Lincoln Manufacturing Company

Mr. Lincoln, president of Lincoln Manufacturing Company, and Mr. McGregor, the vice
president, were discussing how future economic conditions would affect their product, home
air purifiers. They were particularly concerned about cost increases. They increased selling
prices last year and though another price increase would have an adverse affect on sales. They
wondered if there was some way to reduce costs in order to maintain the existing price
structure.

McGregor had attended a purchasing association meeting the previous night and heard
a presentation by the president of a tool company on how his firm was approaching cost
reduction. The tool company had just hired a purchasing agent with a business degree who was
reducing costs by 15%, McGregor thought some of the ideas might be applicable to Lincoln
Manufacturing. The present purchasing agent, Mr. Tim Senior, had been with Lincoln
Manufacturing for 25 years, and management had no complaints. Production never stopped for
lack of material. Yet a 15% cost reduction was something that could not be ignored. Lincoln
suggested that McGregor look into this area and come up with a recommendation.

McGregor contacted several business schools in the area. He said he would be

interested in hiring a new graduate. One of the requirements for applicants was a paper on how
to improve the company's purchasing function. Several applicants visited the plant and
analyzed the purchasing department before they wrote their papers. The most dynamic paper
was submitted by Jim Junior. He recommended the following:

1. Lower stock-reorder level (from 60 days to 45 days) for many items, thus reducing inventory.
2. Analyze specifications on many parts.
3. Standardize many of the parts to reduce the variety of items.
4. Analyze items to see whether more products can be purchased by blanket purchasing
orders, with the ultimate goal of reducing the purchasing staff.
5. Look for new and lower-cost sources of supply.
6. Increase the number of requests for bids, to get still lower prices.
7. Be more aggressive in negotiations. Make fewer concessions.
8. Make sure that all trade, quality and cash discounts are taken.
9. Buy from the lowest-price source, disregarding local public relations.
10. Stop showing favouritism suppliers who also buy from the company. Reciprocity comes
second to price.
11. Purchase to current requirements rather than to market conditions; too much money is tied
up in inventory.
 After reading all the papers, McGregor was debating with himself what he should
recommend to Lincoln. Just the previous week at the department meeting, Tim Senior was
recommending many of the opposite actions. In particular, he recommended an increase in
inventory levels in anticipation of future rising prices. Tim Senior also stressed the good
relations that the company had with all its suppliers, who could be relied upon for good service
and possible extensions of credit. Most of Lincoln's suppliers bought their home air purifies
from Lincoln Manufacturing . Yet Jim Junior said that the practice of favoring them was wrong
and should be eliminated. McGregor was hesitant about what action he should recommend. Mr.
Lincoln wanted a decision in the morning.

Discussion Questions

1. What recommendation would you make if you were McGregor? Why?

2. Analyze each of Jim Junior's recommendations. Do you agree or disagree with them? Why?