Deere study case - supplier evaluation - supply chain management - purchasing

1. Deere Case
Cost Analysis and Cost Management
Group members:
Tosin , Lu Wen,
Jonas, Kai and Arun

2. Presentation Outline
1. Background
2. Key Issues
3. Given Information
4. Data Analysis
5. Alternative Generation and Assessment
6. Conclusion and Recommendations

3. 1 - Background

4. 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

5. 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)

6. 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

7. Departments involved
 Glen 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

8. Negotiation and Cost
Management Techniques
 Breakdown Analysis
 Target Pricing
 Quadrant Analysis

9. 2- Key Issues

10. 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

11. Long Cycle Process
 Immediate issue: to recover the profit margin and offer
a lower after market price
 Basic Issue
 Breakdown analysis
 Strategic sourcing
 Negotiation strategy
 Supplier evaluation
 Research and development
 Supply model

12. 3- Given Information

13. Product Composition
Information 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.

14. 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

15. U.S. companies in Saunder’s Industry
code – Breakdown of Manufacturing
Material
42%
Direct Labor
13%
Overhead
20%
Indirect Labor
6%
Other and
Margin
19%
Costs

16. Costs and Price
Information 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)

17. Missing Information
 % of sales of Saunders to Deere – How important is
Deere to Saunders
 How many different products Saunders produces
(share fixed costs)

18. Assumptions
 Saunders does not have the same “economy of scales”
as Deere
 Deere is the most important client for Saunders – good
for negotiation

19. 4- Data Analysis

20. Aftermarket Price x Purchase Cost x
$40.00
Margin/unit
$36.25
$30.00
$21.25 $22.21
$24.12
$18.75
$14.04
$5.88
$45.00
$40.00
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$-
1 2 3
Aftermarket Price
Purchase Cost
Margin/unit

21. Bottom Line Impact
B
o
tt
o
m
L
i
n
e
I
m
p
a
c
t
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%

22. Revenue and total margin Evolution
$19,000,000.00
$14,862,500.00
$10,500,000.00
$8,906,250.00
$5,756,400.00
$2,058,000.00
Revenues
Gross Profit
Linear
Regression
Forecast
Loss!

23. Material Cost - Saunders
Steel Scrap Steel Pin Total
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$-
Total Cost $3.25 $0.65 $1.61 $5.51
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

24. Saunders’ Gatherer Chain – Estimated costs (benchmark
Material, $5.51 ,
42%
Direct Labor,
$1.71 , 13%
Other and Margin,
$2.49 , 19%
Overhead, $2.62 ,
20%
Indirect Labor,
$0.79 , 6%
breakdown)

25. Budget Market Price – Desired Margin = Target Cost
$24.12
$15.00
$5.88
$15.00
Cost x Margin - Target
Cost Margin
Current Target
Cost-price
ratio =
80%
Cost-price
ratio =
50%

26. 5- Alternatives Generation
and Assessment

27. 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

28. Decision Criteria
 Cost
 Time
 Capacity
 Quality
 Delivery
 Risk

29. Quadrant Analysis
Johnson,Leeders, Flynn . Purchasing and Supply Chain Management. Fourteenth Edition. McGraw,
2013. Printed.

30. Alternative Assessment
# Criteria/alternativ
e
Cost Time Capacity Quality Delivery Risk TOTAL
MARK
S
1 Renegotiation + + + + + + 5
2 Direct Purchase + _ + + + _ 4
3 Change
Supplier
+ _ N _ N _ 1
4 Insourcing _ _ + + + _ 3
BEST ALTERNATIVES!

31. 6 - Conclusion and
Recommendations

32. Recommendations and
conclusion
Options
 Option1 Renegotiation with target price
 Option2 Direct supply of raw materials to
Saunders

33. Recommendations and
conclusion
Future Development
 Suppliers Evaluation
 Research and Development

34. Thank you!