Ashbury Guitars of California, U. S. A has approached our company to enter a deal where we are to supply them with 3 types of electric guitars; the SG200, SG500 and SG1000. This write-up outlines the strategy of KGC during the negotiations to be held in San Francisco, and aimed at attaining the following objectives in order of priority;
- To secure a first order of a minimum of 2000 guitars
- To outsource 40% of production to other Korean firms
- To optimize sales of the SG1000
- 4To secure payment upon shipment
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Secure Order for 2000 Pieces To guarantee feasibility of this venture, it is critical that at least 2000 pieces be sold, failure to which any other objective, though met, might not make up for the losses incurred in setting up an under-utilized production line. This objective is therefore paramount.
- Best case scenario: KGC shall propose to Ashbury that the latter place an initial order of 3500 pieces, the composition of which will be up to them to determine.
- It is anticipated that Ashbury will place a counter-offer.
KGC should then make the point that given Ashbury’s requirements for proprietary designs, KGC will be compelled not to produce the same for any other customers, and as thus, volumes need to be guaranteed. KGC should then make a counter-offer for a first order of 3000 pieces, with 500 of these pieces delivered on a 90-day credit, but on condition that 40% of the order be comprised of the SG1000 line. KGC should also offer a 7% discount with this package (instead of the traditional 3% off the list price) and 5% thereafter.
It is anticipated that Ashbury will argue that the whole point of taking a smaller order is to save on capital costs. To counter this, KGC should maintain the 40% SG1000 requirement but offer to reduce the overall order by 500 pieces (to 2500 pieces), but with the first time discount remaining at 3% of list price, and with no supplier credit lines.
Should this offer be unacceptable to Ashbury, KGC should offer to take a first order of 2000 pieces, but with no discounts, no credit lines. Upon insistence, the 3% discount may be given for the first order of 2000.
Bottom line: If Ashbury insists on a number lower than 2000 pieces, KGC will make a final proposal that the first order comprise of 1500 pieces, with 40% SG1000 composition, but with the proprietary design demoted to limited edition, where KGC will have the right to produce a limited number (proposed to be 1000 pieces) of the SGxx guitar range to up to three other distributors in a region outside of the California region in the U. S. If this offer is unacceptable, then the negotiations will be deemed to have failed
Outsource 40% of Production To save on production costs, it is advised that KGC only handle 60% of production.
It is anticipated that Ashbury might have objections to this arrangement largely on the concern over consistency of quality and possible disruptions in supply. To convince Ashbury to agree to an outsourcing arrangement, the following outline will be followed;
- It will be pointed out to Ashbury that such an arrangement would lower overall production costs, thus lower quotations from KGC. All assurances of quality and consistency will be made, with KGC guaranteeing that it will oversee all the external production lines. KGC will make the offer to have 50% production done off-site.
- The possibility of KGC lowering the number of pieces ordered by Ashbury will be explored at this point should the latter not be convinced. Depending on the deal arrived at under Objective I above, provided it is equivalent to an agreement higher than the bottom line, KGC will offer to bring down the threshold for the first order provided Ashbury allows for 40% off-site production.
- Should not produce an agreement, KGC will offer to do 30% off-site, but with no changes in the Objective I agreement, OR agree to only 20% off-site manufacturing but with a 5% rise in the list price.
- Bottom line: 100% on-site production, but with 10% increase in price for SG200 and SG500.
Optimize Sales of SG1000 at 40% of Order The chief strategy to be used in seeking to achieve this objective will be to convince Ashbury that being a top-end retailer, should concentrate on the finest quality of guitars as their main products and only offer the other models as alternatives to those who really cannot afford the SG1000. The chief contention anticipated from Ashbury will be that the SG1000 is expensive, and might not sell in large numbers.
Additionally, it might need exemplary marketing to push sales. KGC will offer the following incentives in succession;
- KGC will create more attractive packaging for the SG1000 that will give it the image of a professional piece of equipment for the most avid of musicians. To be included in the package will be professional guitar accessories, including replacements for vital parts and accessories. All these will be branded appropriately.
- KGC will offer an additional 15% discount on all purchases of the SG1000, provided two thirds of this amount is channeled directly toward marketing the SG1000. An agreement is to be ironed out on the optimal approach toward such partnership.
- KGC will offer full support for the SG1000 for a period 50% longer than that of the other two models, and will give a 7-year guarantee as opposed to 5 years. KGC will also offer to custom-make SG1000s for Ashbury customers, but this option will be absent for the other models.
Secure Payment upon Shipment Ashbury will seek to minimize their risk by requesting credit line extensions. This might place KGC at higher risk, and it is in the latter’s interest to secure payment upon shipment. The following proposals will be made;
- That Ashbury makes 50% down payment prior to shipment and get a 2% additional discount on orders. This can be softened to 30%. This offer will be available provided Ashbury is willing to accept a delivery date after the 30th of June.
- That Ashbury provides a letter of guarantee from its bank for 100% payment upon shipment of guitars, if (1) is unacceptable.
- Bottom line: That KGC gives Ashbury a 90-day credit line for up to 20% of the overall cost of the first order, 30% on subsequent orders, provided Ashbury comes up with a guarantor, and that it accepts a delivery date no sooner than the 30th of June.
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