PUROSOL

By: Víctor Tateishi Saito

Purosol S.A. is an industrial and commercial company that started its operations ago
5 years with the acquisition of a factory mainly dedicated to production
of waxes for floors and cleaning products for the home.

Production and sales are primarily concentrated in three sectors which are:
waxes, disinfectants, and bleaches whose sales volumes, for each product,
represent a third of the total. During this short time, the operations
have undergone important changes, the production of waxes was incorporated with a
leading brand in disinfection for its production and marketing; while
In the case of bleaches, it started with products in bottles and then expanded the
lines with cushion packaging using high-tech equipment.

The sales system has a distribution structure that includes all

the existing channels in the national market, the number of clients exceeds the
15,000 at equal points of sale; and to achieve coverage it has a
a team of 40 salespeople distributed across areas for Lima and by regions for
Provinces.

The company's goal is to be a leader in production, marketing and

distribution of cleaning and disinfection products, both in the Lima market
like in Provinces.

The areas that make up the organization's company are:

Marketing Management Mr. Felipe Andrade

Finance Management Mr. Jaime Roca
Logistics Management Mr. Luis Pacheco
Production Management Eng. José Cruz
Administration Management Mr. Enrique Pineda

Logistics aims to provide everything necessary to the areas, and

mainly the Production, of all the elements or materials necessary for
the production of the finished products that the company markets.

PARTICULAR SITUATION

There is discomfort in the company due to the supply problems that have occurred
internally due to the lack of one of the main raw materials such as
Solvent No. 3.

This solvent is a product ³A´ under the inventory control classification by

consumption-value, as it reaches 180,000 Kg. of monthly consumption for an amount
US$ 96,000 in the same period.
This input is used in the production of Serafina, which represents a cost.
of 20% of the company's purchases.

In the national market, there is a single supplier that is also monopolistic.

representing the purchases of PUROSOL, 0.2% of its sales, having as
policy cash payments. Additionally, it sets distribution and sales quotas,
which forces one to rely on distributors at a higher price.

Despite the fact that the location of one of the supplier's plants is barely 10
Km., delivery times are very variable, ranging from 1 to 7 days.
The supplier has another plant in the north of the country.

Our storage capacity is 71,520 Kg, which is around 12 days.

in stock.

Due to a supply crisis, the importation of a batch was decided.

of 400 TM, with a 20% surcharge compared to the local market prices;
fundamentally due to the fixed costs of importation and for the rental of the tank
of storage.

Since the solvent is a petroleum derivative, its price is affected by the

variations in price internationally. That is why when oil had
a rise, placing an import order would have meant an increase in
40% in relation to local prices.

A month ago, a contamination of the storage tanks of the supplier

it led to a nationwide shortage of the solvent. A quick reaction of
Logistics allowed the stock to be extended for an additional 4 days while coordinating.
with the supplier for the supply from their northern plant; however, it is not
could avoid the production stop for 2 days until the arrival of the northern batch and
for 2 more days when Lima resumed its deliveries.

Mr. Arturo Hernández, General Manager, requested Mr. Luis Pacheco, Manager of
Logistics, propose alternative solutions to the supply problem.
solvent in order to avoid future production stoppages.

The Logistics Manager took care of the matter and devised a work plan with it.
objective.

This is how, after hard work, he presents the following to the General Management
report:

REPORT

This report is to inform you about the actions that have been taken
taking into account the supply of Solvent No. 3

Being this product vital and indispensable for the development of our
operations and in view of the urgency of establishing a system that allows us to
to have the input at the right time and under the best conditions
possible, we proceed to detail our approach taking into consideration
very important aspects for this purpose:

To select the most beneficial supply alternative, it is necessary

determine the costs that would be incurred, both in the unit price of
product as in all those that are added by this decision (freights,
storage, etc.).

2. The competitive advantage sought is to have the solvent at the right moment.
opportune and the right place to fully meet the needs
from the company.

3. Another very important and beneficial factor to ensure the supply would be
select a supplier whose increase in their revenue would represent
our purchase is attractive and meaningful to you.

Under this reference framework, the following procedure was followed:

1. Contacts were made with a company whose annual solvent consumption

No. 3 signified proportionally optimal amounts for them to show
interest in the formation of a Purchasing Group. It was fully emphasized the
need to group together through this modality carrying out a work of
conviction that was quite objective.

2. The total amount of purchases would be US$ 2¶271,000 divided from the
next way:
Purosol S.A. US$ 864,000 38%
Champion Paints Inc. US$ 727,000 32%
Discomsol S.A. US$ 520,000 23%
Resins and Solvents Inc. US$ 160,000 7%
This constitution allows us to lead the Group, which in itself is already a
very advantageous situation for our company.

3. The costs of the product placed in our storage tanks

could fluctuate between 2% cheaper in the best case and 3%
more expensive than those of the current supplier, at worst.

4. To define the importer, a series of conversations were held.

preliminary and a thorough investigation of possible alternatives, the
which allowed for establishing contact with the company Química Import S.A. for the
next:

4.1. Optimal storage capacity for the volume of solvent

required
4.2. Very acceptable financial position in the market
4.3. Company with a highly efficient and skilled organization
 4.4. It has state-of-the-art information systems
especially for the customs dispatch work

5. An important part of the conversations held was based on what

next:

5.1. The importer would be strengthened in obtaining greater capacity

purchase, that is to say, better negotiation possibility with the manufacturer.
Its billing volume would increase by US$ 2,271,000
a year, which would represent an interesting economic benefit.

