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John%20Deere%20Questions - EWMBA 201a Fall 2009-Felix Vardy...

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EWMBA 201a Fall 2009—Felix Vardy Case Preparation Discussion Questions: John Deere Component Works Answer and be prepared to discuss the following questions: 1. Why did the Gear and Special Products Division (GSPD) do so poorly in bidding for the 275 machined parts? 2. What, if anything, about the standard cost accounting system makes GSPD the low-price vendor for low-volume parts? Conversely, what, if anything, about the accounting system makes it a high-price vendor for high-volume parts? 3. How should they be thinking of the cost of a part in order to make profitable decisions? 4. How did Deere dig itself into this big hole? Why didn’t managers correct this sooner? 5. Read the article that starts on the back. Compare the pricing system that Parker Hannifin Corp. used before 2002 to GSPD’s pricing system. Also, based on what we’ve discussed in class so far, what information should Parker use to place products into the “A,” “B,” “C,” and “D” categories?
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2007 Factiva, Inc. All rights reserved. Changing the Formula: Seeking Perfect Prices, CEO Tears Up the Rules --- Parker's Washkewicz Weighs Market Power Of 800,000 Parts By Timothy Aeppel 2,090 words 27 March 2007 The Wall Street Journal A1 English (Copyright (c) 2007, Dow Jones & Company, Inc.) CLEVELAND -- In early 2001, shortly after Donald Washkewicz took over as chief executive of Parker Hannifin Corp., he came to an unnerving conclusion. The big industrial-parts maker's pricing scheme was crazy. For as long as anyone at the 89-year-old company could recall, Parker used the same simple formula to determine prices of its 800,000 parts -- from heat-resistant seals for jet engines to steel valves that hoist buckets on cherry pickers. Company managers would calculate how much it cost to make and deliver each product and add a flat percentage on top, usually aiming for about 35%. Many managers liked the method because it was straightforward and gave them broad authority to negotiate deals. But Mr. Washkewicz thought that Parker, which had revenues of $9.4 billion last year, had stuck itself in a profit-margin rut. No matter how much a product improved, the company often ended up charging the same premium it would for a more standard item. And if the company found a way to make a product less expensively, it ultimately cut the product's price as well. "I was actually losing sleep," recalls Mr. Washkewicz, a 56-year-old Cleveland native who started with the company when he was 22 and rose through its ranks as an engineer. While touring the company's 225 facilities in 2001, Mr. Washkewicz had an epiphany: Parker had to stop thinking like a widget maker and start thinking like a retailer, determining prices by what a customer is willing to pay rather than what a product costs to make. Such "strategic" pricing schemes are used by many different industries. Airlines know they can get away charging more for a seat to Florida in January than in August. Sports teams raise ticket prices if they're playing a well-known opponent. Why shouldn't Parker do
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