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Universal Computer Company - Negotiation Exercise


In this exercise you will play the role of a plant manager who has to negotiate some arrangements with another plant manager. You will be in a potentially competitive situation where cooperation is clearly desirable. Your task is to find some way to cooperate, when to do so might seem to put you at a disadvantage.

Read the Universal Computer Company Background Information section (below) and the role information that the instructor has provided. Plan how you will handle the forthcoming meeting with the other plant manager. Record your initial proposal on the Initial Settlement Proposal form. Do not show this to the other party you are negotiating with until after the negotiations are completed.
For this exercise, I will be playing the role of Philips plant manager.

Background Information:

The Universal Computer Company is one of the nation's major producers of computers. Plants in the company tend to specialize in producing a single line of products or, at the most, a limited range of products. The company has considerable vertical integration. Parts made at one plant are assembled into components at another, which in turn are assembled into final products at still another plant. Each plant operates on a profit-center basis.

The Quality Problem:

Production at the Philips plant has been plagued by poor quality. Upon examination it has been found that a considerable portion of this problem can be traced to the quality of the modules received from the Crawley plant.

The Crawley plant maintains a final inspection operation. There has been considerable dispute between the two plants as to whether the Crawley plant was to maintain a 95% overall acceptance level for all modules shipped to the Philips plant, or to maintain that standard for each of the 42 modules shipped. The Philips plant manager has insisted that the standard had to be maintained for each of the 42 individual modules produced. The Crawley plant manager maintains that the requirements mean that the 95% level has to be maintained overall for the sum of modules produced. Experience at the Philips plant shows that while some module types were consistently well above the 95% acceptance level, 12 types of modules had erratic quality and would often fall far below 95% level. As a result, while individual types of modules might fall below standard, the quality level for all modules was at or above the 95% level. This raised serious problems at the Philips plant, since the quality of its products is controlled by the quality of the poorest module.

The Interplant Dispute:

The management of the Philips plant felt that the quality problem of the modules received from the Crawley plant was causing them great difficulty. It caused problems with the customers, who complainted of the improper operation of the products that contained the Crawley modules. As a result, the Philips plant operation had earlier added secondary final inspection of its completed products. More recently it had added an incoming inspection of 12 poor-quality modules received from the Crawley plant. There were times when the number of modules rejected was large enough to slow or even temporarily stop production. At those times, to maintain production schedules, the Philips plant had to work overtime. In addition, the Philips plant had the expense of correcting all the faulty units received from the Crawley plant.

Ideally, the management of the Philips plant would like to receive all modules free of defects. While this was recognized as impossible, they felt that the Crawley plant should at least accept the expense of repairs, extra inspections, and overtime required by the poor quality of the parts.

Since installing incoming inspection procedures on the 12 modules, the Philips plant had been rejecting about $8000 of modules a week. For the most part, these had been put into storage pending settlement of the dispute as to which plant should handle repairing them. Occasionally, when the supply of good modules had been depleted, repairs were made on some of the rejected units to keep production going. The Philips plant had continued to make repairs on the remaining 30 types or modules as the need for repairs was discovered in assembly of final inspection.

From its perspective, the Crawley plant management felt that it was living up to its obligation by maintaining a 95% or better quality level on all its modules shipped to the Philips plant. Further, they pointed out that using sampling methods on inspection meant that some below-standard units were bound to get through and that the expense of dealing with thses was a normal business expense that the Philips plant would have to accept as would any other plant. They pointed out that when buying parts from outside suppliers it was comman practice in the company to absorb the expenses from handling the normal level of faulty parts.

The Philips plant management argued that the Crawley plant management was ignoring its responsibility to the company by forcing the cost of repairs on to their plant, where only repairs could be made - rather than to have the costs borne by the Crawley plant, where corrections of faulty processes could be made.

Initial Settlement Proposals:

1. How do you propose that the following expenses and repairs should be handled?

a. Expense of repairing all faulty modules.

b. Expense of repairing faulty modules other than the 12 types that fall below 95% level.

c. Expense of repairing the faulty modules of the 12 types that fall below the 95% level.

d. How to handle the repair of the faulty modules of the 12 types that fall below the 95% level ?

e. How to handle the repair of the modules other than the 12 types that fall below the 95% level ?

Solution Preview

The expense of all the faulty modules should be shared. This is a division of costs that should take into account the fact that there is currently a 95% level of acceptable defects. However, the burden of costs for any that are over this percentile should be charged to the plant that makes the modules. They are the ones responsible for the quality of the modules at production. There should also be a Philips representative on the Crawley production floor to help resolve issues with the defects and make sure the proper processes are being followed.

b. The ...

Solution Summary

The negotiation for Universal Computer Company is examined.