The Purchasing Decision For The Fenix Project

P-1158-E
December 2016
PACECO: The Purchasing Decision for the Fénix Project

Este documento es una copia autorizada para uso particular de D./Dª. Daniel Rojas Arroyo, 2018-07-08
Javier Vázquez, the purchasing manager at PACECO ESPAÑA, was facing a situation that had
to be addressed without delay. The company, a world leader in the design, manufacture and
installation of container handling cranes for seaports, had just landed a major project—an order
for four cranes that represented almost a year of work and would significantly boost the
company’s performance. However, the negotiations leading up to the sale had been very tough.
The customer already had six PACECO cranes with similar features and had managed to get a
very competitive final price by arguing that the new project simply consisted of repeating what
they’d already done with great success. As a result, the company’s CEO, acting on the
instructions of the board of directors, had made it clear to Javier that he had to significantly
cut costs to ensure a positive net profit margin on the order.
Javier decided to focus on procurement in certain key purchasing categories, including wheels
and bogies. In the coming days, he had to make a decision on the procurement of these
components, which were critical to the production process. He had no choice but to start
passing on some of the pressure to suppliers. At the time, he was considering a proposal from
an Asian supplier with whom he’d initiated discussions over a year ago at a trade fair, and
whose facilities he’d visited. The proposal offered significantly lower costs than those of current
suppliers, which made the prospect of switching very attractive. But the decision wasn’t an
easy one. In a sector like his, where work was done on a project-by-project basis, engineers
usually had to redesign many details on each project, partly due to changes requested by
customers or technical adaptations that had to be made while work was underway. Given the
importance of shared knowledge and mutual trust, there was a strong sense of attachment to
the “regular” suppliers (in fact, engineers sometimes insisted on working with certain suppliers).
Javier was hoping these “regular” suppliers would make a counter-offer.
Now that the project had been given the green light, a decision needed to be made without
delay if the deadlines agreed with the customer were to be met.
This case was prepared by Miguel Mediavilla, CEO of OPERATIONS Management Engineers, and PDG 2014, and Professor
Alejandro Lago as the basis for class discussion rather than to illustrate either effective or ineffective handling of an
administrative situation. December 2016.
Copyright © 2016 IESE. This translation Copyright © 2017 IESE. To order copies contact IESE Publishing via www.iesep.com.
Alternatively, write to iesep@iesep.com or call +34 932 536 558.
No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form
or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of IESE.
Last edited: 2/23/17

1
P-1158-E PACECO: The Purchasing Decision for the Fénix Project
PACECO CORP. and PACECO ESPAÑA

PACECO® (an acronym for Pacific Coast Engineering Company) was founded in 1958 and was
the first engineering company in the world to design and manufacture a container crane for
loading and unloading ships. Its patents for both ship-to-shore cranes (Portainer® models) and
models for handling containers in a terminal or yard (Transtainer®) have been a global
benchmark in the industry since the company’s inception (see Exhibit 1). PACECO also offers
technologies to ensure the traceability of cargo and integration software for port systems.
From its headquarters in Hayward, California, the parent company, PACECO CORP., focuses
mainly on patenting technology, while the marketing, design, manufacture and installation of
projects is carried out by four licensees based around the world: TIL (India), Hyundai Samho Heavy
Industries Co. (South Korea), Mitsui Engineering and Shipbuilding (Japan), and PACECO ESPAÑA
(Spain). Each licensee is assigned a specific geographic region, but due to the global reach of some
customers (global terminal operators), a licensee may occasionally sell projects outside its assigned
area. In these cases, it seeks the support of other licensees to execute the project and provide after-
sales service. Over the company’s history, there have been significant moves between the licensees.
For example, the Japanese licensee, Mitsui Engineering and Shipbuilding, took over the American
parent company and also took a stake in PACECO ESPAÑA.
PACECO ESPAÑA was founded in 1967 (just nine years after PACECO CORP. introduced the first
container crane) as a personal initiative of Ignacio Cárdenas, an industrial engineer with a knack
for spotting opportunities, who managed to obtain a license from PACECO to supply cranes in
Spain (see Exhibit 2, which shows various milestones in the history of PACECO ESPAÑA).
In the first years after it was founded, the company essentially acted as a sales office. The
manufacture of equipment was subcontracted to local industrial partners, mainly large
workshops in the area that could handle the technical details (drawings, specifications, etc.)
and deliver cranes based on the designs proposed by the American corporation, which received
royalty payments in return.
In 1989, the Japanese group Mitsui Corp. became the majority shareholder of PACECO CORP.,
and in 1996 it acquired the licensee PACECO ESPAÑA. This development coincided with a change
in the business philosophy of PACECO ESPAÑA. To be competitive in the market and strengthen
its industrial presence, the company had to develop its internal engineering capabilities and
product knowledge, thus reducing its dependence on suppliers. Changes initiated years earlier
were taken further. The Technical Office was expanded so it could modify designs and develop
drawings and technical specifications. The goal was to stop being dependent on the workshops
they’d always worked with and be able to broaden their portfolio of suppliers.
In 2000, the parent company, Mitsui Corp., handed over the management of PACECO ESPAÑA
to Mitsui Engineering and Shipbuilding (MES), one of its business units. MES provided new
capital and process technology to support the company’s international sales expansion. During
these years, the company was led by a Japanese executive and, in line with the Japanese model,
production and procurement were concentrated in tier-1 local partners who could supply
complete equipment.
2 IESE Business School-University of Navarra

