Case Study: Lantana. The case is based on a Kotler Marketing Group consulting assignment. Names and some of the data have been altered.

Transcription

1 Case Study: Lantana The case is based on a Kotler Marketing Group consulting assignment. Names and some of the data have been altered. 1. Read the Lantana case. 2. Review the questions at the end of the case and discuss at your table. 3. Be prepared to share your answers with the group. 1 Copyright Kotler Marketing Group

2 Lantana, Inc. Francisco Gonzalez, the executive responsible for Lantana s account with Cumberland Machines, leaned back in his chair and tilted his head toward the ceiling. He thought about the upcoming quarterly review meeting with Cumberland s supply management organization in Cedar Rapids. The meeting was in two weeks and, while he didn t expect any major surprises, he knew Dave Olson, Director of Supply Management, would want to discuss matters related to Cumberland s current contract with Lantana, a four-year agreement set to expire in less than one year. Gonzalez considered some of the issues that Olson was likely to raise in the meeting, such as Cumberland s need for additional volume. The current agreement called for Lantana to annually supply over 20,000 engine blocks to Cumberland s facility in Torreon, Mexico. However, due to increased demand in North America, Cumberland was now projecting it would need an additional 6,000 engine blocks per year. For several months now, Cumberland had asked about Lantana s capability and willingness to supply the additional blocks. Because Lantana was already running at full capacity, this meant they would have to make a significant investment in new tooling and machining. Among the members of Lantana s management team, there had been considerable debate about whether to make the investment. There was some concern that if Lantana did not add additional capacity, it would open the door for other suppliers. Some argued that to keep up with the strong demand in North America Lantana would have to add additional capacity fairly soon anyway. On the other hand, some wanted to make the investment in additional capacity conditional on Cumberland committing to a new four-year contract. In spite of the debate, management decided to go ahead with the investment and Gonzalez knew Olson would be pleased to hear this. Olson and his team would also be interested in talking about the next fouryear agreement; particularly about pricing. The formal execution of a new agreement was still six to nine months away, but both parties were trying to feel each other out and establish a bargaining position. At each of the last two quarterly review meetings Olson had pointed out that, due to fluctuations in exchange rates, Cumberland was now paying considerably more to Lantana, than to their other supplier, Luzuriaga, a Spanish manufacturer. With the US dollar becoming stronger, relative to the Euro, and weakening relative to the Peso, the adjusted price that Cumberland paid Lantana was 30-40% higher then what they paid Luzuriaga. Of course, Luzuriaga provided nowhere near the level of services and support that Lantana did, and they were not investing in their plants and facilities the way Lantana was. Lantana had recently invested in a process control system, SinterCast, which would enable it to manufacture diesel engine blocks using compacted graphite iron (CGI), instead of traditional materials, such as grey and ductile iron. The SinterCast system would enable Lantana to supply Cumberland with 2 Copyright Kotler Marketing Group

3 blocks that were lighter weight, more durable, and with better thermal conductivity - - all of which would benefit Cumberland and its customers. Within a year, Lantana expected to be able to produce 10,000 CGI blocks. Gonzalez made a note to remind the Cumberland team yet again about the SinterCast system and the virtues of CGI. Luzuriaga Victorio Luzuriaga, Lantana s primary competitor at Cumberland, is a manufacturer of automotive parts including engine blocks, brake housings and suspension arms. Customers include Continental Teves, Bosch Brake Systems, and TRW. Luzuriaga had always been fairly aggressive on price and could afford to be, as they provided little in the way of value-added services and support. In the eyes of European and North American manufacturers, Luzuriaga was perceived to be a viable, low priced source of supply. Lantana rarely competed against Luzuriaga and knew very little about the company. Cumberland was Lantana s only customer that also sourced from Luzuriaga. Lantana Unlike Luzuriaga, Lantana is a significant supplier of diesel engine blocks to the worldwide automotive market, having shipped more than 2,000,000 units in 1999 to customers such as Navistar, Detroit Diesel, Cummins, and Cumberland. Based in Mexico, Lantana has four plants and turns out over 300,000 metric tons of iron casting each year. In addition to engine blocks, Lantana manufactures exhaust manifolds, crankshafts, bearing caps, bedplates, calipers, brackets and steering knuckles. The company s annual revenues approach $600 million. Like many Mexican auto parts manufacturers, Lantana offers numerous benefits to North American automotive manufacturers an educated and low cost labor force, close geographic proximity, and relatively low tariffs. But Javier Lopez, Lantana s Chairman and CEO, was not content to simply be a low cost solution for North American OEMs. In 1998, he had established a goal for his company to become one of the top 10 largest publicly traded companies in Mexico by the year To achieve his vision, Lopez made significant investments in the development of value-added services as well as new technology. He believed that, by committing capital in this way, he could create a lasting strategic competitive advantage, and thereby transform Lantana from a successful regional manufacturer to a dominant player in the worldwide market. By 2000, Javier s vision was beginning to pay off. Lantana had developed many proprietary manufacturing processes and was one of only a handful of suppliers in the world with the capability of one day producing high volumes of diesel engine blocks utilizing CGI. 3 Copyright Kotler Marketing Group

