Homework answers / question archive / A BALTIC SCARE   (Authorship withheld)   In the fall of 1999, a group of managers met in The Baltic region for the first of three negotiations involving four companies from three different countries and a family of products

A BALTIC SCARE   (Authorship withheld)   In the fall of 1999, a group of managers met in The Baltic region for the first of three negotiations involving four companies from three different countries and a family of products

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A BALTIC SCARE

 

(Authorship withheld)

 

In the fall of 1999, a group of managers met in The Baltic region for the first of three negotiations involving four companies from three different countries and a family of products. The situation was a common one: a buyer tells a supplier it wants prices reduced by 10 percent and, “Oh by the way, we’ll also be soliciting quotes from your major competitor.”

 

At the heart of the meetings was the buyer’s corporate agenda to cut costs. Cost-cutting is a common theme among large corporations. Even in good times, they have been known to pressure their vendors to lower prices and to play vendors off against each other. This case illustrates what actions a supplier might take in this situation. Other vendors who may find themselves in similar situations can take these actions as well.

 

BACKGROUND

 

FD is a Dutch manufacturer of filtration products. Rather than selling directly to end customers, throughout the 1970s and 1980s, FD sold oil filters and oil filter cartridges (replacements) to Swedish and Finnish heavy equipment manufacturers who, in turn, branded and sold the products to their own customers. In the late 1980s the The Baltic regionmarket for oil filters began to change. The Finnish government consolidated many of the region’s heavy equipment manufacturers into one company, Rhonquit. About the same time, FF, a Finnish competitor of FD, began supplying filters to Rhonquit

that were similar to those supplied by FD. Because the Finnish government had a stake in both FF and Rhonquit, FF was able to gain market share quickly. As a result, entire divisions of Rhonquit began replacing FD as their supplier of filters in favor of FF. By the late 1990s, only RhonquitTruck, a Swedish division of Rhonquit, remained as a dedicated customer of FD filters in the region. FD was determined to keep Rhonquit Truck as a customer.

 

In the mid-1990s FD had introduced a new filter cartridge design called LEIF (Low Environmental Impact Filter). FD had hoped that the LEIF products would block further FF inroads into the market for oil filters. The patented LEIF product family, which included LEIF filter housings and LEIF replacement cartridges, was designed to fill increasing demand for environmentally friendly products and to tackle the problem of imitators such as FF. LEIF’s new technology meant that LEIF cartridges were cheaper to produce than the old filters, and so could be offered at a lower price. In the environmentally conscious The Baltic regionn market, LEIF was the product of choice.

 

Rhonquit Truck started purchasing LEIF replacement cartridges from FD and prepared to begin purchasing LEIF filter housings as well. But before LEIF could be widely adopted and marketed, Rhonquit Corporate launched an initiative aimed at reducing supplier costs within its divisions. In 1999, Rhonquit Corporate sent FD a list and asked FD to quote its best prices for these filters. This RFQ (request for quote) seemed like an ultimatum. If FD did not quote competitive prices, Rhonquit might force its RhonquitTruck division to stop buying from FD. FD had been aware of Rhonquit’s supplier cost initiative, but the RFQ came rather earlier than FD had hoped, as even within RhonquitTruck LEIF still had not been widely adopted.

 

THE NEGOTIATIONS

 

Harry Sumner, the FD marketing and sales director, studied the product list in the RFQ and proposed a meeting in Finland to discuss this request. This meeting turned out to be the first in this case’s series of three meetings and negotiations.

 

Meeting 1: Information Exchange and Relationship Building

FD’s goals for the first meeting were to develop a relationship with the Rhonquit representatives and, in the process, find out about Rhonquit’s objectives, positions, and interests. Developing personal rapport and trust with Rhonquit’s corporate office would be extremely important in any future negotiations. FD attended the meeting along with CHILLTECH, its Swedish distributor.

 

The discussion helped reveal Rhonquit’s goal: reducing prices on all filtration products supplied by FD and FF over the next three years. At the meeting, Rhonquit offered to retain FD as a companywide, primary supplier if FD could meet its price demands. However, Sumner was suspicious of this offer because of the close relationship between Rhonquit and FF. He thought that it would be difficult to hold Rhonquit to its promise. Moreover, many of FD’s high-volume products were conspicuously missing from Rhonquit’s RFQ. Sumner concluded that Rhonquit just wanted quotes from FD on products that competed directly with FF products, no doubt for the purpose of reducing FF’s prices.

