GINO
Problem Definition
One of the problems facing GINO is to create the appropriate price adjustments and price discounts. Its distributors are bargaining for better prices and low quotas. The pricing of products is also a problem faced by the company in terms of the prospective OEM business with Feima. The company is approaching GINO to obtain better prices rather than those given by its distributors. It wanted at least 10 percent greater discount in exchange for additional purchases of industrial and commercial burners. While GINO consider this a potential to expand its business, pricing becomes a critical issue in directly selling to the OEMs. The price must be higher than those charged to the distributors. Thus, the appropriate criterion for pricing decision is a key issue. Distributors are also stealing sales form one another by increasing the price discounts on other distributors’ customers. In this sense, Zhou needs to decide whether or not he would adjust the pricing and the price discounts allowable.
Analysis of key facts
There are four levels of price: transfer price, base price, public listed price and actual contract price. Of these, the management is facing problems with regards to the transfer price and the contract price. The transfer prices are known as the distributor’s prices. The prices for all the distributors are the same irrespective of the volume. Prices are reviewed yearly to make adjustments on all the models based on the inflation rate from the previous year. The contract price is the price which the distributor reached with the customer. There was a consensus between GINO and the distributors to keep the discount into a maximum of 25 percent. However, there is the tendency to discount higher to win orders. The severe competition and the frequency of distributors that sell outside their territories contribute to lower contract prices.
Also, some of the distributors’ customers are directly asking purchase from GINO. The proposal of Feima to buy directly from GINO was seen to be a prospect to develop OEM business. At present, Jinghua allowed Feima of an average 25 percent discount off the public list price. The primary purpose of Feima for asking GINO was to obtain better prices. It wants to get a 10 percent greater discount from GINO. In return, it promised to purchase 50 percent of its commercial and industrial burners and all its domestic burners from GINO.
Alternative SolutionsThe manager’s decision may include any of the following: (1)Maintain the status quo (2) Allow for a review of the pricing and price discounts given to the distributors. After which, the new pricing agreement be implemented.
Analysis of Alternative Solutions
In this case, there appears to be two alternative solutions. The first is to maintain the status quo, if the management is to remain passive about the issue. There are serious implications for ignoring the need for price adjustments. For one, it will aggravate the hostilities of distributors towards the management. Second, there is the tendency that the distributors will poach sales from one another by offering price discounts higher than the agreed maximum. Third, the distributors’ customers will also demand for better prices which may cause them to go directly to GINO. In such case, there may be a potential conflict between the manufacturer and the distributor. On the other hand, the management may review the reasonable price adjustments that can be given to the distributors. This way the distributors will refrain from poaching the sales of other distributors. A good pricing might also prevent the distributors’ customers from directly approaching the manufacturer for better prices. Aside from this, the agreed maximum price discounts must be fixed. Any attempt to steal sales by exceeding the price discount must be sanctioned.
Recommended Solution
The most viable option for GINO at this time is to review its pricing and discounts. Any adjustment that is deemed reasonable must be adapted. As a manufacturer, GINO may suggest resale prices and encourage distributors to that direction. However, any tactics from the distributors perceived to be coercive (i.e. threat of termination for failure to charge the specific price) can be considered a violation of the anti trust law.
Implementation
Upon agreeing to the necessary adjustments, the management must ensure that the distributors comply with the agreed prices. Distributors are assigned to specific territories and thus they cannot sell products out of their territories. The stealing of sales as alleged by other distributors through increasing price discounts other than the set maximum must be closely monitored.
Credit:ivythesis.typepad.com
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