Suman Corporation In mid-April, Mike Bradie, vice president of supply chain management at Suman Corporation (Suman), had become increasingly concerned about the potential shortage of supply of barac, a new high-tech raw material for air filtration. During the last two weeks, Suman's three suppliers had advised Mike Bradie to sign long-term contracts and he was trying to assess the advisability of such commitments. SUMAN Suman Corporation of Pittsburg, Pennsylvania, produced high-quality consumer and industrial air conditioning and heating units. An extensive network of independent and company-owned installation and sales centers serviced customers throughout the North American market. Company sales last year totaled $1 billion. AIR FILTRATION AND BARAC For decades, Suman had sold air humidification and air filtration units along with its prime units in air heating and cooling. Until three years ago, air filtration had accounted for about 7 percent of total corporate sales and had been sold primarily as add-ons to a new air cooling and heating systems. However, with the advent of barac, air filtration had started to increase significantly as a percentage of total sales. Barac, a new high-tech product developed as part of the U.S. space effort had a range of unique properties of high interest to a variety of industries. In the case of air filtration, Suman developed and patented a process where barac could be transformed into a thin, very light, and extremely fine, mesh-like sponge material capable of filtering extremely small particles. The manufacturing cost of a barac filter amounted to about 28 percent of its selling price. Given the population's sensitivity to air quality and the increasing number of people with asthma and allergies, the new Suman filters became popular, not only with new Suman air system installations but also as retrofits in older air conditioning and heating systems. Moreover, compared to electronic air cleaners, which cost about three times as much to install and required monthly cleaning, barac filters had to be replaced every six months, guaranteeing a continued sales volume of filters for years to come. When combined with an ultraviolet light unit, which killed airborne bacteria, a barac air cleaning system was considered a huge leap forward in air treatment. AIR FILTRATION SALES Along with the barac filtration system introduction three years ago, Suman's marketing department had initiated a significant Page 43 promotional campaign directed at both the industrial and consumer sectors. Marketing's ability to forecast sales accurately had not been impressive, according to Mike Bradie. For the first year, marketing had forecasted barac filter sales at $2 million when in reality they sold $13 million. In the second year, the forecast was for $18 million and actual sales were $35 million. In the third year, a forecast of $48 million turned into actual sales of $87 million. The marketing department expected sales growth to level off over the next three years to a rate of 20 percent per year. BARAC SUPPLY Suman's first barac supplier was Levy Chemical, a longtime supplier of paints and adhesives to Suman and a large, diversified innovative chemical producer that held the patent on barac. Mike did not like the idea of single sourcing and therefore, when barac requirements rose significantly in the second year, he brought in a second supplier, Vasey Inc., which not only produced the barac raw materials (under licence from Levy Chemical), but also manufactured a variety of barac products in the textile and automotive fields. In the third year, Mike had secured a third supplier, T.R. Specialties, a much smaller company than Levy Chemical and Vasey Inc., which also produced barac under license for its own applications in aerospace and the military, but had some excess capacity that it sold on the open market. All three suppliers sold barac at identical prices, which had increased over the past three years. Actual volumes purchased by Suman from each of the three suppliers were as shown in Exhibit 1. The current price of barac from all three suppliers was $60.00 EXHIBIT 1 Suman Barac Purchases and Prices Purchases (in pounds) Company Capacity (in pounds) Year 1 Year 2 Year 3 80,000 5,000 10,000 20,000 Levy Chemical Vasey Inc. 40,000 0 3,000 8,000 TR Specialties 20,000 0 0 4,000 Prices $47.00 $50.00 $53.00 SUPPLIER PROPOSALS FOR LONG-TERM CONTRACTS During the first two weeks of April, Mike Bradie was visited by each of his current three barac suppliers with Levy Chemical first. Each warned that a shortage of barac supply was looming and that unless Mike was willing to sign a long-term contract, they would not be in a position to guarantee supply. However, each proposal was different. Levy Chemical proposed a five-year contract with take-or-pay commitments of 25,000 pounds for the current year and 20 percent annual increases in volume for each of the following years. Prices were subject to escalation for energy, raw material, and labor every quarter based on the current $60.00 price per pound. Vasey Inc. proposed a two-year contract for 10,000 pounds each year with similar price provisions to those of Levy Chemical. TR. Specialties suggested an agreement for 12.5 percent of Suman's annual requirements, which could be dropped at any time by either party, and proposed a price of $68.00 for the current year, to be adjusted semiannually thereafter, based on inflation, energy, labor, and material Although Mike did not know much about the actual manufacturing process for barac, he had heard that increases in capacity were expensive. He also understood that two of the three component raw materials for barac were by-products from industrial processes that were reasonably stable. Since Mike Bradie had been able to buy almost all of Suman's needs on quarterly, semiannual, or annual contracts, he was not particularly keen on departing from his current supply practice. He had heard some rumors that a much lower cost substitute for barac might be developed in a few years. He suspected that his current suppliers were therefore anxious to tie Suman to a long-term commitment. APRIL 15 On April 15, Jessie Woods, the Levy Chemical sales representative, sent an email to Mike Bradie requesting a meeting on April 22. Page 44 The email concluded, "I would like to bring my sales manager, Rob Hares, so that we may discuss our proposal for the barac with you. We will not be able to guarantee you supply after August 1, if you are unable to commit."

1. Major facts could be causing the issue or issues?

2.Major problem to be analyzed?

3. possible solutions/alternatives?