Suppliers Information - Technutronics Brad Tennant, Sales Manager for Technutronics, was developing a strategy for a negotiation session to be held with Gerald Stecklen, a buyer at Porto Corporation. Mr. Stecklen requested the meeting to discuss the quotation submitted by Technutronics for New Prod, a newly designed component. Brads company submitted the quotation for New Prod 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, Brad 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, Brad wanted to keep tooling charges to a minimum. The Porto business would be beneficial to Technutronics since they were operating at 75% capacity and could handle anything Porto might order. Porto 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. Brad 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). Brad and his controller decided to quote $5.90 per unit plus $40,000 for tooling. Brad felt this bid to be competitive with other firms. The manufacturing manager informed Brad he would make additional effort to develop statistical process control methods to highlight quality problems. Brad realized that the use of statistical methods could help reduce direct costs over time if Technutronics was successful in identifying and eliminating the sources of variability within the process. In addition, there were learning curve considerations for New Prod. However, Brad did not include any estimation of learning effects in the bid. Typically, items such as New Prod have a 90% learning curve. (This means that as production volumes double from a previous level, direct labor requirements should decrease 10-15% on average.) Brads task was to develop his negotiation strategy and plan. He knew the contract was important to Technutronics, but they could not sustain a loss. He also knew that Porto did not possess the manufacturing capabilities for the part. The company had no option but to subcontract the component. Brad also knew that other suppliers were anxious for this business.

Exhibit 1s: Technutronics, Inc. Response to Request for Quotation: Porto Corporation

Based on quantity of 200,000 units:
Unit Price	$5.90
Tooling Cost	$40,000.00
Payment Terms	Net 25
Transportation Terms	Sellers Plant, Freight Collect
Using Location	Detroit, Michigan

Expected New Prod Delivery Schedule
December	20,000 units
January	20,000 units
February	25,000 units
March	15,000 units
April	15,000 units
May	15,000 units
June	10,000 units
July	10,000 units
August	15,000 units
September	20,000 units
October	20,000 units
November	15,000 units

Exhibit 2S: Technutronics Estimated Cost for Response to Request for Quotation: Porto Corporation (Based on Quantity of 200,000 Units)

		Total Cost	Unit Cost
Raw Material (0.4405 lbs./unit x $5.648/lb.)		$497,000	$2.488
Direct Engineering Labor		$21,200	$0.016
	-Electrical Engineer ($17.50/hour x 80 hours)	$1,400
	-Micro Associate Engineer ($11.25/hour x 1200 hours)	$13,500
	-Micro Technician ($10.50/hour x 600 hours)	$6,300
Engineering Overhead ($21,000 x 125%)		$26,500	$0.1325
Direct Manufacturing Labor		$42,167	$0.2108
	-Machine Shop ($10.65/hour x 1080 hours)	$11,502
	-Mechanical Assembly ($6.00/hour x 2940 hours)	$17,640
	-Assembly Supervisor ($11.55/hour x 500 hours)	$5,775
	-Production Manager ($14.50/hour x 500 hours)	$7,250
Manufacturing Overhead ($42,167 x 250%)		$105,418	$0.5272
General and Administrative Costs ($692,885 x 35%)		$242,510	$1.2126
TOTAL		$935,395	$4.678

1. Prepare to negotiate a contract with Porto. Identify the key issues and the range of your position on those issues. Remember that price is not the only variable subject to negotiation.

2. What do you think will be the most important issue(s) to the buyer

3. What do you believe is the highest price that Porto is willing to pay for New Prod? What is the lowest price you are willing to sell New Prod? (This defines your negotiating range on the price issue).