Purchase Negotiation Case: Supplier'sPackage (Orion Corp.)

Common Information

This simulation involves negotiating the purchase of an automotive fabric. The following

information is common to all groups participating in the negotiation:

There are four potential manufacturers of luxury textile fabrics. These

include the following:

Athena Corp. - Annual sales of approx. $ 40 million dollars, located in

Bowling Green, Kentucky.

Cybaris Corp. - Annual sales of approx. $ 50 million dollars, located in

Charlotte, NC.

Medusa Corp. - Annual sales of approx. $ 20 million dollars, located

in Columbus, OH.

Orion Corp. - Annual sales of approx. $ 35 million dollars, located in

Grand Rapids, MI.

There are four potential purchasers of textile products. These companies

are second tier automotive suppliers who supply the major automotive

companies located in Michigan, Ohio, and the Southeast. These companies

have all purchased in small quantities from all of the suppliers, and include

the following:

King Corporation, located in Greenville, SC, has requirements for

150,000 yards of the fabric for 2001. The products will be required in

2002 and 2003 according to current plans, and volumes are expected

to increase.

Queen Corporation, located in Knoxville, TN, requires 250,000 yards

of fabric for 2001, but volumes for 2002 and 2003 are uncertain.

Duke Corporation, located in Cleveland, OH, requires 100,000 yards

of the product, and production volumes required are expected to

increase by 50% or more in 2002 and 2003.

Duchess Corporation, located in Lansing, MI, requires 200,000 yards

of the product, and volumes are expected to decrease somewhat in

2002 and 2003.

Prices for similar textile fabrics are in the $12.00 to $15.50 price range per

yard.

All identified suppliers are able to produce to specifications provided by the

purchasing company. However, quality performance related to the product

can vary greatly.

Individual cost structures of the firms providing the automotive fabric can vary

significantly.

Suppliers provide widely different levels of service and technical support.

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All suppliers have to satisfy the same quality and delivery terms, payment

terms, and transportation (FOB seller's plant).

Industry capacity utilization is about 75 percent.

All purchasing companies have purchased relatively small amounts from all

of the suppliers previously, never totaling more than $100,000 per purchase.

Assignment:

Students will work in small groups and participate in one face-to-face negotiation

session. Group size will not exceed 3-4 people for either the buying or selling

negotiating team. Each group will develop a brief written negotiating strategy prior to

the negotiation which is to be handed in to the instructor, then conduct an actual

negotiation session with an assigned buyer/supplier group from the class. (*Note that

an agreement may not always occur with an assigned group). Eventually, each pair of

groups will develop jointly a written contract that documents the outcome of the

negotiation process. The instructor has an information packet for the buyer and the

seller which provides additional information required to prepare for and conduct the

negotiation. Buyers and sellers can share as little or as much of the information with

each other as they desire during the actual negotiation.

Groups must prepare properly before conducting the negotiation. Each group's

negotiation strategy should be developed prior tothe negotiating session. All group

members are to participate in the research planning as well as the actual negotiation.

Remember, price is not the only variable subject to negotiation. Be creative when

crafting your agreement.

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Supplier Specific Information - Orion Corporation

Orion Corporation (your firm) is a major producer of luxury fabrics to the automotive

industries. Orion sells to a wide range of customers, including the largest

manufacturer in this industry

You have been advised that your firm lost a very large order for fabric which you

were counting on to meet your corporate sales plan. This order accounted for

approximately ten percent of your firm's volume in the past year. You currently have

enough freed capacity for an additional 250,000 yards per year. It is therefore very

important to obtain new business for 2001 through 2003.

Duchess Corporation is a firm that you have done business with regularly over time,

but orders have generally been less than $100,000. You have, however, recently

quoted on a large order which would represent approximately $1,576,000 in sales

annually. This quote was submitted to Duchess Corporation before you found out

that you had lost the earlier mentioned order. Your initial quoted price was $14.44 /

yard with total design costs of $18,000.

You are aware that your prices are generally comparable with your competitors.

Orion's reputation for quality, delivery, and technical support are on a par with

competitors in the industry. You have provided similar quotes to the other three

companies as well.

Quality and delivery performance of several of your competitors have been

improving steadily over the past several years. You are unsure about how your

performance is compared to them.

