Orion Bus - Memo to Rick Solon

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MEMO

To: Rick Solon – Chief Executive Officer

From: Charles Gagnon

Subject: Analysis of historical bid data – recommendations for future bid strategies

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Date: 28 November 2011

Dear Mr. Solon,

ORION should immediately add a Market Level Price Review step to our current bid preparation process. An analysis of the historical bid data shows that both sales volume (number of busses) and sales margin can be influenced through strategies derived from this data.

An interesting fact emerges from examining a formula derived solely from the margin applied to our production costs and the winning prices; it seems to indicate that Orion could increase profit levels from the 15.96% to 17.95% and maintain the number of buses awarded at 189 using the pricing suggested by the formula. Conversely, we could increase the number of buses awarded to 245 while maintaining a profit level of 15.96%. Take care before espousing this method, as it does not differentiate bids awarded to the lowest bidder versus evaluated bids.

It is apparent, from the data gathered, that bus contracts awarded on the “low tender bid” and “negotiated bid” basis each show different characteristics. Table 1 shows how successful Orion is at the former while unsuccessful at the latter.

I was able to derive three separate yet strongly correlated formulas for predicting winning bid prices. Two are specific to the type of award (low tender or negotiated); the third is general across all award types. See Table 2 for further details on these three formulae.

Because the results of all three formulae fit a normal distribution I can find the predicted probability of winning each contract for a given bid price. By multiplying the profit realised for each bid price by the probability of winning, I generated the Expected Value (EV) of each bid price. See figures one, two, and three for graphical...