KNIGHTS ENGINES INC.

The government has recently invited submissions from the privatesector for the supply of one thousand V-16Z (Class A) automobileengines. Although these particular engines only have eightcylinders, they can easily duplicate the speed and performance of asixteen cylinder engine. Their compact size and durability makethem ideal for military operations and it is for this reason thatthe military has decided to incorporate them into their new line ofAll Terrain Vehicles (ATVs). For reasons that cannot be exposedwithout jeopardizing national security, the engines must bedelivered within 60 days.

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

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

Although the technical aspect of fitting these pistons into theengines presents no problems, the people in manufacturing arerather concerned about using a new type of piston from a companywith which Knight has no previous experience. They stated that onthe average, about 3 to 4% of the Class C pistons ordered in thepast (from other suppliers) contained various structural flaws thatrendered them unusable. There is no reason to believe that theClass A pistons should fare any differently. It is thereforeessential that Excalibur provide some sort of guarantee in order toensure that Knight does not have to pay for defective pistons. Evenwith such a guarantee, the inevitable delays for the delivery of areplacement could hinder Knight's ability to complete its enginesbefore the government deadline. In order to cushion against such aproblem, it might be advisable to order extra pistons. Ideally,Excalibur would agree to take back all unused pistons as part of aguarantee package.

You are Knight's Director of Purchasing and it is yourresponsibility to negotiate a contract with Excalibur for theirClass A pistons, the Series 2.1 Intensaflux pistons. Since theprice paid for the piston will raise the overall cost of the engineand therefore affect the bid submitted to the government, it isparamount that the lowest possible price be paid. In order tostrike a good deal, you must pay careful attention to the followingpoints:

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

1. There is rumor that Excalibur has been trying to get its footin the door with respect to government contracts. Many of yourcolleagues find it somewhat unreasonable that Excalibur should havea free ride on Knight's coattails by having their company namementioned 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 returnfor this advertising service. Still, you do not want to press thisissue too far because your company president has told you that itmight be in the interests of Knight to develop a good relationshipwith Excalibur's management since Knight may one day be in aposition to acquire this smaller company.
2. A competitor of Excalibur, Mordred Technologies Inc., hasstated emphatically that it would in no way be able to fulfill sucha rush order for a similar piston in 2 weeks’ time. However, theydid state that if Knight was willing to wait 4 weeks for shipment,they would gladly supply all the pistons required for $470 perpiston. Although a 4-week delivery date would certainly not allowenough time to meet the government deadline, Knight could use thesepistons to upgrade some engines in stock and await anothergovernment or private contract.

Questions:

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