MT436 Unit 7 Negotiation Plan Example

Target One and a Half, Walk Away Above Two and a Half: An MT436 Unit 7 Negotiation Plan for Engines

[Student Name]

Purdue University Global

MT436: Purchasing and Supply Chain Management

Unit 7 Negotiation Plan

[Instructor Name]

[Date]

Marsh Run Utility Vehicles, both engine suppliers and every figure are composite; the values of non-price terms are estimates, and the sources cited are real.

The Situation

Marsh Run buys about $15.88 million a year of engines from its main supplier, which powers about 74 percent of its vehicles; a second brand powers the other 26 percent. The main supplier has asked for a 4.5 percent price increase, about $714,600 a year, citing higher casting and labor costs. Engines are the one strategic category in the Unit 2 spend analysis: high impact and high supply risk, with only two qualified makers. That makes the negotiation important and the relationship worth protecting, but it also means Marsh Run has an alternative it can price.

The Two Sides' Interests

Marsh Run's interests are to limit the increase, keep supply secure through the spring peak, protect the engine warranty its customers rely on and keep flexibility as emissions rules change.

The supplier's likely interests are to recover genuine cost increases, protect its share of Marsh Run's volume against the rival brand, gain predictable orders for its own planning and be paid promptly. Fisher et al. (2011) recommend negotiating over interests rather than positions, and the gap between the supplier's stated position, 4.5 percent, and its likely interests is where the plan finds room.

The Alternative, Priced

If agreement fails, Marsh Run's best alternative is to move more vehicles to the second engine brand. Raising its share from 26 to 45 percent of vehicles means about 551 more engines a year from the second brand. That move has three costs and one saving.

It needs about $212,000 of engine mounting kits, harness adapters and dealer service training. Some customers prefer the main brand, and the sales team estimates about 38 lost vehicle sales in the first year, worth about $270,864 in contribution at $7,128 a vehicle. The second brand has offered a 2 percent discount on the added volume, about $81,548 on roughly $4.08 million of engines.

The year-one cost of the alternative is therefore about $401,316, about 2.53 percent of current engine spend. Any increase above that is worse than walking away; any increase below it is better.

The supplier's 4.5 percent ask is about $313,000 a year more than what Marsh Run's own alternative costs.

The Bargaining Range

The walk-away point is set at 2.5 percent, just under the alternative's cost, about $397,000 a year. The target is 1.5 percent, about $238,200, a figure the supplier's own published cost increases would support: castings and labor are about a third of an engine's cost, and the supplier's stated increases in those items would justify roughly that much. Marsh Run will open at 0.5 percent with a commodity index clause, leaving room to move.

Lax and Sebenius (1986) describe the zone between each side's walk-away points as the space where any agreement must fall; the supplier's walk-away is unknown, but losing 19 percent of Marsh Run's volume to its rival would cost it far more than the difference between 1.5 and 4.5 percent.

Seven Terms Beyond Price

The issues table lists seven terms, each valued to Marsh Run and estimated for the supplier.

Payment terms: moving from net 45 to net 30 would cost Marsh Run about $52,200 a year in interest at 8 percent, and would be worth about the same or more to the supplier's cash flow.

Volume commitment: guaranteeing at least 70 percent of engines for two years costs Marsh Run some flexibility but is worth a great deal to the supplier's planning.

Consignment stock: having the supplier hold engines at the plant until used would free about $600,000 of inventory, worth about $120,000 a year to Marsh Run, at a lower cost to the supplier, which finances inventory more cheaply.

Warranty: extending engine warranty from two years to three would save Marsh Run about $95,000 a year in claims it now absorbs.

Engineering support: dedicated help with the next emissions change would save Marsh Run about $60,000 of engineering time.

A commodity index clause: tying part of the price to published metal and labor indexes, up and down, would address the supplier's stated reason for the increase without a permanent step.

Allocation priority: a commitment to supply Marsh Run's full schedule during industry shortages.

The Concession Sequence

Concessions are planned in steps, each traded for something. Marsh Run opens at 0.5 percent with the index clause. If the supplier holds firm, Marsh Run offers the volume commitment in exchange for consignment stock and moves to 1.0 percent. Next, it offers faster payment in exchange for the warranty extension, moving to 1.5 percent. Only if the supplier offers allocation priority and engineering support does Marsh Run consider 2.0 percent. It does not go above 2.5 percent. Thompson (2020) notes that negotiators who make smaller and less frequent concessions tend to reach better outcomes, and each step here is smaller than the last.

Judging an Offer

The best deal for Marsh Run will not necessarily carry the smallest percentage. If Marsh Run agrees to 1.5 percent with consignment stock and a three-year warranty, its net position is better than a 1.0 percent increase with none of those terms: the consignment stock alone is worth about $120,000 a year and the warranty about $95,000, together more than the difference between the two prices, which is about $79,400 a year. The plan therefore judges any offer on its total value to Marsh Run, using the issues table, not on the price line alone. The supplier, for its part, gains a commitment of at least 70 percent of volume and faster payment, both worth more to it than a percentage point of price. An agreement that leaves both sides better off than their alternatives is more likely to hold through the next shortage.

Risks

The supplier may call the threat to shift volume a bluff, since the switch carries real costs. The plan therefore prepares the switch in parallel, ordering a pilot batch of mounting kits, so the alternative is credible. The relationship matters beyond this contract, and the plan avoids ultimatums.

Summary

Marsh Run should aim for a 1.5 percent increase with a commodity index clause, consignment stock and a warranty extension, and should not accept more than 2.5 percent. Monczka et al. (2021) emphasize that the strongest preparation for a supplier negotiation is a priced alternative and a list of tradeable terms, which this plan provides.

References

Fisher, R., Ury, W., & Patton, B. (2011). Getting to yes: Negotiating agreement without giving in (3rd ed.). Penguin Books.

Lax, D. A., & Sebenius, J. K. (1986). The manager as negotiator: Bargaining for cooperation and competitive gain. Free Press.

Monczka, R. M., Handfield, R. B., Giunipero, L. C., & Patterson, J. L. (2021). Purchasing and supply chain management (7th ed.). Cengage Learning.

Thompson, L. L. (2020). The mind and heart of the negotiator (7th ed.). Pearson.