Disadvantages:
- Sales representatives devote roughly 40% of each sales call hour towards Masterton Carpet Mills
- Masterton Carpet Mills may have to reduce prices to satisfy retailers’ requirements. This could have an impact on the company profit margin
Direct Distribution
Advantages:
- The company will capture some of the margins paid to wholesalers
- Direct distribution will improve the services that we provide to our buyers through a sales force that is exclusive to them
- Direct distribution will give the company more control over their operations
- The company is already involved in direct distribution through contract sales
- By relocating two distribution centers near the area of Dallas-Forth Worth or Atlanta, the company has the opportunity to serve these target markets more efficiently
Disadvantages:
- Threat of a mass exodus of wholesalers once the first company warehouse opens
- Direct distribution will increase the company fixed cost
- The company will have to engage in an aggressive recruiting program for sales representatives
- The company will have to perform the entire marketing strategies task usually done by the wholesalers’ sales representatives
b. Quantitative Analysis
Residential Retail Sales = Total Sales ($75,000,000) - Contract Sales ($75,000,000 * .28%) = $54,000,000
Indirect Cost
- Wholesaler Markup is calculated by dividing their percentage margin of .20 on sales over the cost to retailers, which is assumed to be .8
- The Receivables Cost is calculated by obtaining the carrying cost (10% of retail residential sales = $5,400,000) and dividing it by the Receivables Turnover = 365/90 = 4.06
Projected Sales Force
- Assuming that on average, retail accounts receive at least one sales call per month
- Avg. available selling time = (40 hrs/week * 50 weeks * .75 average time spent on selling activities) = 1,500 Hours
Number of Sales Representatives = (4,000 * 12 * 1)/1,500 = 32 Reps
Direct Cost
- One Manager per 8 Sales Representatives; 32/8 = 4
- Sales Administration cost account for 40% of Total Sales Force and Management cost per year
- Inventory Carrying Cost is determined by dividing Cost of Good Sold for Residential Sales = $56,250,000 * .72 = $40,500,000, over the desired turnover = 365/90 = 4.06; multiplied by 10% carrying cost
3. Chosen Alternative
The quantitative analysis shows that there is a $4,225,950.73 cost difference between our current distribution system (Indirect = $18,070,049.26) and the cost of going direct to our retailers (Direct = $13,844,098.53). There is a significant 23% decrease in cost by deciding to enter into a direct distribution system to retailers.
The qualitative analysis supports this decision. Going direct will improve the satisfaction of retailers by allowing the company to avoid additional markups associated with wholesalers and discount the price to retailers. The company is also able to provide better service through an efficient sales force that is exclusive to Masterton Carpets. This new distribution system will also benefit the 1200 members of buying groups that demand lower prices.
Moreover, the company has enough working capital to initiate their own distribution operations:
Current assets are $26,937,500 and Current Liabilities are $10,312,500; which gives us a Current Net Working Capital of $16,625,000. This allows the company the opportunity to finance the cost of direct distribution from internal funds. Keeping with the company goals, the policy of Masterton Carpets has been to finance programs from internal funds except for capital expansion.
The initial difficulties of change maybe challenging due to the time constraints involved in implementing a direct distribution system. Nevertheless, in the long run the benefits of direct distribution will out- weight its current disadvantages.
4. Plan of Action
- Discretely begin the search for appropriate locations for the distribution centers among the seven metropolitan areas
- Hire and train the required knowledgeable personnel for each distribution center. First, the four managers would be hired and trained by our current regional sales coordinators. Thereafter, managers would be responsible for hiring and training their sales force
- Try to end relationships with wholesalers on good terms. Plan a meeting or send a letter that tries to persuade them to continue to do business with the company until the distribution system is established. If this is not possible, a friendly explanation of the reasons for the change would be given. Additionally, it will be imperative that Masterton is ready to begin basic operations at all seven warehouses when the letter/meeting takes place, since wholesalers threat a mass exodus as soon as the first company warehouse opens. Being prepared to open all seven operations simultaneously with the threat of a mass exodus of the wholesalers should not cause a huge disruption in the operations of Masterton Carpets.
- It is important to inform the retailers of the change of distribution system. This can be done through a letter that highlights their benefits from this change (price reduction, better service, etc). This will be most effective at the time of opening our distribution operations
5. Controls
- Monitor retailers’ needs and concerns through surveys that show their buying patterns and preferences
- Weekly reports from the sales force that describe sales numbers, product description, and personal opinions on the way retailers are being served.
- Monthly access of inventory turnover from each distribution center in order to track sales and efficiency
6. Contingency Plan
- If our new distribution system fails, the company will begin an extensive search for new wholesalers that are willing to make an alliance with the Masterton Carpet. The failure would have to be substantial due to the expense and possible contractual obligations incurred by Masterton carpets distribution efforts
- Establish relationships with buying groups to purchase and distribute product. In the past, buying groups accounted for about half of the U.S. residential market. This might be beneficial for the Masterton if the buying groups perform all of the functions of the wholesaler and they do it better. It is also less expensive for a manufacturer to supply one location with large orders than to supply several separate retailers. However, buying groups may flex their buying power to obtain product at lower-than-normal margins and possibly force the manufacturer to ship to several locations
- As an alternative, Masterton might renegotiate the possibilities of resuming business-as-usual with our former alliances. This may not be simple due to the threat of the wholesaler’s replacing the Masterton product line with a competitor’s product. Carpeting is a commodity which can be replaced easily in the market.
