1 Automotive Fabrics - Negotiation Case This negotiation case has been successfully used in both undergraduate, MBA, and executive education sessions, and is an excellent simulation tool that allows participants to experience a true negotiation. Mock negotiations such as these allow students to experiment with different negotiation strategies, in a "safe setting" where there are no real dollars on the table. In some classes, the students have been informed ahead of time that part of the grade for the assignment will correspond to how good the relative outcome of the negotiation is for their team. This generates a great deal of competition amongst students! The case can be run over two to three one hour class periods. One of the "assignments" from this exercise is to get students to prepare a negotiation preparation paper that details their negotiation plan, their pessimistic, optimistic, and most likely goals for each negotiated item, and their concession strategy. Students should be assigned to teams of 3 to 4 individuals, and designated as either a buyer or a supplier team. Each team has available to them some common information, as well as proprietary information. It is critical that teams do not inadvertently gain access to the other team's information, otherwise the negotiation will be patently unfair! Each team's information is included in the next section. Discussion / Recommendation: A very important part of the negotiation process is the preparation for the meeting. Because the teams have limited information, they should prepare their negotiation strategy based on the available information. For instance, the buying company should ask themselves if 8% is a reasonable profit margin, given the number of qualified suppliers. There are different permeations of this negotiation that you can use with this case to set the stage: 1. You can assign teams to negotiate with one another according to their preferred supplier and historical relationship. In this case, the assigned negotiating partners are: a. King with Cybaris, b. Queen with Athena, c. Duke with Medusa d. Duchess with Orion 2. The second option involves allowing any buyer to partner with any other single supplier. However, each team is limited to one and only one other partner. This scenario can take a little more time, as buyer teams may go out for RFQ's, and supplier teams may decide to send "sales people" out to find a preferred partner. Interestingly, although teams are already matched based on their reputations, the authors have observed situations where buyer teams have refused to do business with their initial team. 3. A final scenario which takes the most amount of time (three or more class periods) allows buyers to source from more than one supplier, and suppliers to supply more than one buyer. This leaves open the possibility that one or more buyer/suppliers are "shut out" and do not receive any business. It also opens up the opportunity for "consortia" to develop, reverse auctions, collusion activities, and all sorts of other interesting scenarios! However, it is indeed a totally "free market". 2 In general, the supplier team has ample margins (16%), and certain has room to move downwards in their pricing. This is compounded by the fact that their initial price offer was "out of line", and they are now under pressure to make this sale due to the loss of another major contract. Other negotiable items include the length of the contract, tooling, delivery terms and responsibility for payment, and future engineering changes. However, price always ends up as the stickiest point, and teams have often developed innovative cost savings sharing and productivity agreements in negotiating a contract. From this perspective, the case has the potential to be a win-win negotiation, but the range of the outcomes are very wide. Generally speaking, teams that spend some time upfront preparing a detailed negotiation strategy tend to do better. In preparing a strategy, each team should be advised to prepare an "outcome map", which outlines their absolute minimum acceptable outcome, their "ideal" outcome, and their "most likely" outcome. An outcome map should be prepared for every major issue to be negotiated. When the two teams meet, the negotiable range is therefore the area of intersection for the two outcome maps. An example of two possible outcome maps in a negotiation is shown below. Teams should meet ahead of time and prepare their negotiation strategy, which should also include a "blueprint" for how the meeting should take place. That is, each team should identify what the tactic or strategy should be, the agenda for discussion of the issues, what a contingency plan is if the other party reacts in a certain manner, etc. This strategy should be handed in to the instructor prior to the negotiation. Some teams may even prepare a sample contract prior to the negotiation Once the teams are assembled for