Lieutenant Early, the contracting officer of the Navy, was facing complications in negotiating the purchase of equipments from Trustworthy Equipment Company. After she had been unable to reduce the costs of the machinery from questioning the unreasonable allocation of fixed costs, it is necessary that she question costs that have been caused by inefficient management. Such costs could include increased expenditure on five production workers on one stenographer, while yet two could have been efficient. Moreover, duplication of responsibilities increased idle time, hence the attributed notion of employees having a lot of relaxation time. In situations where a company experiences high costs due to mismanagement, the consumer should not be the one to compensate for the inefficiency. This is because the supplier should have focused on improvement of efficiency and effectiveness in order to eliminate cases of acquiring loses. Transferring costs that arise from inefficiency is unethical since the company should have taken responsibility through employing measures of improving management. Hence, the liability of inefficiency costs lies on the company (Stiglitz & Rosengard, 2015). This would help reduce the price of the goods.
Another action Lieutenant Early should take is question the usage of the contingency allowance during production. The 3.3% of all costs had contributed to the high prices. The cost could only be viable if it had been used during production. However, if there were no emergency cases, Trustworthy Equipment Company had saved the funds, hence crediting them to the company. This would result to reduced prices since charging the cost to the customers would be unreasonable, as the supplier would only be increasing the price while yet no contingency costs were incurred. If there were any emergencies, the supplier should have indicated the cost allocated to every emergency. The amount could have been subtracted from the allowance, hence determining the cost and the saved funds. The credible costs to be charged would only those incurred but not the whole amount (Matz, 2011). Thus, Lieutenant would be able to adhere to the policy of assuming prices that only reflect reasonable costs.
If the supplier would still be unwilling to eliminate the unusual costs, it is important that the contracting officer leverage the value of the Navy as a customer. This is because the unwillingness of the supplier to reduce the price could be due to the supplier’s perception of its importance to the customer. Being the sole supplier of the machinery and knowing its ability to improve the performance and productivity of the Navy would have led to the company developing a feeling that the Navy cannot accomplish its target without it. Hence, Trustworthy Equipment Company could have overlooked the importance of the customer, which would have resulted in making the Lieutenant feel that he needs the supplier more than the company could need him. The first step to this solution is evaluating the consequences of no agreement (CNA) (Dietmeyer, 2010). In this case, the short-term consequence would be reduced sales by 100 while the long-term outcome would be losing a customer, hence no chance of making a repurchase. This would result to reduced profitability and a reduction in the scope of the target market. On the other hand, making the sale would help increase the credibility of the company, as it would have achieved a great reference in the market, hence improved sales and profitability. The contracting officer could use this information to thus ask for a cost reduction or withdraw from purchasing, which would result to loss of advantages the supplier could have acquired.
References
Dietmeyer, B. (July, 2010). Supply managers often think they have no power in a single-source negotiation. The Journal of Healthcare Contracting. Retrieved on June 19, 2016 from http://www.jhconline.com/single-source-negotiation.html
Matz, L. (2011). Liquidity risk measurement and management: Base III and beyond. Bloomington, IN: Xlibris Corp.
Stiglitz, J., & Rosengard, J. (2015). Economics of the public sector. New York: W.W. Norton & Company, Inc.
