407 ETR Highway Extension: Material Procurement
(3 pages of text)
In April 2016, the chairman of the partnership charged with building the $1 billion Highway 407 East Extension Phase 2 in Ontario was reviewing an e-mail from the procurement team that recommended allocation of more than $45 million in contracts for the purchase of granular base material for the highway construction. He knew that the procurement team had worked for several weeks to negotiate and analyze the supplier’s quotes, but after reviewing the recommendation, the chairman wondered whether the team’s recommendation captured the optimal supplier mix and the most cost-effective selection of suppliers. It was certainly a good solution, but was it the optimal solution? Even with an experienced team, this was a difficult optimization problem to solve.
The case can be used at undergraduate, graduate, and postgraduate levels in finance, management, purchasing, cost accounting courses, and other courses related to assessing cost-effectiveness. Students can use Excel Solver in this case to solve an optimization problem that is not solvable intuitively or experientially by an experienced team. After completion of this case, the student will be able to:
- assess the cost-effectiveness of various bids from suppliers;
- analyze the impact various suppliers’ quotes and conditions have on the company’s bottom line; and
- evaluate the differences suppliers’ transportation costs, maximum capacities, and offers of discounts have on the overall cost of a project of this magnitude.
Canada, Large, 2016
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