Sellers Information - Electrozad

Rick Dietrich, Sales Manager for Electrozad, was developing a strategy for a negotiation session to be held with David Hayter, a buyer at Edge Corporation. Mr. Hayter requested the meeting to discuss the quotation submitted by Electrozad for Widget Z, a newly designed component.

Ricks company submitted the quotation for Widget Z in response to a request for quotation of 200,000 units plus a possible follow-on order of up to 200,000 units (Exhibit 1S). Working with the Engineering and Manufacturing staffs, Rick developed an estimate of manufacturing and tooling costs (Exhibit 2S).

The process required to produce the component was unique and somewhat complex. Therefore, quality control requirements for the part were quite involved. Furthermore, if material or equipment problems occurred, an additional $0.60 to $0.70 per unit would be required to produce the part at a level that satisfied the buyers requirements. Additional tooling might also be required beyond the quoted tooling charge of $40,000. However, Rick wanted to keep tooling charges to a minimum.

The Edge business would be beneficial to Electrozad since they were operating at 75% capacity. Edge was also a long-time customer. The contract would amount to approximately $1,000,000 plus a possible addition of $1,000,000 if the additional 200,000 units were realized.

Estimated direct costs to produce the component were $2.71 (raw material + direct engineering + direct labor) of the $4.68 total cost to produce. Rick wanted to establish a per unit selling price that would cover all direct costs and significantly contribute to fixed costs and profit. Furthermore, he needed to consider the quality cost contingencies.

After some discussion by the management committee and a review of estimated costs for the part, a quotation was agreed upon. The quality cost contingencies were included and the possible tooling cost increases ignored ($4.68 + $ 0.70). A profit percentage of 10% was added ($0.54). Rick and his controller decided to quote $5.90 per unit plus $40,000 for tooling. Rick felt this bid to be competitive with other firms.

The manufacturing manager informed Rick he would make additional effort to develop statistical process control methods to highlight quality problems. Rick realized that the use of statistical methods could help reduce direct costs over time if Electrozad was successful in identifying and eliminating the sources of variability within the process. In addition, there were learning curve considerations for Widget Z. However, Rick did not include any estimation of learning effects in the bid. Typically, items such as Widget Z have a 90% learning curve.

Ricks task was to develop his negotiation strategy and plan. He knew the contract was important to Electrozad, but they could not sustain a loss. He also knew that Edge did not possess the manufacturing capabilities for the part. The company had no option but to subcontract the component. Rick also knew that other suppliers were anxious for this business.

Exhibit 1B

Expected Widget Z 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: Toronto, Ontario

Exhibit 2S

Sellers Estimated Cost

(For 200,000 Units)

Total Cost Unit Cost

Raw Material: $497,000 $2.488

(0.4405 lbs./unit x $5.648/lb.)

Direct Engineering Labor:

Electrical Engineer

$17.50/hr. x 80 hrs. $ 1,400

Micro Associate Engineer

$11.25/hr x 1200 hrs. $13,500

Micro Technician

$10.50/hr. X 600 hrs. $ 6,300 $21,200 $0.016

Engineering Overhead: $21,000 x 125% $26,500 $0.1325

Direct Manufacturing Labor:

Machine Shop

$10.65/hr. x 1080 hrs. $11,502

Mechanical Assembly

$6.00/hr. x 2940 hrs. $17,640

Assembly Supervisor

$11.55/hr. x 500 hours $5,775

Production Manager

$14.50/hr. x 500 hours $7,250 $42,167 $0.2108

Manufacturing Overhead: $42,167 x 250% $105,418 $0.5272

SUBTOTAL $692,885

General and Administrative Costs:

$692,885 x 35% $242,510 $1.2126

TOTAL $935,395 $4.678

Develop a negotiation plan for the seller (selling negotiation plan). Explain with reasons.