Deere & Saunders Supply Chain Cost Analysis Case Study
This case study examines the cost and pricing pressures Deere faces in its gatherer chain supply relationship with Saunders. The analysis breaks down variable costs, material estimates, and profit margins to evaluate whether Saunders' pricing is justified. It further explores the business dynamics at play — including competitive threats, eroding trust, and transparency concerns — before recommending that Deere leverage its bargaining power to demand a $15-per-unit price, reduce its own selling margins, and rebuild volume in the market. The paper concludes that Saunders needs Deere's business far more than Deere needs the gatherer chain segment.
- Introduction: The Margin Squeeze on Deere: Saunders raises prices as Deere revenue declines
- Saunders' Cost Structure and Profit Margins: Variable cost breakdown and 50/50 split analysis
- Material Cost Estimates and Pricing Transparency: Deere's raw material estimates expose excess pricing
- Business Issues and Competitive Pressures: Competition undercuts Deere using cheaper supplier
- Trust, Transparency, and the Supplier Relationship: Eroding trust undermines long-term partnership
- Recommended Strategy and Negotiation Approach: Deere should demand $15 and leverage bargaining power
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What makes this paper effective
- It grounds its recommendations in specific numerical analysis — citing exact figures such as $12.43 variable cost per unit, $3.90 material cost, and the 16.3% revenue decline — giving the argument a concrete, evidence-based foundation.
- It clearly identifies the power asymmetry between Deere and Saunders and uses that asymmetry as the logical basis for the recommended negotiation stance.
- It connects the operational cost analysis directly to strategic business concerns (market share loss, competitive undercutting, long-term viability), showing how financial details drive broader decisions.
Key academic technique demonstrated
The paper demonstrates cost decomposition analysis applied to a supply chain negotiation context. By separating variable costs, indirect labor, overhead allocations, and profit margin, it constructs a bottom-up estimate of Saunders' true cost structure — then uses that estimate to expose the likely source of excess pricing and justify a firm negotiating position.
Structure breakdown
The paper opens by establishing the problem (margin compression), moves through quantitative cost analysis (Saunders' variable costs and material estimates), then broadens to strategic and relational issues (trust erosion, competitive environment), and closes with a concrete recommendation. This problem–analysis–recommendation arc is characteristic of a business case study response.
Introduction: The Margin Squeeze on Deere
The gatherer chain is selling for less and costing more, putting a squeeze on margins at Deere. The supplier, Saunders, is likely increasing prices to Deere to help cover fixed costs in the face of declining demand. Revenue to Saunders from Deere has declined 16.3% even with those price increases, highlighting the severity of the situation for both parties.
Saunders' Cost Structure and Profit Margins
For Saunders, variable costs of production are $12.43 per unit based on last year's figures. Of that, indirect labor accounts for $1.36 and overhead allocation for $4.52, with profit of $4.29 per unit. If Deere wants to maintain a 50/50 split, it needs to purchase from Saunders at $15 per unit.
At that price, Saunders would retain $2.57 per unit after direct costs are excluded — a profit margin of approximately 20.67%. That amount would contribute to Saunders' profit but would not cover indirect costs and overhead allocations. It is reasonable to argue, however, that overhead allocations and indirect costs should be incorporated into the profit margin Saunders takes regardless.
Material Cost Estimates and Pricing Transparency
According to Deere's raw material estimates, 13.92 lbs of material goes into each gatherer unit, equating to approximately $3.90 per unit including scrap, plus $1.61 for pins and a modest amount for packaging. This suggests that the material costs Saunders actually faces are likely to be significantly lower than the $9.50 estimate derived from the manufacturer's survey.
Once again, this points to the excess cost flowing into Saunders' profit margin or being absorbed into allocated overhead — neither of which is transparent to Deere under the current arrangement.
Business Issues and Competitive Pressures
There are a number of significant business issues at play in this situation. Deere currently has only one supplier for the gatherer chain. Competitors are using a cheaper supplier, allowing them to undercut Deere on price and steal market share in the process. Simply matching the competition's prices is unlikely to win back lost market share — Deere would need to undercut them — making the current trajectory unsustainable in the long run.
Saunders' lack of transparency compounds the problem. If his firm were publicly traded, Deere would have access to his margins. The basis of any healthy trade relationship is trust, and at this point Deere has little reason to trust Saunders. He appears to be raising prices in the face of declining demand in order to maintain a contribution margin, with overhead likely factored into that calculation.
Whether Saunders recognizes it or not, this approach amounts to gambling with his own business in a changing competitive environment. He needs Deere far more than Deere needs him. If Deere were to exit the gatherer chain business altogether, it would forfeit roughly $10 million in revenue — an amount that is negligible for a company with $14 billion in total sales. For Saunders, the loss would be far more consequential.
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