4 The Promise of CGI Historically, most heavy-duty diesel engine blocks have been manufactured using either grey or ductile iron. However, over the past several years CGI had finally begun to emerge as a viable substitute in the manufacture of diesel engines. Figure 1 As illustrated in Figure 1, cast irons are differentiated by the shape of the graphite particles. In contrast to either grey or ductile iron, the CGI clusters interlock themselves into the iron matrix to provide a strong adhesion. CGI is an intermediate form of cast iron that combines the good castability, machinability, thermal conductivity, and vibration-damping properties of grey cast iron with the elevated strength, stiffness, and fatigue-resistance properties of ductile iron. In engine blocks, the higher strength, stiffness, and wear resistance of CGI offers the potential to reduce weight, reduce noise, vibration, and handling (NVH) characteristics, and increase power output. For these reasons, there is great optimism about the potential value of CGI blocks. Consultants and industry analysts have predicted that engine blocks produced with CGI could be priced at a 20-25% premium to those produced with grey or ductile iron. While automotive engineers have long understood the potential benefits of CGI, the production of complex castings utilizing CGI has been hindered by the lack of reliable foundry procedures. CGI is produced by adding controlled amounts of magnesium and inoculant to a de-sulfurised base iron. If the additions are too small, some of the graphite may precipitate as flakes rather than 'worms', resulting in a 20-50% reduction in strength and stiffness. If the additions are too large, more of the graphite may precipitate as nodules, resulting in less thermal conductivity, machinability and casting defects such as shrinkage. SinterCast, in Lausanne, Switzerland, has developed and patented a computerized process control system that would allow foundries to make 4 Copyright Kotler Marketing Group

5 large amounts of CGI with stable, consistent properties. In short, the SinterCast system is designed to overcome the reliability, consistency, and quality problems often associated with CGI. The cost of implementing the SinterCast system can easily run into the millions and it can take well over a year s time to implement and test the system before it is ready for full production. Lantana was one of the first North American engine block manufacturers to invest in the SinterCast system. Lantana expected to be able to manufacture high volumes of CGI blocks with 12 months. The Cumberland Account Cumberland Machines, founded in 1907, grew from a one-man blacksmith shop into a worldwide corporation that today does business in more than 160 countries and employs approximately 40,000 people. Cumberland consists of three equipment operations (agricultural, commercial & consumer, and construction & forestry). Lantana produced engine blocks for Cumberland s agricultural equipment including, tractors, combines, harvestors, and hay and foraging machines. Cumberland sells its equipment to farmers of all size and maintains an extensive dealer network. Cumberland has a direct sales force that focuses on medium to large agri-businesses. These accounts generally care about three things: Improved control of input costs (e.g., fuel, equipment) Increased crop yields Enhanced productivity of equipment and labor Lantana has been a key supplier to Cumberland for several years, supplying the bulk of Cumberland s requirements at Cumberland s manufacturing facilities in Torreon, Mexico, and DeBuque, IA. Lantana had a particularly large share of account at Torreon, supplying 90% of Cumberland s total requirements (23,753). Luzuriaga controlled roughly 10% of the Cumberland account in Torreon. Planning for the Negotiation With the meeting at Cumberland approaching, Francisco thought hard about how he wanted to handle the discussion. Cumberland had provided him with an agenda for the four-hour meeting. The first two hours were to be spent discussing Cumberland s production forecasts, how to solve the capacity problem, Cumberland s progress with its new EDI system, and a minor change that was being made to the fuel system on one of Cumberland s engines. In addition to Gonzalez, several of his Lantana colleagues usually attended these review meetings. They included Arturo Rincón, Director of Planning, Francisco Sánchez, Engineering Director, Gabriel Wehbe, Commercial Account Manager, and Reuben Rivera, Resident Engineer at the 5 Copyright Kotler Marketing Group