PACECO: The Purchasing Decision for the Fénix Project P-1158-E
In 2012, due to a share restructuring (motivated in part by corporate directives from Mitsui Corp.)
70% of PACECO ESPAÑA was acquired by URSSA, a company that belongs to the Basque
industrial group Mondragón Corporación Cooperativa (see Exhibit 2 for a description of the
companies that own PACECO ESPAÑA). It was hoped that URSSA’s experience could be
leveraged to improve crane design and the assembly process, and to make the company more
competitive in terms of costs and flexibility. URSSA was one of the main suppliers of structural
frames for PACECO ESPAÑA and had extensive experience in the assembly of metal structures.
(The company’s flagship projects included the manufacture and assembly of metal structures for
the Guggenheim Museum in Bilbao, the Mapfre Tower and the Collserola Tower in Barcelona,
and the World Trade Center Transportation Hub in New York, designed by Santiago Calatrava).
As a result of this change, the CEO of PACECO ESPAÑA was replaced by an executive from
URSSA, but most of the existing managers, including the purchasing manager, stayed on.
A new strategic plan was developed with the focus on three key priorities: (a) increasing
penetration of medium-sized customers, who were likely to place more value on customization
and a shorter completion time; (b) expanding sales to become a regional leader in European
countries bordering the Atlantic (Spain, Portugal, the United Kingdom, Belgium, the Netherlands,
Luxembourg, Poland and France) and in the Mediterranean region (Italy, Morocco, North Africa
and Turkey); (c) building recurring revenue by offering services that cover the entire life cycle of
cranes (turnkey projects, maintenance, minor technical modifications, upgrades of “old” cranes,
terminal and cargo management systems, etc.) with the aim of becoming a partner that provides
customers with ongoing support over the entire crane life cycle.
Under the new strategic plan, sales were expected to increase by 30% in the next five years
and the average net profit margin per project was projected to increase to 7%. (Exhibit 3 shows
the income statement for the most recent projects carried out by PACECO ESPAÑA.)1 It was
estimated that the target execution cost for a typical project, like the ones shown in Exhibit 3,
could be €4–6 million per Portainer® crane (the most frequently ordered model), depending on
the size, optional elements, cost of shipping by sea or land, and other variables.
The Global Market for Container Cranes

PACECO (like most of its direct competitors) manufactured and marketed the two types of crane
previously mentioned: Portainer® and Transtainer® cranes. The company offered different
models in each case, distinguished mainly by their size (Panamax, Post-Panamax,
Malaccamax) and lift capacity (measured in tons). Container cranes were considered quite a
well-developed technology, and innovation focused mainly on two points: (1) improving
materials, and (2) redesigning structural frames to achieve larger sizes for handling the cargo
of large container ships, to make cranes more versatile, and to facilitate assembly.
The global market for ship-to-shore cranes was dominated by the Chinese industrial
conglomerate ZPMC, which had a 70% market share by installed base. As in other heavy
manufacturing industries, the Chinese company’s success and relatively recent emergence were
attributable to its high price competitiveness and the favorable financing conditions it offered
1 Since the company works on the basis of projects that are executed over more than one fiscal year, it generally isn’t easy to
interpret the annual income statement (beyond tax considerations). Analysis by project is therefore the most useful approach for
this type of business.
IESE Business School-University of Navarra 3

