Racol, Inc. is a long established company selling industrial piping and plumbing supplies. They ave four flants and a series of regional warehouses serving the contiguous United States. Total sales was $600 million with piping totaling $204 million. The company has experienced rapid growth of at least 20% a year and were expected to continue for the next four years.

PL75 piping

Racol used PL75 in manufacturing piping products. The cost of manufacturing PL75 pipe was 35% of the its selling price. Pipes produced from PL75 had excellent long-life characteristics and have not yet been known to break down or deteriorate. It also relied on resin to bond, a significant improvement over iron and copper pipes. It was, however, difficult to stabilize during the production process.

The Plastic Pipe Industry

Approximately 60 companies shared the business volume of $2,400 million. Of the 60 companies, no more than 25 were major players and only 6 had sales volumes exceeding $120 million. Due to the relatively high cost of shipping plastic pipe, many small companies have cropped up serving local markets. Very little capital was required to become a pipe extruder, however, the extrusion of PL75 pipe required an investment of $160,000-$200,000. It also required technical expertise.

Future Demand for PL75

Un the U.S. PL75 had seen extraordinary growth, but has had some hurdles. Many local zoning and building standards did not allow the use of this type of pipe. It was expected that growth would stabilize between 10 and 12 percent annually.

Supply of PL75 Polymer

Suppliers of PL75 had bullt up loyalties with their customers over the years when the market was soft and prices were low. However, beginning this year, they had set quotas their customers. This allowed small extruders to continue to manufacture PL75 tubing. Many other suppliers of PL75 polymer had stopped selling the polymer during the last year and were using it in all of heir own productions

Suppliers located within a 1,000 mile radius were considered to be within the maximum shipping distance. It was delivered in bulk by rail or track and all contracts were FOB Rocal plants. It was surmised that any supplier further than 1,000 miles would not enter in to a FOB Racol. Thus, the switching cost to a new supplier included the, not insignificant, shipping cost.

Purchase forecasts by Racol

3 years ago	*
2 years ago		*
1 year ago			*
This year				*
1 year from now				70 million
2 years from now				94 million
3 years from now	40 million	70 million	90 million	120 million

Actual purchases and prices per pound

	Volume (million pounds)	Price per pound
15 years ago	3	16
3 years ago	12	40
2 years ago	15	42
1 year ago	20	44
This year	28 (projected to year end)	48

Current supply of PL75 to Racol

Company	Current capacity (million pounds)	Racol purchases (million pounds)
Clark	85	8.4	Reliable supplier 15+ years
Solvay*	60	8.4	Reliable supplier 15+ years
Imperial*	20	5.6	New supplier < 3 years
Acro	40	2.8	New supplier < 3 years
Albis	60	2.8	New supplier < 3 years
- Capacity available for sale

The situation is changing. Clark, Solvay, and Imperial had approached the firm with proposals to supply Racol with present and future requirements of PL 75. They are:

Clark	A leader in the monomer and polymer field 5-year contract with escalation for labor, eergy, and feedstock based on the current price of 48 cents per pound. Minimum contract volumes would be based on Clark’s present share of Racol’s purchases (30%). If Racol cancelled, the penalty would be 60% of the selling price. Without the long term contract, Clark could not guarantee supplies after 3 months
Solvay*	Another large international concern that manufactured PL75 for the market and for their own PL75 piping. The primary difference between the two
Imperial*	Imperial asked for a purchase agreement which could be dropped at any time by either party.
Acro Albis	Do not have proposals and have not initiated discussions about future purchases

Purchasing practice at Racol has never included long-term contracts. Most were on a yearly or monthly basis. Recently, short-term three- or six-month blanket contracts have been used. All it took to get an order shipped was a phone call to the supplier.

Racol looked at the concept of producing their own PL75 polymer. It would take 18 months and the investment and capacity is:

Capacity	Investment
150 million pounds	$28 million
50 million pounds	$16 million
100 million pounds	$24 million

What is your prediction of demand and price?

What do recommend to Racol for their supply of PL75?

Answer rating: 100% (QA)

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