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Purchase Negotiation Case:  Buyer Package (King Corp

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Purchase Negotiation Case:  Buyer Package (King 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:

n There are four potential manufacturers of textile products.  These include the following:

n Athena Corp. - Annual sales of approx. $ 40 million dollars, located in Bowling Green, Kentucky..

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

n Medusa Corp. - Annual sales of approx. $ 20 million dollars, located in Columbus, OH.

n Orion Corp. - Annual sales of approx. $ 35 million dollars, located in Grand Rapids, MI.

n 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:

n 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.

n Queen Corporation, located in Knoxville, TN,  requires 250,000 yards of the fabric for 2001, but volumes for 2002 and 2003 are uncertain.

n 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.

n Duchess Corporation, located in Lansing, MI,  requires 200,000 yards of the product, and volumes are expected to decrease somewhat in 2002 and 2003.

n Prices for similar fabrics are in the $12.00 to $15.50 price range per yard.

n All identified suppliers are able to produce to specifications provided by the purchasing company.  However, quality performance related to the product can vary greatly.

n Individual cost structures of the firms providing the fabrics can vary significantly.

n Suppliers provide widely different levels of service and technical support.

n All suppliers have to satisfy the same quality and delivery terms, payment terms, and transportation (FOB seller's plant).

n Industry capacity utilization is about 75 percent.

n 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 online negotiation session.

Group size will not exceed 2-3 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 to the 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.

 

Buyer Specific Information - King Corporation

 

n    You are the buyer of fabrics at King Corporation for all corporate divisions and are responsible for supply base optimization. Recently, the focus of this effort has been on reducing the size of the supply base.

      

n    You have received a purchase requisition for a new luxury fabric. Estimated annual requirements for 2001 is 150,000 yards, with a possible doubling or tripling of requirements in 2002 and 2003.

      

n    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.

      

n    There are several acceptable suppliers for the product in the Mid-West and Southeast. However, since your plant is located in Greenville, SC, you have initiated discussions with the closest supplier, Cybaris Corp., located in Charlotte, NC.

      

n 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 King Corporation estimated cost (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 $)

     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/yard

n    Quality, delivery to schedule, and service are critical to King Corporation. Moreover, because you deliver JIT to the new BMW plant, you are required to maintain QS 9000 certification and tightly control supplier quality and delivery.

n    Cost pressures are increasing, and you have been informed that you cannot miss the product introduction date in six months. This has tightened the schedule required to source the fabrics.

n Transportation terms offered by all suppliers are FOB seller’s plant, freight collect.

n    All suppliers have adequate available capacity currently. However, future capacity requirements may fill up quickly, meaning that they may need to expand production in the future, and will require a solid balance sheet to be able to do so.

      

n 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.

n    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.

n    Cybaris has the best delivery cycle time, due to their integrated information system which directly links customers to their MRP planning and scheduling system. Athena, however, has indicated their willingness to provide a dedicated salesperson to serve your needs.

n    You and your team believe that Cybaris can support your needs but do want to negotiate a better contract. You have therefore asked the Cybaris team to meet and further discuss their quotation.

n    Prior to the meeting, your boss told you that a decision had to be reached today. You also have an important appointment in 1 hour with the division vice president that you found out about earlier today. He will be expecting a decision.

Buyer Assignment:

1.    Develop a negotiation strategy and plan.

2.    What “common ground” do both King Corp. and Cybaris have to negotiate?

3.    What is the lowest price you believe you can get, i.e. what you consider to be an “excellent” bargain?

4.    What is the highest price per year that you will pay?