June 2, 2014
“National Oilwell Varco is a worldwide leader in the design, manufacture and sale of equipment and components used in oil & gas drilling and production, the provision of oilfield inspection and other services, and supply chain integration services to the upstream oil and gas industry (NOV, 2014).” The success of the business allowed them to expand services and create new jobs. The economic analysis section of this business proposal will include market structure and elasticity of demand for services. Also concentrating on how the changes will affect marginal cost and revenue.
“National Oilwell Varco, Inc. has formed a new Delaware corporation, NOW Inc., to serve as an independent, publicly traded company for its plan to spin off to its shareholders its distribution business. The proposed business will operate under the name DistributionNOW (Pennwell Cor., 2007-2014).” As part of NOV, Fiber Glass Systems has 16 manufacturing facilities worldwide.
Market Structure and Elasticity
The market structure for DNOW is pure competition because they compete with local distributors such as Grainger and ISSC. The biggest barrier to entry is the high number of local distributors available to provide the same service. Vendors come in daily to fight for the chance to win the company over, but price is not the only key factor that gives them the opportunity. DNOW competes with its competitors by offering a good discount, relieves FGS from labor and expenses and has the convenience of being on company grounds. While FGS purchases a heavy load of items from a long list of vendor, the company needs a distributor who can establish and maintain a system capable of tracking materials within one system. DNOW operates under two systems that are easy to manage and track. Tool Crib allows employees to order, receipt, inventory, issue, return, replenish and reground supplies. It manages inventory to avoid overstock or unnecessary buying. Another great feature is the reorder process. Both systems create a report that will assist a buyer in determining what items need to be replenished for a specific department and stock items. Lastly, Tool Crib creates a graph that provides a pictorial presentation of usage for all departments, employees, work, etc. Vending Machine is another system that tracks inventory for all unmanned material that is replenished with a subset of high usage material. It provides an interface that FGS can use to order and receive material at point of need. Demand is very elastic and regulated not only on price, but ease of use and results. DNOW is pure competition, but it can easily stand out amongst others if the service is excellent, low-cost, and saves the company more than it costs. It can also take advantage of the position to improve its service, reputation, and outperform others on price and utility. Competitors exist, but they are on high end and not practical for this type of organization. Graph 1.2 presents a clear picture of the instant savings based on other distributor’s prices.
Price Elasticity of Demand The price elasticity of demand is comparatively elastic. FGS is a manufacturing company that needs a variety of parts and tooling to complete customer’s orders. As a manufacturing industry, FGS has a long list of distributors to buy from and by custom they buy from the one who has a quicker turnover on delivery versus prices. As a larger distributor, DNOW has access to larger discounts and take the responsibility of the ordering process. The services offered from DNOW to FGS has a marginal cost of 18% that includes freight charges incurred by all vendors. Example: Product A has a value of $100.00 then the cost will be divided by 0.82 to account for 18% margin = total price of $121.95. If at any point there is an increase in the service, they will still have a high demand because in