Legal Aspects in Procurement and Contract Management Mr.

Ramon Guevara

LEGAL ASPECTS IN PROCUREMENT AND CONTRACT MANAGEMENT

CASE STUDY NO. 1

TOO MUCH, TO SOON

Aguila Transmission Manufacturing Corporation, located in Santa Rosa, Laguna,

manufactures automotive transmission assemblies for local and export markets. One of
the most difficult items to manufacture was the transmission case and the clutch
housing which are fabricated from malleable castings, and comprised many machine
drillings and finely cuts slots. These were machined to extremely close tolerances, and
the slightest discrepancy in either materials or machining meant a total loss.
For nearly two years, castings had been purchased from Republic Foundry located
in Pasig, Rizal. Republic Foundry had been Agula’s supplier for many years and since
that time had produced thousands of castings at suitable quality levels. Eight months
ago, however, Aguila went out of business when its founder and President, Robert Ang,
died.
At the time of Ang’s death, two other foundries were also supplying castings for the
same item. Although they were capable suppliers, they could not assume the additional
load created by Republics withdrawal from the business. Accordingly, a search for new
sources were made. At first, few suppliers could be found who were either capable or
willing to meet the exacting specifications and tolerances required. Ultimately, however,
three foundries were selected, and invited to submit bids on 8,500 castings.
The low bidder, at Php 980 a unit, was Imperial Foundry located in Valenzuela,
Bulacan. Imperial Foundry was a medium-size company with a good reputation for
doing quality work and never failing to meet a delivery promise. Imperial was given a
purchase contract for the full 8,500 units, with stipulation that Aguila approve the first
100 units produced.
Within two weeks, the first 100 castings were received. They were subjected to
initial inspection, and then dispatched to the floor for machining. In the words of the
production foreman, “They machined like butter”, so that Imperial was told to proceed
with the entire order and a four-month delivery schedule.
It was about this time that problems began to develop in the production floor. Some
hard castings had damaged both grinding wheels and drilling tools. Also, cracks from
castings porosity appeared on newly machined surfaces and slots. Although these
conditions were not present in all castings, they occurred in a sufficient number to
warrant action. Procurement Standard would be required. All suppliers were to be
notified immediately.
Accordingly, the buyer contacted Imperial and told them to stop production of
castings to the old standard, advising that new specifications were now being completed
and would be issued within the next two days. To the buyer’s surprise, he learned that
Imperial had completed all 8,500 castings. Having had approval on the first 100 units.
Imperial established production on a continuous-line basis, and turned out castings at a
fast rate. Although the order call for deliveries to extend over the next four months,

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Legal Aspects in Procurement and Contract Management Mr. Ramon Guevara

Imperial was holding the castings and shipping them in accordance with the schedule.
To meet the new Procurement Standard, it was obvious that Imperial would either have
to scrap all old castings and produce new ones, or undergo an expensive process of re-
annealing.

1. What are Imperial’s legal obligations in this matter?

2. Comment on the fact that Imperial had already produced the full order quantity of
8,500 well in advance of actual delivery requirements?

3. What does the buyer do now?

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