After which, BDD believes that HMC will be better off as a key account in the company to better take advantage of its multidivisional efforts. This proposal will show how HMC can best utilize its strategic partnership with BDD in response to its current financial dilemma.
Our company is currently aware that HMC is in a tight financial situation due to the decline in state funding. In this regard, HMC seeks to reduce medical management cost by $175,000, $100,000 of which is assigned to medical acquisition cost. BDD is also aware that the company sought a supplier which can possibly slash the prices currently charged to HMC. Thus, Terumo, a Japanese manufacturer offered to charge a price 15% lower than HMC. Further evaluation revealed that Terumo's products passed the standard of the hospital and was thus considered. Slashing the medical acquisition cost of 15% will lead to $32,000 cost savings. It is of BDD's interest to help HMC with its effort to cut operating cost through this proposal.
The counter proposal of BDD far outweighs the cost savings to be generated should HMC accept Terumo's offer. Initially, BDD offers to cut the HMC's acquisition cost by 10%. At first, it might seem that Terumo offers higher cost advantage than BDD as the proposed 10% cut will only reflect a $21,333 saving as opposed to $32,000. However, BDD will undermine the first offer by posting more cost savings in the form of value-added services. It should be noted that BDD wants to convey more value to HMC in the form of add-on services not covered in the deal with Terumo.
Through the partnership of BDD and HMC, the latter avails of the basic services offered by the company which include fulfillment accuracy, on time delivery, damage-free goods, efficient order-inquiry routines, effective sales representation, accurate invoicing, and efficient in-servicing of end users. Acceptance of this proposal will assure HMC of the aforementioned services. However, it should be noted that deciding to choose Terumo will risk incurring the associated cost should the company fail to delivery the above services. It is irrefutable that Terumo's inability to ensure efficiency will be recorded as other costs. It is estimated that ordering inefficiency alone will HMC incur $2,500 a year. It is assumed that HMC acquire additional $8,500 if Terumo fails to deliver BDD's basic services. This significantly erodes the cost savings initially covered by Terumo's $32,000 cost savings. It should also be noted that since Terumo cannot supply all the syringes and needles provided by HMC, this will cost another $7,000 for HMC. Thus, HMC will only be able to save $16,500 if it chooses to accept the proposal of Terumo.
As HMC will be converted into a key account instead of a national account, it will also benefit from BDD's multidivisional efforts. The table below summarizes the cost savings of HMC between the two alternatives. Aside from the 10% discount, HMC will also directly benefit from the multidivisional effort of BDD in the form of lower ordering, transportation, warehousing, and disposal cost. In the multidivisional program, HMC will not need to place order every now and then as BDD's information system facilitates automatic ordering. This reduction in operation processes is expected to generate a $2,000 savings