Baker Adhesives Case Study

I. Context and Key Issues

In June of 2006 Doug Baker, the owner of Baker Adhesives, was told that their sale of adhesives to Novo, a Brazilian toy manufacturing company, was not going to be as profitable as they originally anticipated. The original sale with Novo had been for 1,210 gallons and Baker Adhesives was very excited to make this deal. This was Baker’s first international sale and he did not account for the exchange rate changes from Brazilian real (BRL) to American dollars (US$). Since Baker and Novo had agreed on a per-gallon price, the exchange rate changes severely hurt the profit margin Baker Adhesives expected on receiving from the first deal. The purpose of this meeting is to decide whether or not Baker Adhesives should go ahead and accept a new order proposal from Novo. This next Novo order would be 50% larger than the original order, or 1,815 gallons. The payment from the first Novo order had just been received and Baker was looking to pay down some of the balance of their line of credit, which currently stood at $180,000. The first order from Novo was denominated by Brazilian real (BRL) and then converted into US dollars (US$). Since the time that Baker and Novo agreed to terms on the sale, the value of the deal had dropped significantly because of the exchange rates. What made it more difficult was that Novo was unwilling to change the per gallon price for this new order. This would mean that the new order would not be as profitable as Baker Adhesives initially thought. On top of not being as profitable, Baker’s costs of materials had risen by 10% since the last order from Novo.

The original order with Novo was used for a new line of Brazilian toys that needed to be waterproof. Since they needed to be waterproof, there were very specific needs from the adhesives that Novo required from Baker. Baker prided their company on having a good chemist and a flexible production system to respond to different kinds of specialty items. Novo found out about Baker Adhesives from a mutual friend in Alissa Moreno, who is the Sales Manager at Baker. In the sales agreement between Novo and Baker, Novo would cover the shipping costs, all Baker had to do is bring the adhesives in 55 gallon drums to the near by shipping facility. Novo agreed to pay Baker 30 days after the 55 gallon drums had been dropped off at the shipping facility. Baker planned on a five week manufacturing cycle once all of the raw materials were ready to go. All materials would be ready in two weeks. Based of the original order from Novo, Alissa Moreno planned for the payment to come three months after the order had been received, somewhere around September 5th, 2006. To allow for some flexibility, Moreno thought that Baker would get paid three months after the order placement. One-third of the raw materials were left over from the original order that Baker had planned to sell off for a loss previously