The company produces 2 types of products, namely, 38 micron aluminum foil lids & 35 micron polypropylene film labels. 38 micron aluminum foil lids are used for sealing polystyrene, polypropylene & other kinds of plastic containers for yoghurt, fruitcake & water. 5 micron laypeople film is used in wrap-around labels for carbonated beverages, water & fruit juice bottles. Due to the criticality of the process & high inventory’ carrying cost of aluminum foil, Pack Tech has only 5 competitors in the whole Middle East region, 3 of which are based in Dub. Since very few companies produce aluminum foil lids, it is important for suppliers and customers to maintain their relationship with Pack Tech. Pack Tech also believes in a collaborative supply chain relationship.
The company has been the sole supplier of packaging materials to most of its key customers (e. G. , Nestle, Fomenter, Cargill, Coca Cola and Pepsi) in various countries since 1997. Similarly, it has also developed relationships with its key suppliers (e. G. , Exxon Mobil, Level, Avionic, and Weaker chemicals). The company has gained the trust of its customers through its commitment to quality & it enjoys excellent credibility among its suppliers. The company in this case had faced problems with its agents earlier between 2007 & 2009 in Iran, Sir Lankan & Greece.
The case also finally describes how Pack Tech currently faces problems with its current ink supplier & how should these problems be tackled. Iranian Agent There was no formal agency agreement or contract be;men the two parties, because both of them wanted to explore their mutual potential and capabilities for a year before drafting an agreement. During the period of 2002 to 2005, Ail performed extremely well, with an average increase in business of about 20% per year. He gave prompt customer service and market feedback and arranged payments effectively.
Due to the transparency between the partners, they gradually developed a mutual trust and didn’t feel the need to make their relationship legally binding. Razz got excited about he market demand & the overall growth trend of the market in Iran. Considering Alias track record over the previous four years, Razz confidently expanded his production capacity to 50% by investing in specific machinery to meet the growing demand in the Iranian market. At the beginning of 2007, a couple of flexible packaging companies based in Iran started to manufacture similar products to those of Pack Tech in Iran.
Ail was confronted with the problem of competing with them on price. In order to help Ail compete, Razz offered his cooperation by reducing prices, increasing credit facility & extending the credit period but Ail was expecting more support from Razz, as his margins in trading had become negligible. However, Razz also faced constraints in terms of how much he could reduce the price and increase credit facility. As a result of the situation, Ail felt that in the long run he would lose the business to his local competitors.
Ail had sufficient process knowledge, market information & contacts, he believed that he could start his own flexible packaging company in Iran & that this would allow him to survive in the Iranian market & avoid the uncertainty of shipment delays, while popping with the volatile economic & political situation in the country. Without Razz’s knowledge, he started working on this project by seeking the help of pack Tech’s technical manager. By the end of 2008, pack Tech had lost the total Iranian market, resulting in a production capacity redundancy of 25% for the company.
Pack Tech could not raise any objection or pursue legal action against Ail, as there was no formal agency agreement between them. Their relationship was based on an informal arrangement of mutual trust and commitment. In addition, Razz could not take any action against his technical anger who had helped Ail, because he could not find any concrete evidence to prove the manager’s involvement. Sir Lankan Agent Sir Lankan Agent Dillon, a trader from Sir Lankan, met Razz at Pack Tech’s stand at a packaging exhibition in Dub in 2001.
Dillon showed interest in promoting Pack Tech’s products in the Sir Lankan market. Since the Sir Lankan market was new to Razz, he agreed to cooperate with Dillon and offered the best price and direct service to his customers without any credit facility. Until 2003, Dillon bought an average of US$20,OHO worth of material very month through letters of credit (L/C) and sold it in the Sir Lankan market. In 2008, the business grew further, reaching an average of US$OHIO,OHO per month, and there were few incidents of payment delays on Dollop’s part.
As a result, the total outstanding was SIS$ADD,OHO, apart from orders executed against L/C. Upon realizing this, Razz interfered in the order execution process & instructed the sales manager to collect the outstanding amount before executing any new orders. As a result, Dollop’s customers suffered material shortages. Though Dillon was a trustworthy person, Razz ever had complete confidence in him due to his limited financial strength & the political situation in Sir Lankan. Therefore, Razz wanted to limit his credit exposure.
