Making a decision on revenue possibilities:

(3) Suppliers have submitted proposals to your company, the Power Pump Company, to install turnkey operations using a new pumping system which Power Pump has designed. The pumping system is sold by Power Pump exclusively to your customers directly. The installation suppliers have submitted proposals for their services to install the pumping stations for your company at your customers' sites.

As the purchasing manager, you are faced with making a recommendation on which supplier would contribute the highest net revenue. For Supplier A, a market analysis suggests that a favourable market could have an 80% probability of driving $1,200,000 per year in revenue with a 20% chance of achieving $600,000 per year with a weak market acceptance. The COGS would be 60%. Supplier A has a good service record and good quality. They have experienced recent staff turn over in their operations management.

For Supplier B, a market analysis suggests an 85% probability of driving $1.0M in revenue with a 15% possibility of only hitting $400K. The COGS would be 60%. Supplier B has provided high quality work in the past. They have had some recent staff changes in terms of hiring and employees leaving.

For Supplier C, the market analysis for revenue suggests an 80% probability of driving $850K and a 20% chance of $700K. There is some familiarity with their services. The COGS would be 50%. Supplier C has new ownership with strong references and many new staff were hired.

Which installation supplier should you recommend?

This is a case study used in the Better Ways to Better Deals seminar which involves expected monetary value theories. Which supplier would you recommend and why?

Send your comments to: lberglund@prezplus.com