CASE SUMMARY

Aug 2015- Pricing Dispute Arose between managers of some of the divisions of Zumwald AG. Mr.
Rolf (MD) had to decide whether to intervene or not

About Zumwald Company

 Headquartered in Cologne, Germany

 Sold a range of medical diagnostic imaging system and bio medical test equipment &
instrumentation
 Organized in six operating division
 Managers ran the company on a highly decentralized basis and were allowed considerable
autonomy
 Performance evaluated based on each division ROIC
 Divisional Managers were allowed to source their components from external supplier
although company was partly vertically integrated

Dispute arose between Image System Division (ISD), the Heidelberg Division and the Electronics
Components Division (ECD)

ISD- Sold complex ultrasound and magnetic resonance imaging system

Heidelberg- sold high resolution monitors, graphic controller and display system etc. ISD was its
major internal customer

ECD- Sold application specific integrated circuit. Originally established as captive supplier to
Zumwald’s division

Dispute- ISD recently designed a new ultrasound imaging system called X73. Heidelberg’s engineer
participated in its design. ISD managers solicited bids for the materials needed to produce X73.

Three companies including Heidelberg came.

Quotes Received- ISD- 140,000 Bogardus (Dutch)- 120,500 Display Technologies (British)- 100,500

After that Conrad Bauer, MD, ISD- Announced that ISD would be buying its display system from
Display

Paul Halperin, Heilderberg’s MD was angry. Complained to Rolf, Zumwald’s MD when he did not get
response. A meeting was called.

1. What sourcing decision for the X73 materials is in the best interest of:

a. The Imaging Systems Division?

Lowest Quote. More Margin. But Display tech is a new entrant. So there may be quality issues. So
source external.

b. The Heidelberg Division?

Heildelberg Helped in engineering of X73. So should be source internally

c. The Electronic Components Division?

Should be sourced internally as ECD supplies sub-assemblies to Heildelberg. So good for the division.

d. Zumwald AG?

Yes good for the organization as a whole as sourcing internally as 102,600 Contribution would have
to be foregone. (See excel)

2. What should Mr. Fettinger do regarding the X73 sourcing issue?

Mr. Fettinger should ask ISD to source internally from Heilderberg at a fair price which benfits all.

3. Can a system be designed to motivate each of Zumwald's division managing directors to take
actions that are not only in the interest of their division but also in the best interest of Zumwald?
Explain.

If a lucrative offer is presented by an external agency against internal, such policies should be there
in order to have a normal premium above which even if price quoted by internal is high can be given
to it.