QUESTION 1

You are Purchasing Manager for ‘Get Going’, a new organisation promoting sport and activity, nationally. Most of your funding comes the novel LottoBingo smart card your organisation launched last year. The LottoBingo project was a great success, nearly eight million units were sold, at €1 each in the first six months. The card uses novel chip based technology that displays the bingo numbers on the player’s smartphone. The technology was developed by researchers at the Institute of Technology, Carlow, it is understood that the development cost was €225,000. The cards themselves are manufactured by TrickTeck Ltd., in Kilkenny.

The initial order was for ten million units. It is now time to place an order for another ten million units to cover requirements over the coming months. The price agreed for the first order with TrickTeck was €330 per 1000 cards. Cost information is as follows :

(i) charged on the basis of labour cost

(ii) re :€225,000 fee paid to ITC

(iii) based on a mark-up of 50% You have had an initial discussion with TrickTeck, who confirm that there will be no increase in the price of €330 per thousand units. You feel, however that a better price might be negotiated.

From your research you know that the learning rate in the industry is 90%, and that raw material commodity prices are stable. You are aware also, that the cost of the chip technology, which is half of the material cost, has come down by 20%.

You are required to prepare a report supported by a critical evaluation of the possibility for a better deal supported with relevant workings for a meeting with TrickTech which is planned for next week. Your organisation will be represented at the meeting by the Operations Manager (Des Foley) and yourself. The report should detail the key facts, and outline the agenda and strategy for the meeting with the supplier.

Section A.

The answer should be in report format, be dated, signed and addressed to Des Foley.

There is no need to restate the question, but key facts could be listed as follows: There is a learning curve of 90% in the industry, this should lead to higher productivity and a lower labour cost (21.60). As the production overhead is allocated on the basis of labour cost, this also should reduce. The design fee is fully recovered, as a ‘once-off’ cost this should not be charged again. These changes would bring the cost to € 192.7, and if a 50% mark-up were applied, then the price would be €289.05. There may be scope for squeezing the margin a bit, it is quite high, by any standard.

This being the case, the negotiators should prepare their agenda, setting out their objectives, being sensitive to the fact that the seller has good leverage (they have the technology and the design etc) Accordingly they should set a maximum price that they are willing to pay and a minimum, they might expect. The face to face meeting

should be planned – introductions, fact-finding, a strategy of questioning would be useful, before bargaining begins.