Question

1. Establish a buyer's negotiating position and plan using the information in the case (It is suggested you answer questions 2 to 5 before preparing your plan), and include:

a. Negotiation objectives.

b. Identify two (2) or three (3) key issues to be negotiated and define the minimum, maximum and target positions for each.

c. Identify important facts from buyer's point of view.

d. Identify buyer's and seller's strengths and weaknesses.

e. Identify buyer's and seller's needs.

f. List other key information.

g. Identify the expected opening positions for both buyer and seller.

Please answer the following questions and include the answers in your case study posting.

2.  Given the unit price, tooling costs, and estimated transportation charges presented in Exhibit 2B; determine the cost per unit for each supplier (use production of 200,000 units).

3. What do you think will be the most important issue(s) to the seller?

4. What do you believe is the lowest price that Technotronics is willing to accept? What is the highest price New Prod is willing to pay? (This defines your negotiating range on the price issue).

5. What are some possible reasons why two suppliers did not provide quotations to Porto?

Post your answers to the appropriate discussion thread. Due Tuesday

Comment on at least two other students' replies in the appropriate discussion thread. Due Wednesday

Case Text

Buyer's 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 (5) and eight (8) 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 under utilization.

Seven (7) 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 (5) of the seven (7) 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 decreases 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

                                                                                       Estimated Transportation

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 - Buyer's "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

Answer 1

Ques 2.

Determining the cost per unit for each supplier

See the excel below, with formulas used and cost per unit-

Supplier 6 Baur manufacturing 7 Metal Modes 8 Tyler Manufecturing 9 Aircraft inc 10 Techtronics 11 Aerobotics Inc 12 Space Metals Unit Price Tooling Cost Estimated tranportation cost per unit Total units Cost per unit- F6+H6+G6/16 ギ74H7+67/17 -F8+H8-G8/18 0.08 0.16 INA 0.06 0.08 0.09 INA F10+H10+G10/110 F11+H11+G11/111 -F12+H12+G12/112 20000O 6.25 6.4 45000

The unit cost= cost/per unit + Transportation cost per unit + Toolin costs/total units

The values are-

5 Supplier 6 Baur manufacturing NA 7 Metal Modes 8 Tyler Manufacturing 9 Aircraft inc 10 Techtronics 11 Aerobotics Inc 12 Space Metals 13 14 15 16 17 18 Unit Price Tooling Cost Estimated tranportation cost per unit Total units Cost per unit- NA NA 200000' #VALUE! 6.1 30000 0.08 200000 0.16 200000 6.33 5.95 6.31 NA NA NA 5.9 6.25 6.4 40000 0.06 200000 0.08 200000 0.09 200000 6.16 6.555 6.74 45000

The lowest cost per unit is for Techtronics

Ques 3. Most important issue for the seller will be-

1. Providing top notch quality to the buyer, without any compromise

2. Enough capital in hand to fulfill the buyers' demands on time

3. Enough labor and machinery in hand to produce the required demand

4. Good relations with the raw material supplier to provide the raw material on time and at desired costs

Ques 4-

Unit price according to buyer should be = 4.10 per unit, excluding tooling and transportation costs

This includes learning curve rate of 85-90%. Learning rate of X % means (100 - X%) reduction in per unit cost.

Considering the max price new prod is willing to pay:
Consider learning curve rate 85, best reduction of 15% in price (company would take lesser of the learning rate range in order to be secure and then decide the max price it can pay)

So cost per unit is = 4.10/0.85 = 4.82

Cost of tooling is estimated at – 25000

Tooling cost per unit – 25000/200000 = 0.125

Transportation cost per unit – 0.06

Hence, max it is willing to pay is= 0.06 + 0.125 + 4.82 = 5.005

Hence, max New Prod is willing to pay should be= 5.005

Now, assuming that Techtronics achieves a learning rate of 85%, and also 15% reduction in direct labor costs on production doubling, the minimum per unit cost should be=

5.9*0.85*0.85 + 0.06 + 40000/200000= 4.522

The range should be between 4.522 to 5.005

Ques 5

Possible reasons supplier did not provide the quotation-

1. Not enough capital to fulfil demand

2. Not enough labor and machinery

3. Not enough expertise to produce the required quality this time around

4. Previous relations issues with the buyer

Ques 1.

a. Negotiation objectives-

1. To obtain best prices

2. To obtain best quality

b. Prices

Per unit cost- 4.522 tp 5.005

Transportation cost – 0.06-0.16

c.

Facts from buyer’s point of view-

1. Knows that there will be a learning rate

2. Knows the direct labour costs would go down once the production doubles

d.

Buyer’s strength-

1. Has price leverage available

Buyer’s weakness

Has to depend on supplier, no manufacturing of its own

Seller strength-

Not too many competitors to compete with

Seller’s weakness-

Competitors are in close ranges of unit price, which can be negotiated

e. t

Buyer’s needs-

1. Good quality

2. Affordable prices

3. On time delivery at all costs

Seller’s needs-

1. Enough profit

2. Capital to produce goods

There is some info missing in your uploaded case, for example Exhibit 3B, per unit costs amounts to only 2.18 where in the case it is written 4.1, there is some problem in the data uploaded. I have tried my best to solve with the provided data, if you want some clarifications on the answer, or have doubts, please post in the comments

Thank You