GREAT WESTERN UNIVERSITY

Dan Summerfield just recently took over as director of supply management for Great Western University.
Great Western spent roughly $400,000 a year for the purchase of various kinds of plumbing supplies.
These supplies included such items as pipe, tees, elbows, and many small plumbing repair parts.
However, they also included some expensive items such as large valves and water heaters. Because its
plumbers were poor planners, Great Western maintained approximately a $240,000 inventory of
plumbing supplies in its stores system. The university purchased its plumbing requirements from four
plumbing supply houses.
Mr. Summerfield believed that if the university could consolidate its plumbing purchases with a
single supplier who could supply all its needs, Great Western could save money two ways: first, by
getting lower prices, and second, by reducing inventories. Within the geographical area where Great
Western is located, there were two very large plumbing suppliers and six small plumbing suppliers. Mr.
Summerfield visited each and carefully reviewed its managerial, technical, and financial capabilities.
The closest plumbing supplier to Great Western University was Bumble Bee Plumbing Services.
This company was owned by the Bee family, and last year sales were roughly $64 million. Although
Bumble Bee had many warehouses and offices throughout the state, one of its largest outlets was in Red
City, just a few miles from Great Western. In fact, it was so close to the university that the plumbers
regularly went there to pick up plumbing parts and participate in the free coffee and soft drinks Bumble
Bee made available for its pick-up customers.
Bumble Bee was managed by Mr. John Bee, age 74 and senior member of the Bee family. John
Bee had worked in the family business since he was fifteen years old. His desk was located just inside the
front door of the companys largest branch, where he was readily available to all who wanted to see him.
Also, as he stated, From here I can keep an eye on everything going on in the business. When
questioned about the size of Bumble Bees inventory by Dan Summerfield, Mr. Bee stated that he didnt
know the exact size because he used no formal inventory control system, but he figured the inventory to
be about $80 million, or a little over a years supply of everything. Bumble Bee had excellent young
managers, but for the most part Mr. Bee would not let them manage. For example, the supply manager
told Dan Summerfield that only a few months ago he showed Mr. Bee a plan for reducing inventory by
$20 million with little or no loss in customer effectiveness or product cost. Mr. Bee would have none of
the plan. The companys controller told Summerfield that Bumble Bees financial position was
unbelievable. The Old Man had no interest in financial ventures outside the company, and for years he
had just let its cash position grow until it now exceeded $30 million in cash assets. Total liabilities were
less than $4 million.
After proposing an annual contract with Bumble Bee, Mr. Summerfield was told by Mr. Bee that
his firm never sold for less than wholesale list price, and it would not sell to Great Western for anything
less than that. With great pride Mr. Bee stated that Great Western might pay a little more for material
from Bumble Bee, but his company never would be out of anything Great Western might need. Although
Mr. Bee would not reduce prices to get an annual contract, he would give daily delivery service to Great
Western in consideration for such a contract. Mr. Summerfield estimated that daily delivery from Bumble
Bees huge backup inventory would permit him to reduce his own inventory from the present $240,000 to
$80,000.
The largest plumbing supplier in Great Westerns area was Automated Plumbing Supply. This
was a widely held corporation with a staff of professional managers, the majority having been trained in
well-known graduate schools of business. Automateds sales throughout the state last year totaled $100
million. Automateds closest outlet to Great Western was 12 miles away in the city of Dumbarton. The
Dumbarton branch was not large; however, it could be supplied daily from Automateds large central

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warehouse in the city of Field. Field is a large industrial center about 30 miles from Great Western.
Automated had experienced rapid growth during the past ten years, its compounded growth rate
being approximately 20 percent per year. Members of the management team at Automated pointed with
pride to their new computer, which was located at their headquarters in Field. The computer, in addition
to providing reports to guide the companys overall operations, controlled the inventory in all twelve
Automated branch warehouses. By use of the computer, Automated was able to turn its inventory roughly
five times per year, which meant it had on hand about $20 million of inventory at all times. Mr.
Summerfield was told that stock-outs averaged about 5 percent. However, use of the computer might
lower the percentage of stock-outs for the specific items Great Western buys. Automateds management
was superb. Their capability and drive really impressed Summerfield. The management was young, aggressive, and very knowledgeable concerning the companys problems, how they could be solved, and
where they were trying to take the company. Because of the companys rapid growth, finances in terms of
accounting ratios appeared weak. Summerfield commented on this fact to the financial ~ice president.
The latter readily admitted the weakness, explaining how the company planned to handle its finances to
assure continued rapid growth. So sure of ultimate success were the managers that all had agreed to
relatively low salaries with high stock options. This faith removed Summerfields doubts.
Because of Automateds efficient operations, the company felt able to offer Mr. Summerfield a
very attractive discount schedule, averaging 15 percent below wholesale list price, if he would sign a
years contract to purchase all his plumbing supplies from Automated. Under the contract, Automated
would deliver twice a week. Mr. Summerfield believed that semiweekly deliveries and a 5 percent stockout level at Automated would enable him to reduce his inventory from $240,000 to $160,000.
The other plumbing supply firms in the area typically had sales of less than $4 million. Some of
these firms had only one office, but others had several branches. All of the branches were managed by the
owner, so they prided themselves on their personalized service. Several of these firms offered Mr.
Summerfield a flat 25 percent discount if he would sign up with them. Typically, these firms had average
stock-out levels exceeding 10 percent. Each of these firms could deliver only once weekly to Great
Western. Therefore, Summerfield could not reduce his inventory meaningfully, if at all, were he to
contract with one of the smaller firms. However, the substantial 25 percent discount was attractive and
interesting to Summerfield.
What should Dan Summerfield do? Should he contract with Bumble Bee? Automated? A small
supplier?

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