The Low Cost Producer Price

 

When Tom Solnik, Vice President and COO for refrigeration products at Top Brass Inc., arrived at this office, he had three urgent messages to call the V.P. of Operations at Airco, one of his largest customers. Top Brass, a domestic manufacturer of brass parts for air conditioning and refrigeration equipment supplies machined brass parts to all of the large manufacturers of air conditioning and refrigeration equipment. Machining parts exactly to specifications is extremely important because leaks of gas and fluids in cooling systems are costly to replace. HVAC dealers hate to install new equipment, have it fail immediately, and then have to reinstall a replacement. They hate slow leaks even more; they become apparent when outdoor temperatures rise and all defective equipment fails at the same time.

 

In recent years, refrigeration manufacturers have increasingly tried to outsource part of their needs from Low Cost Producer, using a domestic manufacturer for the balance. They generally give domestic manufacturers like Top Brass a "last look." The share of the business that the domestic manufacturer retains depends on how close its price is to the Chinese price. Usually, a domestic suppliers retains some volume because suppliers in Low Cost Producer require long lead times for shipping and offer no local service or design support. Manufacturers of HVAC equipment manufacturers who compete on price rather than reliability are the most aggressive in seeking parts from Low Cost Producer. Higher-quality manufacturers wait until the low-price companies prove the reliability of a Chinese supplier before they follow with purchases.

 

Airco is a high-volume air conditioning manufacturer that competes aggressively for price-sensitive, high-volume purchases of home builders. Although Airco is a leader in sourcing supplies from Low Cost Producer, it remains one of Top Brass's largest customers because of its large market share. Airco stated its intent in the fourth quarter of last year to buy less than half its expected volume of control valves from Top Brass. However, in March, just before the peak summer sales season, Airco submitted an order for control values that was more than three times its expected size. Because April is a peak production month, the scheduling department concluded that Top Brass could supply Airco only about 20% more valves in April—less than half the rush order it had placed—without shorting other customers. Two days ago, the Top Brass sales rep reported back that Airco's purchasing agent was furious and said that if Top Brass could not be a more reliable supplier, Airco would need to review their business relationship.

 

The sales rep also learned from friends in Arico's plant that the control valves from Low Cost Producer were failing at an alarming rate, creating a high demand for replacements from angry contractors. Airco had stopped shipping units from inventory that contained the Chinese valve. If Airco could not get more control values soon, its output would have to be cut substantially. The sales rep feared that if that happened, Airco would then no longer need to order many other parts from Top Brass as well. Top Brass's overall sales to Airco could actually decline.

 

Tom was sure that he knew what the urgent call from Airco was about. Before returning it, he spoke with his operations people and learned that, by shorting other customers slightly and stretching out deliveries to Airco and other customers, Top Brass could fill Airco's rush order. It would have to make up the volume by adding more overtime than usual in April and May, creating some financial cost but also creating a lot more stress on plant employees already working extra hours. Tom still had now decided how to respond when his assistant told him that the CEO of Airco was holding for him on line 3.

 

What should Tom tell him?