4. Based on the Annual Survey of Manufacturers? ll out the following table. I Industry Data Estimate Direct material (Includes scrap factor of 20%} I 42% Direct labor I Indirect labor I Overhead I | Prot margin Selling price I Deere Cost Management 011 Wednesday, February 18, Jim Elsey', cost management specialist at Deere St Company in Moline, lllinois, received a call from Glen Lowery, sales manager in the Agricultural Products Division: Jim, I need you to look into out 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. The Gatherer Chain Deere Sr Company (Deere) manufactured and distributed a full line of agriculture equipment as well as a. broad range of construction, turf, and forestry equipment. Additional supporting businesses were Financial Services, Power Syst s, T'arts SerVices, and the intelligent Solutions Group. The company had annual sales of . billion with operations in more than 160 countries, A popular product sold by the Agricultural Product 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 books 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, Dcerc 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 . s department regularly benrhmarked pricing for its products, lim learned that the gatherer chain was purchased from Saunders Manufacturing (Saum tiers), a. supplier located in Decatur, lllinois. Saunders was a familyo\\vned biisin run by Wayne Saunders, the son of the company's founder. Saunders had a long-term relationship with Deere, and Wayne had a reputation as a tough, successful businessman who had grown the company to the point where it now emploved approximately 300 people. Reviewing the sales margin for the gatherer chain, Jim could see why Glen was concerned. Over the past three vears, the sales revenue and margin had been declining steadily t see Table 1). The budgeted selling price for the current year was based on the need to match the price set by a major competitor. Financial Analysis Jim arranged a meeting the following day with Susan Tcssier, from purchasing, and Jose de Costa, from engineering. During the meeting, Jim laid a gatherer chain on the conference room table ad asked Jose to estimate the raw material content After a little bit of work, Jose estimated that the product consisted of approximately 11.6 pounds of steel and 46 pins that joined the links. He also expected that Saunders would have approximately a 20% scrap 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 proc ,. s. Table l: Protability Analysis for Gathered Chain Two Years Ago Last Year ' Current Year Budget Aftermarket price $40.00 St. 5 Purchase cost $21.25 $22.61 Cost-price ratio 53% 62% 8 , Unit Sales 475,000 410,000 350,000 Susan then pulled out her material cost le and made the following observations: We just nished negotiations with our steel suppliers and expect to pay approximately $2 .00 per hundredweight for this type of material. I am also buying the same pins for a couple of our divisions, and 1 gure Saunders is paying about 3.5 cents. Donlt 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 nd anyone that capable of beating the current price, Saunders has been a good supplier. Their quality and onetime delivery performance have been excellent. 1 wouldn't want to lost them as a supplier. l'bllowing the meeting, Jim examined the Annual Survey of Manufactures, published by the US Department of Commerce. \\Within the report was a breakdown of manufacturing costs, as a percentage at sales, for US companies in Saunders" industry code, According to data from the previous year, the breakdown was material, 42%; direct labor, 13%; indirect labor, 6%: and overhead, 20%. Supplier Negotiation Glen felt that the budgeted costeprice ratio for the gathered chain was unacceptable and was anxious to see what could be. done to address the problem. He remarked to Jim, \"The competition is pretty strict about maintaining a 50750 costeprice. ratio on their product lines. Why is it they can sell this product for $30.00 and We can't match their cost structure?\" lim felt that he had gathered enough information to do some preliminary anal sis. How ever, 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 regarding pricing, and had been unwilling to share any specic cost information to justify his requests for price increases. to