Due to the air pollution issue

Major Facts / Major Problems:
Due to the air pollution issue the U.S.
government established vehicle emission standards; the U.S. government-mandated
standards could not be achieved with the existing technology – design engine
control computers to manage engine efficiency.
Existing methods and strategies of procurement
no longer provided satisfactory results when applied to the procurement of
Semiconductors were required for the
manufacture of the new engine control computers.
Production disruptions were occurring in the
auto industry due to stock-outs. Semiconductors were a greater cause of the
disruptions and suppliers seemed uninterested in the firm’s problems neglecting
to react to the emergencies of their customers as normal auto industry
suppliers would.

Possible Solutions:
A: The motor company should buy all
portions of the semiconductor outside suppliers. The company may want to find another
supplier. Research and locate suppliers in the semiconductor industry.
Establish a long term agreement with the top rated supplier, in terms of
quality and discuss terms and conditions especially regarding delivery speed
and quality defects.
B: The motor company Universal may be
able to buy a portion of the semiconductors from outside suppliers. The company
could start making the semiconductors and develop a pricing strategy that would
possibly recover the high cost associated with manufacturing the integrated
Possible Solutions:
A: Universal’s management determined
that the motor company designed the chips in-house, for all practical purposes
it would own the technology. The processing technology would be covered by
contract license agreements. An advantage would be saving costs. The
semiconductors would come at a high cost. Establishing an agreement would
sustain the relationship with the supplier.
A: This presents a high risk; the auto industry is less than 2 percent of the
semiconductor market.
B: If the company makes the
semiconductors, this will somewhat guarantee a quality product. The company
Universal would produce the product that is needed- design and quality. There
would be a continuity of supply. The motor company would be able to replace
broken or damaged semiconductors. This would decrease repair cost and aid in
establishing a good reputation for the company and ensuring customer
satisfaction. Universal would benefit from evolving technologies by producing
their own chip.

B: A chip might offer Universal
technological leadership in the automobile industry and possibly some very
important marketing advantages. This
will come at a high cost. Universal wanted to own the technologies incorporated
in these circuits. There is risk that the money will not recover costs and that
the market would be too competitive price wise. According to the case most
companies often bid with the lowest supplier and it has already been determined
that the semiconductors will cost double what their paying now. (Doyle&Burt

Choice and Rationale:
would choose Solution B. Solution A did
not seem too bad but it was a high risk. The company’s management team has
decided that quality is more important than cost. There are many specific requirements,
such as packaging that the motor company wanted completed in a custom manner
which would not necessarily be agreed upon with other suppliers. Quality
control should be done within a company; this will ensure better monitoring.
Most of the research for the motor company to
Universal to enter the market has been conducted but more details will need to
be outlined; such who was the leading supplier of the industry, their biggest
customer, and their strategy. A pricing strategy and structure should be
developed. The company must develop a pricing process that systematically
incorporates all relevant information and wins the support of sales, marketing,
finance and operations. Since the company is taking on more cost they will need
to know at what price they will need to sale other products. An improvement in
manufacturing cycle time could help make up for the cost increase associated
with designing the semiconductors in house. Also fewer repairs will also
reflect less cost associated with having to send the defective semiconductors
back to the suppliers. A more profitable decision would require looking into
the semiconductor market as a whole, not just in reference to the automotive
industry. Effective pricing requires gathering and integrating large volumes of
information about the company’s strategic goals and cost structure. Universal
could potentially own a larger part of the market depending on market
conditions. If quality is a major factor in the semiconductor industry that could
easily help them advance. Acquiring the existing engineers from an acquisition
move will help them to train other engineers in the profession for Universal.
Analyzing the growth of the market over the next five years and figuring out
the right price to sale additional semiconductors could create a substantial
amount of profit for Universal. It is imperative that Universal create value
with developing the semiconductors so that customers are aware of the
difference and aren’t influence by low prices. It is also important that other
companies in the automotive industry are able to distinguish the level of
quality from the existing suppliers and Universal.

F. Doyle and David N. Burt copyright this classic case study. Reproduced by



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