Question

KNIGHTS ENGINES INC.

The government has recently invited submissions from the private sector for the supply of one thousand V-16Z (Class A) automobile engines. Although these particular engines only have eight cylinders, they can easily duplicate the speed and performance of a sixteen cylinder engine. Their compact size and durability make them ideal for military operations and it is for this reason that the military has decided to incorporate them into their new line of All Terrain Vehicles (ATVs). For reasons that cannot be exposed without jeopardizing national security, the engines must be delivered within 60 days.

Knight Engines Inc. has been involved in the manufacture of a wide variety of engines for nearly five years. Although Knight has managed to turn a healthy profit every year, sales for its V-16Z engines have been lagging somewhat. It is for this reason that Knight is quite excited by the government's request for V-16Z engines. Knight has dealt with the government before and their established reputation would certainly be a bonus in their favor if another company were to submit an equally low bid. There is, however, one problem: Although Knight does have the capacity to build one thousand V-16Z automobile engines, they do not have the pistons required to make the Class A engines. Their regular piston supplier only manufactures inferior Class C pistons, which would be unacceptable to the government. Since one thousand engines are to be produced, eight thousand Class A pistons are required. If the Class A pistons could be acquired within two weeks, the two-month government deadline could be met.

Knight made inquiries at several companies and only one showed any interest in supplying Knight with all the Class A pistons that it needs on such short notice. The Excalibur Engine Parts Company stated that it would be possible to process such a rush order but that it would do so only on two conditions: First, that the chassis of any engine constructed with their pistons clearly states that it is fitted with Excalibur brand pistons. Second, that a 5% mark-up be applied due to the extra costs of processing such an order on short notice.

Although the technical aspect of fitting these pistons into the engines presents no problems, the people in manufacturing are rather concerned about using a new type of piston from a company with which Knight has no previous experience. They stated that on the average, about 3 to 4% of the Class C pistons ordered in the past (from other suppliers) contained various structural flaws that rendered them unusable. There is no reason to believe that the Class A pistons should fare any differently. It is therefore essential that Excalibur provide some sort of guarantee in order to ensure that Knight does not have to pay for defective pistons. Even with such a guarantee, the inevitable delays for the delivery of a replacement could hinder Knight's ability to complete its engines before the government deadline. In order to cushion against such a problem, it might be advisable to order extra pistons. Ideally, Excalibur would agree to take back all unused pistons as part of a guarantee package.

You are Knight's Director of Purchasing and it is your responsibility to negotiate a contract with Excalibur for their Class A pistons, the Series 2.1 Intensaflux pistons. Since the price paid for the piston will raise the overall cost of the engine and therefore affect the bid submitted to the government, it is paramount that the lowest possible price be paid. In order to strike a good deal, you must pay careful attention to the following points:

1. You have never before purchased Class A pistons. Your knowledge of the market for other pistons (for instance, the Class C pistons sell for $250 each) suggests that they should sell for about $500 per piston. The absolute maximum that could be paid per piston and still enable the submission of a competitive bid would be $600 per piston.

2. There is rumor that Excalibur has been trying to get its foot in the door with respect to government contracts. Many of your colleagues find it somewhat unreasonable that Excalibur should have a free ride on Knight's coattails by having their company name mentioned on all the Knight engines fitted with Excalibur pistons, especially when you consider that they are charging a 5% “rush” fee. Perhaps Excalibur should deduct 5% from their price in return for this advertising service. Still, you do not want to press this issue too far because your company president has told you that it might be in the interests of Knight to develop a good relationship with Excalibur's management since Knight may one day be in a position to acquire this smaller company.
3. A competitor of Excalibur, Mordred Technologies Inc., has stated emphatically that it would in no way be able to fulfill such a rush order for a similar piston in 2 weeks’ time. However, they did state that if Knight was willing to wait 4 weeks for shipment, they would gladly supply all the pistons required for $470 per piston. Although a 4-week delivery date would certainly not allow enough time to meet the government deadline, Knight could use these pistons to upgrade some engines in stock and await another government or private contract.

Questions:

1. How would you prepare for this negotiation?
2. Which items (price, speed of delivery, guarantees, long-term relationship) do you consider the most important?
3. What is the highest price you would consider (your walk-away price)?

Answer 1

How would you prepare for this negotiation?

Answer:

Knight Engines Inc. will communicate with the sales manager and the president of Excalibur regarding its concern for several things which include:

1. Knight Engines Inc will define the quality standards of Class A piston as per the internationally set standards and would ask Excalibur to comply with these standards and provide the products accordingly.

2. Knight Engines Inc will ask for the data related to the statistics of number of defective products being produced for every particular batch of production of class A piston.

3. Knight Engines Inc will ask about the guarantee being provided by the Excalibur for the defective pistons and its return policies. Knight Engines Inc will be asking about the production and supply of excess numbers of class A piston so that in case of getting the number of defective pistons, Knight Engines Inc’s production of the engine will not get effected.

4. Excalibur will be asked to provide the class A piston at the prevailing market rate and charge the reasonable rush price as Knight Engines Inc is marketing the product of Excalibur by putting its name on the engines which are required for fulfilling a major order of government and this would help Excalibur to acquire some orders in future and it will help in building brand reputation of Excalibur.

5. Knight Engines Inc will ask Excalibur to charge the reasonable price for Class A piston as it will lead to the development of long term future relationship between the two companies and will help Excalibur for getting the continued orders of Knight Engines Inc in future.

Which items (price, speed of delivery, guarantees, long-term relationship) do you consider the most important?

Answer:

Price, speed of delivery and guarantee will be considered to be the most important parameters while dealing with Excalibur. If the quality and the price of the Class A piston of Excalibur will be appropriate then and then only a long term relationship could be valuable between Knight Engines Inc and Excalibur. However, at the moment, maintaining a long term relationship is not a priority of Knight Engines Inc. At present. Knight Engines Inc’s priority is to get Class A piston as early as possible with the guaranteed product (less number of defective products) at the suitable price of not greater than $600 per piston so that Knight Engines Inc can fulfil its order of the government for the engines.

What is the highest price you would consider (your walk-away price)?

Answer:

The highest price that could be considered to be paid to Excalibur would be $600 per piston of Class A. At this price, the company will be able to submit a competitive bid to the government. Any price higher than this would be non profitable and the company may incur loss in the order received from the government.