San Fabian Supply Company

The San Fabian Supply Company is a building materials distributor which supplies the materials to the Philippine construction industry mainly on an exclusive-only basis. Now one of its suppliers MacDowell Corporation notified San Fabian Supply Company that the exclusive-distributor agreement would be terminated in four months. So the company has to make a decision whether to handle MacDowell Corporation’s products on a nonexclusive basis or to drop the line completely. As discussed in our group, we think San Fabian Supply Company and MacDowell Corporation should find a way to accomplish win-win, and selective distribution may be a good way.

The San Fabian Supply Company’s basic marketing strategy is exclusive distribution strategy on its distribution channel strategy. Under this strategy, the company grows very fast and is one of the largest suppliers of building materials in the Philippines. It also has a good reputation for quality materials. The San Fabian Supply Company also has other strengths that lead to the company’s success. It has a relatively long history and rich experience in supplying building materials to the Philippine construction industry. It has good relationship with the Philippine government and has accumulated a lot GuanXi throughout the Philippine construction industry.

It has powerful well-trained and aggressive sales forces to acquire different customers and its selling network covers the whole country. A retail sales force call on architects, engineers, contractors of nongovernment projects, homeowners, and industrial firms; a wholesale sales force call on the independent retail dealers; and a government sales force call on government contractors, departments, and agencies. The company provides its sales forces with formal training program and seminars, and incentive pays. All of these contributed a lot to the San Fabian Supply Company’s success.

At the beginning of the exclusive distribution agreement between San Fabian Supply Company and MacDowell Corporation, both of them benefit a lot from the agreement. The San Fabian Supply Company was an aggressive building supply outfit, but did not have a roofing line. So the MacDowell Corporation’s product line was needed by San Fabian Supply Company. At the same time, MacDowell did not know the market and lacked relationship in construction industry in the Philippines. As the exclusive distributor of MacDowell Corporation’s products, San Fabian Supply Company was stimulated to make great efforts to push the sales. In 1986, the total sales volume of MacDowell Products was 44,051,000 pesos, which accounted for 13.74% of the total sales of San Fabian Supply Company.

However, MacDowell Corporation believes that changing the relationship with San Fabian Supply Company will make it benefit more. On one hand, MacDowell has been marketing its products through an exclusive distributor only in the Philippines and the parent company wants to market the products same as in other countries. On the other hand, the demand for construction materials has decreased since the expansion of its plant in the Philippines before. MacDowell Philippines’ plant operating rate was very low, at only about 45% capacity, and the overcapacity plagued the company a lot. To get rid of this situation, MacDowell Philippines wants to increase sales and its new president believes that having more dealers can lead to more sales. So MacDowell wants to change the relationship with San Fabian Company in the Philippines.

However, that is not necessarily the case. After discussing within our group, we found that if MacDowell takes upon itself the wholesale distribution role and participates directly in large commercial and government projects, and treat San Fabian Supply Company same with other dealers, it will bring harm to both of the companies. If San Fabian Supply Company drops MacDowell Corporation’s product line completely, it will lose the profit of 833,130 pesos, which accounts for 13.75% of the total net income (6,058,000 pesos). For the case in San Fabian Supply Company, the overhead is 17% of the sales of MacDowell Corporation’s products. Take sales in 1986 as an example, the profit is for selling MacDowell Corporation’s products is calculated as below: Dealer Sales: 9,768,000*(-2%)=-195,360 pesos

Retail Sales: 13,715,000*(20%-17%)=411,450 pesos
Government Sales: 20,568,000*(20%-17%)=617,040 pesos
Profit: -195,360+411,450+617,040=833,130 pesos
Since it is difficult to sign exclusive distribution agreement with other Cement-Based pressure pipe, corrugated sheets, and flat sheets with manufactures, and there is not suitable substitutes, the span of San Fabian Supply Company’s product line will be narrowed a bit, which probably will make customer satisfaction a bit down and the company’s image will be down as well.

If the MacDowell Corporation takes upon itself the wholesale distribution role and participates directly in large commercial and government projects, and the San Fabian agrees to be a non-exclusive distributor in the Philippines, it will not be a good news for MacDowell. First of all, the Philippines is a small country, and the money is concentrated in a few areas. Relationship is also critical for doing business in the Philippines. MacDowell does not know the Philippine market well. We can learn this from its wrong decision to expand the plant though San Fabian Supply Company who knows the market very well disagreed with that decision. Under this environment, if MacDowell takes upon itself the wholesale distribution role and participates in directly in large commercial and government projects, the company has to invest a lot to know the market, to build relationships and to market its products in the Philippines, especially for large commercial and government projects.

Besides, the products line of MacDowell is different from fast moving consumer goods such as Coca-Cola, Beer, or articles of everyday use. For fast moving consumer goods, intensive distribution strategy may work very well, but for MacDowell’s products, it may not work. The company should not apply the marketing experience in fast moving consumer goods to construction industry in the Philippines. MacDowell Corporation’s products are used specially, and sometimes specialists are needed to provide guidance to users, contractors, or government agency. Also, as the number of dealers increase, it is really difficult for MacDowell to control the distribution channel effectively and efficiently. Same products may be sold in different prices in different dealers and there may be disorder in the market, which will break the image of MacDowell Corporation accordingly. Distributors like San Fabian Supply Company will be discouraged to make efforts to push sales, which may result in decrease in sales.

If MacDowell Corporation gives dealers 10% margin, it cannot cover San Fabian Supply Company’s overhead, which will cause a completely loss. As is discussed above, whether to drop MacDowell’s product line completely or to be a non-exclusive distributor, the benefits of both MacDowell and San Fabian will be harmed. A win-win decision is needed. Our recommendation is that it is acceptable for both companies to agree on a selective distribution strategy. MacDowell can choose two or three other aggressive distributors with good reputation and competitiveness to make these distributors compete under a fair environment, which means the margin is not as low as the totally nonexclusive distribution. This strategy will help MacDowell avoid its weaknesses in the Philippine market and control and evaluate the distribution channel easily. As for San Fabian, the not-so-low margin may help them to cover their overhead and continue running the product line as well. But if MacDowell insists to have excessive lots of dealers, San Fabian should drop the line to avoid a completely loss and save the energy to get some new business from other companies.