Question 1

Your friend and neighbour Conor Nolan, a retired chemist, concocted a solution last year that kills 100% of all known bacteria and viruses. This breakthrough was made in his garage / home laboratory, and he came to you to help find a commercial laboratory to make the solution under licence. You negotiated with a local chemical facility, Bell Labs, to make and package this product on his behalf. Conor’s timing was perfect and a surge of interest in this product has resulted in the stock being sold very quickly and the orders have doubled in the last 6 months. Conor is happy to supplement his pension, but has no interest in working full time again, so he has offered you the role of supply chain manager. It’s almost time to negotiate another contract with Bell Labs, you are confident that they are a capable and committed supplier and enjoy the idea of supporting local employment. However, Bell Labs have recently revealed that the main ingredient in the solution has increased in price by 10% and have suggested a price of €159.75 per batch of 100 units. The last order was priced at €147 per batch of 100 units. You have done your research and you know that the main ingredient price did indeed increase by 10% in the last few months, but you also know that a 90% learning curve applies to this industry. Coupled with the fact that you intend to double what was ordered last time you feel there is some room for negotiation. There are some costs that will be hard to move on such as the cleaning costs because Bell Lab make other products in the same production area for other customers, they need undertake a deep clean before production to be sure of your product being 100% effective. This particular circumstance has made you consider the idea of renting a production facility yourself and producing the solution there. You have spoken to the local enterprise board and there are grants available, help with regulatory affairs and investors ready so you could be up and running in 6 months. If all went to plan you could produce the solution for €142 per batch of 100.

Conor is going to join you when you negotiate with Bell Labs for this next contract, his experience within the industry is valuable but you need to brief him about the price movements for ingredients and about the options for producing in the rented facility. Your briefing should take the form of a report. The report should detail the key facts and outline the agenda and strategy for the meeting with the supplier. You should specify and justify your target price, and consideration should be given to your BATNA.

(i) charged on the basis of labour cost

(ii) Cleaning before production run

(iii) based on a margin of 33%