Chapter 3

  • 27 November 2002


    Sometimes I wonder whether I made the right decision back then. Over the last six years, I became the best mechanic in the company. I had a great boss, a good salary, a secure future and awesome colleagues. I didn't really want to give up all of this, and yet I did. I just feel that this job can no longer teach me anything new, nor is it challenging enough for me.

    I remember my old childhood dream of becoming a top manager, but is it worth giving up what I have, only to chase dreams, not knowing whether I'll ever make it anywhere? I don't know, but the decision is made now. And here I am, back with the books again, studying business administration at university. Who knows where this will end. Anyway, I need to focus right now. I'm preparing for my first exam. Let's see if I can solve this exercise:


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    Excercise:

    Imagine you work in the middle management of a mechanical engineering company.

    The general manager asked you to present a purchasing plan for machine components for the upcoming year. For the procurement of several machine components, you can choose between three suppliers:

    • The supplier 'Mecha-Heads' sells their components for only $20 per unit, but the components have a relatively low durability. Also, after some online research, you find that many customers rated the supplier's punctuality with 3 out of 5 stars.
    • The supplier 'Swiss Metal' is quite expensive and sells their components for $60 per unit, but their components have the greatest durability. Customers rate their punctuality with 4 out of 5 stars.
    • The supplier 'General Machines' offers components with average durability and their pricing is $40 per unit. Their punctuality is also rated with 4 out of 5 stars.

    Your general manager would like to purchase components of great quality that are cheap and are delivered punctually. But if it's not possible to have it all, he'd consider a low price to be twice as important as punctuality, and the quality twice as important as the price.


    You have to make a rational decision. Based on this information, which supplier would you choose and why?



    Task: Solve the exercise

    • 3 points for the correct answer
    • 7 points for the correct analysis


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  • Answer: Swiss Metal


    Explanation:

    Priority Analysis Scoring - Point ranking system weighted by priority:

    x1 Punct (1,2,3 Pts) x2 Cost (2,4,6 Pts) x4 Qual (4,8,12 Pts) Total Points
    Mecha-Heads 1 Point 6 Points 4 points 11 Points
    Swiss Metal 2,5 Points 2 Points 12 Points 16,5 Points
    General Machines 2,5 Points 4 Points 8 points 14,5 Points

    If it ain't Dutch, it ain't much!

  • Use a decision matrix


    Relative importance:

    Punctuality is least important score 1

    Price is twice as important as punctuality score 2

    Quality is twice as important as price score 4


    Rate each company from 1 – 3 in each category then multiply rating score by importance factor

    company

    Price

    Punctuality

    Durability


    Total score

    Importance

    factor

    2

    1

    4


    Mecha-heads

    $20 per unit

    Rating score 3

    Total score 3x2=6

    3/5 stars

    Rating score 2

    Total score 2x1=2

    Low

    Rating score 1

    Total score 1x4=4

    6+2+4=12

    Swiss metal

    $60 per unit

    Rating score 1

    Total score 1x2=2

    4/5 stars

    Rating score 3

    Total score 3x1=3

    High

    Rating score 3

    Total score 3x4=12

    2+3+12=17

    General machines

    $40 per unit

    Rating score 2

    Total score 2x2=4

    4/5 stars

    Rating score 3

    Total score 3x1=3

    Average

    Rating score 2

    Total score 2x4=8


    4+3+8=15


    Outcome: I would recommend Swiss Metal as the decision matrix, based on the boss’s priorities, indicates that that this best meets the company’s needs.


    Besides which, as a lover or cheese and chocolate, a quick visit to Switzerland (by train of course) to have a proper assessment of the product, would be very welcome!

  • Starting with punctuality, the factor of least importance, the different companies are rated Mecha-Heads 3, Swiss Metal 4, General machines 4. These scores are graded out of 5.

    The other ratios (for punctuality and durability) are graded out of 3, so the raw scores will be adjusted to maintain consistency. The raw scores will be divided by 5 (stars) and multiplied by 3.

    This method gives the scores Mecha-Heads 1.8, Swiss Metal 2.4, General Machines 2.4.


    The ratio for low pricing is 3:1:2 for Mecha-Heads : Swiss Metal : General Machines.

    As pricing is twice as important as punctuality, these ratio scores will be doubled.

    Mecha-Heads scores 6, Swiss Metal scores 2, General Machines scores 4.


    Keeping the ratio 1:2:3, Mecha-Heads has a low durability so scores 1, General Machines has an average durability so scores 2 and Swiss Metal has the greatest durability so scores 3.

    As durability is twice as important as pricing, these ratio scores will be multiplied by a factor of 4.

    Mecha-Heads scores 4, Swiss Metal scores 12 and General Machines scores 8.


    Adding the scores gives Mecha-Heads a total of 11.8, Swiss Metal a total of 16.4 and General Machines a total of 14.4.


    Swiss Metal is the supplier chosen.

  • The supplier to choose is Swiss Metal


    The reason:


    Durability/quality is the most important, it has a multiplier of 4

    Price has a multiplier of 2

    Punctuality has a multiplier of 1


    Since Swiss Metal has the best quality, it has a quality value of 60, General Machines has quality level of 40, Mecha Heads has quality value of 20. All of this is multiplied by 4.


    Swiss Metal 240 points

    General Machines 160 points

    Mecha Heads 80 points


    Price is reverse so Mecha Heads has 120 points (2 X 60)

    General Machines 80 points (2 X 40)

    Swiss Metal 40 points (2 X 20)


    Finally for punctuality 5 is max so 5 = 60 points


    Swiss Metal 48 points

    General Machines 48 points

    Mecha Heads 36 points


    In the total ranking we have:


    Swiss Metal 328 points (240+40+48)

    General Machines 288 points (160+80+48)

    Mecha Heads 236 points (80+120+36)


    Swiss Metal should be purchased

  • I would choose Swiss Metal.


