Negotiation management: CHEMICAL COMPANY INTERNATIONAL & DRAGON MANUFACTURING (DM)

CHEMICAL COMPANY INTERNATIONAL (CCI) OVERVIEW

CCI is a UK-based pharmaceutical company that manufactures many different kinds of drugs and lenses for the ophthalmological market. The company has a proud culture of innovative and engineering-driven production. Traditionally the key strengths of CCI centred on a solid understanding of the strategic aspects of the industry, backed by solid engineering and research disciplines that constitute the very fabric of the company. Last year CCI had global revenues in excess of $8 billion. Dealing with CCI as a supplier can be difficult as CCI is a big player in the market and is not afraid to use this to its advantage during negotiations. The strong engineering discipline within the company has also ensured that supply chain management has become a key competitive advantage to CCI. CCI has recently developed a new product line, the TGB range of lenses. CCI’s experience indicates that the TGB range of lenses has the potential to be a blockbuster for the company. These lenses could potentially increase the revenues of the company by as much as 5% should they capture market share as intended. As with all pharmaceutical products, managing the competition is a key element of success. It is critical to protect the investment costs incurred in designing the TGBrange of lenses, and exclusive supplier agreements are one of the most effective tools to raise the barriers to entry into the marketplace for competitors.

CONFIDENTIAL INSTRUCTIONS:

CHEMICAL COMPANY INTERNATIONAL (CCI) Just when you thought your work load was easing off and you were in the final straight heading towards your annual holiday, the CEO of CHEMICAL COMPANY INTERNATIONAL (hereinafter CCI), your employer, has asked you to lead the negotiations with one of your most critical suppliers. The price of success can sometimes be high! You have worked with CCI for over 10 years and you are well respected in the organisation for the quality of the purchasing agreements that you have concluded with suppliers. After eight years of research costing over $500 million, the company is due to launch a new range of lenses that will cost 20% less than traditional lenses, yet will still offer an improvement of up to 50% in quality and durability. The manufacturing process for this type of lens, the TGB range of lenses, is highly specialised and dependent upon the supply of the VBY compound manufactured in China by DRAGON MANUFACTURING (hereinafter DM). The manufacturing process for the VBY compound is highly specialised and there are only three suppliers of VBY compound worldwide. Out of the three available suppliers, only DM were prepared to consider an exclusive supply arrangement whereby they will supply the VBY compound to CCI exclusively, thereby denying potential competitors access to this product. DM indicated that it was prepared to consider an exclusive supply arrangement based on certain criteria: A maximum exclusive period of three years coupled with a supply agreement of 7 years. A minimum supply level of $50 million of the VBY compound per year, escalating at 10% per year. Payment terms of 30 days. You have a mandate to be able to conclude an agreement based on the following terms: A supply contract for 10 years of which you would like to have at least 3-5 years on an exclusive basis. You would like a guaranteed level of $30 million of the VBY compound per year – you could increase this if you can get favourable terms. Payment terms of 30 to 60 days. Whilst DM is an attractive potential supplier due to the fact that it is prepared to consider an exclusive supply arrangement, CCI has some concerns: There is concern within CCI engineering circles about the quality guarantees that will need to be in place with regard to the VBY compound, as the quality of the TGB lenses is highly dependent on consistent quality in the base materials. DM has very little experience dealing in the international market, as they have mostly only traded in the Chinese domestic market. CCI has some concern about managing the cultural dimensions of an ongoing relationship.

DRAGON MANUFACTURING (DM) OVERVIEW

Dragon Manufacturing (hereinafter DM) is a specialist chemical compound manufacturer based in Shanghai in the People’s Republic of China. The main market for DM’s products has been small to mid-size Chinese pharmaceutical, engineering and chemical companies. DM’s turnover for the past year was $ 300 million. DM has been in exploratory talks with Chemical Company International (CCI) regarding a possible supply agreement for one of the products that DM produces – the VBY compound. The potential contract with CCI will have a significant impact on DM’s revenues and margins, as well as enabling DM to appoint more staff in its Shanghai plant if an agreement can be reached with CCI. This is sure to win the company favour with local authorities as it is important these days to be politically well positioned in an emerging capitalist environment. In some ways, the Executive of DM couldn’t believe their luck when this opportunity was brought to them by Chris Waters. Chris Waters is an expatriate Englishman who has spent the past 20 years living and working in China, specifically focusing on creating opportunities for Western and Chinese companies to trade products and services. As CCI is a UK-based company and Chris Waters is English, it has made a lot of sense to the DM Executive to appoint Chris as the lead negotiator on behalf of DM with a full mandate to strike a deal on favourable terms. The Executive of DM has deemed the following terms as the basis of a favourable deal. An overall supply contract of at least 8 to 10 years if CCI were to expect DM to be an exclusive supplier for a period of between 3 to 5 years. A minimum contract value of $ 200 million measured over the first 5 years. Payment terms of 60 days The DM Executive is well aware of the strategic nature of this deal, as this would provide the working capital and a key reference to fund further growth in the export market. As a matter of fact, should this deal be closed, DM will probably want to establish a permanent presence in London to drive further development of exports to Europe and the USA. Culturally, DM knows that they will have to overcome their lack of international exposure and experience if they wish to take advantage of the export market.

 

CONFIDENTIAL INSTRUCTIONS:

DRAGON MANUFACTURING (DM) Finally you have the opportunity to convert a substantial opportunity! You have been living and working in China for the past 20 years and have been involved in more deals than you can remember, but never have you had the opportunity to facilitate something of this size! What’s even better is that you see a natural synergy between the companies participating in this opportunity, CCI and DM. DM has appointed you to lead their negotiation team. Your mandate is to close a deal on favourable terms with CCI. It is your responsibility to ensure a cultural fit with CCI, translate some of the vagaries of the western culture and apply your significant negotiation experience to structure a sustainable deal. Being a conservative Chinese organisation, DM views the business relationship as the most important component of a profitable agreement. You know this from your own experience as you have had a long and personal association with the Chairman of DM, Mr Won. This is why you have been requested to lead the negotiation. However, you suspect that the negotiation may be challenging, as CCI has a strong engineering and research-based culture, and building relationships is not necessarily what they are best at doing. CCI has a proud track record of success and is a huge potential customer which will provide significant credibility to DM’s export efforts. From a strategic perspective, this deal holds immense value to DM. DM in turn could provide CCI with a potential strategic advantage, as you are aware that there are only three companies in the world that are able to manufacture the VBY compound in the quantity and to the quality standards required by CCI. Of these three companies, you are convinced that only DM is prepared to consider an exclusive supply agreement with CCI as the other two already trade with CCI competitors. In your previous correspondence with CCI, you indicated to them that the criteria you would like to attach to an exclusive supply arrangement would include: A maximum exclusive period of 3 years coupled with a supply agreement for 7 years. A minimum supply level of $ 50 million of VBY compound per year, escalating at 10% per year. Payment terms of 30 days.

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