A supplier partnering agreement
A supplier partnering agreement
The supplier partnering agreement at the University of Las Vegas case reflects the initiative of the Nevada Office Supply Company (NOSC) to become the sole supplier of office goods, not only to the University, but also to all state institutions involved in education. NOSC already is a major supplier to these institutions with approximately 50% of the business, and has provided competitive prices, good quality and service in the 15 years the company has been present in the industry. NOSC wants to go beyond and take the full 100% of the business by offering the University a series of incentives in the form of discounts and rebates. NOSC doesn’t want any bidding competition with the other 7 suppliers and gave Mr. Bob Ashby, the purchasing director at the University, 15 days to accept the offer. This case represents a good opportunity for both NOSC and the University of Las Vegas to increase their business ties. Mr. Ashby wanted to reduce the number of suppliers in order to reduce the number of purchase orders, the number of contracts, and the number of delivery trucks on campus.
On the other hand, NOSC expects to grow and increase its sales by about 20% next year. This forecast was based on the continuous growth seen in the gaming sector, the education system and the population growth of Las Vegas and the state of Nevada. This partnering agreement will allow NOSC to meet the 20% growth figures forecasted and take the full office supply demand in the region that amounts to $1 million to $1.5 million a year. It will also help the University of Las Vegas to streamline the flow of office supplies and take advantage of the very attractive discounts (between 50% and 70%) in addition to the 2% rebate from all combined purchases when they exceed $1 million offered by NOSC. On the contrary, this agreement will allow NOSC to form a monopoly in this sector and as a result, this move might drive small suppliers out of business. Discussion Questions
1. What legal issues involved in NOSC’s proposal?
NOSC’s proposal, which ultimately persuades Mr. Bob Ashby not to perform a regular bidding competition process, has the potential to be illegal. Under the Sherman Act of 1890 any type of agreement or conduct that restricts trade and destroys competition, is considered illegal. “The Sherman Act rests on a legislative judgment that ultimately competition will produce not only lower prices, but also better goods and services. Section 2 stands as a vital safeguard of that competitive process. Individual firms with monopoly power can act anticompetitively and harm consumer welfare.Firms with ill-gotten monopoly power can inflict on consumers higher prices, reduced output, and poorer quality goods or services. Additionally, in certain circumstances, the existence of a monopoly can stymie innovation” (“Competition and Monopoly: Single-Firm Conduct Under Section 2 of The Sherman Act” 10-11)
Even though both parties have a potential gain in this agreement, the fact that NOSC is requesting to be the education system’s sole office supplier in the growing area of Las Vegas and the State of Nevada, and most likely wants to eliminate some of the competition, makes it an illegal and unfair act against the other suppliers. The true meaning of a free market economy arises from acts that lead to healthy competition, cost reduction and better product quality. It is likely that if Mr. Ashby brings to the table other suppliers, they may be able to match or even surpass the offer NOSC is proposing. This is the free market and healthy competition in action.
2. What are the ethical issues?
As stated previously, NOSC’s intention with this negotiation is to monopolize the growing office supply business the University of Las Vegas and other educational institutions demand. By asking Mr. Ashby to exclude the other suppliers from the negotiating table, NOSC is negating the possibility for others to help decide what’s in the best interest of the University and the education system when it comes to ordering office supplies. If this agreement goes through, it is possible that some small suppliers end up closing their business due to this unfair act. This can be an example where ethical sourcing, which attempts to take into account the public consequences of organizational buying, is put aside. A transparent organized bidding process should be the option to make sure that the best possible agreement can be reached without sacrificing good quality and competitive prices.
3. How should Mr. Ashby analyze the proposal?
Mr. Ashby needs to decline the proposal regardless of how attractive and profitable it might look. The right approach is to call on NOSC and invite them to participate in a real bidding competition, where the other 7 suppliers have the chance to expose their ideas on cost reduction and business incentives. After having heard the others and still NOSC’s offer is the most attractive, at this point it is in the best interest of the University to choose to do business with NOSC. In my opinion, The University should keep some number of suppliers to diversify the stream of supplies coming in, and allow the development of each of them individually in case one or two of them can’t continue to comply with the University’s needs.
The possible agreement between The University of Las Vegas and NOSC, where NOSC would supply the 100% of all the University’s office goods need, may be perceived as unethical and opportunistic. This move might leave some of the smaller suppliers out of business and would close any door leading to similar or better opportunity with other supplier. This business relationship would go against the Sherman Act of 1890, which prohibits any type of monopoly and acts that destroys competition. Regardless of the great business opportunity this partnership represents on the table in terms of cost and administrative work reduction for ULV and profit opportunity and market growth for NOSC, this agreement has some potential for failure. What would happen in the event that NOSC can’t comply with ULV’s demands? There needs to be a pool of suppliers ULV can count on in the unlikely event NOSC is unable to meet its responsibilities. Instead of taking the path of one sole supplier, ULV should implement a policy of supplier development, where it can help develop and better the performance of many suppliers. This approach will incentivize the suppliers to offer better services, and lower prices.
United States. U.S Department of Justice. Competition and Monopoly: Single-Firm Conduct Under Section 2 of The Sherman Act. 2008. Web.