Sampson Products Corporation

Sampson Products Corporation was a major manufacturer of electrical equipment used

extensively by consumer goods manufacturers. The company sold most of its products to

manufacturers of refrigerators, automatic washers, and electric stoves to be installed as original

equipment that usually retained the Sampson brand name. In addition to the original equipment

market, Sampson had obtained a significant portion of the replacement market for the products it

manufactured. Sales of Sampson replacement parts were normally made through channels such as

small hardware stores and other home repair retail outlets. Another substantial part of Sampson's

revenue was derived from manufacturing electrical equipment for large electrical supply houses

under the brand names of those outlets.

Sampson's annual sales averaged approximately $400 million. Of this total, the

production and sale of small electric motors accounted for over $100 million. Although Sampson

was one of the largest producers of small motors in the United States, there were four other

competing companies of comparable size, as well as several smaller manufacturers.

Approximately one-fourth of the company's production of motors was used to fill contracts with

manufacturers of air conditioners, vacuum cleaners, and other power equipment for the home.

These motors carried the brand name of the retailer; hence, Sampson referred to these contracts as

"special brand business."

In 1997, Sampson Products obtained a special brand contract with General Company to

manufacture $20 million of "General" motors. General was a major U.S. electrical products

manufacturer with annual sales of approximately $750 million. Sampson had been awarded the

contract after bidding competitively against one of the other large motor manufacturers and five

of the smaller firms. Sampson's sales manager believed his bid had been accepted because of the

excellent quality and reputation of the firm's motors, not because it offered the lowest price.

Although the contract terminated annually, new contracts had been negotiated each year to the

satisfaction of both parties, and Sampson had obtained the contract to manufacture motors for

General again during 2002. Sampson succeeded in making an average before-tax profit of 9

percent on this contract, which management considered very satisfactory for this type of business.

While General Company had become an important customer for Sampson Products,

General also sold to Sampson small rotor shafts used in some of Sampson's small high-speed

motors. General manufactured these shafts in its machine shop division, which had been acquired

in a merger seven years ago. Mr. George Smithe, director of purchases for Sampson, estimated

that his department had purchased approximately $200,000 of shafts a year since 1998. In

February 2001, Mr. Smithe negotiated a five-year contract with General, which obligated General

to sell $200,000 of shafts each year at a fixed price of $3.10 per shaft (with escalation for labor

and materials provided these costs rose by more than 10 percent). When the contract was

developed, it contained a clause that provided General with an option to cancel the agreement at

any time, with a three-month notice to Sampson. However, Mr. Jones, sales manager for the

machine shop division of General, assured Mr. Smithe that his company would exercise the

option only in the case of highly unusual, unforeseen circumstances.

The shafts were made of a special alloy that was in very short supply. Moreover, there

were strong indications that the U.S. government might restrict all nonmilitary applications of the

material to conserve supplies for military use. Accordingly, Sampson decided to purchase several

years' supply of shafts before any government regulations could materialize. Consequently, Mr.

Smithe was working on the procurement of approximately $1 million of motor shafts during

2001. Although Sampson was impressed by the performance of General shafts, Mr. Smithe

decided to solicit competitive bids from several prospective suppliers. After investigation, he

selected four major motor shaft manufacturers that had outstanding reputations for quality,

service, and efficient operations. General Company was one of the producers from whom a

quotation was requested.

The day following the receipt of General's quotation, Mr. Jones and the president of the

machine shop division of General visited Mr. Smithe. Mr. Smithe understood that the president

had a widely recognized reputation as an extremely aggressive,