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!