The Supplier Who Is Also the Customer
Halcyon Devices assembles medical monitors. A single supplier, Trelco, provides 71% of a critical sensor; the sensor is sole-sourced because of a regulatory approval tied to that specific component. Trelco is also Halcyon's largest distributor in two regions, accounting for 18% of Halcyon's revenue. Trelco has announced it will raise sensor prices 15% and has asked for extended payment terms from 45 to 90 days. Halcyon's inventory of the sensor covers 6 weeks of production. Qualifying an alternative sensor would take 9-14 months including regulatory re-approval, and would require Trelco's cooperation on the existing approval in some markets. Halcyon's net margin is 6%.
1. Assess Halcyon's bargaining position and the risks in the relationship.
Read the worked answer
Halcyon's position is weak on both sides of the relationship. As a buyer it is dependent: 71% of a sole-sourced, regulatorily locked component, with six weeks of cover against a 9-14 month qualification path. As a seller it is exposed: 18% of revenue flows through the same counterparty, which gives Trelco leverage over Halcyon's commercial access as well as its input costs.
The dual role is the core risk. A price increase and a payment-terms extension arriving together suggest Trelco is managing its own cash position, and possibly testing how much of Halcyon's margin it can absorb. On a 6% net margin, a 15% sensor increase is material - if the sensor is, say, 20% of cost of goods, a 15% rise is roughly 3 points of margin, half of net profit.
The extended terms add working capital cost: moving from 45 to 90 days on 18% of revenue ties up cash and, combined with the price rise, means Halcyon funds Trelco's balance sheet. The six-week inventory buffer is the only near-term counterweight and it is thin.
2. Recommend a negotiating approach and a longer-term structural response.
Read the worked answer
Near term, split the two demands rather than trading them as a package. Concede or partially concede payment terms - it is a working-capital cost, reversible, and cheap relative to losing supply - while resisting the full 15% price increase, tying any increase to a volume or term commitment and to Trelco's support on a second-source approval. Never let the price rise and the terms extension be settled in one move; bundling favours the party with more leverage, which is Trelco.
Use the six-week buffer deliberately: it is enough time to negotiate, not enough to threaten a switch. Do not bluff about qualifying an alternative.
Structurally, the objective is to break the sole-source lock. Fund a second-source qualification now, budget the 9-14 months, and negotiate Trelco's cooperation on regulatory re-approval as an explicit term of any price concession - this is the concession Halcyon most needs and the one Trelco may undervalue. In parallel, review distributor concentration: 18% through a counterparty that is also a critical supplier is a governance problem, and the board should be told so. Set a target ceiling for single-supplier share of critical components and report against it.