Question

Case Study: Purchasing at an Airlines Struggles with Reciprocity

Prepare a half-page response to your reaction

Recently, a major airline was in the process of searching for an IT provider for a specific service. The business was worth about $50 million in spend. The purchasing group sent out RFQs to several qualified suppliers and reviewed the responses. Three of the suppliers met their purchasing criteria but varied in cost by 1 to 3 percent. Before awarding the contract the procurement team met with their sales organization to discuss the findings. Sales also contacted the suppliers to discuss who currently had the major contract for their airline business travel. Two of the suppliers stated that they were locked into their current contract and the contract was with another airline. One of the companies, the one with the highest price, noted that they were not under contract but were going to sign a contract with another airline. The contract was worth $50million in revenues with a significant profit margin. The sales team fed this information back to purchasing and based on TCO analysis, purchasing determined that the company with the highest price would provide the most overall value to their internal customers, and the business overall.

Is this a legal contract?

what is the best value for the airlines?

Hint: The company that came back with the highest bid potentially could sign on to have all of their business travel done through that airlines. Think of the issues here.

Answer 1

The selection criteria for the airline to select the ideal supplier should revolve around the goals it intends to achieve by the partnership. However in the current context, economic / financial goals are considered the primary goal of every organisation, the airline should view with the profitability index in view. As the airline is a service industry, they should give equal emphasis to achieve goals relating to operational efficiency too. As the suppliers service is related to providing IT solutions, it will impact the sales of the airline as the IT solutions will directly/indirectly is related to the booking experience of the airline customer.

I suggest that the the company with the highest price should not be given the contract. The other two suppliers are already in touch with similar airline and hence have the experience to give the best IT support than the highest bidder. Also once the user acceptance testing (UAT) is completed, there will be annual maintenance charges (AMC) which will be the highest if we prefer the supply which offers highest price. Moreover in this era of cut throat competition, the airline should keep its costs lower. IT is always a huge cost to any airline as it contributes almost 40-50% of its total expenditure. Also as we are aware any technology becomes redundant after 3 years and hence the airline should make provisions for huge capital expenditure every three years to revamp its IT infrastructure.  

Signing up for business travel with the airline could be complicated. The requirements of company with regard to availability of airline in certain sectors and at specified timings may be a challenge to the airline. Hence may not completely meet the company's travel requirements. As its a contracted deal, the airline may be forced to offer deep discounts to the company which may adversely impact profit margins. To honor travel commitments of the company, the airline may have to contract with other airline at higher rates which is not recommended.