6 Cumberland s plant in Torrean. They would be able to address any technical and design issues that came up. The last two hours of the meeting would be spent exploring the general parameters of a new agreement between Cumberland and Lantana. Now that the question of adding additional capacity had been solved, Lantana s pricing was likely to be the focus of the discussion. Francisco would have time to make a half-hour presentation and he carefully considered the points he d want to emphasize. If Cumberland was going to make price an issue, he d focus on the value Lantana provided. Earlier in the year, Lantana had hired a consulting firm and had asked them to examine key competitors and assess their strengths and weaknesses. The firm did so by interviewing a number of North American OEMs, primarily people in Purchasing, Engineering, and Marketing. Francisco pulled the study from the shelf and examined its contents. On page 18, he found what he was looking for: In addition to the core product (both currently supplied engine blocks with grey iron), Francisco found a comparison of Lantana s offering to Luzuriaga on several key variables. For Technical Support and Quality a 1-5 scale was used. (1=very poor; 5=very good) Luzuriaga Lantana Painting No Yes Delivery Lead Time 32 days 4 hours Technical Support 3 5 Scrap Rate 4 4 The value of engine block painting was fairly straightforward. Luzuriaga did not have the equipment required for the type of powder painting process Cumberland wanted, while Lantana did. As a result, Cumberland made arrangements for the Luzuriaga blocks to be shipped to a painting company in Torrean, where the coating was applied. To determine what that was costing Cumberland, Francisco called the manager of Lantana s painting facility, Alberto Noroyo, and asked what he thought Cumberland was paying. Arroyo replied that, given the volume Luzuriaga was shipping, Cumberland was probably paying close to $12.00 to paint each piece. Next, Francisco considered the differences in lead times. He called Gabriel Wehbe, Commercial Account Manager for the Cumberland account. Wehbe had heard from Steve Matus, a supply chain manager at Cumberland, that Cumberland usually ordered additional inventory from Luzuriaga to guard against shortages. Cumberland then paid to have the safety stock stored at a local warehouse at an average cost of $1, per month (which worked 6 Copyright Kotler Marketing Group

7 out to roughly $1.00 per piece). Wehbe told Francisco that long lead times posed an additional challenge for North American manufacturers that sourced from Europe. Engine blocks would often rust during transit, which forced manufacturers to own and maintain de-rusting equipment, usually at an annual cost of $30,000. Francisco then turned his attention to the matter of freight costs. In addition to long lead times, sourcing from Spain meant Cumberland incurred significant freight and tariff costs. Given that both Cumberland and Lantana had plants in Torreon, freight costs were minimal. Francisco calculated that Cumberland paid $ per container to ship Lantana s blocks (There were 11 pallets per container and 12 pieces per pallet.) Shipping from Spain would be considerably higher. Based on what they had learned from Matus, Cumberland was likely paying $3,900 in freight costs per container. In addition, Cumberland would have to pay a 5% tariff on each Luzuriaga block. Regarding scrap rates, both Lantana and Luzuriaga were rated as equal. Gonzalez reasoned both were probably around 5%, based on information Lantana had regarding the scrap rate on its blocks at Cumberland s Torreon plant. However, this is a bit misleading because in order to achieve this scrap rate Lantana placed a Resident Engineer on site at Cumberland s Torreon facility, and Luzuriaga did not. This could explain why Lantana scored higher than Luzuriaga on Technical Service. The Resident Engineer assigned to Cumberland s Torreon facility, Rueben Rivera, would help manage the sorting and re-work of defective parts, as well as assist with other problems that occurred in the manufacturing process. Rivera reported that he was usually able to re-work about half of the defective blocks. With the Luzuriaga defective blocks, Cumberland would have to ship them back to Spain, or temporarily warehouse them locally. Finally, Francisco recalled that Olson, in a recent review meeting, commented that they were having problems sharing forecast, schedule, and delivery data with Luzuriaga in real-time. To resolve these problems, Olson complained that he d had to personally spend 4-6 hours a week on the issue over the last two months, which prevented him from doing other things. Cumberland planners/schedulers, dock personnel, and EDI personnel also spent significant time resolving these issues. Francisco reviewed the information he d assembled. Luzuriaga and Lantana s contract had been the same: $ per piece. However, due to exchange rate fluctuations, the price Cumberland paid Lantana was now effectively $56.84 higher than what they paid Luzuriaga. Clearly, he d have to show that the total value of Lantana s offering more than made up for the difference in the effective piece price. 7 Copyright Kotler Marketing Group

8 Exercise: 1. Consider the following benefit categories: a. Hard Cost Savings b. Time Savings c. Strategic Benefits Using the table provided, for each category of benefit (e.g., hard cost savings), identify the benefits that Lantana provides to Cumberland that either Luzuriaga does not provide, or cannot match. For each benefit, try to express the economic value of the benefit to Cumberland by creating what we refer to as word equations. These are calculations that would need to be done in order to quantity what each of the benefits that Lanatana offers would be worth to Cumberland. For example, Cumberland must paint each of the Luzuriaga blocks it receives, but avoids this cost with Lantana s blocks (which are painted prior to delivery). To determine the value of Lantana s painted blocks (or, the extra costs that are incurred with Luzuriaga s blocks), you could create the following word equation: (# of blocks) x (fully loaded cost to paint each engine block) = painting costs saved/avoided There is a lot of quantitative data presented in the case. It is not necessary to perform the actual calculations. Rather, spend your time developing equations for each of the different benefits. 2. During the upcoming contract negotiation, of the benefits you identified, which is Cumberland most likely to challenge? 3. How would you go about overcoming the challenges raised by Cumberland? 8 Copyright Kotler Marketing Group

9 Benefits Framework Hard Cost Savings Benefit Example: Reduced Painting Costs Economic Value to Cumberland (# of blocks) x (fully loaded cost to paint each engine block) Time Savings 9 Copyright Kotler Marketing Group

10 Benefits Framework Strategic Benefits Benefit Economic Value to Cumberland 10 Copyright Kotler Marketing Group