Your full costs to produce the automotive fabric quoted to Duchess are $13.20 / yard

with design costs of $13,000. The profit percentage target of your firm is in the 10-

17% range.

Cost data for the manufacture of the Duchess luxury fabric is presented below:

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Direct material $ 5.50

Direct labor 2.20

Manufacturing overhead

(150% of direct labor $)

Variable overhead 0.80

Fixed overhead 2.50

Sales, general, and administrative

expenses (6.4% of selling price) 0.85

Profit (10.2% of selling price) 1.35

Selling price $ 13.20

In addition to the above lost order, you have become acutely aware of competitive

bids by several of your major competitors. Duchess has indicated that they are

awarding business to low cost suppliers, and will not maintain loyalty to suppliers.

You know that product quality and delivery are extremely important to Duchess.

Furthermore, you perceive that Duchess intends to do business with fewer suppliers

than in the past.

The product appears to be a repeat buy for several years, but volumes will probably

decrease as GM phases out the line. However, Orion does not want to be locked

out of future business with Duchess should they be awarded new business from

their major customer, General Motors.

If you don't get this order, other product costs will have to go higher due to

unfavorable overhead cost allocation.

You know the buyer has to place the business immediately to meet plant requirements.

Your firm's management wants you to get this contract to offset the business already lost.

To obtain the order, you must reach agreement within 1 hour.

The fabric is relatively easy to make to your firm's specifications and uses

well-established manufacturing technology. However, quality problems can

(and do) occur.

There are a number of acceptable suppliers for the product in the Mid-West

and Southeast. However, since your plant is located in Lansing, MI, you

have initiated discussions with the closest supplier, Orion Corp., located in

Grand Rapids, MI.

You have obtained unit pricing and design quotes from four interested

suppliers, who have provided the following quotes:

Price / Yard Redesign Costs Lead-time

Orion Corp. $14.40 $13,000 5 weeks

Athena Corp. $13.80 $15,000 4 weeks

Medusa Corp. $14.20 $20,000 3 weeks

Cybaris Corp. $15.00 $18,000 2 weeks

The Duchess Corporation estimated cost of manufacture (including profit) is

$13.00 / yard with design costs totaling approximately $13,000. The estimated supplier

cost structure is as follows:

Direct material $ 5.20

Direct labor 2.08

Manufacturing overhead

(150% of direct labor $)

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Variable overhead 1.12

Fixed overhead 2.00

Sales, general, and administrative

expenses (12% of selling price) 1.56

Profit (8% of selling price) 1.04

Estimated selling price $ 13.00

Quality, delivery to schedule, and technical support are critical to the

Duchess Corporation. Moreover, because you deliver JIT to the GM plant in

Lansing, you are required to tightly control supplier quality and delivery to

prevent line shutdowns.

Cost pressures are increasing. As mentioned, GM is emphasizing continued

cost reductions. They are also seeking to outsource a larger portion of their

operations currently done internally, and are likely to award such business on

cost. They have set an objective of 5% cost reductions per year for the next

three years for all major second tier suppliers.

Transportation terms offered by all suppliers are FOB seller's plant, freight

collect.

All suppliers have adequate available capacity currently. However, future

capacity requirements may fill up quickly, meaning that suppliers may need

to expand production in the future, and will require a solid balance sheet to

be able to do so.

The supplier performance history and current considerations follow:

Orion Excellent delivery (99% ontime), marginal quality (500

ppm), good technical support, manufacturing capability is

good.

Athena Acceptable quality (300 ppm) , sometimes poor delivery

(80% ontime), marginal technical support, capacity

uncertain.

Medusa Good quality (200 ppm) and delivery (95% ontime),

capacity uncertain, excellent technical support, financially

unstable.

Cybaris Very good quality (50 ppm), acceptable delivery (93%

ontime), poor technical resources and service, stable

financially.

Orion and Medusa provide the best technical support. They provide design

suggestions and will assist on technical problems when necessary, and are

willing to co-locate technicians temporarily on-site to support their product line.

Seller Negotiation Questions

1. Develop a negotiation strategy and plan.

2. What common ground do both Orion and Duchess have to negotiate on?

3. What is the highest price you believe you can get, i.e. where you have achieved an

"excellent" bargain?