, China has been known to have major labor strikes due to unrest of employees. They
are in extremely unfair and dangerous working environments, yet they make next to nothing in
American standards. Child labor has been widespread in the past, an excellent example being
Nike. In 2010, China had a very active period of protests, strikes, and disputes. Chinese workers
were tired of the conditions they faced on a daily basis. They wanted better wages, working
hours, and reasonable benefits for themselves and their families for which they were trying to
provide. Based on this history, BP would need to be particularly cautious on entering into
business with Shin Yin. If any problems were to arise with labor, production would be
decreased, maybe even to the point of being stopped for an amount of time. Since this
company had the longest lead times to begin with, products would take an extraordinary
amount of time to get to the United States, time which BP does not have when the need is high
and immediate.
COMPLETE COMPRESSION INDUSTRIES
This company does most of its business within Canada and the United States. It is
headquartered in the province of Alberta, Canada which is good news for BP because they have
some locations in Calgary, only 137 kilometers apart. Thus, if there were any issues with labor,
BP representatives would be close and could theoretically go to the plant and check it out. This
does not seem to be a likely problem though. According to McGraw Hill Education Answers,
many Canadian workers fall under U.S. unions. Those that do not and fall under Canada’s
unions are almost the same though since their labor laws are so similar to ours, patterned after
the Wagner Act. Yet, dealing with multiple countries, there will always be differences due to
varying culture and legalities. Strikes are not prevalent, but unions are and BP would need to be
mindful of this fact.
STARKE AUSSTATTEN INC.
In the years since the fall of the Berlin Wall, Germany has had much quieter problems regarding
labor strikes and unions. Unions were formed to protect the workers from harsh conditions and
unfair treatment that preceded 1989. Immediately following, things were not as good for
laborers as they would be today, but Germany was determined to make the country a better
Global Procurement at BP | Risk Assessment 20
place to prosper and raise families. This is not to say that there is no unrest and the country is
perfect, but it does not look as though labor strikes are a huge issue of concern. However,
recently in the headlines, Germany’s largest airline is getting heat from employees. They want
to freeze wages for two years, until January 2015, and extend the working week by one hour.
Their work force is obviously very unhappy about this and is threatening a strike if the upper
management does not change their tune. However, as long as the company itself does not
make any rash moves like this example, the labor union should be cooperative and strikes
should be avoidable.
VARYING BUSINESS CULTURE
BRIBES
S HIN Y IN B REEZE W ORKS
Shin Yin poses an ethical breach due to the Chinese business culture and its acceptance of gifts,
which can be seen as bribes to do business with outsiders. A focus on building a strong
relationship and trust between partners, often involving lavish courting and exchanges of gifts
is essential to build a relationship with Chinese businesses.
C OMPLETE C OMPRESSION I NDUSTRIES
Canada experienced a series of bribery scandals in the public and private sectors, but in recent
years strict legislation has passed in the enforcement and prosecution of those who participate
in the giving and receiving of bribes.
S TARKE A USSTATTEN I NC .
Bribery is a potential risk with Starke Ausstatten, where until recently bribery was a commonly
accepted German business practice. It showed that partners were serious about doing business,
and had the capital to do so. Around 2008, or the time when the Seimens $1.6 billion bribery
scandal occurred in Germany, businesses became more regulated and bribery more strictly
enforced.
CHILD LABOR
Child labor is a looming issue in China. With Shin Yin being so far from the United States, it is
difficult to make visits to the plant and ensure all ethical practices accepted by American
companies are being executed and followed without exception. Most European and American
companies have steered away from using child labor, but that does not necessarily mean it
never happens.
