PROGRAM ON NEGOTIATION AT HARVARD LAW SCHOOL PON093

AN INTER-UNIVERSITY CONSORTIUM TO IMPROVE THE THEORY AND PRACTICE OF CONFLICT RESOLUTION

BMP POLICY MEETING

General Instructions

Eagle Aircraft Engines, manufacturer of engines for military and commercial aircraft, is
preparing to negotiate a major five-year procurement for more than 1,000 various parts
from its suppliers. Its Airfoils and Castings Division (A&C) is responsible for
purchasing roughly 100 of these parts.

Over the past three years, A&C has purchased 90 percent of the parts it needs from two
suppliers: Crown (60 percent) and JDC (30 percent). The remaining parts were
provided by two other smaller suppliers. Crown is the country's oldest and largest
supplier of A & C and comes with a reputation for dependability and quality. Its plants
are 1,500 miles from Eagle. JDC is a younger but growing company, located within
200 miles of Eagle. It hopes to make Eagle one of its top customers and has therefore
quoted significantly lower prices than Crown for many parts. However, it does not yet
have Crown's financial resources, or its proven track record of quality manufacturing.

In preparation for the negotiations, the division's purchasing director, Mort Harris has
asked the buyer, J. Ferguson, to chair a meeting of five key personnel within A&C.
The purpose of the meeting will be to generate a business-managed procurement policy
(BMP policy) to guide the upcoming negotiations with suppliers.

There are four questions that the BMP team must answer:

1. What pricing strategy should Eagle pursue for each part?

2. What quality programs will Eagle require from suppliers?
3. What delivery schedule will Eagle require from suppliers?
4. What relationship strategy will Eagle adopt?

The answers to these four questions will collectively represent the BMP policy.
Agreement on the policy must be unanimous.

The buyer will have to explain in writing to the purchasing director any purchase that
varies from the BMP policy. If the group cannot reach agreement today, negotiations
will have to be postponed, a development that will not be looked on favorably by the
purchasing director.
Copies are available online at www.pon.org, Telephone: 800-258-4406 (within U.S.) or 781.239.1111 (outside U.S.); or by fax:
617.495.7818. This case may not be reproduced, revised, or translated in whole or in part by any means without the written
permission of the Director of Curriculum Development, Program on Negotiation, Harvard Law School, 518 Pound Hall,
Cambridge, MA 02138. Please help to preserve the usefulness of this case by keeping it confidential. Copyright © 1993, 1995,
2001, 2002, 2008, 2009 by Endispute and GEAE. Distributed with permission by the Program on Negotiation at Harvard Law
School. All rights reserved. (Rev. 2/09.)

This document is authorized for use only in LAURA JULIANA ZABALA VELEZ's Diplomado negociaci?n CEC / 2018-2 at Universidad EAFIT from Aug 2018 to Jan 2019.
 BMP POLICY MEETING: General Instructions PON093

Because A&C's standard practice is to negotiate part by part, the BMP policy will serve
as a central guideline for more than 100 separate negotiations.

The following five people will attend today’s meeting:

J. Ferguson, buyer, will chair the meeting and leads the group that is responsible for
actually purchasing parts from suppliers next week. It is up to that group to negotiate
the price and all of the quality and delivery terms and conditions.

B. Archer, value engineer, looks for improvements or savings (or both) in the design
of each part. S/he also works with each supplier to estimate the supplier's costs of labor
and raw materials.

J. Banks, financial analyst, analyzes each supplier's financial stability, cash flow and
assets, and rate structure (management and overhead costs).

C. Roberts, quality engineer, looks at the process each supplier uses to make a given
part, to ensure that the part will be of high quality and conformance.

G. McGuire, design engineer, is responsible for the success or failure of the final
product (aircraft engines) and thus wants to be sure that each and every part that goes
into it is of high quality.

Harris, the purchasing director, has written the attached memo, which has been
distributed to all five BMP team members. He has also compiled the attached list of
options under each issue, based on his conversations with various team members.

Copyright © 1993, 1995, 2001, 2002, 2008, 2009 by Endispute and GEAE. Distributed with permission by the Program on 2
Negotiation at Harvard Law School. All rights reserved. (Rev. 2/09.)

This document is authorized for use only in LAURA JULIANA ZABALA VELEZ's Diplomado negociaci?n CEC / 2018-2 at Universidad EAFIT from Aug 2018 to Jan 2019.
 BMP POLICY MEETING: General Instructions PON093

M EMORANDUM

To: BMP Policy Team

Fr: Mort Harris, A&C Purchasing Director
Re: Overall Procurement Strategy

In preparation for your meeting this afternoon, I am writing to remind you of Eagle's
General Procurement Strategy (GPS) promulgated last year by Joan Anderson, vice
president of procurement. This memo still applies to all Eagle divisions, including
A&C. However, I ask you to keep in mind additional points that have been stressed in
recent management meetings:

1. It is important for Eagle in general, and A&C in particular, to move toward

improved relationships with suppliers. Our new president believes that working
more intensively with fewer suppliers will improve quality. It is especially
crucial to build trust with those suppliers in the short term.

2. We need to cut our financial losses from defective parts. Last year we received
too many defective parts and consequently lost revenue.

