Scenario - There is a 100 year old Spanish company which manufacturers valve in Spain (like a water tap). MD of the company is coming to India for the 1st time. His agenda is –
· To buy valves as per his company’s logo and design.
· For his company’s stock in Spain – Keep some buffer in stock to fulfill instant demand locally (If someone comes and wants to buy a single valve, he can sell it from this stock). Hence, he will charge a high price compared to contracted supply of goods (Inventory carrying cost, Interest cost). This is 1million dollars (He is going to buy 1 million $ worth valves in 1 shot – Different vendors can make it in small batches but all of them have to supply 1 million $ worth of valves in one go).
· For back to back orders from clients in Germany, UK etc. – 3 million dollars (similar as above).
Hence, his total buying requirement is 4 million dollars. (1$ = INR 50)
He has a sole distributor in India called Venky enterprises for last 2 decades. Venky sells valves from Spain in India to process industries like Chemical plant, fertilizer plant, refineries, petro-chemical plants.
Why anyone will buy valves from outside –
· Made in Spain tag
· Cheaper to import
Hence, Spanish guys wants to buy valves becomes export transaction and Venky selling Spanish valves becomes an import transaction.
MD asks Venky to suggest some local manufacturers in India. (Marketing Intelligence – To sit with competitors to gauge their strategy). Based on trust and long lasting relationship of 2 decades, Venky recommends the name of the manufacturers to MD of Spanish firm.
· EOU (Export oriented unit), Vashi, Navi Mumbai – EOU only exports and doesn’t sell locally at all. This EOU sells valves. Turnover of this company is INR 200 million.
· Company in Ghatkopar, Mumbai Suberb – Domestic turnover of INR 100 million and an export turnover of INR 100 million.
· Federation of SSI (Small Scale Industries) in Vasai, Mumbai. Each SSI has a turnover of INR 10 million. They are strictly small – no financial or marketing muscle. So, they have come together to form a federation. Hence, federation bargains on behalf of SSIs. But contract is then to be given to each SSIs. Federation is just a bargaining body and not a manufacturing body.
· Company in Bhiwandi, outskirts of Mumbai named as Amit trading. Amit trading makes castings and not valves. Turnover is INR 200 million. Casting is used to make valves – In volume, 80% of valve is from casting; in value, only 20% of valve is contributed by casting. Hence, casting companies makes 80% of valves and rest 20% value addition (in terms of volume) is done by valve makers.
· Amit traders has a step brother company (Have same promoters, but 2 different entity - same people have financed both the companies) in Jebel Ali (Free trade zone), Dubai. He makes valves and his turnover is INR 1 billion.
Please do not assume that
ü Casting company makes valves or valve making company makes casting.
ü There are only above players in the market.
ü All the valve company may or may not buy castings from Amit traders.
Spanish MD asks for small manufacturers only (Small and strictly reliable) and not big names. (Bigger companies will try to find out who are Spanish companies end customers are and will try to take it from him – Can cut the Spanish company and go directly to end customer of valves).
Question 1 - What is the one question which comes to your mind after reading the case above?
Answer 1 –
ü What Venky (distributor) is getting out of this deal
ü Whether it is profitable to purchase valves from Dubai or India – Competitiveness / Cost-benefit analysis
ü Why does the Spanish company wants to enter India / is coming to India
ü Is it cost benefit to acquire the company or place the order at SSI
ü Why not buy the company in India manufacturing valves rather than just buy valves
ü From which source, Spanish company should buy the valve
Question 2 – You are EOU & your capacity is full. Spanish company wants to give order worth 1 / 3 / 4 million INR to EOU. Price & delivery date, whatever EOU is comfortable with. How many options does EOU has.
Answer 2 – Options are four – either take 1 million worth of order, take 3 million, take 4 million or take no order.
Why nothing is an option – EOU is already having existing orders to fulfill / his capacity may be full. Rule of business – Do not take new orders / customers at the cost of existing one. Also, the customer is new. After giving the 1st order, EOU increases its capacity. But then EOU might not receive another order. So, what is the use of investing in machinery to increase capacity (Only for 1 order !!!! … Makes no sense). To avoid this, EOU will try to outsource most of the excess orders.
Question 3 – Spanish company wants to give entire 4 million INR order to EOU, but on a condition that logo and design of valve should be as per their company. What is the fear in the mind of EOU after executing the order?
Answer 3 – The EOU would have spent years to build his brand under which his quality product gets delivered. Spanish company is asking to part away with that. That’s the fear. (Indirect promotion of Spanish company’s brand).
The result will be Spanish company will go to EOU’s customers in EOU’s market and will deliver EOU’s product under his name / brand and will build his market share (Brand erosion of EOU).
May be my customer wanted to give extra order, but now rather giving it to me, they will give that extra order to Spanish company and I will be continuing with old set of orders only.
Question 4 – You are Amit Traders. Spanish company wants to give order worth 4 million INR. Price & delivery date, whatever Amit trader is comfortable with. Amit trader accepts the order. How will they execute the order.
Answer 4 – Amit traders gives the castings to SSI. SSI makes the valves (It is called Job work / sub-contracting / business process outsourcing). Amit traders then exports to Spanish company.