its customers, usually with the backing of Chinese public banks. ZPMC offered cranes of both
types in several standard sizes. Although no precise data is available, according to sources
outside the company, the price difference between ZPMC and PACECO ESPAÑA on small and
medium-sized orders wasn’t usually that large (between 5% and 10%). However, for customers
purchasing many cranes in a single order, ZPMC was usually much more competitive on both
price and delivery time because its cranes were assembled in the country of origin and shipped
to the destination by sea in lots of eight or more.
In contrast, for each project PACECO offered a unique solution adapted to the specific needs
of the customer and the port terminal. As an additional competitive element, PACECO ESPAÑA
proposed a multitude of optional functionalities and specifications. According to Javier, if this
possibility of customization and the flexibility on completion times the company could offer
thanks to its experience in the assembly process were taken into account, PACECO was a very
good option in terms of price (in many cases, the second most cost-competitive after ZPMC).
The rest of the market was made up of medium-sized manufacturers (generally part of multi-
sector industrial groups) and specialized engineering firms. Some of the best-known were
Kalmar Global (Finland), KONE Corporation (Finland), Mitsui (Japan), Liebherr (Germany),
PACECO (Spain) and Hyundai (Korea).
Container Cranes: Design, Procurement, Manufacturing and Assembly

PACECO followed a strict engineer-to-order process for most of its projects to ensure
customization. Work on projects was only started after sales were finalized and the technical
specifications of the crane — with respect to its size, lift capacity and location — were confirmed.
At that point, a project manager (who reported to the Technical Office) was assigned, and the
design, procurement, assembly and installation process was initiated. (Exhibit 4 shows the
process and the average execution time for each phase, and Exhibit 5 presents the company’s
organizational chart.)
The design was defined by the Technical Office, which worked on aspects of the project related
to mechanical engineering, electrical and electronic engineering, hydraulic engineering, and so
forth. The focus at this stage was on engineering issues. PACECO’s engineers designed each crane
based on the contract specifications, and it wasn’t unusual for them to produce different designs
for each job. In this process, the end customer (who participated by suggesting modifications),
the Sales Department and Technical Office usually did more than just define functionalities and
requirements in their drawings: often they also specified the brands or suppliers to be used for
various components. Over the years, this way of working had generated a portfolio of “regular”
suppliers who had built up a wealth of experience. In some cases, the Technical Office didn’t
even need to define project drawings in detail; the suppliers themselves, based on the
specifications and their knowledge of the way PACECO worked, would define the details.
Therefore, the Purchasing Department didn’t really have much time or freedom to seek new
suppliers; purchases of materials were often made before final designs were completed, based
on so-called “reference drawings.” That’s why it was so important that Javier and his team had
extensive technical experience in the design and manufacture of the components they
purchased. This background fostered teamwork with engineers. In fact, Javier, who had a

MSc in Aeronautics and several decades of professional experience, was highly respected by
everyone in the Technical Office.
Assembly was done on-site and supervised by the Technical Office. For each project, PACECO
assigned a project manager and several site managers who oversaw progress on the work, but the
entire assembly and installation process was subcontracted to suppliers or specialized companies.
In addition to the Sales Department, the Technical Office (which included various specialized
engineers as well as project and site managers) and the Purchasing Department, PACECO had
a Finance Department (which provided support to management and project managers in cost
tracking and consolidation of the balance sheet) and a Technical Service. Also, it had recently
launched an innovation unit with the aim of developing technological solutions that were not
exclusively for any one project.2
The Purchasing Department: Options for Improving the Profit Margin