 

Despite his suspicions, Sumner promised to prepare a quotation based on the information given, and a second meeting was scheduled for later that fall to discuss and negotiate pricing options. In a side discussion after the first meeting, FD and CHILLTECH came to the conclusion that Rhonquit was trying to replace FD with FF throughout the company. It was a tough situation: unless FD was able to meet Rhonquit’s demands and convince them to keep FD as a supplier, FD risked losing all of its business with this major Finnish customer.

 

Meeting 2: The Negotiation

Before the second meeting Sumner assessed the situation. There were three main issues to discuss: pricing; product type; and volume of sales to Rhonquit, including to how many and which of Rhonquit’s divisions FD could sell its LEIF product range. FD and CHILLTECH’s highest priorities were to maintain positive margins and a long-term sales relationship with Rhonquit. FD also had some sense that Rhonquit was interested in sales in the high-margin aftermarket (the market for filter replacement cartridges) and to ensure low procurement costs from FD. Rhonquit’s interest in scope of sales (number of products), however, was not as clear.

 

FD walked into the negotiation with a poor BATNA: no agreement meant FD risked losing all its Rhonquit business to FF. FD was aware of this poor BATNA, but did not want to make concessions too easily and look weak. Meanwhile, Rhonquit seemed to have a strong BATNA: the company could easily switch to FF filters. However, if Sumner could convince Rhonquit of the value of LEIF’s innovative technology, Rhonquit’s BATNA would weaken: it would have no supplier of a product that would be equivalent to the patented LEIF product.

 

Both FD and CHILLTECH enjoyed sizeable margins on filter sales to Rhonquit Truck. They knew they could meet Rhonquit’s 10 percent price cut demand over three years and still enjoy healthy margins.

 

The negotiation began with an almost exclusive focus on the price. The sides haggled over Sumner’s prices on items in Rhonquit’s RFQ. As a result of this focus on one issue, negotiations proved to be difficult. Sumner did offer a series of different proposals that incorporated different levels of pricing, different product lines, and so on, but Rhonquitrejected all these proposals, insisting on a 10 percent discount across all products. Rhonquit would not discuss any other issues without an agreement first on price.

 

It seemed like an impasse until Sumner began to focus on Rhonquit’s aftermarket sales. He guessed that Rhonquitmight be willing to accept smaller price cuts if it could increase aftermarket sales. Unknown to Sumner at the time, in the aftermarket for FF replacement cartridges, Rhonquitwas losing market share to its competitors. Sumnerexplained that LEIF’s patents would ensure a strong position for Rhonquit in the aftermarket. (Customers with LEIF filters would demand LEIF replacement filters manufactured by FD, which only Rhonquit could supply.) This meeting ended with Rhonquit agreeing to commit Rhonquit Truck to LEIF products at prices reduced by 7 to 9 percent (depending on the product) over three years. Rhonquit also promised to seriously consider FD as a supplier for its other divisions.

 

Meeting 3: Post-Agreement Negotiations

Several days after the agreement resulting from meeting 2, Sumner received a phone call from Rhonquit Corporate indicating that the pricing was not acceptable after all. Rhonquit Corporate wanted to renegotiate prices before signing the final agreement. Sumner made clear that he was not coming to Finland or Sweden again to renegotiate a deal in which all parties had already come to a verbal agreement. He invited them to Holland if they wanted to renegotiate.

 

Ultimately a meeting was set up between RhonquitCorporate and CHILLTECH in Sweden. This final negotiation resulted in an extra price decrease that would be shouldered by CHILLTECH (not FD) and a promise to give CHILLTECH more business at another Rhonquit division in Sweden where business had been lost previously.

 

DISCUSSION QUESTIONS

 

1.?Why did Rhonquit send an RFQ with a 10 percent price-reduction requirement rather than calling Sumnerin for a negotiation? Is there any downside to having run the negotiation this way?

2.?At the first negotiation meeting, Rhonquit made a threat disguised within an offer. The offer was to retain FD as a companywide, primary supplier if FD could meet its price demands.

?A.?What was the threat embedded in this offer?

B.?Why was this offer not credible to Sumner?

3.?If FD could have reduced prices by the 10 percent requested by Rhonquit and still have a positive and reasonable margin, why negotiate? Why not just reduce the price to save the business?

4.?How did Harry Sumner improve his bargaining position at meeting 2? What general negotiation principle did he employ? How well did it work?