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Executive Summary
Deere is a company that deals in the manufacturing and distribution of a diverse range of agricultural, commercial, consumer, construction, and forestry equipment. Lately, the company’s margins in the gatherer chain have been reducing. This chain constitutes one of the most popular products sold by the company’s Agricultural Products Division. The diminishing margins were mainly attributed to increased market competition and the increasing purchase cost of the chain from Saunders. This paper aims at evaluating this issue and, subsequently, providing solutions to the problem. Deere operates in a market that is highly competitive. As such, the company’s price is relatively fixed by that of its competitors. Deere only has control over the cost of the machine part. Therefore, Deere should provide Saunders with information regarding demand to enhance their effectiveness. Also, Deere should involve them in the risk assessment and progressive risk management of the products.
Procurement Process
Product value is increasingly surpassing brand and supplier loyalty with regard to customer preferences around the globe. Hence, stabilizing the margins of products in the deflationary global markets of today puts more pressure on the reduction of costs (Christopher & Gattorna, 2005). Ernst & Young (2014) examines the five basis of procurement that a company’s procurement division needs to uphold to give value to the company. Their report stipulates that procurement needs to drive sustainable savings in any organization. Moreover, it should promote the value of the organization through proper supplier relationship and contract management. In the Deere case, these basics have been ignored. Thus, it is necessary to introduce budgeted cost management in Deere, in spite of the fact that it may constrain contractual relations with suppliers, as well as their attitudes and communication.
If budgeted cost management interferes with communications, relationships, and other external market forces, the procurement division of the company should manage the contracts and suppliers of the organization. To address this situation, the company’s procurement processes usually adopt a framework that aligns effort, risk, and reward to ensure the consistent creation of value (Ernst & Young, 2014). Occasionally, procurement processes incorporate critical suppliers into the long-term demand planning processes of the company to promote value addition to the company.
Market Competition
In a market with very similar products produced by different firms, price competition between the various companies is bound to arise. In this case, the companies adopt pricing strategies based on the competition. As such, the price set by one company is dependent on the pricing of the competitor instead of the company’s production costs and profit targets (Piccione & Spiegler, 2012). Before setting prices for their products, companies in this environment need to evaluate their price environment. This evaluation helps them to ascertain the level of control that they wield over the prices of their products.
A corporate environment that is controlled by the market exhibits higher competition due to the presence of more similar products. Thus, control of their prices by a single company is restrained. Moreover, the products trade in price ranges, hence, a company needs to evaluate the pricing of competitors to gauge their levels in the current price ranges (Piccione & Spiegler, 2012). Due to the reasons stated above, market competition determines a company’s selling price, and this limits the ability of a single company to sell for a price that covers their costs, leave alone ensuring profit margins.
Deere’s Case
In Deere’s case, margins for the gatherer chain have been declining steadily over the years with a concomitant rise in costs. As such, the company is facing a situation whereby increased competition may drive them out of the market. If this trend progresses, Deere will inevitably run into losses. Given the fact that the company has limited control over market pricing, it has to exert control over its costs to sustain its margins. Deere can control its costs by integrating the vendors, Saunders in this case, into the company’s long-term planning. This integration is necessary since vendors need the demand information to become more efficient (Ernst & Young, 2014).
The management of the supply base will be conducted by employing a supplier management framework that understands the risks, efforts, and rewards. In Deere, the execution of risk assessment within the company appears to be relatively weak. This parameter needs to be evaluated during sourcing followed by continuous monitoring and management. Economic changes usually lead to the shifts in position by the suppliers. This will ensure that the suppliers like Saunders understand the symbiotic relationship existing between the two parties (Ernst & Young, 2014). Moreover, they will have a better understanding of the market pressures faced by Deere. Besides, the company will understand its position in the market to gain the foundation that will promote the identification of opportunities that will minimize risks. Deere should also consider a thorough review of the volume requirements. Therefore, it should develop alternatives that will adequately fulfill the need with no significant reduction in marginal revenues.
The resolution of this issue should focus on ensuring that the supplier, Saunders, understands the market pressures faced by Deere. Despite the toughness of Wayne Saunders as a negotiator, he is still considerate. Thus, providing him with appropriate demand information will surely enhance the effectiveness of his company through better control of gatherer chain costs. This resolution will ensure that the risk assessment is not only executed during sourcing but also managed and monitored continuously in the company (Ernst & Young, 2014). The risks need to be jointly managed by both Deere and Saunders to ensure commitments over the long-term.
A potential outcome of the cost management process will be the insistence of Saunders to negotiate a favorable deal that guarantees the profits they are used to receive from their previous contract with Deere. In spite of this possibility, Saunders can still be made to understand Deere’s risks concerning reducing margins and market pressures. Moreover, providing Saunders with appropriate demand information will enable them to understand Deere’s circumstances. Hence, they will be more willing to minimize their costs to a level that is favorable and profitable for both companies.
References
Christopher, M., & Gattorna, J. (2005). Supply chain cost management and value-based pricing. Industrial Marketing Management, 34(2), 115-121.
Ernst & Young (AY). (2014). Five things - Getting the basics right in procurement. Ernst & Young Report Retrieved from http://www.ey.com/Publication/vwLUAssets/Five_things_-_Getting_the_basics_right_in_procurement/$FILE/Five_things_you_should_expect_from_procurement.pdf.
Piccione, M., & Spiegler, R. (2012). Price competition under limited comparability. The Quarterly Journal of Economics, 127(1), 97-135.
