Posted: November 26th, 2014

THE MUENNING OIL COMPANY;

THE MUENNING OIL COMPANY;

“Look,  you  asked  for  my  advice,  and  I  gave  it  to  you,”  Frank  Kelsey  said.  “If  I  were
you,  I  wouldn’t  make
any  more  concessions!  I  really  don’t  think  you  ought  to  agree  to  their
last  demand!  But  you’re  the  one  who  has  to  live  with  the  contract,  not  me!”
Static  on  the  transatlantic  telephone  connection  obscured  Jean  Fontaine’s  reply.
Kelsey asked him to repeat w
hat he had said.
“OK,  OK,  calm  down,  Jean.  I  can  see  your  point  of  view.  I  appreciate  the  pressures
you’re  under.  But  I  sure  don’t  like  the  looks  of  it  from  this  end.  Keep  in  touch
—
I’ll  talk  to
you early next week. In the meantime, I will see what others a
t the office think about this turn
of  events.”
Frank Kelsey hung up the phone. He sat pensively, staring out at the rain pounding on
the  window.  “Poor  Fontaine,”  he  muttered  to  himself.  “He’s  so  anxious  to  please  the
customer,  he’d  feel  compelled  to  give  t
hem the whole pie without getting his fair share of the
dessert!”
Kelsey cleaned and lit his pipe as he mentally reviewed the history of the
negotiations.  “My  word,”  he  thought  to  himself,  “we  are  getting  eaten  in  little  bites  in  this
Reliant deal! And I c
an’t  make  Fontaine  see  it!”
BACKGROUND
Muenning
Oil Company was founded in 1902
.
The founder of
Muenning
Oil,
J
.
E
.
Muenning
, pioneered a major oil strike in north central Oklahoma that touched
off the
Oklahoma  “black  gold”  rush  of  the  early  1900s.  Through  growth  and  acquisition  in  the  1920s
and 30s,
Muenning
expanded the company rapidly
. After a period of consolidation in the
1940s and 50s,
Muenning
expanded
again. It developed extensive oil holdings in North
Africa and the Middle East, as well as significant coal beds in the western United States.
Much of
Muenning
’s  oil  production  is  sold
under other company names
as gasoline through
service stations in the United St
ates and Europe, but it is also distributed through several
chains  of  “independent”  gasoline  stations.  In  addition,
Muenning
is also one of the largest
and best known worldwide producers of industrial petrochemicals.
One of
Muenning
’s  major  industrial  chemic
al lines is the production of vinyl chloride
monomer (VCM). The basic components of VCM are ethylene and chlorine. Ethylene is a
colorless, flammable, gaseous hydrocarbon with a disagreeable odor; it is generally obtained
from  natural  or  coal  gas,  or  by  “c
racking”  petroleum  into  smaller  molecular  components.  As
a  further  step  in  the  petroleum  “cracking”  process,  ethylene  is  combined  with  chlorine  to
produce VCM, also a colorless gas.
VCM is the primary component of a family of plastics known as the vinyl
ch
lorides. 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. As the bonding occurs, polyvinyl chloride (PVC) is produced;
coloring pigm
ents  may  be  added,  as  well  as  “plasticizer”  compounds  that  determine  the
relative flexibility or hardness of the finished material. Through various forms of
calendering (pressing between heavy rollers), extruding and injection molding, the
plasticized poly
vinyl chloride is converted to an enormous array of consumer and
industrial applications: flooring, wire insulation, electrical transformers, home
furnishings, piping, toys, bottles and containers, rainwear, light roofing, and a variety of
protective coati
ngs. (See Exhibit 1 for a breakdown of common PVC
–
based products.)
3
In 2006,
Muenning
Oil established the first major contract with the Reliant Corporation for
the purchase of vinyl chloride monomer. The Reliant Corporation was a major industrial
manufacture
r of wood and petrochemical products for the construction industry. Reliant was
expanding its manufacturing operations in the production of plastic pipe and pipe fittings,
particularly in Europe. The use of plastic as a substitute for iron or copper pipe w
as gaining
rapid acceptance in the construction trades, and the European markets were significantly
more progressive in adopting the plastic pipe. Reliant already had developed a small
polyvinyl chloride production facility at Abbeville, France, and
Muenning
constructed a
pipeline from its petrochemical plant at Antwerp to Abbeville.
The 2006 contract between
Muenning
Oil and Reliant was a fairly standard one for
the industry, and due to expire in December of 2009. The contract was negotiated by
Reliant’s  pur
chasing managers in Europe, headquartered in Brussels, and the senior
marketing managers of
Muenning
Oil’s  European  offices,  located  in  Paris.  Each  of  these
individuals  reported  to  the  vice  presidents  in  charge  of  their  company’s  European  offices,
who in tu
rn reported back to their respective corporate headquarters in the States. (See
Exhibits 2 and 3 for partial organization charts.)
THE 2002 CONTRACT RENEWAL
In February 2009, negotiations began to extend the four
–
year contract beyond the
December 31, 20
09, expiration date. Jean Fontaine,
Muenning
Oil’s  marketing  vice  president
for Europe, discussed the Reliant account with his VCM marketing manager, Paul Gaudin.
Fontaine had been promoted to the European vice presidency approximately 16 months
earlier aft
er having served as
Muenning
’s  ethylene  marketing  manager.  Fontaine  had  been
with
Muenning
Oil  for  11  years,  and  had  a  reputation  as  a  strong  “up  and  comer”  in
Muenning
’s  European  operations.  Gaudin  had  been  appointed  as  VCM  marketing  manager
eight months ear
lier; this was his first job with
Muenning
Oil, although he had five years of
previous experience in European computer sales with a large American computer
manufacturing company. Fontaine and Gaudin had worked well in their short time together,
establishing
a strong professional and personal relationship. Fontaine and Gaudin agreed that
the Reliant account had been an extremely profitable and beneficial one for
Muenning
, and
believed that Reliant had, overall, been satisfied with the quality and service under
the
agreement as well. They clearly wanted to work hard to obtain a favorable renegotiation of
the existing agreement. Fontaine and Gaudin also reviewed the latest projections of
worldwide VCM supply which they had just received from corporate headquarter
s. (See
Exhibit 4.) The data confirmed what they already knew
—
that there was a worldwide shortage
of VCM and that demand was continuing to rise.
Muenning
envisioned that the current
demand
–
supply situation would remain this way for a number of years. As a r
esult,
Muenning
believed that it could justify a high favorable formula price for VCM.
Fontaine and Gaudin decided that they would approach Reliant with an offer to
renegotiate the current agreement. Their basic strategy would be to ask Reliant for their fi
ve
–
year demand projections on VCM and polyvinyl chloride products. Once these projections
were received, Fontaine and Gaudin would frame the basic formula price that they would
offer. (It would be expected that there would be no significant changes or vari
ations in other
elements of the contract, such as delivery and contract language.) In their negotiations, their
strategy would be as follows:

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