6. Benefits from the formation of the Purchasing Group:

6.1. Ensure the supply of Solvent No. 3, allowing for

small stocks, which would benefit the company by reducing
significantly its stocks, managing to use these resources in
other investments.
6.2. Reduction of prices due to a better purchasing position.
6.3. Improvement of credit conditions due to the possibility of having
with a longer deadline for the fulfillment of the obligations.
Tentatively, it would be about 60 days.
6.4. In the administrative aspect, efficiency would also be improved.
by having the systems and procedures that the importer provides us
would provide as: Inspections, Monitoring, Storage,
Desaduanajes, etc.
6.5. Another aspect that should be taken into consideration is related to
the infrastructure in the construction of 2 storage tanks that
They would stop being built for an amount of US$ 50,000 each.
6.6. Technically, we would also benefit from this.
alternative since the solvent to import has lower content
of sulfur, its organoleptic characteristics are superior to the
national.

After the analysis carried out in this report, it is important to consider our position.
in front of the market and the customers, which demands greater competitiveness from us, with
quality products, at a reasonable price and continuously available in your
homes.
If the fundamental objective is the customer, decisively and in this sense, the
efforts to consolidate our company as a market leader,
fully support our suggestion to form the Purchasing Group
to be able to fully meet our objectives.

Luis Pacheco
Logistics Manager

Mr. Hernández, after reading the report submitted by Mr. Pacheco, sent
You copy the other managers inviting them to a meeting to know the
opinions of their collaborators from different angles of approach.
On the day of the meeting, with Mr. Pacheco present, Mr. Hernández the
it began by explaining the reasons that have driven the search
solutions alternatives to the critical supply problem of Solvent No. 3
thanking the Logistics Manager for the effort made and then gave the floor
to Mr. José Cruz, Production Manager, to make his comments on the
regarding.

Eng. Cruz stated that in his opinion, having a solvent of higher quality
it would be reflected in the qualities of the final product. He also said that it would be
Interesting to have a sample of this product in order to verify, in the
laboratory, if it indeed meets the characteristics it claims to have, although
it was not shown very emphatic since it is known that the 'samples' do not necessarily
they are a faithful representation of orders in larger volumes. In what yes
I was very satisfied to have a stock of 60 days, which allowed him
would allow for proper scheduling of production and avoid interruptions due to
supply issues. In summary, I agreed with the proposal
Mr. Pacheco.

Then it was the turn of Mr. Felipe Andrade, Marketing Manager, to

Just like Eng. Cruz, he expressed his agreement with the proposal in question. Without
embargo, suggested that the competition would be importing products
ended at a price below current levels; which could affect,
some measure, in sales and therefore, in our income. In any case,
our brand and the prestige gained with the entire advertising campaign has given us
strongly positioned in the market and it will be quite difficult for the competition to
bring us back, he said. What would be unacceptable is to raise the price of
our products, rather I would be thinking of a special promotion like
strategy for greater dissemination of the cushions.

Immediately intervened the Administration Manager, Mr. Enrique Pineda, who was
the oldest and who had worked in the paint industry for more than
15 years. He stated that he had no further comments beyond what they had said.
those who preceded it. Just a rumor in this regard, and it was that Discomsol S.A.
(Distributor and Marketer of Solvents S.A.) had gone through a no
very good economic situation for a relatively long time, since it
he said that he had diverted resources into strong investments in other areas that did not benefit him
they had reaped the benefits they were expecting; but in any case, it had been
surprisingly recovered quickly. What he was very well known for was the great
the momentum that Pinturas Campeón S.A. had been gaining, which had allowed it to achieve
a good positioning within the paint market segment.

It is the result of the injection of foreign capital, Mr. Andrade murmured.

That's right, Mr. Pineda commented. By the way, did you know that Discomsol S.A. is, since
many years ago, supplier of Pinturas Campeón S.A.?

Everyone looked at each other without making any further comments and the meeting continued.
Finally, it was Mr. Jaime Roca's turn, who, contrary to his colleagues,
he did not show much enthusiasm for the proposal. He expressed that while it is
certainly the idea was interesting, the claim about it was not entirely true
improvement of credit, since in a short time, it would have to
assume the payment of the Letters of Credit resulting from the import, as well as of the
Freight, Insurance, Customs Duties and Taxes, Transportation, etc. and the commission and
storage to Química Import S.A. for its intervention in this process, which to
purpose had not been included in the report.

Mr. Pacheco intervened by saying that there was still no exact definition of the
commission for said service, but that the estimated calculations of the costs placed
in the warehouse, they had been exposed in their report.

He added that the main objective of his research had been to obtain
fluidity in the supply of Solvent No. 3; and that this had been achieved without
excessively increase the cost, which could well be reduced if given the
optimal conditions for it.

Mr. Roca took the floor again, saying that he would like to have more participation.
active in conversations with other companies and with Química Import S.A., already
that in their opinion, there were specific points related to the topic of the flow of
box that had not been clearly defined.

There was a brief silence in the meeting room that was interrupted when
Mr. Hernández thanked everyone for their comments and opinions and agreed to
coordinate with some of them to delve deeper into the topic in order to reach
a convenient decision for the company.

WORK TO BE DONE

You are Mr. Luis Pacheco.

As a Logistics manager, what do you think of your colleagues' comments?

You are Mr. Arturo Hernández, General Manager of Purosol S.A.

What would your opinion be on that?
What points would you evaluate in more detail and why?