SAN FABIAN SUPPLY COMPANY

September 1987. Paul Cheng (president) and the directors of San Fabian must decide what to do
after the announcement of MacDowell, one of the manufacturers for which they distribute
exclusively, decides to break the exclusivity agreement and sell to all distributors.

• Company founded in 1958 to supply building materials by the Cheng family.

• Distribute "Made in Philippines" products by 90%.

• Its policy is to distribute products only exclusively.

• They have 3 locations: Manila (central), Cebu (southern zone) and Davao.

• Its sales are distributed from the sgte. Form:

1. Sales to contractors and other government users: 135 million pesos. (42.2%). Their sales
strategy is to visit and service the person who makes the design and the work of the purchases,
mainly architects, contractors.

2. Independent wholesale customers: 114 million pesos (35.6%). In the Philippines there are
about 1000 independent traders, who buy from San Fabian and others and resell their products to
small contractors, owners.

3. Most are Chinese with very little Overhead as they employ their relatives in the business and
have limited stocks.

4. Sales related to government agencies and contracts: 71 million pesos (22.2%) Personal
relationships are the most determining factor in business with the Government. SF staff know
those people and know who to turn to.

5. Its sales network is highly prepared (most university students and all trained within the
company) and aggressive.

6. Its sales in recent years were in clear decline, with -26% in the last 3 years.

7. In 1986, the profit on sales was 1.89%, with an Overhead of 17%.

RELATIONSHIP WITH MACDOWELL CORP:

Macdowell was a Canadian company, established in the Philippines since 1967.

MacDowell Philippines was 40% Macdowell capital and the rest Philippine capital, including 7%
owned by Paul Cheng, president of San Fabian.
 At present, MacDowell was struggling, having a 60 million plant operating at only 45%.

In 1969 they signed the first exclusivity agreement, which was in force since then (the current
one was terminable by both parties with 120 days' notice).

On September 1 , 1987, Jean Brevett, the new president of Macdowell Philippines, visited Cheng
to give him the news of the termination of the agreement. Brevett asked San Fabian to continue
distributing the Macdowell material within the new system.

This system established the same margin for all distributors: 10%, without rappels for sales or
anything similar. San Fabian had an overhead of 17%, while small distributors could have 5%
approx.

The difference was in the service that San Fabian offered, where it included advertising (1 million
in 1986), technical advice, monitoring of the work ... while small distributors could not offer that,
but a much lower price.

Sales of MacDowell products accounted for 13.74% (44,051 million) of San Fabian's sales, with
margins of 15% on sales to merchants, but 20% on retail and sales to the Government.

MACDOWELL PRODUCT LINE:

Pressure Tubes:

1.- They accounted for 50% of MacDowell's sales with 21,985 million, and were the most popular
products in the range.

2.- 70% of San Fabian's sales were to government departments, 5% to municipal or provincial
governments, 9% directly to private project contractors, and 16% to merchants.

3.- The possible substitutes for the pressure tubes were not viable due to lack of quality or
because they had the exclusive distribution with another company.

4.- Pyrolite corrugated sheets for ceilings:

* They accounted for 39% of MacDowell's sales with 13,138 million. It was not a very popular
product, since in the installation of the ceilings they required a different installation mode than
usual, which ended up causing leaks due to the bad installation, and also raised fungi, which on its
gray color gave a very bad appearance.

* The option to replace this product are galvanized steel sheets, which are 10-15% cheaper than
Pyrolite, although they would give margins of 8-10%.
Pyrolite smooth sheets:

They accounted for 13.46% of MacDowell's sales with 5,928 million.

45% of sales were in housing construction, 35% in commercial buildings, and 20% in government
constructions.

The possible substitutes for the pressure tubes were not viable due to lack of quality or because
they had exclusive distribution with another company.

PROBLEM:

Obviously it is the loss of a contract of exclusivity and the respect of a manufacturer, who
believes us expendable and incapable (at least sufficiently) as a sales force.

CRITERIA:

- SALES: The possible refusal to distribute the Macdowell range would reduce sales, especially
considering that there are practically no possible or viable substitutes for Macdowell products. Can
we afford it? Should we afford it? Keep in mind that sales have been declining in recent years
worryingly.

STRATEGIC: In case of selling Macdowell products in the new conditions, we would be

contradicting our company philosophy and setting a precedent with the rest of the manufacturers
for which we sell exclusively.

DECISION+ACTION PLAN:

Stand up to Macdowell and not sell his products at least for the next year. Your sales will probably
decrease markedly and we will be in a position to negotiate a new exclusivity contract even better
than the previous one.

It is a necessary decision for the good of the company, as it would see its image strengthened in
the face of the rest of its suppliers. Otherwise, we could provoke the same reaction from other
suppliers and it would be the ruin for San Fabian.

It should be borne in mind that sales of Macdowell products are sold by 66% thanks to the sales
pressure of San Fabian (22% for sales to state companies, and 42% for sales to technical offices ...).
If that sales force, MacDowell's turnover will be much lower in 1988, and it is not likely that there
is any other company that wants to do the sales work of San Fabian taking into account that at the
time of purchase it does not have sales assured.
Feedback

Good morning, I think basically the same. I would continue to carry MD products in a passive way,
that is, without advising, recommending.

My proposal is to continue selling their products, but negotiating a price reduction to compensate
precisely the services we give to our customers. I think it's important to maintain those services
because it can set us apart.

I am rather with Rafa, MD products represent about 14% of San Fabian's sales and precisely now
that sales are going down I do not think that the Chinese can afford to lose it.

I think you must rely on the experienced and well-formed sales force to continue marketing the
products, in any case you have no other alternative in the market.

They have been making the thread for many years to the prescribers and buyers as to now leave
because they no longer have the exclusive.and the experience?and the knowledge?and the
contacts?all this is no longer worth anything?

You must continue to give the advice since that will differentiate you, at least before the small
hardware store that has no infrastructure or knowledge to send personnel to the works to advise.

It is possible that MD will hit the ground and San Fabian must be there for when that happens and
has to go through the hoop again, if it is removed from the middle another distributor can take
away the site.

Of course, it would reduce the stock to a minimum and stop spending on advertising, it is no
longer up to us