the final negotiation, they should be allowed a maximum of one class period. This places an artificial "deadline" on the negotiation. Each buyer team is assigned a supplier with whom to negotiate a contract. However, the instructor should stipulate an absolute deadline for handing in a contract. This can also result in some interesting "end games" as the deadline approaches. $125 $130 $135 $120 $124 $131 BUYER SUPPLIER Optimistic Most Likely Pessimistic Most Likely Optimistic Pessimistic Range of Outcomes 3 Once the contracts have been collected, the range of outcomes should be compared to the actual outcomes, including price and who is responsible for paying for tooling. This can be done fairly easily on a spreadsheet, as in the case below. It is also helpful to note the time at which the contract was settled, in order to determine if this had an effect on the result. Once the outcomes are identified, the highest and lowest performing teams should be asked to share their strategies, and how they reached their outcomes. This can often result in some very entertaining and interesting dialogues, especially when parties learn of the different types of deception used in the negotiations! Again, the instructor should emphasize the importance of goal setting and preparation in negotiation. Generally speaking, teams with higher initial objectives tend to perform better than those with lower goals. Some teams may also emerge with true "win-win" negotiations. In such cases, it should also be emphasized that even in win-win outcomes, one party always "wins" more than the other! In some classes, participants have also been videotaped, so that they can note how their "body language" affects the outcome. 4 Sample Range of Possible Outcomes King Cybaris 11.5 LOW 13.0 14.0 HIGH 15.0 13.0 TARGET 14.0 CONTRACT PRICE 13.5 TOOLING 18000 King TIME 11:00 Queen Athena 12.0 LOW 13.4 15.0 HIGH 15.0 12.5 TARGET 15.0 CONTRACT PRICE 128 TOOLING 18000 SMP TIME 11:00 Duke Medusa 120 LOW 135 130 HIGH 150 TARGET CONTRACT PRICE 135 TOOLING 16,200 XYZ TIME 11:25 5 Purchase Negotiation Case: Buyer's Package (King Corp.) Common Information This simulation involves negotiating the purchase of an automotive fabric. The following information is common to all groups participating in the negotiation: There are four potential manufacturers of textile products. These include the following: Athena Corp. - Annual sales of approx. $ 40 million dollars, located in Bowling Green, Kentucky.. Cybaris Corp. - Annual sales of approx. $ 50 million dollars, located in Charlotte, NC. Medusa Corp. - Annual sales of approx. $ 20 million dollars, located in Columbus, OH. Orion Corp. - Annual sales of approx. $ 35 million dollars, located in Grand Rapids, MI. There are four potential purchasers of textile products. These companies are second tier automotive suppliers, who supply the major automotive companies located in Michigan, Ohio, and the Southeast. These companies have all purchased in small quantities from all of the suppliers, and include the following: King Corporation, located in Greenville, SC, has requirements for 150,000 yards of fabric for 2001. The products will be required in 2002 and 2003 according to current plans, and volumes are expected to increase. Queen Corporation, located in Knoxville, TN, requires 250,000 yards of the fabric for 2001, but volumes for 2002 and 2003 are uncertain. Duke Corporation, located in Cleveland, OH, requires 100,000 yards of the product, and production volumes required are expected to increase by 50% or more in 2002 and 2003. Duchess Corporation, located in Lansing, MI, requires 200,000 yards of the product, and volumes are expected to decrease somewhat in 2002 and 2003. Prices for similar fabrics are in the $12.00 to $15.50 price range per yard. All identified suppliers are able to produce to specifications provided by the purchasing company. However, quality performance related to the product can vary greatly. Individual cost structures of the firms providing the fabrics can vary significantly. Suppliers provide widely different levels of service and technical support. 6 All suppliers have to satisfy the same quality and delivery terms, payment terms, and transportation (FOB seller's plant). Industry capacity utilization is about 75 percent. All purchasing companies have purchased relatively small amounts from all of the suppliers previously, never totaling more than $100,000 per purchase. Assignment: Students will work in small groups and participate in one face-to-face negotiation session. Group size will not exceed 3-4 people for either the buying or selling negotiating team. Each group will develop a brief written negotiating strategy prior to the negotiation which is to be handed in to the instructor, then conduct an actual negotiation session with an assigned buyer/supplier group from the class. (*Note that an agreement may not always occur with an assigned