In the Purchasing Department, Javier Vázquez had two people under his direct responsibility.
This team was responsible for executing and supervising all stages of the procurement cycle:
scouting for and evaluating suppliers, negotiating prices and terms of payment, and, once the
negotiation was completed, monitoring and ensuring the delivery of components to the project
site in coordination with the project manager.
As Javier saw it, there was a big difference between purchasing made-to-order components
and buying commercial, off-the-shelf items (i.e., standard catalog parts and components
purchased from distributors). As a rule, he dealt with the most important suppliers himself to
negotiate the purchase of made-to-order components, and delegated the supervision of
decisions related to less critical components to his team.
Acting on the incoming CEO’s instructions for the new project, Javier started putting together
several proposals. Although some minor details related to the sale still needed to be nailed
down, he knew PACECO would invoice €20-22 million for the project. To achieve the target of
7% net profit, Javier calculated that he’d need to save nearly €1 million on purchases for the
four cranes to be supplied (compared to costs for previous projects with similar characteristics).
Among the most significant purchasing categories in terms of cost, the most important one
and several others were supplied by URSSA. For these categories, it wasn’t like dealing with a
regular supplier: PACECO ESPAÑA and URSSA had agreed to set up joint teams to focus on
improving the profit margin. For Javier, it was hard to quantify the savings that could be
achieved in advance, so he decided to focus on other purchasing categories.
Javier had decided to concentrate on the so-called “mechanisms”3—in particular, bogies (i.e., the
“feet” of the crane, which allow it to move around the terminal on rails; see Exhibit 7 for photos).
Mechanisms were the second most significant category in terms of costs (after the structural
frame), and bogies represented 45% of the total cost for this category (see Exhibit 6 for details
2 There was another unit that operated independently, focusing on the sale and installation of ERP systems for ports.
3 There are two broad categories of mechanisms: the main mechanisms (the “feet” of the crane) and those that form part of the
gantry (the upper part of the crane). Exhibit 7(B) shows photos of both types.

of the cost impact of the various crane components). Up until then, production of the whole
bogie assembly had been subcontracted almost entirely to just a few local suppliers, and Javier
thought he could probably get a substantially better offer if he explored the international market.
Mechanisms: First the Wheels—The Low-Cost Supplier Alternative

Javier’s first idea had been to look for more economical alternatives only for wheels and
bearings (also included in the “mechanisms” purchasing category). Bogie wheels were a fairly
standard component, made of forged steel, whose main cost component was the raw material
used. The additional operations involved (polishing and calibration) weren’t especially critical,
and quality controls to check hardness and dimensions were quite routine. And bearings were
standard components that were purchased through a distributor and easily installed on wheels
(see Exhibit 7 for photos of bogie wheels).
Until that time, bogie wheels had always been purchased from one of the two Spanish suppliers
that manufactured this component. Prices were never reduced because the suppliers knew that
eventually PACECO would come to them with an order. Also, they usually passed on any
increases in the cost of raw material to the company. Against this backdrop, Javier had decided
several months earlier to review offers from two Chinese suppliers that also did work for some
large multinational companies with port terminals all over the planet. With the approval and
involvement of the two chief engineers in the Mechanics Unit, he visited both suppliers and
managed to get excellent initial offers that represented a savings of almost 50% compared to
the total price offered by the regular suppliers (a savings of around €40,000 per crane, which
made a total of €160,000 since the project Javier was currently concerned about involved
supplying four cranes).4
To allay any misgivings on the part of the Technical Office, Javier agreed with the head of the
Quality Department that they would engage a highly regarded German firm that offered quality
inspection services in China. Moreover, the time required to acquire materials, manufacture the
wheels, and ship them to Spain wasn’t as long as one might expect (around six weeks). If an
order was placed at the start of the project (wheel dimensions didn’t vary much from one
project to another), there was enough time for them to be delivered without delaying final
assembly. This seemed like an option worth considering, though there was some talk in the
Technical Office about the consequences of purchasing cheap components and criticism based
on the perceived risk of technical defects.
Not Just Wheels: Bogies Too

Javier was struck by the extensive network of suppliers he saw on his trip to China. The area
he visited was full of manufacturing facilities linked to local heavy industry (shipyards and
makers of construction machinery). There were suppliers of rolled steel and large-scale metal
fabrication and machining facilities. He even had a chance to visit a factory that made part of
the frame of some Chinese commercial cargo planes. With all these facilities, producing,
assembling and shipping the entire bogie from the Asian giant (rather than just ordering the
wheels from a Chinese supplier) looked like a real possibility. In fact, one of the two Chinese
suppliers (who worked mainly for shipyards in the zone) proposed using part of its idle capacity
4 Each crane had 16–32 wheels.

