Mars Incorporated was one of the leading material purchasers in the world. The company was an American based confectionery and pet food manufacturer. The founder of the Mars Incorporated began its operations by making candies in 1911 and sold them door–to–door. The concept of Mars Incorporated was initiated by Frank C. Mars in 1929 and was a company that is well known for the confectionery items, for example, milky ways, M&M, Twix, skittles, 3 musketeers, snickers candy bar and mars bar. They also produce non-confectionery foods and other snacks, for example, Uncle Ben’s branded rice, Combo and pasta sauce brand Dolmio, stuffing mixes as well as pet foods, such as Pedigree brands and Whiskas. They were also engaged in the state of the art electronic payment system that were used in the telephone booths, public transit ticketing system and also in vending machines. The Mars Incorporated had recently matured its business from $300 million in the 70’s to a $14 billion business in 2002. Mars had its business operations in over 100 countries. The Mars Incorporated is one of the largest privately owned company in the world with the bulk of $4 billion annual raw material purchases from a small number of greatly appreciated suppliers who dealt with the company’s supplier development department.
The Mars Incorporated valued its business to such a high level based on 5 core principles, namely Quality, Responsibility, Mutuality, Efficiency and Freedom. These 5 frameworks provided a guideline for supplier relationship management and purchasing negotiations. They used different type of contracts and negotiations to address a large number of situations involving different parties such as brokers, monopolies, government organizations, cartels and also different private businesses. Normally it’s too often that a supplier works with the manufacturer for a long period of time with mutual consent because it is normal that the contract do affect by the disagreement over delivery conditions, in-transit handling of material, difference between quality specified and quality delivered, information sharing, after sales services, choice over best fit supplier skills and the requirements of the buyer and payment terms etc.
Mars Incorporated Online Procurement Case Solution
The major threat the Mars Incorporated was facing in the industry was that the competitors and also the non-competitors were saving around 5% of their material procurement cost through an online procurement system. The problem related to Mars Incorporated material procurement system was that the previous procurement method was unable to leverage up the competitive supply conditions, which affected the company’s performance adversely. The previous system was also a threat in term of time consumption as the process was too lengthy and hectic. The procurement process was also unable to generate supply synergies and economies of scale with the Strategic Business units (SBUs) and with different brands. So, the management of the Mars Incorporated was keen to go for the Online Procurement Process so that they can also save their investment, time and generate incomes as the trend in the market. For this problem’s solution the company has decided to use online auctions websites to conduct reverse auctions where a set buyer and pre-defined suppliers negotiated at a private web-based exchange. Note that in reverse auction the low bidder won.
Question No. 1: Describe a model that Mars can use to operate an online procurement auction. Start with a basic model where all demands are met and cost is minimized.
By using Linear Programming Technique, Mars Incorporated can established a cost minimization primary objective which will meet all demands and at the same time minimized all costs. A linear programming problem states that as the problem of maximizing profits or minimizing costs a linear function is based on to the system of linear constraints. The constraints may be equalities or inequalities. The objective function is called the linear function. As shown in exhibit, the cost minimization function or linear minima function is:
|Objective Function=||Minimize||2050 x1 + 350 x2 + 1199 x3 + 220 x4 + 4639 x5 + 199 x6 + 1199 x7 + 1350 x8 + 350 x9 + 2200 x10 + 999 x11 + 1700 x12|
In the above linear objective, Mars Incorporated’s complete demand can be satisfied hence at the same time minimizing the cost of procurement process......................
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Mars Incorporated Online Procurement
MARS INCORPORATED: ONLINE PROCUREMENT
Basic Types of Auctions
1. English Auction
The English auction takes place for the auction of arts, crafts, antiques, etc. It is the auction in which the auctioneer starts the auction with the reserved price and then gathers bids from different bidders (Reserved Price can even start from zero). The bids are collected at some bid increment set forth by the auctioneer in advance and then at the end, the highest bid is accepted by the auctioneer when no one else from the bidders further wills to add bids. The final bidder receives the item at the bid price.
