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A Solution to Butler Systems Case


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The case presents a supply chain issue faced by Butler Systems, a manufacturer of
environment control systems and power conditioning equipment. One of the products
manufactured by the company is Emergency Power Supply (EPS) system. EPS is a power
protection system that safeguards network systems from limited power outages allowing them to
shut down in a smooth fashion so as to avoid loss of data and damage to hardware. The customer
requirements are determined by the design engineering department. The core component of the
system is HD-5 battery that the company procures from certified suppliers.
The supplier of HD-5 battery poses a great importance in the supply chain of Butler
Systems hence the selection process is very thorough and involves careful screening process.
This is done through competitive-bidding pricing process. Two of the suppliers that offer the best
prices are negotiated with and the one that proposes the best set of offerings is signed up as the
official supplier for the company. The case mentions of contract terms that the vendor needs to
meet and accept in order for the contract to go into effect. The current supplier of HD-5 batteries
for Butler Systems is SDX Chemicals. As the sole supplier of the company SDX holds a very
high bargaining power over the buyer.
Butler Systems is running low on the inventory of HD-5 batteries. Normally, it stocks a
90-day supply of batteries, which has been reduced to a mere 20-day supply. SDX has been
unable to honor its commitment. It has declared the contract to be null and void and demands
that in order to continue the supply of batteries the price of new batteries will be double the
original price agreed. SDX has pinned this change in price to change in the industry dynamics.
The battery industry has been facing shortage of HD-5 batteries whose demand has spiked due to
recent decision by Chinese auto-makers to use this battery in their electric cars. It has also been

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noted that if the electric-car market sees a boost in sales, SDX will allocate more of its capacity
to production of batteries for the auto sector.
Butler System has remained competitive due to its efficient battery procurement process.
It believes that supplier relationship is of crucial importance to Butler’s success. Hence any harsh
action will only result in situation getting worse. Legally speaking, SDX Chemicals could be
sued over dishonor of commitment as mentioned in the contract. This would end the relationship
between Butler and SDX but would not help cater to the worsening inventory situation. One
solution could be to break the immense bargaining power of the supplier. This could be done by
purchasing a 10 to 40-day supply of batteries at double the price on immediate basis so that time
could be bought which new suppliers are sought. Moreover, this additional inventory will help in
case the relationship worsens between the two and Butler decides to sue SDX. When new
suppliers are sought some changes in the contract need to be incorporated. The clause over
breach of contract needs to be added. The party that dishonors the agreement or commits a
breach of contract will be liable for a fine.
A second solution is to work with the current supplier and enter into a negotiation
process. This option makes more sense in case the suppliers of the battery are few. A mid-level
price could be agreed upon by letting go of a clause or two from the original contract. This action
however will only work in the short-run since by implementing this solution the company is
giving in to the demands of the supplier who can demand a even higher prices later in the stage.
A third solution could be that Butler starts producing the batteries in-house so as to
reduce the reliability over suppliers, specially due to changing industry dynamics resulting in
more suppliers willing to cater to auto-makers in China than to companies like Butler. Again,

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this solution makes sense if the product is unique and has very few suppliers. Ideally, a chain of
suppliers need to be entrusted with supplying the company with batteries based on quota system.
The role of buying organization in selecting and qualifying potential suppliers is to
ensure that the product is being procured at the best possible rates considering the quality of
product, flexibility and efficiency with which the supplier delivers it. The organization also
needs to devise a strategy whereby the bargaining power does not go against its favor. The
organization is also responsible to look into the previous experience of other manufacturers with
the potential supplier. Buying organization also needs to ensure that there aren’t any loopholes in
the contract that the supplier can use to exploit it.
One reason to why this case concerns is that it highlights the importance of
interdependence of companies over one another. Although Butler is a leading power-protection
systems developer it only enjoys that position due to its efficient dealing with the supplier. Such
a dependence of a company over another is a cause for concern since it gives the latter company
enormous power that it can use to dictate terms. Therefore every company needs to have a
strategic plan, a plan B, in order to counter such issues and maintain its competitive edge over a
longer period of time.

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Very useful material for studying!