The 9% Increase at Vantage Motion
Vantage Motion, a 900-person maker of industrial actuators, buys 240,000 machined aluminium housings a year from a single incumbent, Kessler Precision, at $18.40 each. Kessler has announced a 9% increase, citing aluminium and energy costs. Purchasing has two alternatives. Meridian quotes $17.10 per unit but requires Vantage to pay $120,000 for tooling, accept a 20,000-unit minimum per release, tolerate a 14-week lead time, and take on a supplier with no PPAP history on this part. A second existing supplier quotes $18.90 with a 6-week lead time but only 60% of the required capacity. Vantage carries 3 weeks of safety stock and owes its own customers 94% on-time delivery. Kessler's quality record last year was 1,800 ppm with two line stoppages. Engineering estimates that qualifying any new source takes 10 weeks and $45,000 of internal test time. The CFO wants a decision before the budget freeze in three weeks.
1. Compare the total cost of ownership of accepting Kessler's increase versus switching volume to Meridian. State your assumptions and recommend a course of action.
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Step 1 - Normalize the incumbent price. $18.40 x 1.09 = $20.06 per unit, or $4,814,400 a year at 240,000 units.
Step 2 - Build Meridian's landed cost.
- Units: 240,000 x $17.10 = $4,104,000
- Tooling: $120,000 amortized over a 3-year expected part life = $40,000 a year
- Internal qualification: $45,000 one-time in year 1
- Year 1: $4,189,000. Years 2-3: $4,144,000.
Step 3 - Add what the unit price hides. Meridian's 14-week lead time against 3 weeks of safety stock means roughly 11 weeks of bridge inventory, about 50,800 units or $868,000 of stock. At a 20% carrying cost that is roughly $174,000 in year 1. Add the risk that a 94% OTD obligation is breached during ramp-up, and the first-year advantage narrows sharply even though the recurring gap stays near $670,000.
Step 4 - Weigh quality as a cost, not a footnote. Kessler's 1,800 ppm and two stoppages are a known liability; Meridian's missing PPAP history is an unknown. A stoppage on a customer line typically costs more than a year of price delta, so the unknown must be bought down with inspection and a controlled ramp, not assumed away.
Conclusion. The recurring economics favour Meridian by roughly $625,000-$670,000 a year, but a full switch in three weeks is not executable because qualification alone takes 10 weeks. Recommend a phased dual-source: move 30-40% of volume to Meridian over two quarters, retain Kessler for continuity and capacity, and use the Meridian quote as negotiation leverage rather than as a threat you cannot carry out.
2. What should Vantage do about Kessler's requested increase within the three-week window, and which negotiation levers are realistic?
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Do not accept a flat 9%. A percentage increase with no cost transparency is unauditable, and it sets the baseline for every future year. Ask for a cost breakdown by material, conversion, energy and margin, and compare it with published aluminium indices over the contract period.
Convert price to formula. Offer an index-linked arrangement: a fixed conversion fee plus a material component tied to a named aluminium index with a quarterly reset and a collar. This addresses Kessler's stated driver without granting permanent margin expansion, and it protects Vantage if metal falls.
Trade, do not concede. Vantage has levers: a 12-month volume commitment, forecast visibility beyond the current release pattern, consolidated freight, and relaxed delivery windows. Each should be priced. A 3% increase in exchange for a firm 12-month volume floor and improved OTD commitments is a better outcome than 9% with nothing attached.
Use the alternative carefully. Meridian is real but not immediately executable, so present it as a credible, quantified option rather than a bluff: share the qualification timeline, not the price. Signalling a switch you cannot complete in three weeks destroys credibility and invites retaliation later.
Sequence the three weeks. Week 1: request the cost breakdown and issue an RFI refresh to the second supplier on capacity expansion. Week 2: negotiate index-based pricing and volume commitment. Week 3: present the CFO with a recommendation that shows the accepted increase, the offsetting volume and payment terms, and the dual-source plan that reduces dependence over the next 12 months. If Kessler will not move below roughly 5-6% with indexation, award Meridian the 30-40% tranche now and let Kessler's volume shrink.
3. Identify the three most significant risks in this decision and how you would mitigate each.
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Risk 1 - Supply interruption during transition. Meridian's 14-week lead time versus 3 weeks of safety stock leaves an 11-week exposure. Mitigation: build a bridge stock of roughly 50,000 units before reducing Kessler's releases, phase the shift in two tranches, and keep Kessler on a minimum volume that preserves their willingness to hold capacity for Vantage.
Risk 2 - Quality escape at a new source. Meridian has no PPAP history on this part and Vantage runs a 94% OTD promise. Mitigation: require full PPAP with run-at-rate, apply 100% inspection for the first three lots, set a contractual ppm cap with a chargeback for line stoppage, and hold a 30-day exit ramp before releasing full volume.
Risk 3 - Leverage loss and price ratchet. If Vantage switches entirely to Meridian, it recreates the single-source problem with a supplier that has already seen Kessler's price. Mitigation: keep a qualified second source at 20-30% of volume permanently, write a price-adjustment formula with an index rather than an annual negotiation, and include a benchmarking or most-favoured-customer clause so Meridian cannot price above market once Vantage is locked in.
A fourth, quieter risk is tooling ownership: the $120,000 should be owned by Vantage and marked, with a right to retrieve it, or Vantage has funded a switching cost that belongs to Meridian.