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Purchasing Problem at University of West Ontario Case Solution
The case study is related to the issues of conflict resolution, contract negotiation, and cost management.
The University of West Ontario purchases its daily use paper from two suppliers; Xerox and Tenex. Paper pulp prices had been increasing from past few months. All the suppliers are facing the blow of increased prices. Both the companies have fixed price contract with the university which is valid for next few months. The university is under pressure in financial terms, and prudence measures are in action. The university mainly (approximately 60% of its revenues) relies on government grants. The university is in a difficult situation financially, since tuition fee increases had been capped by the government. While on the other hand, both the paper suppliers have been facing high pulp prices in the industry. But their approaches towards the contracts, with the university, are different. Both the companies supply a large amount of paper to university. Xerox supplies standard plain paper and photocopying and printing machinery while Tenex supplies stock tab paper and sells computer equipment to university campus store for sale. Xerox business volume is higher than Tenex’s business. The purchasing department is faced with a precarious issue due to increased paper prices because paper suppliers are intending to pass on the cost to the university.
Following questions are answered in this case study solution
Choice and Rationale
Case Analysis for Purchasing Problem at University of West Ontario
2. Major Problem
With tough times, both politically and economically, the university is facing financial issues. The paper prices are rising, and so are the costs to the suppliers. The purchasing department director, Robert Moore, realizes that both, Tenex and Xerox, would want to pass on the increasing costs to the university. Though, Xerox had notified the university that it would honor its agreement and supply paper at the price negotiated in the contract. But the other suppliers, Tenex, suddenly raises prices by 9% and issued a notification to the university without prior consultation. The dilemma faced by the purchasing department is whether to accept peacefully the unilateral increase in prices or to take a legal action against Tenex for not honoring their contract? Moore is facing a difficult situation. He is contemplating a solution to the predicament, whether to re-open the bidding process and invite new companies or to settle in for increased prices for next few months till Tenex contract expires? It is a difficult situation for the university since working relationship with Tenex had been good. Moore has to take a decision regarding the situation of whether to renegotiate the issue and settle for an adjustment, or stand firm on his grounds and insist on paying the same price?
3. Possible Solutions
Moore is facing a dilemma. There could be different solutions to the paper purchasing issue, and each has its pros and cons. Both the companies have good working relation with the university. In the context of situation stated above, below are some of the solutions that can help Mr. Moore.
One solution is to maintain the status quo. Mr. Moore could flatly refuse the price increase and insist on maintaining the same price till the contract ends on 30th April 1995. Companies in businesses anticipate raw material prices. Tenex, as a paper supplier, should have foreseen the potential increase in pulp prices and should have devised its strategies in accordance to that. Mr. Moore would be correct to insist on paying the same price that had been decided in the contract. This solution would be beneficial for university as it would let it buy paper from Tenex at the price fixed in the contract. If Tenex refused to supply paper at the contracted price citing the operational difficulties due to the price increase, the situation would lead to a tug of war. One side is insisting on fixed price while other intending to increase, the situation will not lead to any resolution of conflict.
In another scenario, the university could accept the revised prices. It could accept the 9% revision in prices and pass on the additional costs to end-users and also cut on consumption of stock tab paper. It could put a limit on consumption of stock tab paper and insist on using electronic sources to transmit and store information. University could also ask users to print on normal printing paper instead of stock tab papers and use alternative methods for tabbing such as using colored sticky notes. It could also increase on the price charged to students for using stock tab papers. This way the university would be able to peacefully resolve the issue with its supplier. But this would increase costs to the university and would ask for extreme frugality measure in paper consumption to account for increased price.
Another situation could be that both sides negotiate and agree on the partial price increase. The university could absorb a part of increase paper pulp price while Tenex could absorb rest of it. This arrangement could work till the contract expires. After the contract expires, the university could look for new suppliers who would deliver at the optimal price. This solution might not be very practical since the university is facing financial difficulties itself. With economic problems and restrictions on fee increase, it might not be able to pay for the increasing paper costs. Also, it is not fair on the part of the university to expect it to revise its budget when it signed the contract with Tenex at the price it knew it could pay.
Furthermore, another solution is that university could take a legal action against Tenex. Both the parties entered a contract and agreed on a price after negotiation. It is not deemed appropriate in the business community when one of the parties goes back on its commitments. Also, that the information related to the price increase was conveyed in an abrupt manner. Tenex had been doing business with the university for few years and addressing a long-term customer with “Dear Valued Customer” seems cold and indifferent. Legal action would get university some compensation to account for loss and would force Tenex to honor its commitments. This solution is not advisable. Legal proceedings are expensive, long and time consuming. It brings bad reputation to companies especially educational institutions. This solution would not be advisable in the current case.
The university could insist on maintaining the same price as stated in the first solution. If Tenex refuses to honor its commitments, the university could break the contract.
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