Question: What do you think will be the most important issue(s) to the buyer?

This assignment is not so much about coming up with calculations as it is to determine what your negotiating points are. Think of it like this. I have quotes from suppliers some of the unit prices are higher and some of the tooling, admin costs, etc. are higher. You have the opportunity to go back to the negotiation table. What points are you going to negotiate. Maybe you want lower tooling, but are willing to pay a little more for each unit. Come up with a strategy you would like to use and establish some ranges for negotiation.

Case Text:

Buyers Information

Use the information provided below to develop your plan to negotiate.

Gerald Stecklen, a buyer for Porto, is responsible for developing a negotiating plan and strategy for the purchase of a component (called New Prod) for a newly designed product. After evaluating the quotations submitted by potential suppliers, he has decided to pursue purchase negotiations with Techtronics.

New Prod was designed and developed by Porto engineers for a product currently under development. Prototypes of the component were produced by a small specialized firm without production volume capacity. Gerald knew the high tech industry had between five and eight potentially qualified suppliers who were familiar with the complex manufacturing process required to produce New Prod. Supplier capacity was available since the industry was just recovering from a period of underutilization.

Seven suppliers received a request for quotation. The RFQ included a 12 month delivery schedule for 200,000 units plus a possible follow-on order for up to 200,000 units. The quotes also included payment terms and shipping (F.O.B. point) information (Exhibit 1B)

Five of the seven suppliers receiving RFQ responded. (Exhibit 2B). Techtronics had the lowest quoted price at $5.90 per unit. Tyler Manufacturing was very close except for a high unit cost of transportation. Both companies were acceptable suppliers and Gerald decided to pursue negotiations with Techtronics. He is well aware that the lowest quoted price does not always mean the lowest total cost. For that reason, Gerald knows that issues besides price will have to be discussed with Techtronics. The requests for quotation were intended to reduce the list of suppliers before commencing negotiations.

Gerald requested a cost estimate for New Prod from his staff analyst to help him formulate his negotiating plan. The analysis (Exhibit 3B) provides a should cost of $4.10 per unit excluding tooling and transportation. This cost included learning curve effects. He believed that production times for this component should decrease as volumes increased due to learning. Based on discussions with internal engineers, Gerald estimated that production of this component should demonstrate an 85%-90% learning rate.* He was not sure, however, that this rate applied specifically to Porto since he has not visited the Techtronics facility.

Quality control measures were a vital concern for Gerald. All products were subject to strict quality guidelines and New Prod was no exception. Techtronics, Tyler Manufacturing, and Space Metals each have a record of solid performance ratings for quality and delivery.

With this information, Gerald now sat down and planned his negotiating strategy.

This means that as production volumes double from a previous level, direct labor requirements should decrease 10-15% on average.

Exhibit 1B

Expected New Prod Delivery Schedule

Month Quantity

December 20,000

January 20,000

February 25,000

March 15,000

April 15,000

May 15,000

June 10,000

July 10,000

August 15,000

September 20,000

October 20,000

November 15,000

Total 200,000

Payment terms: Net 25

Transportation Terms: Sellers Plant, Freight Collect

Using Location: Detroit, Michigan

Exhibit 2B

Quotation Summary

Note that transportation charges are baked into the quote.

Supplier Unit Price Tooling Costs Cost Per Unit

Bauer Manufacturing No quote --------- --------

Metal Modes $6.10 $30,000 $0.08

TylerManufacturing $5.95 $40,000 $0.16

Avicraft, Inc. No quote --------- --------

Techtronics $5.90 $40,000 $0.06

Aerobotics, Inc. $6.25 $45,000 $0.08

Space Metals $6.40 $50,000 $0.09

Exhibit 3B

Buyers Should Cost Estimate

(For 200,000 units)

Total Cost Unit Cost

Material:

0.3525 lbs./unit x $5.648/lb. $398,215 $1.991

Direct Engineering Labor:

1500 hours x $11.50/hr. $17,250 $0.0863

Engineering Overhead:

$17,250 x 120% $20,700 $.01035

Direct Manufacturing Labor:

3900 hours x $8.50/hr. $33,150 $0.1658

Manufacturing Overhead:

$33,150 x 250% $82,875 $0.4144

SUB TOTAL $552,190

General and Administrative Costs:

$552,190 x 35% $193,265 $0.9663

SUB TOTAL $745,455

Profit: $745,455 x 10% $74,545 $0.3727

TOTAL $820,000 $4.10

Estimated Tooling Charges: $25,000