Why not send the castings to Dubai & ask the Dubai form to make castings – Problem is customs in India is going to murder Amit traders as their order sheet will show export of valves outside India (to Spanish company) though they are only exporting castings to Dubai under that order sheet. Hence, order sheet needs to be changed by Spanish company stating that Amit traders will only export castings out of India.
Why Spanish company is not doing business directly with SSI – Total order is worth 4 million USD or 4*50 = 200 million INR. Each member of SSI has power to cater to 10 million INR. Amit traders will take the headache of bargaining with federation of SSI and will see that order is completed on time without any glitches.
Question 5 – The Spanish company pays the Amit traders (casting guy) after order is delivered. Now, what is the fear Amit trader will have in their mind?
Answer 5 – Amit trader is supplier to company in Ghatkopar, EOU and SSI. All 3 of them (the Ghatkopar company, EOU and SSI) were trying to get this valve order from Spanish company, but finally Amit traders gets it, who is a casting maker and not a valve maker. Amit trader will approach all 3 of them. But now, all 3 of them will start looking Amit traders as competitor, though Amit trader still manufactures castings and not valves. This might result in them not taking the orders and Amit traders manufacturing valves themselves. If it happens, then it will now become a competitor to its Dubai partner as well who is into business of making castings.
Question 6 – Reliance is setting up a refinery in Jamnagar, Gujrat. Venky contacts Reliance to supply valves. Reliance asks whether Venky is a registered supplier. Venky then registers as a vendor of valves. Reliance then asks Venky that who is the manufacturer, please register them. Venky registers Spanish company (Here, Spanish company is exporting to India). There are 2 ways it can be done –
1. Reliance gives order to Venky and he passes on it to Spanish company and they in turn gives the cost in $ which Venky converts in INR and quotes to Reliance.
2. Reliance directly deals with Spanish company and gives commission to Venky.
In both the above cases, Venky benefits as Spanish company can’t cut Venky off. Which route will Reliance will take and why?
Answer 6 – Take the 1st route - With Venky involved as mediator. Reason -
1. In case, Valves leaks or has problem, Reliance can catch Venky’s neck very easily – Venky has to be technically strong.
2. Spanish company might not give high credit period (period for payment of valves) to Reliance, but Venky can as he is a local player – Venky has to be financially strong.
3. When valves comes to India, Venky goes to the port, clears it from customs by paying import duty, loads it on a truck and send it to Jamnagar. Reliance does not have to do anything. And on top of it, Reliance pays Venky after 5 months (though Venky will add all the above costs as well as his margin).
Question 7 – Reliance is now in a desperate need of valves. Venky and Spanish company has valves in stock. Reliance asks to lower the price, which Venky put downs. The company from Ghatkopar can also supply, at reduced new prices, but not before 3 months. Reliance agrees to buy from Venky. After the above, the Spanish company and Venky had a hearty laugh though they supplied the best valves to Reliance at Reliance’s desired credit period of 5 months (though market practice is 3 months), though Venky paid Spanish company immediately. Why Venky & Spanish company are laughing (that finally they gave back Reliance what it deserved)?
Answer 7 - Spanish company bought valves from the Ghatkopar company sometime ago. But because of bad forecasting, they bought excess and it was now in their stock lying idle. They now sold it to Reliance, who could have easily bought it from Ghatkopar at a cheaper price, but now had to buy the same stuff via Spanish company at a much higher price (price of logo and design of Spanish company) because of urgency. Moreover, Reliance still believed that it had bought valves made from Spain. Hence, Spanish company and Venky were laughing (This is a rare scenario).
Question 8 – Spanish company comes and asks to supply valves to him. Price and delivery date, whatever you are comfortable with. But remember packaging. Make good sea-worthy packaging. Use good marine plywood. Water should not enter the wood and the valve should not be rusted. (The packaging of the valve has to be good, protection against rusting). Put each valve in a plastic bag, vacumize and seal the bag. Put not more than 4 valves in 1 box. Close the box, put nails on top and steel straps around the box (as it will lifted in Spain using fork lifts, hence, can’t use threads / ropes, otherwise box will whop), put name of company on top. Put non-soluble ink stencil marking, if not put, it may disappear and customs from Spain will ask to open all boxes – packaging / re-packaging cost will increase.
Spanish company tells that they will pay for all this. Venky has to ship it’s client in UK and Germany. What is odd about this story.
Answer 8 – Spanish company can’t take the risk of revealing the client’s name or next time, Venky will supply directly to them. The above is applicable only if Spanish company supplies to its own companies / subsidiaries in UK and Germany.
Why this story / message behind this story – International business is all about least cost production location.
What is the story afterwards – No one accepted order of Venky as the price coated by Spanish company was very low. So, Spanish company invited all 4 of them on a day at a gap of 1 hour each. On the d-day, Spanish guy was sitting with Venky. EOU comes 1st, meets them, Spanish guy quotes the same price, EOU rejects it as earlier, Spanish guy says – Thank you and EOU representative leaves the meeting room. Outside he sees, the SSI representative sitting. So, now EOU thinks, that SSI might get the order if he quotes a slightly lower price and mentality says – If I do not get the order, others should also not get the order. EOU again enters and quotes a lower price. Similarly, all the other 3 goes through the same situation and quotes lower price.
What could have avoided this price war – If instead of thinking that no one should get the order, he would have thought that let someone get the order and all others will share the order by forming a CARTEL, then they could have not brought down their prices & Spanish guy would not have known it and would have accepted the original price.
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