In 2009, as a result of the strained relationship with Razz, Dillon started to source material from Pack Tech’s competitor in Dub to meet his customers’ demand & to purchase only small quantities of material from Pack Tech. Razz chose to limit business with Dillon and to strictly follow up on payment collection. Gradually, Pack Tech lost Dollop’s business to its competitor. Greece Agent A foil rolling mill in Greece was the sole supplier of aluminum foil to pack Tech ND also provided full technical support in developing products and markets.
By 2005, Pack Tech’s monthly consumption had grown to about 100 metric tons. During the 7-year period, a strong business relationship was established between the foil mill & Pack Tech managers and there was transparency between the companies. Pack Tech maintained a good relationship with the supplier, without any payment delays or issues. A very high level of mutual trust & transparency developed between the 2 companies. Starting in 2006, metal prices gradually increased by as much as 50% and the rolling mill’s energy cost went up by almost 100%.
The same year also saw an increase in Euro-dollar parity. Pack Tech had previously absorbed any price increases imposed by the foil mill. But by April 2007, pack Tech’s average consumption had grown to 150 metric tons per month & it could not pass price increases on to its customers because its competitors were buying foil in dollars from India, China, Malaysia and Bahrain, & their prices Were much lower than those of Pack Tech. As a result, Pack Tech was not able to compete on price & started to lose market share. In an attempt to retain its market share, Pack
Tech asked the Greek foil mill to reduce its price to match those of Pack Tech’s competitors in the Middle East, but it could not reduce its price. With the consent of the Greek foil mill, Pack Tech decided to gradually shift its orders to Malaysia & Bahrain foil mills by the end of 2007. The Greek mill was not willing to match the price of these mills & it did not have any problem with pack Tech moving out. Current Problem with their Ink Supplier In April 2004, the company wanted to develop a solvent-based primer with a local ink supplier to improve print quality & reduce the inventory level.
A local ink supplier came forward to develop the solvent-based primer as per the company’s requirements. They made an agreement that the ink supplier would not supply the primer to Pack Tech’s competitors in Dub & Pack Tech would not develop a 2nd supplier or purchase the same product from any other local supplier. In January 2008, one of the ink supplier’s chemists joined its competitor & approached Pack Tech to offer the same product at a much cheaper rate.
He promised to deliver the same quality with better service and claimed that he was the one who had originally developed this product Pack Tech could not resist the offer & asked the original supplier to reduce its price, referring to the new development. The supplier replied that it had not increased its price over the past four years despite drastic increases in the cost Of raw materials & that there was no scope to reduce the price further. The supplier argued that it was not fair for Pack Tech to use this new competitor for the purpose of negotiating the price.
Recommendations According to the given situation in this case, Pack Tech should listen to its original supplier & not go for the 2nd supplier’s offer. First of all, Pack Tech would investigate how it’s even possible for this 2nd supplier to offer the same product to them at such low prices & maybe do a rough analysis if he can even sustain this operation for long. Pack Tech’s original supplier is a well- established firm in its field when compared to the new start-up of this 2nd new supplier.
Pack Tech should re-negotiate with its original supplier with respect to current prices & see if a middle win-win situation can be arranged in the near future. Pack Tech should also do cost benefit analysis of what can happen should they actually decide to go forward & breach their contract tit the original supplier & whether they would be willing to draft a new contract again with them in the future maybe at the same prices should anything go wrong with the new supplier.
Extensive situation analysis is required when it comes to resolving the predicament that pack Tech now faces & careful planning with clearly defined objectives is needed from their side. According to the Product Portfolio model, the product in this case could be a bottleneck wherein the supply risk is high as it was jointly developed by Pack Tech & its original supplier hence there are no other players in the racket who can supply them this item, except the new supplier of course. And the profit impact on purchase is low.
Meaning Pack Tech should come up with back-up plans in case anything goes wrong as mentioned earlier. However, if we see that the impact on profits could be high since the price is reduced by almost 50% by the new supplier & the supply risk remains low due to the fact that there is a new player in the market for the same product supply, this product becomes quite a leverage point for pack Tech, in which case they will have to try & exploit their purchasing power thereby targeting pricing strategies & negotiations.