Case Study

Budgeted Price Negotiations

C.S. Balan, Purchase Executive at Ganga Washing Machine Co. faced a negotiation problem.
Ganga needed major tub-assembly and reliability were important factors. But so were rock
bottom costs. Not a paisa could be wasted.

A cost programme for vendors was developed by the Engineering Department. Balan was
directed to follow the said programme and the costs worked out. The break-up for cost per unit
was as given below:

Estimated Vendor Costs:

Material Rs. 400

Labour Rs.600

Overhead and Profit Rs.600

___________

Rs.1, 600

Balan first asked himself, ”What if we make our own assemblies?” But he discarded this when
he found out that Ganga’s tooling costs will be twice those of outside suppliers.

Meanwhile, the sales department was flowing with enthusiasm; hoping Balan would come
through, Sales Targets: (Units)

1st year 50,000

2nd year 1, 50,000

3rd year 3, 00,000

4th and 5th year 2, 00,000

Balan figured that the sales projections were impressive enough to make the tub contract very
attractive. He invited three old suppliers to review the specifications and submit informal
proposals for 50,000 units.

Jain of ABC Co. presented setback No. 1. He said that his Co. could not go lower that 1800.He
stated that packing costs were higher than Balan’s figures. If a three year contract for 50,000
units was given, Jain thought he could spread tooling costs and get the price down to Rs. 1,680.
Niranjan of Gujrat Co. Ahmadabad was disappointment No. 2. He offered 100 per cent return
policy on rejects and quoted Rs.1, 960. Niranjan said that anything cheaper would just be junk
and Balan would not dare put it on the market.

Gautam of RKT. Co., Rohtak would not quote at all. Gautam told Balan that he thought that the
Engineering Department was pulling his leg. Gautam suggested that Balan and RKT’s sales
manager sit together to review the cost figures.

Balan told the three salesmen (Jain, Niranjan and Gautam) that he would think over their
proposals and get in touch with them soon. Then he wrote his report and sent it to managing
director. The managing director reiterated the fact that if they could not get the tub at RS.1, 600,
then the new machine would be dead. He felt that the suppliers were pretty short sighted and we
should teach them a lesson. In any event, Ganga Washing Machine Co. needed the tub at RS.
1,600 so that they can push their machines for a neo-middle-income group class in India.

Questions

1. What factors must Balan consider now?

2. Comment on the policy of the Managing Director of Ganga Washing Machine Co.
3. How should Balan prepare for negotiations?

Note: The students should benefit from this case study more if they read about negotiating skills.