Assessing and managing monopolist suppliers

This is maybe a typical problem in Russia, where many markets are underdeveloped to easily adopt quality management principles.

The exposition:
1. There is an SME manufacturing hydroisolation construction materials. Thay use toluene for production of one of them. They need 500-1000 litres monthly to satisfy their needs.
2. toluene is pruchased from a local oil refinery - the only producer of toluene in the region and one of the few in the whole Russia.
3. The refinery sells the bulk of toluene in batches starting from 40-60 tons (railway barrel) and is not very much interested in small customers purchasing small batches. However they sell these small barrels to the SME in question through a wholesaler related to them.
4. The refinery decides to stop the production of toluene for several months in order to renovate their facilities. The SME get to know about it only as they decide to order next batch for the coming period. The SME is running out of stock very soon and stops releasing the product breaking contact liabilities.
They neither can find another supplier within such a short period of time. All other domestic suppliers refuse to ship toluene to the SME for different reason.
5. The refinery does not bother to introduce a quality system neither it bothers to get registered. Being a monopolist supplier they do not need more trust from the side of customers.

The above situation seems to be a rather serious non-conformance. At least it has destructive effect upon the business.

There are several suggestions concerning the corrective action for this case:
1. Keep a better database on alternative suppliers of toluene .
2. Arrange the relations with the refinery in a way, that the latter advices the SME of their facilities renovation plans beforehand (timely) So that the SME can have a security stock.
3. Develop an alternative recipe of the product in order to have a possibility to avoid the use of toluene .
4. Do something else (you are welcome to suggest).

5. Increase the stock of toluene at SME's factory (Just forgot to mention it from the beginning.

Three first suggestions have their drawbacks:
1. It is anyway very hard to switch to another refinery, considering the distances in Russia. Moreover, in this particular case the deficit of toluene is reported throughout the country. So, a better database most probably would not help.
There is a pretty poor wholesale market in this industry. Most suppliers are not interested in small customers.
2. It is very unlikely, considering the lack of interest to the SME from the side of the refinery.
3. They do try. But the product developing process will take time and money.
4. ?

5. Too expensive and dangerous

You can take this as an exotic case study concerning en 'emerging market'.

The above situation is pretty typical. It causes problems to many Russian SME's seeking to build up quality systems and to get registered
I would appreciate any comments or suggestion.

Yours,

Anton

[Claes Gefvenberg]

Wow Anton…

I see your problem.

One question about no. 4: You have not mentioned the possibility to look for toluene abroad. Would that be possible?

Anyway: Some of us in the rest of the world can certainly suffer from being an insignificant customer to a large supplier with a major market share. I have never seen a problem in the order of magnitude you describe, though. What it could boil down around here is the big supplier telling it’s small customer “Take it or leave it”.

/Claes

P.s. I took the liberty to add one more alternative to your poll. Hope you don't mind.

[gburns]

Since this material is a critically necessary component who's availability is limited to a single supplier, it should have been planned by the SME to foresee this possibility and to have previously made arrangements to either stockpile or otherwise assure uninterrupted supply. The SME should use this opportunity as an alarm clock to reassess other areas where suppliers fall into a strategic category or being critical to the continuation of business. Suppliers in that category should either have identified alternatives (other suppliers) or planned stockpiling of a minimum amount of that material.

Either that or risk going out of business.

I new this!

Anyway thanks a lot for all replies!
Now one by one:

skullsike: good idea! Sorry It was so natural, that I even forgot to metion it. You would not mind me editing the initial post, would you?
The problem is that toluen is highly flammable and pretty poisonous. So, keeping a large stock would cost A LOT of money. The SME cannot afford it.


Claes: also a good idea, but it will most probable be **** expensive and is liable to customs duties. Even if it would pay, another bproblem is total lack of export-import experience within the SME.

gburns: you suggest either the first or the second variant. Stockpiling is to dangerous and expensive and other suppliers are situated very far away and are as well reluctant to serve small customers.

I had another suggestion, which lies rather in marketing or economics field than in the field of quality management. It is find other relatively small toluene consumers and set up a purchasing kartel (or whatever we should call it), which would provide for more bargaining power and more efficiency.

The question however is rather rythoric: how should one assure quality under such circumstances! This even leads to another topic: Is it possible to build up an effective quality system in one separate company functioning in the environment disdaining quality menagement? How high should the registration rate in the industry be, in order to provide for maximum efficiency?

Yours

Anton

Carl,

I would say: that is why most western companies are still reluctant to do business in Russia
We do not have these necessary institutions, which would allow you solve the 'business dilemmas' preventing from the QAS efficiency.
OK, OK! maybe I am too critical. We, of cource, have some of the instruments you mention. We've got an anti-trust legislation and a ministry, we've got an improving arbitration system, which allows companies count on the relization of contract liabilities by a monopolist, etc. (Earlier it was even much weaker).
What I mean is, that is would not ever work automatically. The SME would have to pay a lot of effort to only make the monopolist supplier behave, if we can say so.

Anyway, thanks, it may be a good idea for the SME to go to the anti-trust commettee next time a problem like this arises.

regards,

anton

[gpainter]

This goes back to selection of suppliers and the realization that you are the customer. Has this happened before? You as a customer should be taken care of.

[E Wall]

This goes directly to the current push for Strategic Supplier Programs. The key is to partner with your suppliers so that they keep you abreast of their business as you keep them up on yours. It does take time to establish this level of contact, and setting specific individual/team relationships is vital.

As far as what to do after the fact...
My first action (if the product could not be substituted) would be to find out who else the supplier sold to and start contacting them to see if they would be willing to part with some. It will surely cost you a bit more but better than than to have to shut down. Simultaniously you might also consider rallying the other customers to try and assist this supplier with their efforts - if you are all in the same boat, it would be to your mutual advantage to if it is feasable - in the hopes that the supplier down time could be reduced significantly (which if could be done would also be to your advantage in enticing other customers to share with you their supply).

Second action would be to get marketing team working on alternatives - be they product or process, and evaluate our options.