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Pacific Oil Case Study

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Pacific Oil Company is a Sweetwater Oil company of Oklahoma City, Oklahoma. It was founded in 1902. One of the major chemical lines of Pacific's is the production of vinyl chloride monomer (VCM).
“VCM is subjected to the process of polymerization, in which smaller molecules of vinyl chloride are chemically bonded together to form larger molecular chains and networks.” Pacific Oil's first major contract with the Reliant Corporation was in 1979. The contract between Pacific Oil and Reliant was a standard one for the industry and due to expire in December of 1982. The contract was negotiated by the purchasing managers in Europe then it was reported to the vice presidents in the states.
In February 1982, Jean Fontaine marketing vice president of Pacific Oil Europe, discussed the Reliant account with his VCM marketing manager, Paul Gaudin. Fontaine and Gaudin agreed that the Reliant account had been extremely profitable and beneficial for Pacific and Relaint also, overall the quality and the service of the agreement was satisfied. The latest projections proved that there was a worldwide shortage of VCM and that demand was continuing to rise. If the situation would remain the same for years then Pacific believed that it could justify a high favorable formula price for VCM. Fontaine and Gaudin decided to renegotiate the current agreement, so the strategy would be to ask Reliant for their five-year demand projections on VCM and polyvinyl chloride products.
In their negotiations the strategy would be: keep the successful long-term relationship ensure that all of the projections would have a guaranteed supplier point out the extra effort from Pacific to ensure delivery and services use past and future relationships to appear high formula price point out the ways that Pacific competitors could not offer the same kind of service
The result of this negotiation was a very favorable contract for Pacific Oil, signed by both parties on October 24, 1982 till December 1987.
In December 1984 the yearly review showed that: the basic supply-demand situation on VCM was changing Relaint was aware of the situation, so as a result Fontaine and Gaudin wanted to anticipate the change in the supply-demand situation as an opportunity to pursue a more favorable price re-signing all major customers because of the high demand serious talk about Pacific entering the PVC business or not
As a result of the evaluation a new contract had been proposed in December 1984.
Two strategies:
“First, they would approach Reliant with the intent of reopening negotiation on the current VCM contract. They would propose to renegotiate the current agreement, with an interest toward extending the contract five years from the point of agreement on contract terms.”
“Second, they would contact those people at corporate headquarters in New York who were evaluating Pacific's alternatives for new product development, and inform them of the nature of the situation.”
Gaudin contacted Frederich Hauptman, the senior purchasing manager for Reliant Chemicals in Europe. As a result of the meeting, Hauptman cabled Gaudin that Relaint was willing to begin to renegotiate the current agreement.
March 10
Egon Zinnser, the regional vice president of Relaint's European operations, Hauptman, Gaudin, and Fontaine sat down to review the current VCM contract. They felt that Pacific's basic formula price on VCM is fair, but might not remain competitive in the long-term future. The net result of the meeting would be to reduce the effective price of VCM by approximately 2 cents per pound. This would be a net reduction $4 million per year. The proposal went back to Paris for further discussion. By of May 15, they had agreed on a revision of the formula price that would adjust the price downward by alsmot one cent per pound.
May 27
Hauptman contacted Gaudin to talk about the remaining issues in the contract. Gaudin hoped that Reliant would be willing to agree to extend the contract five years from the point of singing. Reliant had serious reservations about committing the company to a five-year contract extension. Reliant wanted to make a commitment for only a two-year contract renewal. After several phone discussions on
August , 17, Gaudin and Hauptman agreed to a three-year contract renewal. Remaining contract issues will be discussed in September.
September 10
Remaining important issues before signing the contract was the minimum quantity requirements should be raised to 10 percent each year. Hauptman's minimums were too low. No meetings were held until late October. In November the agreement consisted of 205 million pounds of minimum quantity purchases in the first year, 210 million in the second year, and 220 million in the third year.
October 24
Pacific had decided not to develop its own product lines for either PVC or fabricated products.
December 14
A year had passed in deliberations, but still few technical issues remained, such as delivery pipeline being metered. Pacific was in charge of maintaining the pipeline. Reliant was concerned about the condition of the pipeline. No agreement had been made.
January Meetings
Gaudin stated that the investigation of the pipeline had discovered no evidence of significant discharge. Hauptman stated that their own spot monitoring showed it was considerably more and that Reliant would feel more comfortable if the new metering system could be installed. Gaudin agreed that Pacific would remeter the pipeline.
January 23
Zinnser had few small issues of contract language which was going to be arranged on February 3. Pacific Oil had an obligation to write two additional clauses into the contract that would protect Reliant in the event of further slippage in the VCM market. The first was a “favored nations” clause, stipulating that if Pacific negotiated with another purchaser a more favorable price for VCM than Reliant was receiving now, Pacific would guaranteeing that Reliant would receive the same price as well.
The second was a “meet competition” clause, guaranteeing that Pacific willingly meet any lower price on VCM offered by a competitor, in order to maintain the Reliant relationship. Hauptman argued with both of the obligations.
March 11
Frank Kelsey, strategic planning manager of Pacific Oil Comanpy, met with Gaudin and Fontaine in Paris to review what happened in the Reliant contract negotiations over the past year. Since Reliant and Pacific had already settled on minimum quantity amounts, Reliant wanted the contractual right to resell the product if it could not use the minimum amount. Kelsey did not agree with this obligation, but Fontaine debated the point, saying he really thought Reliant might default on the whole contract if they did not get resale rights.

The negotiation could have involved professional negotiatiors, such as “The HackerStar Negotiation” case study. Pacific Oil failed to see the other parties point of view and Reliant also failed to view the situation from the other party's perspective. The hackerStar Negotiation was a very good example because the professional negotiatiors made the other parties understand different poistions and views. The whole negotiation took almost a year to finalize the language in the contract. Both companies were looking at their own good and they did not pay enough attention that the companies were very satisfied with each others work. It will affect their future relationship. All the meetings should have been held in person not over the phone. The outcome will be more effective if the parties can see each others reaction. Phone discussions are not the best ways of solving a problem. Too much time is given to the parties, and cannot see any reaction as it would be in person.

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