1, What is your estimated cost for the gatherer chain? What price do you think Deere should be paying Saunders for this product?

2, How would you handle negotiations with Wayne Saunders? How would you use the cost data from your analysis in the negotiation?

308 Purchasing and Supply Management Case 11-1 Deere Cost Management the point where Over the past On Wednesday, February 18, Jim Elsey, cost manage- ment specialist at Deere & Company in Moline, Illinois, received a call from Glen Lowery, les manager in the Agricultural Products Division: Jim, I need you to look into our costs on the gatherer chain. Our margins have really shrunk and we need to do something about this problem. Get back to me and let me know what you think. een declining Wayne had a reputation as a tough, successful bus man who had grown the company to the point now employed approximately 300 p ple. Reviewing the sales margin for the gatherer che o see why Glen was concerned. Over the years, the sales revenue and margin had been de steadily see Exhibit l). The budgeted selling price current year was based on the need to match the price by a major competitor. FINANCIAL ANALYSIS budgeted selling price for the THE GATHERER CHAIN Deere & Company (Deere) manufactured and distributed a full line of agriculture equipment as well as a broad range of construction and forestry equipment and commercial and consumer equipment. The company had annual sales of S14 billion with operations in more than I countries A popular product sold by the Agricultural Products Division was a conveyor system Materials placed on the front end of the conveyor sat on the gatherer chain, which carried the material to the opposite end. The gatherer chain was joined together in links, fastened by pins, and included small hooks that helped to carry the material. It sat on rollers that required regular lubrication to keep the conveyor system in good working condition The Agricultural Products Division had produced the conveyor system for several years, with only slight modifications in its design. As standard practice for each product, Deere sold replacement parts, including gatherer chains, through its dealer network. It was the intention of management to ensure that its aftermarket products were price competitive. As a result, the sales department regu- larly benchmarked pricing for its products. Jim learned that the gatherer chain was purchased from Saunders Manufacturing (Saunders), a supplier located in Decatur, Illinois. Saunders was a family-owned business run by Wayne Saunders, the son of the company's founder. Saunders had a long-term relationship with Deere, and Jim arranged a meeting the following day with Susan sier, from purchasing, and Jose da Costa, from engi ing. During the meeting. Jim laid a gatherer chain conference room table and asked Jose to estimate the material content. After a little bit of work, Jose estimu that the product consisted of approximately to pounds of steel and 46 pins that joined the links. He also expected Saunders would have approximately a 20 percent serap rate, for steel only, as part of their normal production cost. Jose also commented that Saunders could use general-purpose equipment for the manufacturing and assembly process. Susan then pulled out her material cost file and made the following observations: We just finished negotiations with our steel suppliers and expect to pay approximately $28.90 per hundredsigt for this type of material. I am also buying the same pins for a couple of our divisions, and I figure Saunders is paying about 3.54. Don't forget that for this part we pay the freight, which usually costs about 3 percent of the purchase price, and they pay the packaging. We have looked around for other suppliers for this part and haven't been able to find anyone that capable of beating the current price. Saunders has been a good sup- plier. Their quality and on-time delivery performance have been excellent. I wouldn't want to lose them asupp Two Years Ago Last year Current Year EXHIBIT 1 Profitability Analysis for Gathered Chain Budget Aftermarket price Purchase cost Cost-price ratio Unit sales $ 30.00 $24.12 $ 40.00 $21.25 53% 475,000 $36.25 $22.61 62% 410,000 80% 50,000 Chapter 11 Cost Management 309 Following the meeting, Jim examined the Annual Sur- vey of Manufacturers, published by the U.S. Department of Commerce. Within the report was a breakdown of man- ufacturing costs, as a percentage of sales, for U.S. compa- nies in Saunders' industry code. According to data from the previous year, the breakdown was material, 2 per cent; direct labor; 13 percent; indirect labor, 6 percent; and overhead, 20 percent. Jim, "The competition is pretty strict about maintaining a 50-50 cost-price ratio on their product lines. Why is it they can sell this product for $30.00 and we can't match their cost structure?" S U Jim felt that he had gathered enough information to do some preliminary analysis. However, he was aware that he needed to think about how he could use the information in his negotiation with the vendor. Susan had indicated that Wayne Saunders had been a tough negotiator, with a "take it or leave it" attitude regard- ing pricing, and had been unwilling to share any spe- cific cost information to justify his requests for price increases. SUPPLIER NEGOTIATION Glen felt that the budgeted cost-price ratio for the gath- crer chain was unacceptable and was anxious to see what could be done to address the problem. He remarked to M: 42% RL: 13% Case 11-2 McMichael Inc. IL 6% OH 20% the previous owner wished to retire. OSA Inc. had it well as it