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Deere study case - supplier evaluation - supply chain management - purchasing
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Deere CaseCost Analysis and Cost Management
Group members: Tosin , Lu Wen, Jonas, Kai and Arun
Presentation Outline1. Background
2. Key Issues
3. Given Information
4. Data Analysis
5. Alternative Generation and Assessment
6. Conclusion and Recommendations
1 - Background
The Company – John Deere
Annual Sales of $14 billion
Operations in more than 160 countries
Core Values: “We work every day to uphold our founder's core values. Integrity, quality, commitment, and innovation are more than ideals we work toward. They are values we live and breathe – values found in every product, service, and opportunity we offer”
John Deere website – “About Us." John Deere Corporate. Deere & Company. March - 2014
The Product – Gatherer Chain
It is sold as replacement part for Conveyor System
Product has been sold for several years, with only slight modifications in its design
It is sold through dealer network
The competitors offer the product for $30.00 with 50% cost-price ratio.
Purchased from Saunders Manufacturing (supplier)
The Supplier – Saunders Manufacturing
Long term relationship with Deere
Family-owned business run by tough businessman
It does not share cost information
“Take it or leave it” attitude
+300 employees
Departments involvedGlen Lowerly, sales manager - he complaint
about sinking margins of gatherer chain.
Jim Elsey, Cost Management specialist - He needs to diagnose the problem.
Jose da Costa, from engineering department -He needs to analyze material specifications and quantities.
Susan Tessier, from purchasing department -She needs to analyze the costs of acquisition and find alternatives
Negotiation and Cost Management Techniques
Breakdown Analysis
Target Pricing
Quadrant Analysis
2- Key Issues
Key Issues Competitors are able to offer similar product at lower cost, with
a better cost-price ratio, and make the prices in after market decrease.
The supplier is meeting all quality and delivery requirements, but is not willing to negotiate and have been systematically increasing the prices – Margins of Deere are shrinking in this product.
Purchasing department affirm that is not possible to find another supplier and they would not like to change it.
Same product for several years, with only slight modifications, can show lack of research and development.
Sales are decreasing year after year – the customers are not willing to pay more for Deere products
Long Cycle ProcessImmediate issue: to recover the profit margin
and offer a lower after market price
Basic IssueBreakdown analysis Strategic sourcingNegotiation strategySupplier evaluationResearch and developmentSupply model
3- Given Information
Product CompositionInformation from Engineering department – Analysis of
Saunders production process
Composition of Gatherer Chain: pins and small hooks and rollers.
11.6 pounds of steel
46 pins – join the links
20% scrap rate (for steel)
General purpose equipment – they can share fixed costs with others products.
Costs and Supplier Information from Purchasing department –Deere
Steel price = $28.00 per hundredweight
Pins price = 3.5¢/unit
Freight paid by Deere (3% of purchase price)
Packaging paid by Saunders
Supplier with on-time delivery and excellent performance
Material42%
Direct Labor13%
In-di-
rect La-bor6%
Overhead20%
Other
and Margin
19%
U.S. companies in Saunder’s In-dustry code – Breakdown of Manu-
facturing Costs
Costs and PriceInformation from Costs Management department
Description Two years ago
Last Year Current Year Budget
After Mkt price $40.00 $36.25 $30.00
Purchase Cost $21.25 $22.61 $24.12
Cost-price ratio 53% 62% 80%
Unit Sales 475,000 410,000 350,000
• Aftermarket price is decreasing.• Purchase cost is increasing • Cost-price ratio is increasing (target ratio is 50%)• Unit Sales decreasing (competitors performance)
Missing Information% of sales of Saunders to Deere – How important
is Deere to Saunders
How many different products Saunders produces (share fixed costs)
AssumptionsSaunders does not have the same “economy of
scales” as Deere
Deere is the most important client for Saunders – good for negotiation
4- Data Analysis
1 2 3 $-
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
$45.00
$40.00
$36.25
$30.00
$21.25 $22.21 $24.12
$18.75
$14.04
$5.88
Aftermarket Price x Purchase Cost x Margin/unit
Aftermarket PricePurchase CostMargin/unit
Bottom Line ImpactBottom Line Impact
two years ago Last year Current Year (budget)
Last 03 years
variation
1 2 3 %Aftermarket Price $40.00 $36.25 $30.00 -25.0%
Purchase Cost $21.25 $22.21 $24.12 13.5%Cost-price ratio 53% 61% 80% 51.3%
Unit Sales 475,000.00 410,000.00 350,000.00 -26.3%
Revenues $19,000,000.00 $14,862,500.00 $10,500,000.00 -44.7%
Margin/unit $18.75 $14.04 $5.88 -68.6%
Total Margin $8,906,250.00 $5,756,400.00 $2,058,000.00 -76.9%
Revenue and total margin Evolution
Series1
$19,000,000.00
$14,862,500.00
$10,500,000.00
$8,906,250.00
$5,756,400.00
$2,058,000.00
RevenuesGross ProfitNext year projection
Loss!
Linear Regression Forecast
Steel Scrap Steel Pin Total
Total Cost 3.248 0.6496 1.61 5.5076
$0.50
$1.50
$2.50
$3.50
$4.50
$5.50
Material Cost - Saunders
Material used Quantity Cost/unit Total Cost
Steel 11.6 $0.28 $3.25 Scrap rate Steel(20%) 2.32 $0.28 $0.65
Pin 46 $0.04 $1.61
Total $5.51
Material; 5.51; 42%
Direct Labor; 1.70547619047619; 13%
Indirect Labor; 0.7871428571428
57; 6%
Overhead; 2.6238095238095
2; 20%
Other and Margin; 2.4926190476190
5; 19%
Saunders’ Gatherer Chain – Estimated costs (benchmark breakdown)
Estimated total Cost = $13.12
Current Target
$24.12
$15.00
$5.88
$15.00
Cost x Margin - Target
Cost Margin
Budget Market Price – Desired Margin = Target Cost
Cost-price ratio = 80%
Cost-price ratio = 50%
5- Alternatives Generation and Assessment
Alternative Generation
1. Renegotiate with current supplier using target cost
2. Change the purchasing model and directly purchase raw material and send to supplier
3. Implement strategic sourcing and find a new supplier at lower cost
4. Insourcing the manufacturing of gatherer chain
Decision CriteriaCost
Time
Capacity
Quality
Delivery
Risk
Quadrant Analysis
Johnson,Leeders, Flynn . Purchasing and Supply Chain Management. Fourteenth Edition. McGraw, 2013. Printed.
# Criteria/alternative
Cost Time Capacity
Quality
Delivery
Risk TOTALMARKS
1 Renegotiation + + + + + + 5
2 Direct Purchase + _ + + + _ 4
3 ChangeSupplier
+ _ N _ N _ 1
4 Insourcing _ _ + + + _ 3
Alternative Assessment
BEST ALTERNATIVES!
6 - Conclusion and Recommendations
Recommendations and conclusion
Options
Option1 Renegotiation with target price
Option2 Direct supply of raw materials to Saunders
Future Development
Suppliers Evaluation
Research and Development
Recommendations and conclusion
Thank you!