ACTIVITY: NEGOTIATION SIMULATION

Course Code: CMNeg

Course Name: Contract Management and Negotiations

In$-$Class Activity Negotiation Simulation

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 $1$S$).$ Working with the Engineering and Manufacturing staffs, Brad developed an estimate of manufacturing and tooling costs $($Exhibit $2$S$).$

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 $$0\mathrm{.}60$ to $$0\mathrm{.}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 $$2\mathrm{.}71($raw material $+$ direct engineering $+$ direct labor$)$ of the $$4\mathrm{.}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 $($$$4\mathrm{.}68+$ $ $0\mathrm{.}70).$ A profit percentage of $10\%$ was added $($$$0\mathrm{.}54).$ Brad and his controller decided to quote $$5\mathrm{.}90$ per unit plus $$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.

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 $1$B

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 $2$S

Sellers Estimated Cost

$($For $200,000$ Units$)$

Total Cost Unit Cost

Raw Material: $$497,000$ $$2\mathrm{.}488$

$(0\mathrm{.}4405$ lbs$./$unit x $$5\mathrm{.}648/$lb$.)$

Direct Engineering Labor:

Electrical Engineer

$$17\mathrm{.}50/$hr$.$ x $80$ hrs$.$ $ $1,400$

Micro Associate Engineer

$$11\mathrm{.}25/$hr x $1200$ hrs$.$ $$13,500$

Micro Technician

$$10\mathrm{.}50/$hr$.$ X $600$ hrs$.$ $ $6,300$ $$21,200$ $$0\mathrm{.}016$

Engineering Overhead: $$21,000$ x $125\%$ $$26,500$ $$0\mathrm{.}1325$

Direct Manufacturing Labor:

Machine Shop

$$10\mathrm{.}65/$hr$.$ x $1080$ hrs$.$ $$11,502$

Mechanical Assembly

$$6\mathrm{.}00/$hr$.$ x $2940$ hrs$.$ $$17,640$

Assembly Supervisor

$$11\mathrm{.}55/$hr$.$ x $500$ hours $$5,775$

Production Manager

$$14\mathrm{.}50/$hr$.$ x $500$ hours $$7,250$ $$42,167$ $$0\mathrm{.}2108$

Manufacturing Overhead: $$42,167$ x $250\%$ $$105,418$ $$0\mathrm{.}5272$

SUBTOTAL $$692,885$

General and Administrative Costs:

$$692,885$ x $35\%$ $$242,510$ $$1\mathrm{.}2126$

TOTAL $$935,395$ $$4\mathrm{.}678$

$$

THE NEGOTIATION:

$1.$ 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 is your BATNA? Why?

$3.$ What concessions do you plan to make during the negotiation?

$4.$ What concessions do you expect on the part of