Underwater Oil, Inc. is an important player in offshore oil drilling. They have 25 platforms, which...

  

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Underwater Oil, Inc. is an important player in offshore oil drilling. They have 25 platforms, which include 21 wellbore production platforms, both with permanent drilling equipment systems, and four production handling and processing platforms. Fastenal wears many hats and offers multiple services for its customers around the world. It serves as an expert consultant to customers, provides logistics services, is a major technology provider, and does all of this while serving as a distributor of industrial and construction products. Their service model includes over 3,000 market locations (a combination of public branches and customer-specific on-sites), each providing custom inventory and a dedicated sales team to support local customers. These locations are supported by a global supplier and distribution network, and multiple teams of subject-matter experts and support personnel. Fastenal operates in 26 countries with over 21,000 employees. The Biloxi, Mississippi, Fastenal store has done good business with Underwater Oil, Inc. by supplying them with a variety of stainless-steel and custom alloy fasteners for an off-shore oil rig. This business has ranged from $3,000 to $30,000 per month depending on the reliability of their primary supplier. Hailey is a salesperson within Fastenal National Accounts and has gathered all the data from the Biloxi store while also having some preliminary meetings with their director of purchasing and the director of engineering at their corporate headquarters in Houston, Texas. Hailey's goal is to secure a national fastener and associated materials contract with Underwater Oil as their current contract is set to expire next month. Hailey has provided Underwater Oil with a market basket quote of these item types as well as solid information on Fastenal's engineering department and laboratory capabilities to meet their unique specification and engineering demands that result from the harsh environments of their rigs. Fastenal's fastener products will be utilized to repair all of their oil rigs currently pumping oil offshore (25 sites). Fastenal's branch network would result in local service throughout their Gulf Coast and Pacific sites, distinguishing Fastenal from the other finalist in the proposal process. A national contract at all their sites is estimated to be $50 to $100 million annually when the energy sector picks up to full capacity. Page 340 Because of the lucrative nature of this contract and the culture of the energy industry, Hailey expects very tough negotiations from Underwater Oil before she can seal the deal. Their demands going into the next negotiation include: net 90 day terms, firm pricing on all fasteners for two years regardless of commodity price changes of steel, no inventory liability for parts not used at the end of the two-year contract, and limits of product liability capped at $1 million. Further, as a result of their service demands, Hailey anticipates needing to hire 50 people at all the Fastenal sites to service this account, but the guaranteed spend (revenue from Underwater Oil) in the first year can truly only justify hiring approximately 30. If their production picks up as expected, then hiring 50 shouldn't be a problem over time. Questions 1. What areas of this contract put Fastenal at risk? 2. What areas of the business provide potential significant rewards? 3. What terms should Hailey attempt to negotiate more favorably for Fastenal? 4. In what areas, if any, should Hailey walk away if she can't secure concessions from Underwater Oil? Underwater Oil, Inc. is an important player in offshore oil drilling. They have 25 platforms, which include 21 wellbore production platforms, both with permanent drilling equipment systems, and four production handling and processing platforms. Fastenal wears many hats and offers multiple services for its customers around the world. It serves as an expert consultant to customers, provides logistics services, is a major technology provider, and does all of this while serving as a distributor of industrial and construction products. Their service model includes over 3,000 market locations (a combination of public branches and customer-specific on-sites), each providing custom inventory and a dedicated sales team to support local customers. These locations are supported by a global supplier and distribution network, and multiple teams of subject-matter experts and support personnel. Fastenal operates in 26 countries with over 21,000 employees. The Biloxi, Mississippi, Fastenal store has done good business with Underwater Oil, Inc. by supplying them with a variety of stainless-steel and custom alloy fasteners for an off-shore oil rig. This business has ranged from $3,000 to $30,000 per month depending on the reliability of their primary supplier. Hailey is a salesperson within Fastenal National Accounts and has gathered all the data from the Biloxi store while also having some preliminary meetings with their director of purchasing and the director of engineering at their corporate headquarters in Houston, Texas. Hailey's goal is to secure a national fastener and associated materials contract with Underwater Oil as their current contract is set to expire next month. Hailey has provided Underwater Oil with a market basket quote of these item types as well as solid information on Fastenal's engineering department and laboratory capabilities to meet their unique specification and engineering demands that result from the harsh environments of their rigs. Fastenal's fastener products will be utilized to repair all of their oil rigs currently pumping oil offshore (25 sites). Fastenal's branch network would result in local service throughout their Gulf Coast and Pacific sites, distinguishing Fastenal from the other finalist in the proposal process. A national contract at all their sites is estimated to be $50 to $100 million annually when the energy sector picks up to full capacity. Page 340 Because of the lucrative nature of this contract and the culture of the energy industry, Hailey expects very tough negotiations from Underwater Oil before she can seal the deal. Their demands going into the next negotiation include: net 90 day terms, firm pricing on all fasteners for two years regardless of commodity price changes of steel, no inventory liability for parts not used at the end of the two-year contract, and limits of product liability capped at $1 million. Further, as a result of their service demands, Hailey anticipates needing to hire 50 people at all the Fastenal sites to service this account, but the guaranteed spend (revenue from Underwater Oil) in the first year can truly only justify hiring approximately 30. If their production picks up as expected, then hiring 50 shouldn't be a problem over time. Questions 1. What areas of this contract put Fastenal at risk? 2. What areas of the business provide potential significant rewards? 3. What terms should Hailey attempt to negotiate more favorably for Fastenal? 4. In what areas, if any, should Hailey walk away if she can't secure concessions from Underwater Oil?

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