to manufacture bogies for PACECO. Moreover, Javier was sure that if a supplier could
manufacture the bogies, in the medium-term they could also produce the other components of
the gantry mechanisms. (At least, this was technically feasible, though Javier wasn’t in favor
of “betting everything on one card,” preferring to minimize risks.)
Up until that time, PACECO had purchased its bogies from three local industrial suppliers that
manufactured and assembled the products they needed and delivered them to the project site.
Historically, the three companies had been linked to shipyards in the north of Spain. More
recently, they’d been involved in the construction of wind towers, a booming sector thanks to
public support for renewable energies. For various reasons, PACECO maintained an almost
exclusive relationship with these three suppliers, distributing orders between them. Two were
highly specialized family-owned businesses with an annual turnover of less than €10 million;
the third was part of a medium-sized industrial group with an annual turnover of €40 million.
Bogies were manufactured by welding together large metal elements made from various steel
parts (forged steel, steel sheet, etc.), which then needed to be machined (i.e., drilled and polished
according to exacting specifications). The final stage was to attach mechanical and electrical
components (pulleys, cables, axles, wheels and suspension systems, motors). Many of the parts
assembled had to meet strict requirements in terms of dimensions and tolerances. Working
closely with familiar suppliers was an advantage when it came to dealing with unforeseen events
and ensuring that drawings were interpreted correctly, but it wasn’t always the best option from
a cost perspective. In the short-term, switching to a new supplier could require a higher level of
attention and coordination on the part of PACECO (which would pose a challenge as time is
usually a scarce resource for a company operating on a project-by-project basis).
Despite the ongoing relationship with suppliers, each order was negotiated individually due to
the seasonality and uncertainty of PACECO’s projects. Javier had the feeling their suppliers
sometimes took advantage of the fact that prices were negotiated on an order-by-order basis.
By stressing their lack of capacity and the short lead times demanded, they pushed for and got
favorable prices as a condition for giving priority to PACECO’s orders. Javier and his team
were experienced enough to get good deals, but this order-by-order approach to negotiation
consumed a lot of their energy, and there was always a degree of uncertainty.
Given the new options now on the table and the need to cut costs, Javier met with the two
chief engineers from the Mechanics Unit, the head of the Quality Department, and a technician
in the Purchasing Department who had previously been a foreman at one of PACECO’s
suppliers. With the support of a consultant with experience in purchasing who had worked
with the CEO on similar projects, the team spent several weeks performing a value analysis for
the bogies and produced an estimated cost sheet. Based on this analysis, they put forward three
proposals (see Exhibit 8 for the economic details for each option):
Continue to source bogies from one of the local suppliers. To get better prices, Javier proposed
that PACECO define a preferred supplier and negotiate a three-year exclusive contract. The
company would agree to subcontract all its production to this supplier in exchange for two
things: a guarantee that its orders would be given priority, and a price reduction (compared to
the average price for the most recent projects). To this end, rather than working on a per-bogie
basis, he intended to establish an “average price per ton” and fix the cost of each bogie
according to its weight and volume. So far, the two small suppliers, whom he’d sounded out,

initially seemed receptive to the idea of an exclusive arrangement, but they’d refused to fix a
price, arguing that PACECO’s purchase volumes were too seasonal. Nevertheless, Javier thought
that given the uncertainty about the future of the wind power sector, he’d be able to get a
commitment and discounts of between 5% and 10% (depending on the business cycle).
Accept the initial offer from the Chinese supplier for delivery to the project site within four to
eight weeks. Under the terms of this offer, PACECO would save 25% with respect to the average
price of bogies for recent projects. Javier was thinking about the initial order, but he had a
hunch that they’d have to establish some kind of long-term relationship to ensure a
commitment from the supplier and that the same prices were maintained. It seemed that
Chinese suppliers tended not to maintain prices offered on initial orders over the longer term.
The external consultant had worked on a more radical proposal that involved breaking down the
procurement structure for bogies. According to this proposal, the bogie could be broken down
into various sub-categories that could be purchased independently. The various parts could then
be assembled locally at the project site or through one of the local suppliers. The advantage of
this solution was that the choice of suppliers for each component was much wider. Final assembly
of bogies and more complex activities that provided more value to the end customer (machining
and assembly of the movement system) could be subcontracted in Spain. Moreover, this approach
would be a way to reduce prices in other, less critical sub-categories. Based on a detailed analysis
of the cost sheet (see Exhibit 9), Javier estimated that this option would reduce costs by 18% to
20%. If a more aggressive policy was applied, savings of 30% to 40% could be achieved. Such
an approach would involve putting pressure on some local suppliers who did machining work
and final painting and assembly, and at the same time shifting metal fabrication and intermediate
assembly (i.e., activities that were much more labor-intensive) to China.
The head of the Quality Department and the mechanical engineers argued strongly that they
should continue working with the local suppliers. Javier was expecting them to take this position,
but when he abruptly asked why they didn’t support the Chinese supplier the way they had in the
case of the decision on the wheels, he was rather surprised when the technician from his own
department wryly replied: “Have you ever seen a wheel break? I haven’t! But it’s not the same
with bogies, Javier. You’ve got to understand that.” Javier smiled. He’d heard this argument before
and knew that in the medium-term these fears could be overcome. However, in the short term,
and for the project that now concerned him, it was a position he’d have to take very seriously.
Ultimately, he was the one with final responsibility for the decision. And, though he needed to
find ways to cut costs soon, he knew that if he changed the purchasing policy and things
turned out badly, he could find himself in a difficult situation in relation to the Technical Office
or the Quality Department, and—quite possibly—the new CEO.
Javier also had a hunch that the decisions made for this project could have a significant impact on
the way things were done in his department in the future. With a new industrial partner on board,
the company’s plans had become more demanding in terms of both sales volume and financial
results. This project was probably just the starting point for renewed pressure on his department.

