Rmc: Hydra Division
7 Pages Posted: 21 Oct 2008
This case and its companion case, “Akron Foundry” (UVA-QA-0398), are a supply-chain negotiation for which there is a narrow zone of potential agreement. Locating outcomes in that zone is challenging due to differences in raw material costs (real and perceived), potentially extreme opening offers, lack of commitment to do a deal, and different interpretations of history. The difference in raw material costs can provide an opportunity for mutually beneficial agreements to be reached.
Rev. Apr. 27, 2012
RMC: Hydra Division
The letter from the corporate purchasing office came as a complete surprise to Elizabeth Allston, a purchasing agent for the Hydra Division of RMC. Her impression was that she had negotiated good deals on each of three past contracts with Akron Foundry; Akron had made significant concessions during the negotiations in both its quoted raw material costs and in its acceptable profit margin. The letter from corporate stated, however, that Akron's quoted aluminum costs were “consistently and significantly higher than the prices that we were able to secure for comparable ingot through our centralized raw material purchasing program.” Allston was advised that, in the pending negotiation with Akron, she should aggressively pursue a reduction in the aluminum cost so that “it would be in line with RMC's prices.”
RMC was a $ 10 billion conglomerate with business units ranging from small consumer products to major industrial equipment. The Hydra Division was a relatively small group within RMC, representing less than 5% of sales. Hydra specialized in fluid handling equipment for the agricultural and automotive markets.
For the past several years, Akron had supplied Hydra with aluminum castings for its water-pump housings. Akron produced the rough castings and Hydra performed the final milling on the castings, joined the housings with the other components of the pumps, and installed the pumps in its end products. Akron was one of five medium-size foundries that Hydra used to supply the pump housings. In an effort to maintain multiple sourcing relationships, Hydra would use a different vendor each month and try to spread the business evenly among them. Contract discussions generally occurred during the month preceding the requirement. The contract would be for a specific number of units delivered during the month of the contract. The vendors seemed to have no difficulty making delivery within the designated period. Recent discussions with the vendors had focused on their problems with forecasting and controlling aluminum costs rather than with difficulties in meeting production schedules.
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Keywords: cost analysis, management of service industries
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