The main points from last year's GPS memo are listed below:

GENERAL PROCUREMENT STRATEGY

1. Use LEVERAGE. Whenever possible, use the size and importance of each
contract to leverage a lower price.

2. Strive for a SOLE SUPPLIER. Try to award each part to only one supplier, in
line with our goals of (a) reducing variation by having a single supplier for each
part, and (b) decreasing our total number of suppliers.

3. Ensure SUPPLIER CAPABILITY. Make sure suppliers have the capability to

deliver what they promise. Evaluate capacities carefully and realistically.

4. Implement quality-driven HOLDBACKS. For any part that is awarded to more

than one supplier, withhold a percentage of the order for one year to award to the
supplier with the best quality and delivery score in the first year.

5. CONTINUOUS IMPROVEMENT. Be sure to implement provisions in every

contract to assure continuous improvement in all of our processes.

Copyright © 1993, 1995, 2001, 2002, 2008, 2009 by Endispute and GEAE. Distributed with permission by the Program on 3
Negotiation at Harvard Law School. All rights reserved. (Rev. 2/09.)

This document is authorized for use only in LAURA JULIANA ZABALA VELEZ's Diplomado negociaci?n CEC / 2018-2 at Universidad EAFIT from Aug 2018 to Jan 2019.
 BMP POLICY MEETING: General Instructions PON093

6. BAILOUT CLAUSE. Incorporate a bailout clause into as many agreements as

possible. In the next ten years we want to be able to penetrate some large new
foreign markets. Some foreign governments may require us to offset our entrance
to their markets by contracting with suppliers from those markets. This means we
need to maintain the option of breaking contracts with our domestic suppliers
quickly and cleanly.

ISSUES AND OPTIONS

1. What PRICING policy should Eagle pursue for each part?

a. Discount Pricing. For any part A&C will award 100 percent of the
order to a supplier that will accept a price 10 percent below the nearest
quoted price.
b. Competitive Pricing. For any part A&C will award at least half of the
order to the supplier with the lowest price as long as it is below the "fair
cost" price estimate given by the value engineer and the financial
analyst.
c. Fair Cost Pricing. For any part, A&C will simply pay the fair cost
price estimate (provided by the value engineer and the financial analyst).
d. Quality Pricing. For any part A&C will be prepared to pay up to five
percent more than the fair cost to ensure long-term quality and delivery
improvements.

2. What QUALITY programs will Eagle require from suppliers?

* CONTINUOUS IMPROVEMENT PROGRAM. Eagle and suppliers will jointly

fund a task force to look at ways to continuously improve their product
processes.
* QUALITY CONTROL PROGRAM. Stricter tolerances and more process
capability studies by suppliers.
* HOLDBACKS PROGRAM. Eagle will withhold 20 percent of each part order
and award it to the supplier with the best "supplier excellence" in one
year.
* COMPENSATION PROGRAM. Suppliers must fully compensate Eagle for the
labor and overhead it spends finishing parts that turn out to be defective.

a. Continuous Improvement, Compensation, Quality Control, Holdbacks.

All four programs to be required in all contracts.
b. Continuous Improvement, Compensation, Holdbacks. Quality Control
program if Ferguson's team can get it; other programs required.

Copyright © 1993, 1995, 2001, 2002, 2008, 2009 by Endispute and GEAE. Distributed with permission by the Program on 4
Negotiation at Harvard Law School. All rights reserved. (Rev. 2/09.)

This document is authorized for use only in LAURA JULIANA ZABALA VELEZ's Diplomado negociaci?n CEC / 2018-2 at Universidad EAFIT from Aug 2018 to Jan 2019.
 BMP POLICY MEETING: General Instructions PON093

c. Continuous Improvement, Compensation, Quality Control. Holdbacks

program if Ferguson's team can get it; other programs required.
d. Continuous Improvement, Quality Control. These two programs
required; other programs if Ferguson's team can get them.

3. What DELIVERY schedule will Eagle require from suppliers?

a. Just-in-time. Suppliers and Eagle will agree on a demand-driven

delivery schedule, with orders going directly from Eagle's shop floor to
the suppliers' shop floors.
b. Speed Cycle. Weekly delivery, with supplier-housed stockpile as
guarantee.
c. Standard Cycle. Fourteen-day delivery, with supplier-housed stockpile
as guarantee.

4. What RELATIONSHIP strategy will Eagle adopt?

a. Play it Safe. The buyer will only negotiate with Crown but each contract
must include a bailout clause to allow Eagle to discontinue orders with
Crown if ventures abroad require Eagle to develop foreign suppliers.
b. Protected Risk. The buyer will negotiate with Crown and JDC. Each
contract must include a bailout clause.
c. Selective Commitment. The buyer will negotiate with Crown and JDC.
Each contract will be binding (no bailout).
d. Open Commitment. The buyer will negotiate with all four suppliers.
Each contract will be binding (no bailout).

Copyright © 1993, 1995, 2001, 2002, 2008, 2009 by Endispute and GEAE. Distributed with permission by the Program on 5
Negotiation at Harvard Law School. All rights reserved. (Rev. 2/09.)

This document is authorized for use only in LAURA JULIANA ZABALA VELEZ's Diplomado negociaci?n CEC / 2018-2 at Universidad EAFIT from Aug 2018 to Jan 2019.