Question

Case study: Negotiation-Porto

Seller’s 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.

Brad’s 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 buyer’s 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. 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

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include any estimation of learning effects in the bid. Typically, items such as New Prod

have a 90% learning curve.

Brad’s 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 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

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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

Engineering Overhead: $21,000 x 125% $26,250 $0.131

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

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

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).

4. Conduct the negotiation with the buyer. You may share as little or as much

information with the seller during the negotiation as you desire. Be sure to

record any agreement you reach in the form of a contract.