Reference no: EM131651354

Negotiation

Background Information:

The Universal Computer Company is one of the nation's major producers of computers. Plants in the company tend to specialize in producing a single line of products or, at the most, a limited range of products. The company has considerable vertical integration.   Parts made at one plant are assembled into components at another, which in turn are assembled into final products at still another plant. Each plant operates on a profit center basis.

The Crawly plant produces computer chips, modules, cable harnesses, and terminal boards, which are shipped to other company plants. In addition to numerous computer chips, the Crawly plant makes more than 40 different modules for the Phillips plant. The two plants are about five miles apart.

The Quality Problem:

Production at the Phillips plant has been plagued by poor quality. Upon examination it has been found that a considerable portion of this problem can be traced to the quality of the modules received from the Crawley plant.

The Crawley plant maintains a final inspection operation. There has been considerable dispute between the two plants as to whether the Crawley plant is to maintain a 95 percent overall acceptance level for all modules shipped to the Phillips plant, or to maintain that standard for each of the 42 modules shipped. The Phillips plant manager has insisted that the standard has to be maintained for each of the 42 individual modules produced. The Crawley plant manager maintains that the requirements mean that the 95 percent level has to be maintained overall for the sum of the modules produced. Experience at the Phillips plant shows that while some module types were consistently well above the 95 percent acceptance level, 12 types of modules had erratic quality and would often fall far below the 95 percent level. As a result, while individual types of modules might fall below standard, the quality level for all modules was at or above the 95 percent level. This raised serious problems at the Phillips plant, since the quality of its products is controlled by the quality of the poorest module.

The Interplant Dispute:

The management of the Phillips plant felt that the quality problem of the modules received from the Crawley plant was causing them great difficulty. It caused problems with the customers, who complained about the improper operation of the products that contained the Crawley modules. As a result, the Phillips plant operation had added an incoming inspection of 12 poor-quality modules received from the Crawley plant. There were times when the number of modules rejected was large enough to slow or even temporarily stop production. At those times, to maintain production schedules, the Phillips plant had to work overtime. In addition, the Phillips plant had the expense of correcting all the faulty units received from the Crawley plant.

Ideally, the management of the Phillips plant would like to receive all modules free of defects. While this was recognized as impossible, they felt that the Crawley plant should at least accept the expense of repairs, extra inspections, and overtime required by the poor quality of the parts.

Since installing incoming procedures on the 12 modules, the Phillips plant had been rejecting about $15,000 of modules a week. For the most part, these had been put into storage pending settlement of the dispute as to which plant should handle repairing them. Occasionally, when the supply of good modules had been depleted, repairs were made on some of the rejected units to keep production going. the Phillips plant had continued to make repairs on the remaining 30 types or modules as the need for repairs was discovered in assembly or final inspection.

From its perspective, the Crawley plant management felt that it was living up to its obligation by maintaining a 95 percent or better quality level on all its modules shipped to the Phillips plant. Further they pointed out that using sampling methods on inspection meant that some below-standard units were bound to get through and that the expense of dealing with these was a normal business expense that the Phillips plant would have to accept as would any other plant. They pointed out that when buying parts from outside suppliers it was common practice in the company to absorb the expenses from handling the normal level of faulty parts.

The Phillips plant management argued that the Crawley plant management was ignoring its responsibility to the company by forcing the cost of repairs onto their plant, where only repairs could be made-rather than having the costs borne by the Crawley plant, where corrections of faulty processes could be made.

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