2. Dutch auction
Namely Dutch Auction, takes place at a faster pace, mostly at auction of flowers. There is an option to “call mine” given to bidders, who can claim the item as their possession when the auction closes. It starts with a higher bid by the auctioneer, who knows what price the item will fetch and then decreases down the auction. As there are never too much bids; hence, the auction takes relatively low time.
3. First Price Auction
The First Price Auction is the auction that takes place at financial venues e.g. Foreign Exchange and Refinancing Credit. This auction is different from English Auction and Dutch Auction and is more of a concealed auction in which the bids are submitted in a sealed envelope and when all the bids are received, then the envelope containing the highest bid wins.
4. Vickery Auction
The Vickery Auction is an auction that is the least used auction from the above three options. Unlike the First Price Auction, Vickery Auction is known as the second price auction. This auction is the same as First Price Auction; however it differs when the bids enclosed envelopes are opened, then the envelope containing the second highest bid is given the item. Due it’s most risky feature, it is not used much in the financial venues.
5. Other Auctions
- In a single item auction, the highest bidder wins the regular auction whereas the lowest bidder wins the reverse auction. This type of auction is also called “English Auction”.
- There are various other types of auctions such as “multiple identical-item auctions”. This type of auction includes the winner of all auction in which the bidder can bid on price per unit. Whereas, the Winner’s Choice Auction is one in which the winner of the auction gets one more item of his choice other than the item on bid and then the remaining items are auctioned.
- The multiple item auctions as the name suggests, is the auction that includes either a single item wholly or partly for an auction, either in one or multiple lots.
- Another one is the Combinatorial Auction that is used by Mars Incorporated itself and is one that allows the bidders to bid on a bundle of items by using a single price for the each set of bundle.
Present Implementation Challenges of Features of the Proposed Mars’ Auction
Mars Incorporated as seen through the case study is employing online auction with the rising costs associated to the supply of sugar and cocoa from the suppliers. It outsourced IBM’s services to develop an online auction portal, where authorized suppliers could bid on the items listed by Mars Incorporated and then according to the demand set by the company, suppliers can bid on bundles for all or nothing depending on their required margin. The bids are then submitted and Mars Incorporated can get the lowest bid in a fair way without compromising on quality. The issue that Mars Incorporated faced while the bids are on the go are the issues related to one of its five core principles, Mutuality. It states that the benefit that Mars Incorporated will reap out of its value share will be the one that is shared and endured. Therefore, placing the order at the lowest bid will depart Mars Incorporated from its Mutuality principle.
In addition to this, the online auction had an illogical end point of negotiations, which led to a rise in unfavorable situations from the competitor’s side. The supplier that got awarded by the order might think that it might have got a better price elsewhere, which would distort the supplier relationship with Mars Incorporated. Furthermore, the one on one negotiation technique incorporated by the company didn’t have any room to leverage competitive supply conditions. Due to all this, the suppliers were unable to have positive synergies despite the ongoing competition that also prevented Mars Incorporated from reaping the benefits of economies of scale. Hence, much of the negotiation was price-centered because of the rising expenses from getting supply manually, which led Mars Incorporated to develop an online auction portal for its suppliers. In addition to all this, the company .........................................
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Recommended for MBA graduates, this case is one of a pair of cases that are used in the exercise merger talks. It is designed for use with "Wm. Wrigley Jr. Company" (UVA-F-1607), but it can also be used by itself. Half the class is produced only in the case of Wrigley, and the other half uses the case of Mars. Wrigley and Mars are considering mergers and in the process of negotiating a merger agreement. Macroeconomic assumptions, in particular, the prediction of future sugar prices in the face of uncertainty and speculation about the meaning Wrigley make future cash flows of the company Wrigley, difficult to predict. "Hide
by Elena Loutskina, George Shapovalov Source: University of Virginia Darden School Foundation 24 pages. Publication Date: March 24, 2010. Prod. #: UV4277-PDF-ENG