Chapter 6: Price-Setting
The Low Cost Producer Price
When Tom Solnik, Vice President and COO for refrigeration products at Top Brass Inc.,
arrived at this office, he had three urgent messages to call the V.P. of Operations at Airco,
one of his largest customers. Top Brass, a domestic manufacturer of brass parts for air
In recent years, refrigeration manufacturers have increasingly tried to outsource part of
their needs from Low Cost Producer, using a domestic manufacturer for the balance. They
generally give domestic manufacturers like Top Brass a “last look.” The share of the
business that the domestic manufacturer retains depends on how close its price is to the
Chinese price. Usually, a domestic suppliers retains some volume because suppliers in
Low Cost Producer require long lead times for shipping and offer no local service or
Airco is a high-volume air conditioning manufacturer that competes aggressively for
price-sensitive, high-volume purchases of home builders. Although Airco is a leader in
sourcing supplies from Low Cost Producer, it remains one of Top Brass’s largest
customers because of its large market share. Airco stated its intent in the fourth quarter of
last year to buy less than half its expected volume of control valves from Top Brass.
However, in March, just before the peak summer sales season, Airco submitted an order
The sales rep also learned from friends in Arico’s plant that the control valves from Low
Cost Producer were failing at an alarming rate, creating a high demand for replacements
from angry contractors. Airco had stopped shipping units from inventory that contained
the Chinese valve. If Airco could not get more control values soon, its output would have
to be cut substantially. The sales rep feared that if that happened, Airco would then no
longer need to order many other parts from Top Brass as well. Top Brass’s overall sales to
Airco could actually decline.
What should Tom tell him?