Split Award for a Precision Component Under Cost and Capacity Pressure
A manufacturer is awarding a one-year contract for a precision component. Three suppliers submitted quotes: Supplier A at $42 per unit for 100,000 units, 4-week lead time, 99.2% quality history, capacity 8,000 per month; Supplier B at $39 per unit for 150,000 units, 6-week lead time, 97.5% quality, capacity 12,000 per month; Supplier C at $45 per unit for 50,000 units, 3-week lead time, 99.8% quality, capacity 5,000 per month. Annual demand is 120,000 units with a 10% volume swing. The current approved supplier list includes A and B; C is not approved but has a quality certification. The sourcing rule is set to '100% to lowest price' and the buyer wants to split the award to reduce risk. Finance requires a 3% annual cost reduction.
1. Recommend an award strategy and show whether it meets the 3% cost-reduction requirement.
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A 100% award to B is the lowest-price option: 120,000 x $39 = $4,680,000. If the current baseline is A at $42, that is a 7.1% reduction. However, a single source with a 6-week lead time and 97.5% quality creates delivery and quality risk, especially with a 10% volume swing that can push demand to 132,000 against B's 144,000 annual capacity.
A split award is more defensible. One workable split is B 70% and A 30%: 84,000 x $39 = $3,276,000 plus 36,000 x $42 = $1,512,000, total $4,788,000. Against the $5,040,000 A baseline, that is a 5.0% reduction, which clears the 3% target. It also keeps both approved suppliers active and uses B's capacity without exhausting it.
A 60/40 split gives $4,752,000? No: 72,000 x $39 = $2,808,000 plus 48,000 x $42 = $2,016,000, total $4,824,000, a 4.3% reduction. That is also acceptable but less cost-effective. The judgment is to choose the split that balances savings, capacity, and quality. B at 70% and A at 30% is a reasonable starting point; C should be qualified as a second source for the 3-week lead time, not awarded volume yet.
2. How should the sourcing rule and approved supplier list be configured to support the split?
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The current rule '100% to lowest price' will always pick B and ignore the risk objective. The buyer should replace it with a split-award sourcing rule that assigns percentages or quantities by supplier and rank.
Configuration points:
- Rank B first with a 70% allocation and A second with 30%. If the rule supports capacity constraints, cap B at its monthly capacity so the plan does not overload it during the volume swing.
- Keep C off the awarded rule until qualification is complete. The quality certification is a good start, but the approved supplier list should require the remaining qualification steps, such as audit, insurance, and sample approval.
- Set the blanket agreement or contract with the split percentages and a mechanism for reallocation if B misses delivery or quality targets.
- Review the price-break tiers. B's $39 may depend on 150,000 units; at 84,000 units the price could change. The buyer should confirm the price at the awarded volume before finalizing.
The judgment is that a sourcing rule is a control, not just a default. If the rule cannot express split awards, the buyer should use a sourcing strategy or contract award that does, rather than manually overriding every PO.
3. What risks remain after the split award, and what should the buyer monitor?
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The split reduces single-source risk but does not eliminate it.
- Lead-time risk: B's 6-week lead time is the longest. A 10% demand swing may require expediting or safety stock. The buyer should monitor B's on-time delivery weekly and keep A's 4-week lead time as a fallback.
- Quality risk: B's 97.5% quality is below A's 99.2%. The buyer should set an incoming inspection or quality gate for B's first shipments and track defect rates against the 97.5% history.
- Capacity risk: B's 12,000 per month is enough for 120,000 annually but tight at 132,000. The split should include a capacity review at the volume swing upper bound, not just the base demand.
- Price-risk: B's $39 may be volume-dependent. If the actual award is 84,000 units, confirm the price holds; otherwise the 5% savings estimate is overstated.
- Supplier C: qualify C for the 3-week lead time, but do not award volume until qualification is complete. C's $45 price would erode savings if used for a large share.
The buyer should report monthly on cost against the 3% target, B's delivery and quality, and the status of C's qualification. A split award that is not monitored becomes a manual allocation problem.