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Buyer's Information - Edge

David Hayter, a buyer for Edge, is responsible for developing a negotiating plan and strategy for the purchase of a component (called Widget Z) for a newly designed product.After evaluating the quotations submitted by potential suppliers, he has decided to pursue purchase negotiations with Electrozad.

Widget Z was designed and developed by Edge engineers for a product currently under development.Prototypes of the component were produced by a small specialized firm without production volume capacity.David knew the high tech industry had between five and eight potentially qualified suppliers who were familiar with the complex manufacturing process required to produce Widget Z.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).Electrozad had the lowest quoted price at $5.90 per unit.Denomme Inc was very close except for a high unit cost of transportation.Both companies were acceptable suppliers and David decided to pursuenegotiations with Electrozad.He is well aware that the lowest quoted price does not always mean the lowest total cost.For that reason, David knows that issues besides price will have to be discussed with Electrozad.The requests for quotation were intended to reduce the list of suppliers before commencing negotiations.

David requested a cost estimate for Widget Z 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, David estimated that production of this component should demonstrate a 85%-90% learning rate.*He was not sure, however,that this rate applied specifically to Edge since he has not visited the Electrozad facility.

Quality control measures were a vital concern for David.All products were subject to strict quality guidelines and Widget Z was no exception.Electrozad, Denomme Inc, and Regier Fabricators each have a record of solid performance ratings for quality and delivery.

With this information, David now sat down and planned his negotiating strategy.

* This means that as production volumes double from a previous level, direct labor requirements should decreases 10-15% on average.

Exhibit 1B

Expected Widget Z Delivery Schedule

MonthQuantity

December20,000

January20,000

February25,000

March15,000

April15,000

May15,000

June10,000

July10,000

August15,000

September20,000

October20,000

November15,000

Total200,000

Payment terms: Net 25

Transportation Terms: Sellers Plant, Freight Collect

Using Location: London, Ontario

Exhibit 2B

Quotation Summary

Estimated Transportation

SupplierUnit PriceTooling CostsCost Per Unit

ABC ManufacturingNo quote-----------------

Lucan Manufacturing$6.10$30,000$0.08

Denomme Inc.$5.95$40,000$.016

Fanshawe Corp.No quote-----------------

Electrozad$5.90$40,000$0.06

Dashwood Industries.$6.25$45,000$0.08

Regier Fabricators$6.40$50,000$0.09

Exhibit 3B

Buyer's "Should" Cost Estimate

(For 200,000 units)

Total CostUnit 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

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