    Given the relation Quality rates 4 punctyalities and Price rates 2 punctualities. The distribution is then:


    And by transform all the values in terms of punctuality:


    Punctuality Price Quality
    Mecha-Heads 3 5 2
    Swiss Metal 4 2,5 5
    General Machines 5 1,5 3
    Punctuality Price Quality Total
    Mecha-Heads 3 10 8 21
    Swiss Metal 4 5 20 29
    General Machines 5 3 12 20


    Swiss Metal wins

  • I would rate them all. The differences between them are all the same so ranking them can be done. The weight of the score is determined by the manager.

    Mecha Heads is the cheapest so it scores 3(2)=6 points for price, 1(4)=4 points for durability because it is low and 1(1)=1 for punctuality. total points = 11

    SwissMEtal: Price: 1(2)=2. Durability: 3(4)=12 Punctuality: 2(1)=1. Total points = 18

    General Machines: Price 2(2)=4 durability 2(3)=6 punctuality 2(1)=1. Total points 11.



    Swiss Metal scores the most points, so it will be the supplier.

  • The supplier 'Swiss Metal' is quite expensive and sells their components for $60 per unit, but their components have the greatest durability. Customers rate their punctuality with 4 out of 5 stars.

    -This ist the best choice.


    I gave for everithing points:


    1. deliver:

    3-points beause of the cheapest, 1-point because of worst quality, 1- point because of bad punctuality


    2.deliver:

    1.point for 60 dollars, 3 points for best quality and 2 points for punctuality


    3.deliver:

    2-points for price, 2 for quality and 2 for punctuality


    Now, because quality ist twice and punctuality only a half from price:

    1.deliver:

    3+2+0.5(5,5)

    2.deliver:

    1+6+1(8)

    3.deliver:

    2+4+1(7)


    so.. deliver 2 has most points...

  • I would select Swiss Metal


    The rationale (or formula) for selecting the supplier is based on a weighted score system based on

    Quality x 4 + Price x 2 + punctuality.

    Each parameter is converted into values between 0-100, i.e. High quality=100, Avg= 50, Low = 0; Low price = 100, med = 50, high = 0; Punctuality = number of stars x 20, i.e. 3 stars=60, 4 stars = 80:


    Mech-Heads = (0 x 4) + (100 x 2) + (3 x 20) = 260 pts

    Swiss Metal = (100 x 4) + (0 x 2) + (4 x 20) = 480 pts

    General Machines = (50 x 4) + (50 x 2) + (4 x 20) = 380 pts

  • Lets start with a standard rating system to compare the 3 factors - I chose a rating system out of 3 as there are 3 suppliers and the price per unit works out easily.


    For price: 3 is the lowest price with the ratings going down as the price increases.

    The formula is: 20 (lowest price) / varies (actual price) * 3

    Therefore Meca-Heads has a rating of 20 / 20 * 3 = 3, Swiss Metal -> 20 / 60 * 3 = 1 and

    General Machines -> 20 / 40 * 3 = 2


    For durability: As durability has not been quantified we arbitrarily use 3 is the best durability and 1 is the lowest durability.

    Therefore Meca-Heads has a rating of 1, Swiss Metal -> 3 and General Machines -> 2


    For punctuality: We need to convert the 5 star rating to our rating out of 3 where 3 is the best durability equivalent to 5 stars and the rating reduce with lower durability.

    The formula used the rationalize the 5 star ratings is: varies (star rating) / 5 (max star rating) * 3

    Therefore Meca-Heads has a rating of 3 / 5 * 3 = 1.8, Swiss Metal -> 4 / 5 * 3 = 2.4 and

    General Machines -> 4 / 5 * 3 = 2.4


    The general manager has importance weightings: price = 2 (twice that of punctuality), durability = 4 (twice that of price) and punctuality =1.


    Final rationalized scores applying general manager's weightings are:


    Meca-Heads: 3 * 2 (price) + 1 * 4 (durability) + 1.8 = 11.8

    Swiss Metal: 1 * 2 (price) + 3 * 4 (durability) + 2.4 = 16.4

    General Machines: 2 * 2 (price) + 2 * 4 (durability) + 2.4 = 14.4


    Therefore choose Swiss Metals.

  • 4xQuality = 2xPrice ($) = 1xPunctuality


    Rating Average quality as 2, Poor as 1, and Good as 3

    Price $20 = 3, $40 = 2, $60 = 1

    Punctuality 3* = 1, 4* = 2

    MH= 1+ 6 + 1 = 8

    SM = 12 + 2 + 2 = 16

    GM = 8 + 4 + 2 = 14


    Swiss Metal should be the preferred supplier since the improved quality overcomes the higher cost.

  • I would choose Swiss Metal. This companx is first on quality and punctuality and last on price. General machines is first in puctuality, but second on price and quality. Finally Mecha-Heads is first on price but third on quality and punctuality.


    By rating them from 1 to 3 for each category, and with quality = 2 x price and price = 2 x punctuality, we will have the following ratings :


    Swiss Metal : 4 * 3 + 2 * 1 + 1 * 3 = 17 points

    General Machines : 4 * 2 + 2 * 2 + 1 * 3 = 15 points

    Mecha-Heads : 4 * 1 + 2 * 3 + 1 * 1 = 11 points