This case is important because supply managers must understand how to use data to estimate supplier costs and apply cost analysis techniques when preparing for supplier price negotiations.

Read the following case on Robertson Industries and then answer the questions that follow.

Robertson Industries

On Wednesday April $26,$ Kyle Thomas, cost management specialist at Robertson Industries $($Robertson$)$ in Chicago, Illinois, received a call from Tricia Elliott, sales manager in the Agricultural Products Division:

Kyle, I need you to look into our costs on the conveyor link chain. Our margins have really shrunk and we need to do something about this problem. Get back to me and let me know what you think.

THE LINK CHAIN

Robertson manufactured and distributed a full line of agriculture equipment, as well as a broad range of construction and forestry equipment. The company had annual sales of $$30$ billion with operations in more than $160$ countries.

A popular product sold by the Agricultural Products Division was a conveyor system. Materials placed on the front end of the conveyor sat on the link chain, which carried the material to the opposite end. The chain was joined together in links, fastened by pins, and included small hooks that helped to carry the material. It sat on rollers that required regular lubrication to keep the conveyor system in good working condition.

The Agricultural Products Division had produced the conveyor system for several years, with only slight modifications in its design. As standard practice for each product, Robertson sold replacement parts through its dealer network, including link chains. It was the intention of management to ensure that its replacement parts were price competitive with similar aftermarket products sold by competitors. As a result, the Robertson sales department regularly benchmarked pricing for its products.

Kyle learned that the link chain was purchased from Taylor Manufacturing $($Taylor$),$ a supplier located in Springfield, Illinois. Taylor was a family$-$owned business, run by Lane Taylor, the son of the company$$s founder. Taylor had a long$-$term relationship with Robertson and Lane Taylor had a reputation as a tough, successful businessman, who had grown the company to the point where it now employed approximately $300$ people.

Reviewing the sales margin for the gatherer chain, Kyle could see why Tricia was concerned. Over the past three years, the sales revenue and margin had been declining steadily $($see Exhibit $1).$ The budgeted selling price of $$60$ for the current year was based on the need to match the price set by a major aftermarket competitor.

COST ANALYSIS

Kyle arranged a meeting the following day with Casie Beadow, from purchasing, and Vincent Choi, from engineering. During the meeting, Kyle placed a link chain on the conference room table and asked Vincent to estimate the raw material content. After a little by of work, he estimated that the chain consisted of approximately $11\mathrm{.}6$ pounds of steel and $46$ pins that joined the links. He also expected that Taylor would have approximately a $20$ percent scrap rate, for steel only, as part of their normal production cost. Vincent also commented that Taylor could use general$-$purpose equipment for the manufacturing and assembly process.

Casie then pulled up her material cost file on her laptop and made the following observations:

We just finished negotiations with our steel suppliers and expect to pay approximately $$56\mathrm{.}00$ per hundredweight for this type of material. I am also buying the same pins for a couple of our divisions, and I figure Taylor is paying about $7\mathrm{.}0.$ Don$$t forget that for this part we pay the freight, which usually costs about $3$ percent of the purchase price, and the supplier pays for packaging.

We have looked around for other suppliers for this part and have not been able to find anyone that capable of beating the current price. Taylor has been a good supplier. Their quality and on$-$time delivery performance has been excellent. I would not want to lose them as a supplier.

Following the meeting, Kyle examined the Annual Survey of Manufacturers, published by the U$.$S$.$ Census Bureau. Within the report was a breakdown of manufacturing costs, as a percentage of sales, for U$.$S$.$ companies in Taylor$$s industry code. According to data from the most recent year, the breakdown was: material, $42$ percent; direct labor, $13$ percent; indirect labor, $6$ percent; and overhead, $20$ percent.

SUPPLIER NEGOTIATION

Tricia felt that the budgeted cost price ratio for the link chain was unacceptable and was anxious to see what could be done to address the problem. She remarked to Kyle, $$The competition is pretty strict about maintaining a $5050$ cost$$price ratio on their product lines. Why is it they can sell this product for $$60$ and we cannot match their cost structure?$$

Kyle believed that he had collected enough information to do some preliminary analysis. However, he wanted to consider