Buyer’s Information - Porto Gerald Stecklein, a buyer for Porto, is responsible
ID: 351814 • Letter: B
Question
Buyer’s Information - Porto
Gerald Stecklein, a buyer for Porto, is responsible for developing a negotiating plan and strategy for the purchase of a component (called New Prod) for a newly designed product. After evaluating the quotations submitted by potential suppliers, he has decided to pursue purchase negotiations with Technutronics.
New Prod was designed and developed by Porto engineers for a product currently under development. Prototypes of the component were produced by a small specialized firm without production volume capacity. Gerald knew the high tech industry had between five and eight potentially qualified suppliers who were familiar with the complex manufacturing process required to produce New Prod. Supplier capacity was available since the industry was just recovering from a period of underutilization.
Seven suppliers received a request for quotation. The RFQ included a 12-month delivery schedule for 200,000 units plus a possible follow-on order for up to 200,000 units. The quotes also included payment terms and shipping (F.O.B. point) information (Exhibit 1B)
Five of the seven suppliers receiving RFQ’s responded. (Exhibit 2B). Technutronics had the lowest quoted price at $5.90 per unit. Tyler Manufacturing was very close except for a high unit cost of transportation. Both companies were acceptable suppliers and Gerald decided to pursue negotiations with Technutronics. He is well aware that the lowest quoted price does not always mean the lowest total cost. For that reason, Gerald knows that issues besides price will have to be discussed with Technutronics. The requests for quotation were intended to reduce the list of suppliers before commencing negotiations.
Gerald requested a cost estimate for New Prod from his staff analyst to help him formulate his negotiating plan. The analysis (Exhibit 3B) provides a “should” cost of $4.10 per unit excluding tooling and transportation. This cost included learning curve effects. He believed that production times for this component should decrease as volumes increased due to learning. Based on discussions with internal engineers, Gerald estimated that production of this component should demonstrate an 85%-90% learning rate.* He was not sure, however, that this rate applied specifically to Porto since he has not visited the Technutronics facility.
Quality control measures were a vital concern for Gerald. All products were subject to strict quality guidelines and New Prod was no exception. Technutronics, Tyler Manufacturing, and Space Metals each have a record of solid performance ratings for quality and delivery.
With this information, Gerald now sat down and planned his negotiating strategy.
* This means that as production volumes double from a previous level, direct labor requirements should decrease 10-15% on average.
Exhibit 1B
Expected New Prod Delivery Schedule
Month Quantity
December 20,000
January 20,000
February 25,000
March 15,000
April 15,000
May 15,000
June 10,000
July 10,000
August 15,000
September 20,000
October 20,000
November 15,000
Total 200,000
Payment terms: Net 25
Transportation Terms: Sellers Plant, Freight Collect
Using Location: Detroit, Michigan
Exhibit 2B
Quotation Summary
Estimated Transportation
Supplier Unit Price Tooling Costs Cost Per Unit
Bauer Manufacturing No quote --------- --------
Metal Modes $6.10 $30,000 $0.08
Tyler Manufacturing $5.95 $40,000 $.016
Avicraft, Inc. No quote --------- --------
Technutronics $5.90 $40,000 $0.06
Aerobotics, Inc. $6.25 $45,000 $0.08
Space Metals $6.40 $50,000 $0.09
Exhibit 3B
Buyer’s “Should” Cost Estimate
(For 200,000 units)
Total Cost Unit Cost
Material:
0.3525 lbs./unit x $5.648/lb. $398,215 $1.991
Direct Engineering Labor:
1500 hours x $11.50/hr. $17,250 $0.0863
Engineering Overhead:
$17,250 x 120% $20,700 $.01035
Direct Manufacturing Labor:
3900 hours x $8.50/hr. $33,150 $0.1658
Manufacturing Overhead:
$33,150 x 250% $82,875 $0.4144
SUB TOTAL $552,190
General and Administrative Costs:
$552,190 x 35% $193,265 $0.9663
SUB TOTAL $745,455
Profit: $745,455 x 10% $74,545 $0.3727
TOTAL $820,000 $4.10
Estimated Tooling Charges: $25,000
In addition to specific requests by the instructor:
1. Given the unit price, tooling costs, and estimated transportation charges presented in Exhibit 2B calculate the cost per unit for each supplier (using 200,000 units). What are some possible reasons why two suppliers did not provide quotations to Porto?
2. Prepare to negotiate a contract with Technutronics. Identify the key issues and the range of your position on those issues. Remember that price is not the only variable subject to negotiation.
3. What do you think will be the most important issue(s) to the seller?
4. What do you believe is the lowest price that Technutronics is willing to accept? What is the highest price for New Prod you are willing to pay? (This defines your negotiating range on the price issue).
5. Conduct the negotiation with the seller. You may share as little or as much information with the seller during the negotiation as you desire. Be sure to record any agreement you reach in the form of a contract.
Explanation / Answer
Answer 1)
As per the above calculation, the total price per unit is 633, 631, 616, 6556 and 674 for metal modes, Tyler modes, Technutronics, Aerobotics and space metals respectively.
This is calculated as total cost divided by 200000.
Possible reason for two suppliers for not giving quotation can be that the manufacturing cost for the products can be higher and the final outcome is not profitable. And also the timeline for the work can be very tight and not achievable.
Answer 2)
Key issues are:
Supplier relationship – Since the relationship are changing from time to time and with less options to switch supplier, it is one of the main issues with the process. To have good final product, company needs to switch to one supplier and have a good relationship with them.
Risk – there is also risk when the supplier is based globally, with continuous switch of suppliers, there will be no trust building among them which can be a potential risk for the product.
Terms and condition – a pre written terms and condition should be in picture as a contract to litigate the future risk of fraudulence.
Lead Time – the longer the lead time inaccurate will be the future projection of profit. Hence company has to maintain the lead time.
Long term benefit and cost neutralization should be the sole goal for the company to gain profit in future.
Quality – above all the main aim for the company is product quality, with continuous change in supplier, this can be one issue that quality will reduce.
Answer 3)
Issues to the seller
Main issue with the seller comes when he/she is not able to get good deals for his product. He must have knowledge of buying the best deal for the product which will insure profits for the company.
Seller must have a legitimate contract for his selling for the business and he will be responsible for any fraudulence.
Answer 4)
Lowest price on which technutronics can accept the offer = 4.50
Higher price from buyer side for new product = 5.50
So the threshold for the product is 4.50-5.50. to maintain good relationship with sysco, technutronics should be willing to give the price to sysco which they can accept so that they can reach there breakeven point and also manage to get profit out of it by at least 10%.
Breakeven formula –
Total revenue = variable cost + fixed cost
616(x) = 5.90(x) + 40000
0.26(x) = 40000
X = 153846 units (Break-even point)
So maximum price to offer to get breakeven point will be 4.74 plus 10%
And maximum price to offer will be 4.74 plus 20% for profit.
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