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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 "salespeople" 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".

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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", andthey 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.

BUYER / Optimistic: $125; Most Likely: $130; Pessimistic: $135

Range of

Outcomes

SUPPLIER /Pessimistic: $120; Most Likely: $124; Optimistic: $131

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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.

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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

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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.

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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 tothe 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.

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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.

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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 salesperson 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:

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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?