Case 11-1: Deere Cost Management from Purchasing and Supply Management 1. What d

Question

Case 11-1: Deere Cost Management from Purchasing and Supply Management

1.   What do you think is a fair price to pay Saunders for the gatherer chain?

2.   Do you think Wayne Saunders would be prepared to negotiate pricing? What would you say to him?

3.      Do we have enough information to estimate Saunders’ costs? What other data do you want and where would you get it?

4.   What is an acceptable profit margin for Saunders for the gatherer chain?

5.      Why not just develop a new supplier rather than negotiate with Saunders?

318 Purchasing and Supply Management Case 11-1 Deere Cost Management Jim learned that the gatherer chain was purchased t anage- On Wednesday, February 18. Jim Elsey, cost m ment specialist at Deere & Company in Moline, Illinois received a call from Glen Lowery, sales manager in the Decatur, Illinois. Saunders was a family-owned bu Saunders Manufacturing (Saunders), a suppl run by Wayne Saunders, the son of the er. Saunders had a long-term relationship with Deere Wayne had a reputation as a tough, successful busi man who had grown the company to the point whcre ow employed approximately 300 people. Agricultaral Products Division: Jim, I need you to look imo our costs on the gatherer chain Oar margins have really shrunk and we need to do to me and let me Reviewing the sales margin for the gatherer Jim could see why Glen was concerned. Over d three years, the sales revenue and margin had heen de something about this problem. Get back know what you think THE GATHERER CHAIN Deere & Company (Deere) manufactured and distributed a ing steadily (see ExhibitI). The badgeted selling price for the current year was based on the need to match the set by a major competitor. prce ine of agriculture equipment as well as a broad range construction, turf, and forestry equipment. Additional supporting businesses were Financial Services, Power of Systems, Parts Services, and the Intelligent Solutions FINANCIAL ANALYSIS Group. The compuny had annual sales of S3S billion withJim arranged a meeting the following day with Susa operations in more than 160 countries. Tessier, from purchasing, and Jose da Costa, from ucts Division was a conveyor system. Materials placedgDuring the meeting. Jim laid a gatherer chain oe the conference room table and asked Jose to estimate the raw A popular product sold by the Agricultural Prod. on the front end of the conveyor sat on the gatherer material content. After a little bit of work, Jose estimated chain, which carried the material to the opposite end The gatherer chain was joined together in links, fas tened by pins, and included small hooks that helped to that the product consistied of approximately 11.6 pounds of steel and 46 pins that joined the links. He also expected thut Saunders would have approximately a 20 percent scrap rat It sat on rollers that required regular for stel only, as part of their normal production cost. Jkove lubrication to keep the conveyor system in good work-also commented that Saunders could use general-purpose ing condition. equipment for the manufacturing and assembly process The Agricultural Products Division had prodaced the conveyor system for several years, with only slight modifications in its design. As standard practice for each product, Deere sold replacement parts, including gatherer chains, through its dealer network. It was the intention of management to ensure that its aftermarket products were price competitive. As a result, the sales department regu- larly benchmarked pricing for its products Susan then pulled out her material cost file and made We just fimished negotiations with our steel suppliers and expect to pay approximately $28.00 per hundredweight for this type of material. I am also buying the same pits for a couplc of our divisions, and I figure Saunders is paying about 3.5c. Don't forget that for this part we pay EXHIBIT 1 Profitability Analysis for Gathered Chain Two Years Ago Current Year Budget $ 30.00 S 2412 80% Last year Aftermarket price Purchase cost Cost-price ratio Unit sales S 40.00 21.25 53% 475,000 5 36.25 S 22.61 62% 410,000

Explanation / Answer

THE FAIR PIRCE WOULD BE ONE that allows both the parties to have an ample profit.saunder does not want to loose Deere as a client.deere would like to obtain a target price of $15 which would result in a 50-50 cost to price ratio. Thus a fair price would be $20.10 (67%*30) that could be sufficient for both the parties. Wayne Saunders would be ready to negotiate with its biggest client. Transparency is required on part of both the sides. In order for both companies to succeed, they should communicate their cost structures.deere should help squander buy cheaper supply of raw materials and increase productivity by reducing the scrap rate. No there is not enough info to estimate squander’s cost. We have $5.51 material per unit and $13.12 material cost per unit. Find more exact cost of material saunder is purchasing. Without knowing cost breakdown finding cost saving opportunities is difficult. Saunder is most reliable place for getting accurate information .other sources can be competitors in the industry and saunder’s suppliers Estimated cost price ratio is $13.12/$24.12=54%.profit margin of 46%.it is reasonable to negotiate the cost price ratio to (54+80)%/2=67% Saunder was a good supplier in terms of delivering quality and maintaining relationship, only the price has been an issue. The main issue lies in the market demand and not in the purchase cost; we can introduce cost cutting techniques to saunder in order to lower Deere’s cost. Thus we do not want to risk of sacrificing quality and relationship with saunder.

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