LEVERAGE OF POWER
S HIN Y IN B REEZE W ORKS
Global Procurement at BP | Risk Assessment 21
Negotiating and doing business with Shin Yin involves appealing to the Chinese negotiation
tradition, but without losing one’s own company’s objectives or succumbing to the Chinese
company’s strategy. Often, Chinese will talk themselves down to make incur pity, trying to
cause the negotiators to make more concessions. The Chinese are also about saving face and
will not respond positively to any accusations or questioning of power. Also, the power distance
among Chinese is very high, which means upper level management expects respect. The
Chinese give the impression that it is a favor to do business with them, focusing less on profit
and more on pride and “face”.
C OMPLETE C OMPRESSION I NDUSTRIES
Working with Canadians is very similar to working with Americans. They have an especially low
power distance, and, consequently, interaction between varying business levels and company
sizes is accepted and encouraged.
S TARKE A USSTATTEN I NC .
Germans are very serious and straightforward about business. The power distance is low, and
they will engage in fair, but assertive negotiations.
WOMEN
In China, women are still predominately seen as inferior and some companies will even refuse
to speak or negotiate with women. It is very common for a woman to travel with a male
counterpart to give her some authority in the eyes of the Chinese. BP would have to keep this in
mind, which could end up with a less than optimal candidate traveling to Shin Yin to partake in
negotiations. In Germany, the business world is heavily run by men, but the amount of women
in the workforce is increasing. Germany is more accepting than China, but not quite to the
degree that the United States is with women carrying high, prestigious positions. According to
The New York Times, German females, once having children, leave the workforce and do not
return. The same article also states that Germany has lacked in cultural reform since the earlymid 1900’s. Germans appears to cling to the stereotypes of the working man and stay-at-home
mother.
With the North American companies, business is handled in extremely similar ways. Women are
accepted and do hold authority, yet they still only hold a small percentage of top executive
positions. This would be a non-factor for ReciproCo, Complete Compression Industries, and
Machine Pack Systems.
CURRENCY FLUCTUATION
Global Procurement at BP | Risk Assessment 22
Currency fluctuation is a risk assumed when doing business with an international corporation.
Currencies appreciate and depreciate with the variance of a country’s economy, or a zone’s
economy, and change every minute of every day.
SHIN YIN BREEZE WORKS
Shin Yin uses the Hong Kong Dollar, which is pegged to the US Dollar with a floating fixed
exchange rate. To ensure financial security in Hong Kong financial institutions, they must have
the equivalent exchange in US Dollars on deposit, which are kept in Hong Kong’s Exchange
Fund, one of the largest official reserves in the world. Since 1983, Hong Kong operates under a
Currency Board system, in which the exchange rate was fixed at HK.8 per USD. As of 2005, a
new upper guaranteed limit was set for the HKD at HK.75 to the USD, and the lower limit was
lowered from 7.80 to 7.85. This was done to narrow the gap between the interest rates in Hong
Kong and those of the United States. This creates a strong, reliable currency that will be easily
predictable for business partnership with BP.
COMPLETE COMPRESSION INDUSTRIES
The Canadian dollar is pegged to the US Dollar, and is closely converted at USD $1 is CAD $1.02,
meaning the USD is only slightly stronger than the CAD. This makes for easy conversion and also
less expensive goods and services. Also, because Canada’s economy is so closely tied economy
to the US (especially after NAFTA), the CAD appreciation and depreciation is likely to be in sync
to that of the USD.
STARKE AUSSTATTEN INC.
Germany uses the Euro, which is stronger than the dollar, making it more expensive for BP to
purchase from Starke. The Euro has depreciated recently, due to the Euro Crisis, which is a
currency risk that stems from the fact that Germany’s Euro currency is in a “basket” of
currencies with sixteen other countries. This means the market forces of sixteen different
economies impact the Euro, making Germany vulnerable to the failing or thriving economies of
the other member nations. This was evident in the Euro Crisis, which led to the eventual
depreciation of the currency. This is beneficial for the currency conversion, but to maintain a
healthy supplier it is necessary for them to be able to sustain and support their business with
their native currency to provide BP the best service.
