By reading the case study "Karnataka Gears ltd" listed below, answer the following Questions:

1. Critically analyze the approach of the two suppliers towards price increase. Describe pointwise and in detail

2. Are there any other aspects of Buyer-Seller relationship that need to be considered? Analyze logically and answer

3. What style of negotiation was used by Suresh Mehta and Arvind Mittal?

8 Karnataka Gears Ltd* Case In December 2004, all the buyers of "alloy steel" (a mixture of steel with other metals) were surprised and upset due to a large increase of 20 per cent in the prices of alloy steel, mainly due to a huge gap in demand and supply. The global demand for alloy steel had gone up substantially and the Indian manu- facturers of alloy steel increased their exports due to higher profitability in the international markets. This resulted in shortage of alloy steel in domestic market. Suresh Mehta, Director of Karnataka Gears, was one of the persons who was shocked at this increase in the prices of alloy steel. He wondered whether his customers would give the price increase for Gears which needed alloy steel material NEGOTIATION WITH A MAJOR CUSTOMER (KEY ACCOUNT) Phoenix Limited, a textile machinery manufacturer, was one of the major customers of Karnataka Gears, which supplied 30 per cent of the total requirements of gears of Phoenix for over 4 years, GI Company supplied the balance 70 per cent of gears to Phoenix, which perceived the quality of gears supplied by GL company better than those supplied by Karnataka Gears. When Suresh Mehta ap- proached the purchase manager of Phoenix for a price increase, he was told "no increase in current prices". Suresh Mehta, in all humility, requested the purchase manager of Phoenix to find a way out in the difficult situation of 20 per cent increase in the cost of alloy steel, which contributed 50 per cent of the total cost. The purchase manager, considering the long-term relationship between their two organisa- tions, confided with Suresh that GL Company had already submitted a letter to Phoenix asking for 15 per cent increase in the prices of gears with immediate effect. GL company had further stated in the letter that supplies of gears would continue only if Phoenix agreed for 15 per cent price increase. Chief executive officer (CEO) of Phoenix perceived the behaviour of GL company as arrogant and gave in- structions to the purchase manager to look for a new supplier (or suppliers) in place of GL company, before leaving for overseas visit. The purchase manager asked Suresh Mehta to rework his cost struc- ture to convince the CEO of Phoenix for a price increase of about 5 per cent, after his return from the overseas tour in about a week's time. Suresh Mehta, after returning to his office, discussed with his accounts manager and industrial en- gineer on the cost structure and different methods that could be used for cost reduction. The impact ofincrease in the cost of gears due to increase in alloy steel prices was about 10 per cent. By reducing the wastage in oil and other materials, better negotiations of purchased items with suppliers, and reduc- tion of inventory of raw material, work-in-process, and finished goods, there was a scope to reduce the total costs by about 2 to 3 per cent. Suresh was informed by his industrial engineer that, if the company could buy a new fully-automatic machine from France in place of three existing and old semi-automatic machines, it would improve the quality and reduce the production time of gears substantially. However, the breakeven volume of the new machine would be double of the existing volume. Suresh thought that with the new machine, the quality of gears supplied by his company would be equal to or better than that of GL Company and therefore, he could aim at about 70 to 80 per cent share of the total number of gears required by Phoenix. This would improve the company's sales volume. However, the profitability would improve, if Phoenix agrees for a price increase of over 7 per cent. Suresh was thinking how to convince the CEO of Phoenix, when he received a call from the pur- chase manager of Phoenix: "Mr. Mehta, could you please come to our office to meet with our CEO today at 4.00 pm for discussion on prices of gears?" "Yes, I will be at your Office at 4 pm," responded Suresh. Suresh Mehta entered the office of the CEO of Phoenix, Arvind Mittal, and gave his visiting card to the secretary of the CEO. After getting a nod from the secretary, Suresh entered the meeting room. With a smile on his face, he said, "Good evening, Mr. Mittal, I am Suresh Mehta of Karnataka Gears" Arvind Mittal extended his hand and said, " Good evening, Mr. Mehta; Nice to meet you. You have been one of our regular suppliers of gears and we value the long-term relationship between our organi- sations, I was recently transferred from our head-quarter at Mumbai to this unit at Bangalore, which is one of our strategic business units, manufacturing textile machineries. The recent increase in the prices of steel and alloy steel has affected all of us. We have to put extra efforts to ensure that the price increase to our customers would be as minimal as possible, so as to remain competitive in the market. Do you agree with this approach, Mr. Mehta?" asked Arvind Mittal. "Yes, I fully endorse your views, Mr. Mittal. We have been your suppliers of gears for over 4 years and we have excellent relations with your people. Although the total impact of 20 per cent price in- crease of alloy steel is 10 per cent, we have thought of taking a number of steps to reduce the cost of manufacture. Therefore, we are requesting for a price increase of only 8 per cent. Besides, we can give you improved product quality and faster delivery by installing a fully automatic, imported machine. For this, we need more than double of the existing volume of business inorder to breakeven. I, there- fore, request you to give us 80 per cent share of your total volume, with a price increase of 8 per cent," responded Suresh Mehta "You seem to have done your home-work well. But, it would be difficult to give you more than 60 per cent volume, and a price increase of over 7 per cent. We have to justify to our customers, when we ask for price increase for textile machines", said Arvind Mittal, in a thoughtful manner, "Considering our long-term relationship, may I make a request of 70 per cent share of your total purchase of gears and a price-increase of 7.5 per cent" pleaded Suresh Mehta. After a pause, Arvind Mittal responded, "OK, I would agree to your request, provided your organisation keeps up to our expectations of per- formance standards on quality, delivery, and technical support" and extended his hand to Suresh Mehta. "Thank you very much, Mr. Mittal. We will ensure that we come up to your performance expecta- tions," said Suresh Mehta with a broad smile