Charlestown Chemical Products

By-Akshay Salaria 08FT-125

Atul Gupta 08FT-137 Sarang Bhide 08FT-140

Mudita Jain 08FT-158 Swati Kundu 08FT-177

Vivek K 08FT-180

Case FactsMost wanted?!

Players & Positions (Physical)• Charlestown: $4.5 bn revenues , $200 mn PAT.

• Puritan: $600 mn revenues, $30 mn PAT.• Lee: Jobber• National Chemical: Possible Supplier

Charlestown - OklahomaPuritan - Texas, MissouriLee (Jobber) – TennesseeNational Chem - Missouri

Sequence of Events• 15th June: Puritan raises price from $48.75 to

$66.25 per ton effective 1st July.

• 17th June: Todd invites quotation from Lee Chemicals.

• 21st June: Lee submits bid of $55.50 per ton(delivery by tank car, max 3500 ton per yr, must-take 3000 tons). Lee also gives sample for trial run.

• 22nd June: Todd meets Puritan representatives, refuses price rise, and informs of a better offer.

• 23rd June: Todd expresses concerns to Lee over consistence of quality, price, delivery mode and must-take condition.

• 23rd June: Puritan reduces price to $52.50 per ton delivered by truck. Does not drop must-take condition. Offers full truck sample for trial which arrived on June 28.

• 1st July: Puritan retracts price rise. Reiterates exclusive supply clause.

Sequence of Events

• 10th Aug: Results of trial run with Lee’s product found satisfactory.

• Later in Aug: Lee reduces price to $51.25 delivered by tank truck, drops must-take condition.

• Early Sept: Puritan offers to renew contract for 1976 at $48.75 per ton on entire-requirement basis. Also offers to increase business by $0.5 mn on other products.

Sequence of Events

Thoughts!(Analysis)

• Insignificant Loss in Sales (~.1%)

• A lost Supplier (Needs raw materials equivalent to ~.13% of sales)

• Loses a Potential Long term partner

If its going to be Adverse!

Effect on Puritan

• 1% Loss in Sales

• A lost Supplier (Needs raw materials equivalent to ~.75% of sales)

• Loses a Potential Long term partner

Effect on Charlestown

Bargaining Power before Lee’s Quotation

• Puritan was sole supplier to Charlestown.

• Muriatic acid was a prime asset(A product very important for the buyer reduces buyer’s bargaining

power)

Puritan - High

Charlestown - Low

Customer Capability is Low

Customer Priority is High

Lee’s Product Specification & ComparisonSpecification/content Charlestown requirement

(Puritan’s supply)Lee’s offer

Appearance Clear Clear

Color- APHA 35 max 40 – 50

HCl 31.45% – 32.56% 31.5%

Free Cl Low concentration Nil

Organics Low concentration 5-7 ppm

Fe 1 ppm max 0.8 ppm

Ni Low concentration Nil

Arsenic 0.2 ppm max Nil

Overall Quality Good Satisfactory

Bargaining Power after Lee’s Quotation

• Lee’s offer bettered Puritan’s $66.25

• Lee could lose the chance to make a riskless

margin if it did not get a chance to supply.

• If Puritan would have lost the contract while

affecting the relationship with Charlestown.Charlestown- High

Puritan and Lee - Low

Value Analysis

VIU = (Valuef – Pricef) - (Valuea – Pricea)

Contractual - Legal Aspects

• The condition of ‘Buyers Requirement of Muriatic Acid’ – was open to interpretation.

• First right of refusal to Puritan.They had the chance to meet any offer by a competitor before a contract with a competitor was signed.

• Hence legally, Charlestown can not go with Lee’s offer, unless Lee’s price is better than Puritan’s in 1975.

Options Left for 1976 and after

• Continue with Puritan• Buy from Lee and look for other

suppliers• Get quotation from National

Chemicals and test them• Make indigenously

Advantages:• Proven results – Track record• Least Cost & High Quality• Meets current capacity

Disadvantages:• End up with low bargaining

power• High Supply Chain Risk• Price risk in future• Deteriorated relationship

with Lee (Could help the best in riskier situations)

Implications

Puritan – Sole Supplier

Advantages:• Replacement in short time• Risk of delivery lies with jobber

(Multiple Sourcing)• Least Supply Chain Risk• Least Contractual Obligations

DisAdvantages:• Relatively High Cost• Not a proven player• Satisfactory Quality• Deteriorated relationship with

potential long term partner

Lee and Others

Advantages:• Similar location to Puritan• If plant manager’s guess work

was right, could get the lowest cost

• Increased bargaining power with Puritan

Disadvantages:• Unknown territory (SC Risk,

Capacity, Reliability, Quality)• Relationship is yet to be

established• Deteriorated relationship with

potential long term partner

Implications

National Chemicals

Advantages:• No risk (Price, Supply

Chain)

Disadvantages:• Known to have high

cost structure• Possible loss in sales as

Charlestown is a potential competitor in certain segments

Make

Continuum of Relationships

Industry Relationship Bandwidth

Pure Transactional

Exchange

PureCollaborative

Exchange

Flaring - OutUnbundling

StrategyAdded

Augmentation

Strategy

Core Produc

t

Augmented

Product

Advantages:• Long term

relationship (Assured supplier with assured quality)

Disadvantages:• High Supply Chain

Risk (Delivery)

Supplier Selection Strategies

Single Sourcing

Advantages:• Reduced risk in

Supply Chain (Delivery)

Disadvantages:• Transactional buying• No obligation from

supplier as well

Multiple Sourcing

Decision Factors

In light of the following facts……

• Lee’s final offer (TCO) by tankcar and tanktruck

cost the same.

• Lee can supply a maximum of 3500 tons and the

Tulsa Plant may need upto 4000 tons

• Puritan has promised contracts worth $500,000 to

Charlestown, if the muriatic acid agreement

works out.

And implications of various strategies its clear that,

Charlestown…..

– Should move out of Puritan’s offer if and only if

increasing bargaining power is a main criteria

– Else, Puritan’s offer could be the best

Decision Validity Test

• As the buying is towards transactional nature –

the extent of current relationship could be well

over the standards

• Supply Chain risk could be termed as less, as in

any case jobber is ready within a lead time of just

4 days (Sounds like excess capacity

somewhere!!!)

• “Road not taken” might well be a “Road should

not be taken”

Tough Diplomatic Options

• Convert “Entire-Requirement” Clause to “Must-

Take” Clause and get atleast 10% from Lee or

National Chemicals to enjoy both Single Sourcing

and Multi Sourcing Benefits

• Extend notice period from 15 days to 30-45 days

so as to completely negotiate with a new supplier

so as to avoid high price risk

• Contract should hold provision for supplies in any

quantities at same cost in failure of “Right to first

refusal”

Fallacies in what we just said!

• Buying Orientation!• Buying Orientation!• Buying Orientation!

Primary Objectives:•Reduce Cost•Increase power over the supplier•Avoid risk wherever possible

Ideal Design:•Focus all of firm’s efforts in delivering value to end customer•Build supply network completing business processes