Exhibit 1
Crane Types and Their Features
There are two main types of cranes: those used for unloading ships (Portainer®) and those used
for moving freight around within the port terminal (Transtainer®). Within each type, cranes are
differentiated mainly by their dimensions and lift capacity (measured in tons). Portainer® and
Transtainer® are trademarks registered by PACECO, but the names are used generically in the
sector to refer to cranes of these types, regardless of the supplier. Gantry cranes (cranes installed
on ships) are another type. This type of crane, which can be used to unload freight in ports
with no cargo-handling infrastructure, are becoming less common.
Portainer®

Exhibit 1 (continued)

Exhibit 1 (continued)
Transtainer®
Source: Document provided by the company.

Exhibit 2
PACECO ESPAÑA: History and Current Shareholding Structure
Main Shareholders
Source: PACECO ESPAÑA, http://www.paceco.es/, accessed November 2016.

Exhibit 3
PACECO ESPAÑA: Income Statement by Project (for the three most recent projects
that are technically comparable to the one to supply four cranes discussed in this
case, with similar features and specifications)
Net profit margin
Overhead costs (including engineering work)

Marketing and selling expenses
COGS (cost of materials)
LATEST PROJECTS COMPLETED BY PACECO ESPAÑA

(similar products)
Selling
2% price
7%
9% 9%
3%
3% 9%
3%
86% 82% 89%
86% 89%
82%
Note: PACECO only does commercial and engineering work. The cost of materials includes all costs for manufacturing, assembly, shipping,
customs and on-site installation. All these activities are subcontracted to third parties.

Exhibit 4
Typical Work Sequence for an Engineered-to-Order Project
Engineer-to-Order Process
This process includes all phases from the signing of a contract with
the corresponding technical specifications to the delivery of a fully

functional crane.
SIGNING OF
CONTRACT
DELIVERY
ORDER
CRANE
Design and
Supply Shipping Assembly
purchasing
10–20 weeks* 8–20 weeks** 4–5 weeks 15–18 weeks
* The time required for design and purchasing ranges from 10 to 20 weeks, depending on the level of customization and the complexity of
the project.
** The time required for supply ranges from 8 to 20 weeks, depending on the purchasing category and the level of complexity or
customization.
A project can run for 9 to 12 months, depending mainly on the level of customization requested by the customer.
Exhibit 5
Organizational Chart
CEO
CFO/HR
Director
Sales Purchasing Technical After-Sales

Manager R&D Automation Quality
Manager Director Service
Project
Managers

Exhibit 6
Cost Breakdown for Product Categories
Cost Sheet for a Medium-Sized Portainer Crane (% of total cost)
30.9 STRUCTURAL FRAME
17.3 MECHANISMS
12.2 Category 3
10.1 Category 4
3.9 Category 5
3.7 Category 6
3.1 Category 7
2.9 Category 8
2.6 Category 9
1.2 Category 10
1.3 Category 11
1.2 Category 12
1.1 Category 13
1.1 Category 14
1.1 Category 15
1.0 Category 16
0.9 Category 17
0.8 Category 18
3.6 Category 19
Note: PACECO considers the total cost of the various components, delivered to the destination (including shipping and installation).
Installation costs are included in the cost for the corresponding product category if installation is subcontracted to the supplier, or in the
“structural frame” category if related to final assembly.

