CaseStudy: Muenning Oil Company
CaseStudy: Muenning Oil Company
Thecase study “Muenning Oil Company” focuses on the contractnegotiation techniques used by two companies, namely Muenning OilCompany and Reliant Company. The two companies are negotiating thesupply of VCM where Muenning had entered into a contract that couldhelp it supply VCN starting from the year 2009 to 2011 for the firstcontract and to 2014 for the second contract. However, drasticchanges in the market conditions (including the increases in price aswell as the supply uncertainties) have forced the two companies torenegotiate the contract with the objective of maintaining theirlong-term relationship. The main issue in this case is that, althoughMuenning invited Reliant to renegotiate the contract that wasexpected to expire in 2014, representatives of Reliant took advantageof the situation to request a lot of adjustments in the contract,which would put Muenning at a disadvantage. However, Muenning is in aconfusing situation because losing Reliant to emerging competitorsmeans a lot to the company.
Analysisof the reopened negotiations
Partiesto a given negotiation seek to maximize their benefits, which meanthat it is the role of the other party to counter the demands made bythe other parties in order to avoid losing all benefits anticipatedfrom the contract. The decision to renegotiate an existing contractshould be based on significant factors that threaten the goingconcern, the future performance, or the relationship between theparties to the contract. In Muenning’s case, the emergence of newproducers of VCM subjected to company that necessitated thenegotiation of the terms of the contract in order to bring in newterms that would help Muenning retain its long-term client, who makesa significant contribution of its annual sales. Reopening thenegotiation was the most appropriate decision that the management ofMuenning would have done in order to avoid losing Reliant to newcompanies that are planning to start the production of VCM. Althoughthe two companies managed to agree on the terms of the new contract,there are several things that each one of them would have donedifferently to maximize its benefits in the new contract.
Thingsthat Muenning would have done differently
Muenningwould have waited for at least one more year to reopen thenegotiation of a new contract. Proper timing is among the key factorsthat help each of the negotiating parties to maximize their benefits.From the case study, it is estimated that the new producers wouldbecome operational within a period of between 20 and 30 months. It isevident that Muenning anticipated a decrease in the negotiated priceof VCM since its representatives were aware of the change in themarket forecast indicating that the supply of VCM would increasewhile its price would decrease. Therefore, it would be more advisableto apply the delay tactic in order to continue selling VCM at thecurrent price until the new manufacturers are ready to introducetheir product in the market. This would have helped Muenning intaking the maximum advantage of the initial contract by earning moreprofits without the risk of losing its loyal client, Reliant.
Therepresentatives of Muenning should have taken the initiative tocontrol the first draft of the contract. The case study indicatesthat the representatives of Muenning allowed Reliant to make itsdemands without taking the initiative to suggest their positionfirst. Muenning invited Reliant for negotiations of new terms ofcontract without a clear idea of what it wanted. For example,Fontaine and Gaudin went to the negotiation table without an idea ofhow much the price of VCM needed to be reduced. The tworepresentatives of Muenning gave room for the representatives ofReliant to propose of reduction of $ 2 cents per pound, which waslead to a loss of $ 4 million per year on the part of Muenning. Thisis a weakness that gave Reliant an opportunity to make exploitativedemands. The strategy of controlling the first draft implies that theparty that introduces the idea of negotiation should come with aproposal of the terms that form the basis of bargaining. This wouldhave protected Muenning from excessive demands by Reliant.
Muenningshould have gone for the key decision makers instead of taking toolong with representatives from the marketing department from Reliant.Analysts and associates dig into details and try to find reasons toderail the process of negotiation (Furmansky, 2014). For example,Zinnser and Hauptmann, the representatives of Reliant, delayed thenegotiations for more than one year to an extent that the topmanagement of Muenning started pushing Fontaine and Gaudin to ensurethat the negotiations are finalized as soon as possible. Fontaine andGaudin should have worked their relationship as well as the socialangles with the top executives of Reliant. Fontaine and Gaudin wouldhave negotiated with Zinnser and Hauptmann after getting the generalnod from the executive management of Reliant, which means that therole of the representatives would have been to bring the negotiationto fruition.
Thingsthat Reliant should have done differently
Thereare two major things that Reliant should have done differently.First, the derail technique was unnecessary for Reliant and instead,Reliant should have fast track the negotiation as soon as the twoparties agreed to reduce the price of VMC by one cent per pound.Reliant delayed the negotiations by presenting its demands one at atime, instead of tabling a list of all items that needed to bediscussed. Fast-tracking the negotiations would have helped Reliantto start buying the product at a lower price immediately, which wouldhave helped the company to save close to two million dollars peryear. This implies that Reliant should have focused on the timingstrategy, instead of the derail tactic.
