Competitive bidding is a fascinating subject; it is as much about business as about the workings of the human mind. The desire to achieve results prompts individuals to adopt strategies that reveal lessons from Game Theory. This issue relates to one such story.
Standard Metals, a large and reputed producer of steel, has bid to supply steel sections and other steel products to India Engineering & Construction Company (IECC).The steel will be used for construction of a bridge over a major river.
All things being equal
IECC had floated a closed tender and invited twenty-three companies from India and abroad to submit prices for supply of steel. All bidders had been selected after a rigorous pre-qualification process.
The products of prospective vendors were approved after they had passed necessary tests.
According to tender rules, the lowest bidder would be the sole supplier. If more than one quotes the lowest price, each will be given equal share of the business.
Standard Metals and one other company – Sterling Steel Mills, a much smaller firm in size compared to Standard – have quoted the same lowest price.
Fortunately, the winning price is reasonably profitable for both suppliers. In deference to their size and reputation, IECC have invited Standard first to finalise the order. Next they will meet representatives of Sterling to award the contract.
The Managing Director of Standard Metals has impressed upon Mr. Sharma, Vice President of Standard Metals, to wrest at least two-thirds of the business. He has been instructed to emphasise their size, reputation and history of good relationship with the Buyer.
In Mr. Sharma’s shoes
Mr. Sharma has at least two choices: accept what is offered, that is 50% of the steel requirement, or decline anything less than two-thirds of the volume
If you were Mr. Sharma representing Standard Metals, what would you do? How would you handle the situation? What other cards, if any, would you play?
I would love to hear your comments. And respond to them in the next issue.