Milway Automotive

This case is important because supply managers must understand how to structure contracts with suppliers and how prices should be adjusted based on changes in costs (either up or down), including fluctuations in commodity markets.

Read the following case on Milway Automotive and then answer the questions that follow.

Milway Automotive

On October 26, Marta Tafler, purchasing manager at the Milway Automotive (Milway) plant in Warren, Ohio, received the following email from Santiago Jimenez, president of Boaz Foundries (Boaz), a supplier of aluminum casting: I would like to arrange a visit with you and Kyle. We need to raise prices to contend with material and labor costs that have been increasing and eroding our margins. Implementation would begin for orders required after January 1. Can I meet with you the week of November 6? Marta confirmed a meeting with Santiago on November 9, which would also include Kyle Hunter, buyer at Milway.

It was the morning of November 2, and Marta was reviewing information about the pricing for seven parts supplied by Boaz. She had a meeting with Kyle at 1:00 p.m. that afternoon to discuss how they would respond to Santiago.

COMPANY BACKGROUND

Headquartered in Auburn Hills, Michigan, Milway was a manufacturer of automotive structural metal components and assemblies serving original equipment manufacturers. Company revenues were $2.3 billion, with 26 plants located in North America and Europe. The Warren plant supplied frame and chassis assemblies for pickup trucks and sport utility vehicles.

The purchasing organization at Milway was a hybrid structure. The head office purchasing group was responsible for negotiating corporate contracts with strategic suppliers and new product development initiatives. Each plant had a purchasing department that was responsible for materials management and negotiating contracts with local suppliers for production requirements and indirect purchases. The purchasing department at the Warren plant consisted of Marta, two buyers, including Kyle, and a materials planner. Marta reported to Isabelle Hout, the Warren plant general manager, on a solid line basis and to corporate purchasing on a dotted line basis.

BOAZ FOUNDRIES

Boaz was a local company that had been a supplier to the Milway plant for more than 20 years. It was a family-owned business that manufactured aluminum castings for the automotive and aerospace industries. Marta estimated that their revenues were about $20 million.

Boaz had been supplying Milway seven aluminum castings for approximately three years (see Exhibit 1). These parts were components used in large chassis assemblies for a sports utility vehicle program for an OEM customer.

Attached to Santiagos email was a proposed pricing list, which was to take effect on January 1 (see Exhibit 2). Kyle was the buyer responsible for supply of production components, including the aluminum casting from Boaz. Marta asked him to review the price increase proposal and to provide his feedback. Kyle provided the following information to Marta in an email on November 1:

1. Boaz had been supplying the seven parts for 34 months without any major delivery or quality issues.
2. This was the suppliers first request for a price increase.
3. Kyle had collected data on the price of raw aluminum from the New York Mercantile Exchange (NYMEX CME Group). The price of aluminum was $0.82 per pound when the contract was originally awarded to Boaz and the current price was $0.97. Aluminum prices had fluctuated significantly in the intervening period, with an average monthly price of $0.78. Exhibit 3 provides a graph of historical aluminum prices prepared by Kyle.
4. Kyle estimated that cost structure for the aluminum castings from Boaz was 35 percent material and 65 percent labor and overhead. He analyzed the proposed pricing using the cost information provided in the email from Santiago: Annual cost increases of 1.5 percent for labor and overhead, representing 4.5 percent over the four-year period; and a 15 percent increase in raw material costs (see Exhibit 4).
5. The contract with Boaz could be terminated at the sole discretion of Milway at any time without penalty. The tooling used by Boaz to manufacture the parts was the property of Milway.

EVALUATING ALTERNATIVES

As Marta reviewed the analysis provided by Kyle (see Exhibits 3 and 4) she wondered how to respond to Santiago during their meeting on November 9. Milways OEM customers expected the company to provide annual cost reductions of 35 percent each year, so it was unlikely that any additional costs could be recovered through price increases. Furthermore, price increases would need to be approved by Isabelle, and it was her view that: Suppliers should proactively offer solutions to avoid cost increases and continually look for opportunities for cost reductions and value enhancement.

Marta also noted that the price of aluminum had been as low as $0.67 two years ago before starting its climb to the current price of $0.97. She wondered what approach should be taken with Boaz regarding how to address future changes in raw material costs.

1. Boaz Foundries had been able to go almost three years without a price increase most likely because:

Multiple Choice

Boaz used kaizen initiatives to reduce costs

Boaz used value analysis projects that simplified product design and lowered costs

Boaz benefited from reduction in overhead costs due to higher production volumes

Boaz had invested in new equipment

raw material prices declined after the contract was awarded

2. The proposed price increase would increase the total spend for the seven parts by approximately ________blank percent.

Multiple Choice

6

8

10

12

14

3. The ability of Milway Automotive to pass on increased costs from suppliers to its customers ________blank.

Multiple Choice

is highly likely

will need to be supported by detailed information justifying the price increase

will require significant negotiations to be successful

is highly unlikely

will be based on competitive prices for similar components