Case 15-1 Rocky Plains Brewing Ltd. On April 21, Mike Pearson, packaging materials manager for Rocky Plains Brewery Ltd. (Rocky Plains), in Billings, May 30 and expected payment of a contractual rebate of Montana, received a call from Gerald Gilpin, owner and president of Gilpin Printing Inc (Gilpin), a local label sup- plier. Two days earlier Mike had notified Gerald that Rocky Plains was terminating the label contract with Gilpin as of $690,000. Gerald told Mike he refused to pay the rebate and demanded a $4.4 million wire transfer the next day in order to continue supply. ROCKY PLAINS BREWING LTD. EXHIBIT 1 Summary Financial Information for Gilpin Printing Inc. (in thousands of dollars) Rocky Plains was more than 100 years old and was one of the most recognized beer brands in the United States. The company had a reputation for producing products of exceptional quality, supported by high standards for raw materials, proven brewing methods, and rigorous produc- tion processes. After operating for more than 80 years as a family business, the company was presently owned by a large multinational brewery. The Billings facility brewed three to four million barrels of beer per year and employed approximately 500 people.* Sales Profit before tax Write-downs Net profit (loss) $34,296 (1,014) 13,715 (14,729) Current assets 9,222 9,953 12,239 21,471 (14,535) Noncurrent assets Current liabilities Long term debt Shareholders equity (deficit) GILPIN PRINTING Gilpin was a family-owned business and its president, Gerald Gilpin, was the son of the company's founder. Gilpin had been Rocky Plains primary label supplier for approximately 15 years, and Mike considered Gilpin's performance in the areas of quality and service to be good. Mike estimated that sales to Rocky Plains repre- sented 45 percent to 50 percent of Gilpin's total annual materials, and print methods. A major concern for Mike and Brian was ongoing financial problems at Gil- pin (see Exhibit 1 for a summary of Gilpin's financial statements). Gilpin had been unsuccessful in efforts to stem its financial losses during the past two years, and Mike had heard rumors that Gerald Gilpin was attempt- ing to sell the business. Requests for proposals (RFP) for a three-year con- tract were sent to eight potential suppliers, including Gilpin, and five responses were submitted prior to the December deadline. Mike's analysis of the proposals included financial stability of the supplier, protection for raw materials price increases, currency and for- eign exchange exposure, freight costs, print run sizes, and label cutting options. Mike narrowed the field to two suppliers in February: Gilpin and Stiles Printing. Stiles was a large printer located in Billings with a solid reputation. Gilpin offered a continuation of its current pricing for a three-year period, which included continuation of an annual rebate payable July 31 each year. The rebate was based on total purchases for the 12-month period be- tween June and the following May each year, and ranged from a minimum of 3 percent to a maximum of 5 per- cent. Mike estimated that the rebate for the current year would be approximately 4.4 percent of total purchases from Gilpin. The proposal from Stiles identified a variety of cost reduction opportunities through initiatives to use white paper with metallised ink, elimination of trim outs/ square cut labels, size optimization, and freight saving opportunities. Stiles also committed that it would not increase prices in the second year of the contract, and price increases for the third year would be capped at 3 percent. In addition, the company indicated that any revenues. Gilpin provided Rocky Plains with three-day service- typically orders for labels were placed on Thursday for delivery on Monday morning. As a result, Gilpin carried substantial raw material safety stock, and Rocky Plains carried minimal inventories for its labels. Rocky Plains used "cut and stack" labels exclusively for its products, of which approximately 80 percent were metallised labels and the balance were paper labels. The majority of high-volume labels supplied by Gilpin were produced through a rotogravure printing process, which used a printing plate to stamp the ink on to the paper. Rotogravure printing required the label design to be etched onto a copper cylinder, which typically required a four-week lead time to create. Litho-offset printing was the second method used for Rocky Plains labels, typi- cally for speciality and low-volume brands. In contrast to rotogravure printing, litho-offset used etched rubber cylinders. CONTRACT REVIEW Rocky Plains' supply contract with Gilpin was to expire on May 30 and, after consultation with Mike's boss, Brian Evans, director of purchasing, the decision had been made in November to test the market. Mike's intention was to probe the market for better pricing, 1 barrel = 13.8 cases of beer with 24 bottles per case. Chapter 15 Legal and Ethics 475 future reductions in cost drivers, including raw material costs, would be passed directly to Rocky Plains. Mike estimated that the Stiles proposal represented savings of approximately $2.5 million in the following year com- pared to the proposal submitted by Gilpin. Meantime, Mike had been working with Pat Schofield, project manager at Stiles, to create a transition plan. The major tasks were: Create rotogravure print cylinders for high-volume brands (total of 285 cylinders)-completion date May 15. Production trials and qualifications of labels at Stiles- to be completed May 22. NEGOTIATIONS WITH GILPIN Due to the long-standing relationship with Gilpin and concerns that losing the contract could push the com- pany into bankruptcy, Mike allowed the company to submit a second proposal. In his meeting with Gerald Gilpin on February 19, Mike indicated: "If you want to keep the business, we need a solid proposal with spe- Production line trials with high-volume brand labels at Rocky Plains (led by Rocky Plains Brewery Support Group)-completion June 15. Implement Stiles pricing in Rocky Plains ERP system-completion June 1. cific recommendations that will reduce our costs sub- stantially." Gilpin's second proposal, received provided an overall annual price reduction of $2.0 mil- lion and did not include specific information regarding measures to support the lower pricing. During the meet- ing between Mike and Gerald Gilpin when the second proposal was presented, Gerald confirmed that he in- tended to sell the business, although a buyer had not yet March 25, RESPONSE FROM GILPIN On the morning of Friday, April 21, Mike Pearson received a call from Gerald Gilpin informing Mike that Gilpin was refusing to pay the contractual rebate due demanding $4.4 million for printed stock inventory, pend- ing orders, and outstanding invoices. Gerald indicated that he expected a wire transfer in their account before the July 1 and been identified. end of the next business day; otherwise he would cut off supply immediately. Mike checked the computer system to see where Rocky Plains stood with Gilpin immediately after Gerald Gilpin's call. He estimated that Gilpin would owe Rocky Plains approximately $690,000 for its annual rebate in July, accounts payable to Gilpin were $442,398, pend- ing orders were $583,165 and total label inventories at Rocky Plains were $846,835. A major concern, however, was potential production problems caused by label short- ages, and Mike expected that production interruptions could start as early as Tuesday, April 25. Recognizing the significance of the problem, Mike knew he needed to come up with a plan quickly. THE DECISION Under the existing circumstances, Mike felt compelled to recommend awarding the label supply contract to Stiles. He based his decision on the better pricing offered by Stiles and concerns regarding the financial stability of Gilpin. Mike toured the Stiles facility in Billings the first week of April and a procurement audit had been com- pleted the following week. Brian Evans concurred with Mike's recommendation, and in a meeting on April 19, Gerald Gilpin was notified that his company's label sup- ply contract would expire on May 30 and it would not be renewed. 1. As Mike Person, how would you respond to Gilpin's ultimatum? 2. Prepare a plan to address the ultimatum from Gilpin for immediate payment of $4.4 million and refusal to pay $690,000 in rebates. 3. What recommendations would you make to Brian Evans? 4. What responsibility does Mike Pearson/Rocky Plains have in this situation?