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 represented 45 percent to 50 percent of Gilpin’s total annual 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, typically 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, materials, and print methods. A major concern for Mike and Brian was ongoing financial problems at Gilpin (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 attempting to sell the business.
EXHIBIT 1 Summary Financial Information for Gilpin Printing Inc. (in thousands of dollars)
| Sales | $34,296 |
| Profit before tax | (1,014) |
| Write-downs | 13,715 |
| Net profit (loss) | (14,729) |
| Current assets | 9,222 |
| Noncurrent assets | 9,953 |
| Current liabilities | 12,239 |
| Long term debt | 21,471 |
| Shareholders equity (deficit) | (14,535) |
Requests for proposals (RFP) for a three-year contract 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 foreign 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 between June and the following May each year, and ranged from a minimum of 3 percent to a maximum of 5 percent. 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
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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 compared to the proposal submitted by Gilpin.