Introduction
CJ Industries or CJI is an engine component manufacturer, which was awarded a five-year contract with its main customer, Great Lakes Pleasure Boats. The contract will provide $10 million annually starting from July of 2008 (“CJ Industries and Heavey Pumps,” n.d.). However, CJI relies on its supplier, Heavey Pumps, for its pumps. Both B2B relationships were functioning on a sporadic as-needed basis, but since the contract implies an increased regular demand requirement, the Heavey Pumps needs to be able to produce at least 50 pumps per month. CJI can remove its reliance on Heavey Pumps by creating its pump production line with a $500000 investment.
Major Problem
Should CJI continue its reliance on Heavey Pumps or invest in its pump production line?
Possible Solutions
The first possible solution is for CJI to invest in its pump production line. Considering the annual revenue of $10 million, $500000 is not as expensive as it looks. In addition, the current contact is not the last one, which means that it is a rather small investment in the long-term relationship between CJI and Great Lakes. It is stated that “buyer power advantage is negatively related to long-term collaboration. Supplier customization and managerial ties mitigate the effect of buyer power advantage on long-term collaboration” (Wang et al., 2016, p. 5587). In other words, Heavey Pumps produces customized pumps for the Great Lakes, which makes the power shift towards the supplier. Since CJI builds every other component in-house, the supplier risk can be eliminated. The advantage is rooted in CJI’s complete autonomy and non-reliance on its suppliers, but a disadvantage is the cost of investment, which might not have a positive return on investment.
The second possible solution is for CJI to award a contract of their own to Heavey Pumps to hold them obliged to produce at least 50 pumps per month. The contract will bring stability to the chain of these two B2B relationships. It is a plausible option since the demand volume is fixed for CJI, which makes a contract a viable option. There is no information regarding Heavey Pumps’ ability to produce such several pumps, which means there is enough time to inform the supplier about the issue. If Heavey Pumps is unable to produce at the moment, they might be able to make necessary changes to adhere to the desired volume due to the contract. The advantage is stability offered by the obligatory contract requirements on Heavey Pumps’ production volume, but a disadvantage is the continued supplier reliance.
The third possible solution is to eliminate supplier risk by contacting and establishing relationships with other pump manufacturers. There are two other potential suppliers, which could be investigated by CJI’s experts on their pump quality. By relying on three suppliers at once, CJI’s supplier reliance risk can be significantly minimized. The advantage is that such a measure does not require the monetary investment and potentially lower cost per pump, but a disadvantage is the lack of quality assurance and their ability to customize their pump for Great Lakes’ needs.
The fourth possible solution is a combination of the first and third options. CJI can make a smaller investment into its pump production line, so it can produce a portion of 50 pumps per month, and other ones are ordered from Heavey Pumps and the other two suppliers. The advantage is risk spread and flexibility, but the disadvantage is that pumps might vary in their quality (Hugos, 2018).
Choice and Rationale
The most plausible choice is the first solution or solution A because it eliminates the reliance on suppliers, which means there are no risk factors involved. CJI should invest in its production line and use the time before the contract start date to make necessary arrangements. All other options have several unknown factors, such as quality, production capacity, and contract acceptance. In addition, even if the $500000 initial investment has a low return on investment, it will be able to recoup itself in a future contract. The given contract should not be viewed as an already established partnership but rather an opportunity to ensure future partnerships. It is likely that such an investment will not incur losses on CJI but will secure future profits. With this choice, the company will eliminate supplier reliance risk and initiate the partnership with Great Lakes with a sense of mutual respect rather than mere profit chasing since the latter awarded CJI with the privilege of being an exclusive supplier.
Implementation
Nik Grams should provide $500000 to the CJI production manager as soon as possible to initiate the development of the pump product line. He should not waste time investigating other alternatives because time is precious with this option. CJI might also consider purchasing additional stocks of pumps from Heavey Pumps in the case of a delay in development.
References
CJ Industries and Heavey Pumps [PDF document]. (n.d.).
Wang, Y., Wang, N., Jiang, L., Yang, Z., & Cui, V. (2016). Managing relationships with power advantage buyers: The role of supplier initiated bonding tactics in long-term buyer–supplier collaborations. Journal of Business Research, 69(12), 5587–5596. Web.
Hugos, M. H. (2018). Essentials of supply chain management (4th ed.). Wiley.