The goal of Part 1 is to experience the process of establishing a price from a single perspective. Specifically, you will be acting as a buyer called PileCo. Your primary mission is to determine a price you would be willing to accept for metal pads. In Part 2, you will use this information in a synchronous meeting with a classmate in the opposite role (seller MetalCo) to negotiate a price for metal pads.
Situation
Metal Pad Customer: PileCo1 You work for a mid-size construction company, PileCo, that specializes in driving piles for building foundations. Pile driving machines like the one pictured below use a powerful hammer to drive metal or cement piles into the ground to form the foundations of buildings. Each year about 300 million feet of piles are driven in the US. Current data suggests that your company enjoys a 5% market share in this business. Two months ago, you were approached by a vendor, MetalCo, promoting a new product that can be used to cushion the shock between pile driving machine hammers and the piles. Cushioning pads keep the shock of the hammer strike from damaging the pile as they are hammered into the ground. In the past, pile driving companies simply used blocks of wood which sometimes caught on fire, but for many years now you have been using unbranded pads made of pieces of asbestos-like material that you can buy from local industrial supply houses for about $3 a piece. These supply houses sell a wide variety of products needed by construction companies like yours. Your company rents its pile-driving equipment and pays the workers an hourly wage. The rental and labor costs together are about $150 per hour per machine. MetalCo is a small ($20m in sales) but successful firm specializing in a metal wire twisting technology typically used for making various kinds of filters for the automobile industry. Their new pad is a completely new application of this technology. It is made from metal wire twisted to form a coil and then wound to form a pad. The pad is expected to transfer the driving energy to the pile much more efficiently and is protected by a patent. They are the only vendor with such a product. After the initial visit, MetalCo left you a case of pads and you agreed to try them in one of your sites – no strings attached. Results just came back. Because of the more efficient energy transfer to the pile, the new pads increased the speed with which piles could be driven from 100 feet per hour to 150 feet per hour. This job was typical and required 15,000 feet of piles to be driven. Five of the new pads were used. For the same job, 100 of the old pads would have been needed. You are scheduled to meet with MetalCo to negotiate buying metal pads from them directly (i.e. skipping the supply house) for a period of 1 year. However, the vendor has not yet discussed prices. How much would you pay for the new metal pads?