Reliantshould have demonstrated confidence instead of cockiness. Therepresentatives of Reliant understood clearly that Muenning was in adifficult situation and was not ready to cut off the relationship. Zinnser and Hauptmann understood Muenning’s frustrations that werebehind its intentions of readdressing initial terms of contract.Zinnser informed the representatives of Muenning that he had held adiscussion with two potential VCM manufacturers, which necessitatedreforms in the pricing formula to help Muenning retain itscompetitiveness. This confirms that Zinnser was aware that Muenningwas not necessarily looking stronger relationship with Reliant as therepresentatives claimed, but it wanted to secure its market share.Demands that the representatives of Reliant makes indicate that theyare taking advantage of Muenning’s situation. It would beunnecessary to blackmail a long-term client by requesting to beallowed to resell VCM.
Thereare three major recommendations that can help Muenning overcome thechallenges associated with the unexpected change in the supply-demandsituation. The first recommendation is value addition, which can beaccomplished by producing derivatives of VCM, instead of selling itas it is. Value addition will allow Muenning to increase itsprofitability since it will be able to sell derivatives at a higherprice than VCM. However, Muenning should expect a decline in itscurrent customers who have been buying VCM from the company. This isbecause the present customers might feel uncomfortable might feeluncomfortable dealing with a competitor. In addition, the process ofvalue addition will require additional capital, but there is noguarantee that Muenning will be able to break even given the currentuncertainties affecting the entire petrochemical industry.
Secondly,Muenning can diversify its customer base by looking for a largenumber of small scale buyers of VCM instead of over-relying on a fewlarge scale buyers, such as Reliant. From the case, the management ofMuenning is frustrated because it gets its largest proportion ofannual profits from Reliant. Therefore, losing a single large saleclient threatens the going concern of the company. By selling to alarge number of small scale customers will reduce the threat of asignificant decline in profits during the times of marketuncertainties. In addition, a large number of customers where eachone of them contributes a small proportion of annual revenue have alimited bargaining power, which gives the company an opportunity tosell its products in a market competitive price (Wilinson, 2013).However, selling to a large number of small scale customers is notcost effective compared to selling in large scale. This means that itis likely that the cost of operation and distribution will increaseand reduce the annual profitability of Muenning.
Third,Muenning should focus producing finished products (such as pipefittings and plastic pipes) with the objective of reducing the middleentities between its manufacturing plants and the final consumers ofthe product. Currently, Muenning produces and sells VCM that is usedby its customers to manufacture the finished that are in turn sold tothe construction companies. If Muenning decides to set up a plant forthe production finished products, it will be able to by-pass Reliantand other customers whose interest is to maximize their profits atthe disadvantage of Muenning. In addition, the production of finishedproducts will help Muenning increase its market share in thepetrochemical industry. This will also minimize the negative impactsmarket uncertainties that have allowed Reliant to take advantage ofMuenning’s situation.
Inconclusion, Muenning approached the negotiation without a draft ofwhat it expected to be included in the new contract, which created anopportunity for Reliant to ask for unreasonable demands. The contractwould have favored Muenning if its representatives would have waitedat least one year before starting the negotiations, controlled thefirst draft of the contract, and gone for the key decision makers inReliant. Reliant would have negotiated more effectively if it wouldhave fast-track the negotiation as soon as the price reduction dealwas agreed upon and demonstrated confidence. Some of therecommendations that can Muenning overcome its current situationinclude a focus on the production of VCM derivatives, finishedproducts, and expanding the customer base to include a large numberof small customers. However, focusing on a larger number of smallcustomers is a more viable solution because it will protect Muenningfrom relying on a small number of large customers who have a higherbargaining power.
Furmansky,A. (2014). Don’t sign anything without knowing these contractnegotiation tactics. Budsies.Retrieved June 30, 2015, fromhttp://www.inc.com/alex-furmansky/don-t-sign-anything-without-knowing-these-7-contract-negotiation-tactics.html
Wilinson,J. (2013). Buyer bargaining power (One of Porter’s Five Forces).TheStrategic CFO.Retrieved June 30, 2015, from,http://strategiccfo.com/wikicfo/buyer-bargaining-power-one-of-porters-five-forces/