Black Belt Negotiators: The pallet predicament
Purchasing's smartest negotiators move from conflict to collaboration fast. Match your wits against these pros. Guess their strategy. Then, read what they really did at purchasing.com/negotiations.
By Purchasing Staff -- Purchasing, 7/16/2009 2:00:00 AM
Reyes holdings, a large food and beverage distributor, wanted a custom plastic pallet to be used for in-store delivery of food items for its largest customer, a well-known global quick-service restaurant chain. The objectives were to improve driver productivity for the distributor and allow the customer to re-deploy its personnel from the back of the store to the front, where the patrons were.
Problem: Though pilot tests were successful, there was no guarantee that the pallet would work in a large implementation, so Reyes Holdings could not estimate volumes. But, without volume guarantees, no manufacturer was willing to build the pallet. The customer didn't want the pallet to be available to companies outside its distribution system, yet Reyes Holdings wanted to spread the costs over other potential buyers. Finally, the raw material for the pallet fluctuated in cost weekly. Mike Ozmeral, vice president for strategic sourcing at Reyes Holdings, had to negotiate a solution.
Solution: Critical to the solution was that each party agreed to share the risks. The customer, particularly, saw the pallet as a competitive advantage and Reyes Holdings convinced them they should share in the cost. Reyes Holdings agreed to buy exclusively from the manufacturer for three years, or 150,000 units, whichever came first. There was a benchmarking clause to ensure competitive pricing. The manufacturer agreed to pay all engineering costs associated with the mold and part design, as well as mold maintenance.
Here are the specifics:
- The distributor, Reyes Holdings, commissioned its preferred manufacturer to design a mold and production system for the delivery pallet.
- In the agreement, Reyes Holdings agreed to buy and own all rights to the mold after it had been produced by the manufacturer and successfully tested. This cost was shared between Reyes Holdings and the end customer.
- Reyes Holdings made a volume commitment to the manufacturer that was significant enough to cover the majority of setup costs, but would be a small percentage of the overall potential volume.
- Also, Reyes Holdings and the customer agreed that the manufacturer could sell additional units to other non-competing customers of the manufacturer, but only upon their prior written approval and only upon providing a % rebate to Reyes Holdings for any such sales.
- The material cost of the pallets was allowed to rise and fall in proportion to a ChemData Resin index, but production costs and overhead was fixed for the duration of the two-year contract.
- The manufacturer provided a 5-year scaled warranty for the pallets (100% of purchase price for 1st year, 80% in 2nd year etc.). The manufacturer also agreed to buy back any used pallets outside of the warranty claims, based on a formula for the then-current cost per lb of used HDPE.
Are you a black belt negotiator? Tell us about one of your negotiation successes, and we'll print it so others can learn from your experience. Send it to pteague@reedbusiness.com.
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