Read the case study below and complete the assignment at the end of the case. Your response to the assignment should be approximately

Electronic Systems Division (ESD) - Buyer (Harry Forbes)

Jackson Electronics Company (JEC) - Seller (Arnold Jones)

In June 20X6, Harry Forbes, a negotiator in the Electronic Systems Division (ESD) of the Air Force Systems Command, was negotiating a firm fixed price proposal with Arnold Jones, Vice President of Jackson Electronics Company (JEC). The proposal was for an electronic component which was used in the guidance systems of air-to-air missiles being provided to the Air Force by two separate prime contractors. The electronic component was to be provided by the Air Force to the two manufacturers as government furnished material. The production contract was for 1,500 units to be delivered over a three-year period.

Background

JEC developed the equipment under a cost-plus-fixed-fee R&D contract with ESD. A subsequent fixed price, redeterminable contract for 350 units was awarded to JEC by ESD. The final price for the production units was $33,250 each, including the cost of production tooling. The bill of materials was updated to reflect the final production configuration.

JEC has proposed a per unit price of $26,107 each for the 1,500 units ($39,160,500). The price includes the amortized start-up costs.

Cost Analysis and Fact Finding

While preparing for negotiations, Forbes had received analyses of the company's proposed cost breakdown from both the cognizant DCAA auditor and the DCAS field representatives. He had also performed an independent analysis of JEC's proposal after discussions with the Air Force technical personnel. On the basis of his fact finding investigations prior to negotiations, Forbes had established a range of $21,000 - $23,750 per unit as a fair and reasonable price for the proposed contract. As he stated in a pre-negotiation discussion with his superior, Dan Higgins, he hoped to negotiate a final unit price of approximately $22,500. The main differences between his proposed price and JEC's quoted estimate lay in the areas of engineering and other direct labor hours.

At the negotiation session, which began at the ESD office at 9:00 a.m. one Friday morning, Forbes opened the meeting with some general comments on the proposed contract and the excellent work that JEC had already performed for the Air Force. After some 20 minutes of small talk, Forbes led Jones into a detailed explanation and justification of each item of cost in the company's proposal. Attention was first directed to the less controversial cost areas - direct materials, engineering overhead, factory overhead, and G&A expense. Jones willingly supplied a detailed explanation of the company's estimate in each area. When Forbes was fully satisfied with Jones' explanation in a given area, he would proceed to the next area with some statement such as: "That looks pretty good to me; let's go on to your estimate for . . ." By noontime, when Forbes suggested that they recess for lunch, all cost items except engineering and direct labor costs and profit had been discussed to his satisfaction.

After lunch, the negotiations centered on the company's estimates for engineering labor and direct labor. In each case, Jones, after explaining how these figures had been developed, argued strenuously that his estimates were realistic. Little by little, however, Forbes was able to win concessions on various aspects of these two cost categories. By 3:00 p.m., the negotiator expressed tentative satisfaction with the reduced figure for engineering. By 4:15 p.m., tentative agreement had been reached on direct labor. (At this point, with the reductions Forbes believed he had gained, and presuming a 10% profit as originally proposed by the company, the per unit price for the equipment component was down to $22,409.) The negotiator then declared: "Well, Mr. Jones, we've spent all day looking at cost items - the only thing we haven't talked about is profit. I'd like to bypass that, however, and talk total price. It's getting pretty late, and I know you're team has a long trip home ahead. Let's see if we can't wrap the whole thing up. I've been impressed with the way things have gone so far, although I'm sure that we're not yet down as low as we should be. I've done some figuring, and I believe a price of $19,000 each would be a good one for both of us; how about it - can we close a deal at that figure?" (The offer is a 27% reduction from the proposed unit price.)

After expressing dismay with the low figure offered by Forbes, Jones requested a 30 minute recess while the JEC team discussed his offer of $19,000 per unit. Forbes concurred.

When Jones returned to the negotiation he made the following statement to Forbes:

"It is almost 5:00 p.m. and our price differences are so significant that I do not see a quick resolution. Let's take a break for dinner and reconvene at 7:00 p.m. If we can't reach the right price tonight, we can begin tomorrow (Saturday) at 10:00 a.m. I hope when we reconvene tonight, the government will be prepared to make an offer that is reasonable enough to justify continuing the negotiation tomorrow. Otherwise, we plan to return home Saturday morning. You will then have more time to thoroughly review the data we have provided you today and reassess your position. We will return to complete the negotiation at your convenience."

Assignment

Respond with a thorough analysis of the following statements/questions:

1. Establish negotiation objectives for Mr. Jones.

1. Evaluate and discuss Mr. Jones strategy for counteroffer to Mr. Forbes. should Jones provided a counteroffer to the $19,000?
2. Why did Forbes make an offer so far below the negotiation range that was approved objective for Forbes?
3. What negotiation techniques is Forbes using to get a reduced proposal offer?
4. Compare offers, counteroffers and objectives at total price level, not unit price.
5. Discuss the relative bargaining power of the two parties:
6. What is Jones' best bargaining strength?
7. What is Forbes' best bargaining strength?