Otto-Bred is a national furniture manufacturer. Otto-Bred products are Amish yet modern designed custom furniture pieces that are distributed globally mainly to commercial clients and corporations. When Otto-Bred decides to create a new product, product developers survey competitors to determine how much they charge for similar items and then select a target price that is 20% to 40% lower than competitors’ prices.
With a product and price established, Otto-Bred determines the materials to be used and selects one of its many suppliers to provide the raw materials through a competitive-bidding process. Otto-Bred also identifies cost efficiencies throughout design and production. All finished products are shipped unassembled and assembled on site by a furniture builder within a 10 mile radius of the client. The shipping costs of the pieces are passed on to the client and the costs of the assembly is the responsibility of Otto-Bred at a 10% markdown in costs.
Questions:
1.)What challenges might managers at Otto-Bred encounter in achieving the target cost?
2.)How might they overcome target cost challenges?
3.)How do you feel about Otto-Bred’s approach to shipping and assembly costs? Are the costs beneficial or considered a non-cost factors in setting prices for the furniture? Is this a matter of gaining customers as an incentive or simply reducing costs overall for the company? Please explain your rationale.
