Negotiation Role-Play
Pacific Shipping versus General Fittings
Confidential Role Information for
David Grady, President of General Fittings
Name:
Instructions: You are
David Grady, President of General Fittings, a company that is supplying newly designed fittings to a shipping company called Pacific Shipping. You are about to engage in a serious negotiation with John Larson, Project Manager at Pacific Shipping. The dispute involves new fittings that you supplied for his ships and is described in more detail in the following pages. As you
prepare
for the negotiation, work through your
goals, positions, interests and BATNA. (Do this by filling out the table on the last page). Do the same for the other side. Then develop a
negotiating strategy and bargaining tactics
that are appropriate for this type of situation and that will help you to achieve your goals. Please do not show your confidential role information to the other party before the role-play begins, although you should feel free to disclose information during the negotiation as you see fit. Also, remember that you represent your organization and that you will have to “sell’ whatever agreement you make with John Larson to your internal stakeholders (i.e. senior management at your parent company).
The Situation
Pacific Shipping is a leading transportation company providing ocean, rail, and road transportation of containerized cargo in the USA and Pacific Rim countries. It is in the midst of taking delivery of six new high-speed, high-capacity container ships. Pacific purchased a new type of fitting from your company, General Fittings, that will be used to fasten the cargo containers to the decks of its new ships. Pacific has taken delivery of the first ship and installed the first set of new fittings to this ship. Your company will supply the remaining fittings to each subsequent ship at the time the ship construction is completed (the schedule calls for one new ship to be delivered to Pacific every six weeks and therefore one new set of fittings will need to be delivered every six weeks).
Shortly after the first ship entered service, problems developed with the new fitting (See Tables 1 and 2 for a comparison of the old standard fitting and the new fitting). Instead of taking 15 minutes to fasten a container to the ship using the new fittings, it was taking 25 minutes and causing major loading delays. At first it was not clear what was causing the problems, but now the problems have been linked to the design of the new fittings. Pacific Shipping and the supplier of the new fittings, General Fittings, are now faced with the dilemma of what to do about the faulty fittings - how to supply the remaining five ships, how to find replacements for the faulty fittings, and who will pay the substantial replacement and redesign costs. (See Table 3 for a summary of the financial aspects of the purchase).
Instructions for David Grady, President of General Fittings
1. Your firm is very short of money. This order has severely taxed your credit lines. You have committed to the production of all five remaining ship-sets of fittings, and owe $50,000 to your subcontractor immediately.
2. This is a big order for you, and having Pacific Shipping as a satisfied customer will allow you to use them as a reference to gain additional business. Your experiences with Pacific during the design phase were very positive. Both your and Pacific's engineers worked well together during the design process, exchanging valuable design and usage information on the new fittings.
3. You are disappointed that Pacific is laying all the responsibility for the product problems on your lap. After all, both companies were involved in the design and testing of prototypes (See Figure 1 for a diagram of the design process), and therefore Pacific had to know what they were getting. The fitting problems stem from a misunderstanding of their application and use. You feel that this "usage" information should have been more clearly explained by Pacific’s engineers that worked on the project. Your engineers are responsible for the actual performance specifications and as far as you know the fittings have not "failed" due to structural reasons. You believe that it is unfair that you are expected to carry the full financial burden imposed by the unsuccessful fittings, especially since your conversations with Pacific Shipping lawyers have led you to believe that you are expected to redesign the fittings without the help of the original Pacific engineers. Without help from Pacific’s engineers it will take your engineers about 8 weeks to redesign the fittings. This would prevent you from meeting the schedule for their second ship, which will be ready in 5 weeks.
4. You have in your inventory standard fittings from your existing product line, which could be used to meet Pacific's short-term requirements. However, you are very reluctant to offer this option because once a fitting is used, it can no longer be sold as new equipment. You estimate that the value of the standard fitting will drop from the retail price of $18 to $10 once it is placed into service with Pacific Shipping. You want Pacific to carry some of this cost if the standard fittings are used. You have thought about asking them to buy the standard fittings, but are not sure if a rental fee to cover the depreciation of the fittings is more appropriate.
5. Your public stand is that product problems should be dealt with on a warranty service basis: Pacific can deliver defective fittings for you to repair. Other than that, you say, is beyond the scope of the contract. Privately you recognize that this is a major issue about to explode, and you are searching feverishly for a solution.
6. Pacific has paid only the $150,000 deposit toward the contract value of $600,000. The contract states that you should have received an additional $75,000 for delivering the first set of new fittings for the first ship last week. You have invoices of $50,000 from your sub-contractor that you must pay by next week. Your parent company has some money available, but they have threatened to let you go if your business cannot operate profitably.
7. Your last meeting with your parent company has left you rather nervous. They have been putting pressure on you to modernize your ordering and inventory handling system. Currently all orders are processed by hand and this takes many hours of work and is very inefficient. You have been given a one-year deadline and a $50,000 budget to acquire a new computerized inventory tracking system. To date, you have not found any such software package available on the market. Conversations with your computer vendor have indicated that most companies in the shipping business actually write and develop their own software packages. You do not think that the budget you have been given will allow you to develop such a software package in-house.
The Negotiation
You are on your way to meet with John Larson, Project Manager at Pacific Shipping. You know this is a crucial meeting because Pacific has indicated that unless a satisfactory solution is found soon, they may not be able to continue with the new fittings program. You are quite anxious to keep Pacific Shipping in the program. You are also particularly concerned about your inability to pay the $50,000 that is due to your subcontractor. You would like Pacific to pay the amounts owed to you so that you can meet your obligations to your creditors.
Table 1: Comparison between Standard Fitting and New Fitting
|
Standard Fitting
|
New Fitting
|
Price
|
$15-$20
|
$20
|
Durability
|
2-3 years
|
5 years
|
Rated Strength
|
0.5-1.5 tons
|
1.5 tons
|
Time to fasten a container
|
20 minutes
|
15 minutes
|
Table 2: Comparison between Standard Ship and High Speed Ship
|
Standard Ship
|
High Speed Ship
|
Speed (Knots)
|
27 knots
|
35 knots
|
Capacity
|
1000 containers
|
1250 containers
|
Number of fittings needed to fasten a container
|
4
|
4
|
Time to fasten a container
|
20 minutes
|
15 minutes
|
Loading Time Savings
|
NA
|
Approx. 104 hours
|
Hourly Loading Wage
|
$30
|
$30
|
Table 3: Summary of Payments Due
|
Due Date
|
Amount
|
Deposit
|
Week 0
|
$150,000
|
Payment per ship
|
Ship Delivery Date
|
$75000
|
TOTAL
|
$600,000
|
Figure 1: Original Design Process for New Fitting
|
|
|
|
|
|
|
|
|
|
|
Design Stage
Pacific Shipping
4 engineers
General Fittings
4 engineers
800 design hours
|
|
|
Approval Stage
Pacific Shipping
John Larson
General Fittings
David Grady
0.5 Week
|
|
|
Production Stage
General Fittings
David Grady
|
|
|
|
|
|
|
|
|
Role Play Preparation Form (complete
before
you do the role-play)
|
John Larson
|
David Grady
|
Positions
|
|
|
Interests
|
|
|
BATNA
|
|
|
Details of the Deal
(complete after role play)
|
|
|