Strategy Paper - Purchase Negotiation Case
Purchase Negotiation Case: Supplier’s Package (Medusa Corp.)
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 automotive fabrics. These include the following:
? There are four potential purchasers of textile fabrics. 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 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 the product 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.
? Individual cost structures of the firms providing the automotive fabric can vary significantly.
? Suppliers provide widely different levels of service and technical support.
? 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.
Supplier Specific Information - Medusa Corporation
? Medusa Corporation (your firm) is a small, family-owned producer of luxury automotive fabrics to the automotive industries. Founded by a former DaimlerChrysler manufacturing engineer, Medusa sells primarily to the automotive industry, and has hired a number of engineers from the Big Three.
? Medusa’s primary advantage in the past has been its technical expertise. It’s technical staff have developed a patented process for cutting and forming performance textile fabrics. However, the company has recognized that delivery problems have surfaced in the past, due to the lack of a formal manufacturing and capacity planning system. As with many smaller enterprises, the company has taken on substantial debt , in order to expand facilities, increase hiring, and upgrade software systems. Financial planners have determined that all new business must include a 15% profit margin to effectively serve this debt. It is therefore very important to obtain new business for 2001 through 2003 which meets these objectives. Currently, you have enough capacity for 175,500 additional yards per year, pending additional capacity expansion next year.
? Duke 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 $1,282,000 in sales annually. Your initial quoted price was $1.41 / yard with total designing costs of $20,000.
? You are aware that your prices are comparable to your competitors. However, Medusa’s reputation for quality, delivery, and technical support are well known in the industry. You have provided similar quotes to the other three companies as well.
? Cost data for the manufacture of the Duke textile order is presented below:
Direct material $ 5.40
Direct labor 2.00
(120% of direct labor $)
Variable overhead 0.60
Fixed overhead 1.80
Sales, general, and administrative
expenses (9% of selling price) 1.12
Profit (13% of selling price) 1.70
Selling price $ 12.62
? You know that product quality and cost are extremely important to Duke. Furthermore, you perceive that Duke intends to do business with fewer suppliers than in the past, and is seeking to expand its business with DaimlerChrysler Corp. (its major customer) in the future.
? If you don’t get this order, there is the potential that you will be locked out of future business with Duke, who is seeking to co-develop a number of new model platforms with DaimlerChrysler.
? You know the buyer has to place the business almost immediately to meet plant requirements.
? Your firm’s management wants you to get this contract to support growth and increase market share.
? To obtain the order, you must reach agreement within 1 hour.
Seller Negotiation Questions
1. Develop a negotiation strategy and plan
· What common ground do both Medusa and Duke have to negotiate on?
· What is the lowest price per year that you will take?