Exhibit 7
Wheels and Bogies
(A) Manufacture of wheels by the Chinese supplier
(B) Mechanisms: bogies
Lower bogie Upper bogie

Exhibit 8
Preliminary Analysis of Options for Bogies
OPTION 3:
OPTION 1: Local OPTION 2: Procurement Disaggregated
procurement from a Chinese supplier procurement of
components
Manufacture of
Company 1 components in low-cost
Supplier Company 2 countries or through non-
characteristics Annual turnover: €6 specialized local
Annual turnover: US$25 million
million suppliers; assembly by
specialized local suppliers
Location Bermeo (Spain) Guangzhou (China) Various
Current: Estimated:
Price per crane Proposal:
€380,000 €230,000–€310,000
(bogies: 4 US$356,000 (€290,000)(1) (see Exhibit 9). Part of
lower and 1 To be negotiated:
the payment will be made
upper) €345,000–€360,000 in US$.
Expected −18% to −40%
savings (according to the
–5% to –10% –25%
compared to percentage of low-cost
current costs suppliers)
Components:
Manufacture: 2 weeks 1–3 weeks
Manufacture: 2 weeks
Average Shipping: Shipping from China:
delivery time Shipping: 4–8 weeks 4–8 weeks (depending on
1–3 weeks (depending
(depending on location) location)
on location)
Assembly: 1 week
Three-year exclusive Contracting on a project-by-

PACECO would be
contract project basis initially. A long-
responsible for
Comments term contract would only be
Estimated purchase coordination between the
signed once the supplier has
volume various suppliers.
proven its reliability.
(1) The Chinese supplier invoices in U.S. dollars. The exchange rate assumed is €1 = US$1.23.

Exhibit 9
Cost Structure of a Bogie With Current Suppliers
Explanations:
1) Metal fabrication. The various metal parts (sheet, beams, straps) must be welded together
to form the base of the bogie. This is a labor-intensive process. The percentage indicated
includes materials and operational costs.
2) Machining. The welded parts are drilled and some surfaces are polished to close
tolerances so movement systems (axles, pulleys) can be inserted, and to ensure that the
bogies roll smoothly. This is an automated process, executed piece by piece, but it must
be supervised by workers.
3) Movement systems. Includes the cost of procuring components (suspension, axles,

pulleys) and assembly.
4) Painting + final assembly. Aesthetically critical steps (painting) and final adjustments.
This process should therefore be carried out as late as possible.

The Purchasing Decision For The Fenix Project

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P-1158-E

PACECO: The Purchasing Decision for the Fénix Project

Last edited: 2/23/17

PACECO CORP. and PACECO ESPAÑA

2 IESE Business School-University of Navarra

The Global Market for Container Cranes

IESE Business School-University of Navarra 3

Container Cranes: Design, Procurement, Manufacturing and Assembly

4 IESE Business School-University of Navarra

The Purchasing Department: Options for Improving the Profit Margin

IESE Business School-University of Navarra 5

Mechanisms: First the Wheels—The Low-Cost Supplier Alternative

Not Just Wheels: Bogies Too

4 Each crane had 16–32 wheels.

6 IESE Business School-University of Navarra

IESE Business School-University of Navarra 7

8 IESE Business School-University of Navarra

IESE Business School-University of Navarra 9

10 IESE Business School-University of Navarra

Source: Document provided by the company.

IESE Business School-University of Navarra 11

Source: PACECO ESPAÑA, http://www.paceco.es/, accessed November 2016.

12 IESE Business School-University of Navarra

Overhead costs (including engineering work)

LATEST PROJECTS COMPLETED BY PACECO ESPAÑA

86% 82% 89%

Source: Document provided by the company.

IESE Business School-University of Navarra 13

the corresponding technical specifications to the delivery of a fully

10–20 weeks* 8–20 weeks** 4–5 weeks 15–18 weeks

Source: Document provided by the company.

Sales Purchasing Technical After-Sales

Source: Document provided by the company.

14 IESE Business School-University of Navarra

30.9 STRUCTURAL FRAME

Source: Document provided by the company.

IESE Business School-University of Navarra 15

(B) Mechanisms: bogies

Lower bogie Upper bogie

Source: Document provided by the company.

16 IESE Business School-University of Navarra

Location Bermeo (Spain) Guangzhou (China) Various

Three-year exclusive Contracting on a project-by-

Source: Document provided by the company.

IESE Business School-University of Navarra 17

3) Movement systems. Includes the cost of procuring components (suspension, axles,

Source: Document provided by the company.

18 IESE Business School-University of Navarra

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