Harvard Business School

9-171-004
August 1, 1970

Hawthorne Plastics, Inc.
Hawthorne Plastics, located in Hawthorne, California, specialized in the fabrication of plastic parts as a subcontractor to companies marketing plastic products, such as toys, kitchenware, fishing tackle, etc. Most of its production involved the molding or extrusion of plastic raw materials and over half of its production was for two major manufacturers of toys, located nearby. The vast majority of its customers were located in southern California, with a few in Arizona, Nevada, and northern
California. In its market area the company was known for its high quality, low-cost products. Its low cost was based on extremely efficient production methods, so
The request came at an opportune time for Hawthorne, since capacity had just been freed up after heavy production for the Christmas toy season. The negotiations proceeded to the point where
Hawthorne agreed to deliver 100,000 pounds of polypropylene plastic strapping per month to Pynes for the next six months; capacity problems at Hawthorne prevented larger shipments, although Pynes would have liked to buy more.
The price per pound that Pynes would pay depended on the quality of the strapping that
Hawthorne delivered. The industry distinguished between "low camber" and "high camber" strapping: low camber strapping was much straighter and thus was suitable for use in automated bundling machines; high camber strapping would cause automated equipment to jam and thus was suitable for use in manual equipment only. Because low camber strapping was sold at a higher price on the market, it was frequently referred to as "high quality", whereas the high camber strapping was referred to as "average quality."
Pynes had agreed to pay Hawthorne 60¢ per pound for high quality strapping and 50¢ per pound for average quality. It did not matter to Pynes which quality strapping it received, because by adjusting its own production process it could provide itself with relatively more high quality strapping if Hawthorne provided average quality strapping in a given month and vice versa. Pynes would provide the production dies