Birch Paper Company Case Study

Birch Paper Company’s Northern division was faced to choose between three bids for an upcoming project from either an internal source or external companies looking to capture the job.  When the bidding results appeared unusual to the manager of the Northern division, it was discussed with Birch Paper’s commercial vice-president to gather additional information.  For specific divisions of the firm, it appeared that accepting the lowest bid would be the most logical step.  However, a company-wide viewpoint of the situation saw that the higher price from the internal division could also be the best solution. The bids submitted produced a number of possible perspectives and alternatives and it was up to the Northern division to do what was best for both its division and the company as a whole.

Mr. Kenton, manager of the Northern Division for Birch, would certainly accept the offer presented by West Paper.  As we can see in Appendix 2, West submitted the lowest bid at $430 per thousand, presenting the most appealing proposal for his specific division.  Kenton’s colleagues at Thompson submitted the highest bid of $480/thousand, while Eire papers were a close second to West with a bid of $432/thousand. Since each division at Birch is judged independently on the basis of profit and return on investment, selecting the bid from West allows Northern to perform better than the Southern or Thompson divisions.  The other offers at a higher price produce no incentives for Mr. Kenton, even if another selection would be better for the overall firm.

The $480 Thompson bid is actually in the best interest of the firm.  It may seem counter-intuitive that the firm actually benefits by paying a higher price, but accepting the Thompson bid results in cost savings of $192 to Birch Paper company because of the revenues of $112 to Southern for providing the liner and corrugating medium to Thompson and $80 from Thompson selling the corrugated box to Northern, which means that the total cost of acquiring the box (from Birch’s perspective) is $288.  Alternatively, accepting the $430 West bid would result in no incremental contribution margin from either the Southern or Thompson divisions, so the $50 savings (versus the $480 Thompson bid) wouldn’t come close to offsetting the total savings if Birch could receive from accepting Thompson bid.  While the Eire paper bid of $432 is definitely more attractive than the West offer (from the firm perspective), with incremental contributions of $5 to the Southern Division and $36 to the Thompson division, the total cost savings of $89 would result in a total price to Birch of $391, still greater than the Thompson bid (See Appendix 3).

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To solve this crisis, the commercial vice-president could get involved with the logistics of this project and push the Northern Division to accept the bid presented by Thompson.  However, one problem with this approach is that it would seem to run in the face of the company policy regarding decentralization and could indirectly impact the company’s overall competitive position.  Another problem with simply forcing Northern to accept the Thompson bid is that this bid would provide great benefit to the Thompson division, at the expense of the Northern Division.  While the company benefits from Northern getting the box at the ...

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