group). Eventually, each pair of groups will develop jointly a written contract that documents the outcome of the negotiation process. The instructor has an information packet for the buyer and the seller which provides additional information required to prepare for and conduct the negotiation. Buyers and sellers can share as little or as much of the information with each other as they desire during the actual negotiation. Groups must prepare properly before conducting the negotiation. Each group's negotiation strategy should be developed prior to the negotiating session. All group members are to participate in the research planning as well as the actual negotiation. Remember, price is not the only variable subject to negotiation. Be creative when crafting your agreement. 7 Buyer Specific Information - King Corporation You are the buyer of fabrics at King Corporation for all corporate divisions and are responsible for supply base optimization. Recently, the focus of this effort has been on reducing the size of the supply base. You have received a purchase requisition for a new luxury fabric. Estimated annual requirements for 2001 is 150,000 yards, with a possible doubling or tripling of requirements in 2002 and 2003. The fabric is relatively easy to make to your firm's specifications and uses well-established manufacturing technology. However, quality problems can (and do) occur. There are a number of acceptable suppliers for the product in the Mid-West and Southeast. However, since your plant is located in Greenville, SC, you have initiated discussions with the closest supplier, Cybaris Corp., located in Charlotte, NC. You have obtained unit pricing and design quotes from four interested suppliers, who have provided the following quotes: Price / Yard Redesign Costs Lead-time Orion Corp. $14.40 $13,000 5 weeks Athena Corp. $13.80 $15,000 4 weeks Medusa Corp. $14.20 $20,000 3 weeks Cybaris Corp. $15.00 $18,000 2 weeks The King Corporation estimated cost (including profit) is $13.00 / yard with design costs totaling approximately $13,000. The estimated supplier cost structure is as follows: Direct material $ 5.20 Direct labor 2.08 Manufacturing overhead (150% of direct labor $) Variable overhead 1.12 Fixed overhead 2.00 Sales, general, and administrative expenses (12% of selling price) 1.56 Profit (8% of selling price) 1.04 Estimated selling price $ 13.00/yard Quality, delivery to schedule, and service are critical to King Corporation. Moreover, because you deliver JIT to the new BMW plant, you are required to maintain QS 9000 certification and tightly control supplier quality and delivery. 8 Cost pressures are increasing, and you have been informed that you cannot miss the product introduction date in six months. This has tightened the schedule required to source the fabrics. Transportation terms offered by all suppliers are FOB seller's plant, freight collect. All suppliers have adequate available capacity currently. However, future capacity requirements may fill up quickly, meaning that they may need to expand production in the future, and will require a solid balance sheet to be able to do so. The supplier performance history and current considerations follow: Orion Excellent delivery (99% ontime), marginal quality (500 ppm), good technical support, manufacturing capability is good. Athena Acceptable quality (300 ppm) , sometimes poor delivery (80% ontime), marginal technical support, capacity uncertain. Medusa Good quality (200 ppm) and delivery (95% ontime), capacity uncertain, excellent technical support, financially unstable. Cybaris Very good quality (50 ppm), acceptable delivery (93% ontime), poor technical resources and service, stable financially. Orion and Medusa provide the best technical support. They provide design suggestions and will assist on technical problems when necessary, and are willing to co-locate technicians temporarily on-site to support their product line. Cybaris has the best delivery cycle time, due to their integrated information system which directly links customers to their MRP planning and scheduling system. Athena, however, has indicated their willingness to provided a dedicated sales person to serve your needs. You and your team believe that Cybaris can support your needs, but do want to negotiate a better contract. You have therefore asked the Cybaris team to meet and further discuss their quotation. Prior to the meeting, your boss told you that a decision had to be reached today. You also have an important appointment in 1 hour with the division vice president that you found out about earlier today. He will be expecting a decision. Buyer Assignment: 9 1. Develop a negotiation strategy and plan. 2. What "common ground" do both King Corp. and Cybaris have to negotiate? 3. What is the lowest price you believe you can get, i.e. what you consider to be an "excellent" bargain? 4. What is the highest price per year that you will pay?