RELIABILITY OF PRODUCTS AND SERVICES
Maintenance is a key part of the 200 total compressors BP will purchase for this initial
investment. Through a proper process of choosing the optimal supplier, BP will ensure to the
best of its ability and knowledge to choose the supplier that best fits the specifications,
especially on the quality aspect. However, the product itself can only go so far before it needs
tune ups, repairs, and normal preventive maintenance. The companies BP would have the most
Global Procurement at BP | Risk Assessment 23
immediate access to would have best response rates to these emergencies should they arise;
therefore, it seems the American companies have an upper hand in this aspect of the
transaction with Canada following, then Germany, and China in last.
These last three companies are international which could present some unforeseen problems
with communication with BP. Canada speaks English predominately in the province where CCI is
located, but Germany and China could potentially pose some issues. Their culture is
considerably different than that of the United States. Top management abroad will have
different theories and processes for carrying out a business deal and following up in the future.
BP will have to stay conscious of how the respective companies operate in the business arena
with negotiations and how to handle such discrepancies.
Being in the oil and gas industry, there are numerous regulations which companies must meet
and follow to stay in business and avoid fines. The Total Recordable Incident Rate (TRIR)
represents the quality of the compressors and is a key indicator of if it will meet the
environmental regulations to prevent possible accidents and harmful emissions. This keeps BP’s
reputation and goodwill high with satisfied customers and content citizens.
MANAGERIAL
COMPANY VISITS
S HIN Y IN B REEZE W ORKS
Shin Yin Breeze Works is headquartered in Hong Kong. On average, a round-trip ticket from
Houston, Texas to Hong Kong costs around $1200. If BP were to choose Shin Yin Breeze Works,
sending a team to Hong Kong to inspect Shin Yin would become expensive quickly. Not only
would BP have to monitor the managerial practices at Shin Yin, but also the subcontractor, KohSuen Automation Instrumentation Co., Ltd. While Koh-Suen is stated to have won the trust of
many industry leaders for their leading new technology products in the compression industry,
their managerial practices would also need to be considered in selecting BP’s new supplier. BP
must be sure that Shin Yin and Koh-Suen are both practicing within environmental and industry
standards.
C OMPLETE C OMPRESSION I NDUSTRIES
Complete Compression Industries, headquartered in Banff, Canada, would be a cheaper
alternative to travel expenses. A round-trip ticket costs, on average, $650. A team sent to
Complete Compression would not be as costly as Shin Yin. However, the environmental risks
could be costly with Complete Compression. Recently, the company was placed on a
Performance Improvement Plan to improve their environmental impact, due to recent
incidents. Environmental standards, if broken, can prove to be very costly, as well as tarnish a
Global Procurement at BP | Risk Assessment 24
company’s reputation. If Complete Compression cannot improve their environmental
performance, then any customer could end up paying a price.
S TARKE A USSTATTEN I NC .
Starke Ausstatten Inc. is a compressed air and vacuum products manufacturer headquartered
in Coburg, Germany. On average, a round-trip ticket from Houston to Coburg costs about
$1100. This is another major investment, however cheaper than Shin Yin, for BP to consider.
Sending managers to inspect the facilities at Starke Ausstatten proves to be costly.
OUTSOURCING
Suppliers outsourcing, or subcontracting their work to other companies can easily become a
problem for management. If BP does not allow its supplier(s) to subcontract, it will be the
responsibility of BP’s management to make sure that the agreement is enforced. It is hard to
ensure that suppliers do not subcontract, since BP management will not be involved full-time.
Management would have to travel more often to check on the business practices of the
supplier.
QUALITY CONTROL
Quality control is an important aspect of managerial risk. BP needs high quality compressors in
order to accomplish its goal. Six Sigma practices are important for the suppliers to implement in
the manufacturing of the compressors. However, Six Sigma is expensive for a company to apply
in planning and manufacturing processes. Having stricter defect allowances costs more money
in inspection expenses. This, in turn, raises BP’s costs, as the suppliers’ expenses have risen as a
result of implementing Six Sigma.
