Chapter 5: ‎ Case Study Brief

Contents:

5.1

The Cancelled Contract

Brief for Sellinco

Brief for Sellinco continued

5.1 The Cancelled Contract

5.1.1 Brief for Sellinco

You are about to have a meeting with representatives of Buyinco.

The purpose is to agree terms to settle their cancellation of an order.

The order was for

"Design, manufacture and installation of special electronic press; 6-month delivery; price £150,000; payment within 14 days of installation."

They cancelled the order three weeks ago, which was just three months after placing the order. There is no contractual arrangement about cancellation fees. At the time of cancellation, you had completed all the designing and drawing of modifications to your standard electronic press; and, fortunately, it had proved possible to design the order without having to buy special components from outside.

You had reserved production facilities to start on the following Monday, and your works staff has had to switch this production to standard presses. They are less profitable.

The structure of your costs is based on having to invest very heavily in research and development: your R & D budget is 22% of total turnover.

A great deal of development was needed for your range of electronic presses.

The information you have from your accounts department is that the estimates for this contact were built up as follows:

5.1.2 Brief for Sellinco continued

When your Buyinco contact tang you to cancel the order, you kept calm but insisted that there would have to be a cancellation fee. You agreed to meet; and he asked you what the fee would be. You remember saying something like – "Well, it'll need looking into, but I'd guess something like £60,000 or so".

Buyinco are important customers and you get a lot of prestige from being known as suppliers to them.

Your task is to negotiate with them and to recommend a settlement to your board of directors.

5.2

 Brief for Buyinco

5.2 Brief for Buyinco 

You are about to have a meeting with representatives of Sellinco.

The purpose is to agree terms to settle their cancellation of an order.

The order was for

"Design, manufacture and installation of special electronic press; 6-month delivery; price £150,000; payment within 14 days of installation."

You have cancelled the order because of changing trade conditions.

You notified Sellinco of the cancellation three weeks ago, which was just three months after placing the order.

You apologised at that time for inconvenience caused, and agreed that some cancellation fee would have to be paid. When you had probed about this, you found that they had not started to make the press; but your contact hinted that the cancellation fee they would expect might be about £60,000.

There is no contractual arrangement about cancellation fees, but you are interested in sustaining the goodwill of Sellinco.

They have many competitors, but they have produced special items of equipment for you on several occasions in recent years, and have proved themselves to be good suppliers.

You have asked your Chief Engineer for guidance on the prospective costs, and he has replied:

"An order of this sort does not call for any great skill in fabrication, but does need a lot of design expertise."

"I would have wanted a budget of at least £ 15,000 to do the design work, and I imagine that they will also have order (and will need to cancel) some special components. I cannot guess at the proportion of specials."

"I would expect them to have high overheads in their cost-structure."

Your task is to negotiate with Sellinco representatives and to recommend a settlement to your board of directors.