CONTRACT
Another risk to consider is how a long or short-term contract will affect the relationship with
the supplier(s). Although a long-term contract may be more effective in ensuring a long-term
relationship with the supplier(s), it could lead to financial trouble for BP if the supplier is
acquired (Machine Pack Systems). While a short-term contract may not be as effective in
ensuring a long-term relationship with the supplier(s), it creates an exit strategy for BP should
the supplier(s) not perform as desired.
RISK MITIGATION
Geopolitical uncertainty is one of the risks that might be faced. To mitigate these risks, BP will
analyze the risks of each country’s current political state. Labor strikes are another risk. BP will
mitigate these risks by making sure the suppliers pay the workers fair wages, as well as follow
all labor laws in the geographical area. Another risk is varying business cultures. To mitigate
these risks, BP will have a full understanding of the culture of the foreign country, as well as a
Global Procurement at BP | Risk Mitigation 25
translator to ensure there are no miscommunications. BP will also ensure there are no
unethical practices at foreign factories. Americans would frown upon unethical activities such
as child labor, and dealing with people who practice such activities would negatively impact
BP’s image. The short-term vs. long-term contract is another risk. Some companies may not
have the ability to maintain a presence in the market. Other companies have the ability to
maintain a presence, so it might be harmful to have a short-term contract. To mitigate these
risks, BP will have a full understanding of the background of the company. If the company is
riskier, BP would make a short-term contract, and if the company is less risky, a long-term
contract would be selected. One of the last risks that needs to be mitigated is the reliability of
products and services. To mitigate these risks, BP will perform preventive maintenance on all
our compressors as needed.
RECOMMENDATION
SUPPLIER SELECTION
113 HORSEPOWER UNIT
BP should order 45 units of the 113 horsepower compressor from Machine Pack Systems. MPS
had the highest overall weighted score at 3.86. However, there is concern about whether MPS
realistically has the capacity to handle a large order. As such, MPS will receive approximately
30% of the total 113 horsepower compressor order.
BP should order 100 units of the 113 horsepower compressor from ReciproCo. ReciproCo had
the second highest overall weighted score at 3.76. ReciproCo has a strong existing relationship
with BP. Although ReciproCo’s net income has declined over the past few years, BP’s added
business should sustain ReciproCo. ReciproCo also has the ability to handle a large order. As
such, ReciproCo will receive approximately 70% of the total 113 horsepower compressor order.
552 HORSEPOWER UNIT
BP should order 40 units of the 552 horsepower compressor from ReciproCo. ReciproCo had
the highest overall weighted score at 3.71 and will handle approximately 70% of the total 552
horsepower order.
BP should order 15 units of the 552 horsepower compressor from Machine Pack Systems. MPS
had the second highest overall weighted score at 3.66 and will handle approximately 30% of the
total 552 horsepower order.
TYPE OF CONTRACT
BP should use a firm fixed price contract with both Machine Pack Systems and ReciproCo for
both the 113 horsepower compressor and 552 horsepower compressor orders. According to
Global Procurement at BP | Recommendation 26
Supply Management: Eighth Edition (Burt, Petcavage, Pinkerton), a firm fixed price contract is
an agreement to pay a specified price when the items specified by the contract have been
delivered and accepted. Firm fixed price contracts are used when specifications are well
defined, cost, schedule, and technical risks are low, and competition has established pricing.
The specifications of both the 113 horsepower compressor and 552 horsepower compressor
are clear. Although the turnaround is relatively quick for the compressor orders, the order sizes
were kept small to ensure that the orders are received on time, keeping the schedule risk
relatively low. Although the compressor is a vital component of BP’s process, compressors are
generally the same across the suppliers, keeping the technical risk low. Although the acquisition
cost of both suppliers’ compressors are in the mid-range, the total cost of ownership of both
suppliers’ compressors are the lowest of the five suppliers. All five suppliers have established
prices.
Global Procurement at BP | Recommendation 27