Crafton Industries, Inc. Instructor’s Guide To Case Analysis1 Background Suzanne Goldman, special assistant to Rober Meadows, then president of Crafton industries, has been tasked with conducting a feasibility study focusing on replacing its existing floorcovering wholesalers with company-owned warehouses and a direct sales program. Ms. Goldman must conduct the study and prepare a presentaiton on the direct sales and distribution question including an economic justification and plan of action. Thus, Crafton Industries must address a classic strategic marketing channel issue: to sell direct to retailers or use intermediaries. For this case you may employ the following problem statement: “Should Crafton Industries modify its distribution channel by selling direct to retail buyers?” Objectives For This Case There are five major learning objectives for this case: 1. Describe the important qualitative advantages and disadvantages of indirect vs. direct distribution in general, and specifically for Crafton industries. 2. Identify and discuss the important fact that the margins allowed middlemen can be viewed as "costs" that must be incurred by manufacturers. These costs are rooted in the functions performed by channel intermediaries, many of which involve the performance of services related to distributing their suppliers’ products. It is critical that students understand that these costs must be absorbed by a manufacturer contemplating direct distribution i.e. contemplating ‘eliminating the middleman.’ 3. Demonstrate how the costs associated with the functions provided by middlemen, such as wholesalers and retailers, can be estimated. 4. Explain why manufacturers contemplating direct distribution must perform channel functions for themselves that were previously provided by other members of the channel i.e. wholesalers and retailers. 5. Describe the real potential for damaging trade relations with channel members when making significant channel modification decisions. Channel modification decisions often result in some ‘channel conflict.’ Material included in this case guide is adopted from those provided by the case book authors and is used with permission. 1 Considerations to Guide Your Analysis 1. What are the general pros and cons (advantages and disadvantages) of a wholesaler vs. a company-owned distribution system? Understanding these general pros and cons will help you focus on the specific pros and cons of the alternatives faced by CI. These pros and cons are examined in chapters from both KK and KP. However, this case is heavily grounded in the material in Kerin & Peterson’s chapter titled “Marketing Channel Strategy and Management.” You will need to pay particular attention to the discussion of considerations for selecting retailer and wholesaler channel members, the discussion of “Satisfying Intermediary Requirements and Trade Relations” and the discussion of “Channel Modification Decisions.’ 2. What are the financial implications of the wholesale vs. company-owned distribution systems? You should tabulate the relative costs of using wholesalers vs. employing direct distribution. Refer again to the discussion of “Channel Modification Decisions.’ This cost comparison is a major DF in the case and should be summarized in a dedicated table in your report. I suggest that you set up your table to show a side-by-side comparison of the relevant costs. The section (basically a worksheet) below will help you get a handle on these costs. You can also create a comparative income statement based on the projected costs. The case report template has a table template to assist you. I have provided an Excel spreadsheet to assist you with all computations. Costs of Wholesale Distribution Cost of the wholesaler’s margin. According to the case, wholesalers' trade margins2 are 20% of sales billed at the price to retailers. Margins represent how much money Crafton gives to its wholesalers. This figure is 20% of the retail cost, which is how much retailers pay wholesalers for the carpet. The amount of this margin can be viewed as one of the relevant ‘costs’ of wholesale distribution since, if wholesalers were to be eliminated, this margin would be reclaimed by CI. Crafton's costs of servicing wholesalers is given as a percent of its present sales to these wholesalers. What is the amount in dollars? Cost of financing wholesalers' accounts receivable. The case states that a 90-day collection period exists, therefore accounts receivable turnover is 4.06 (i.e., 365 days/90 days). Based on this information, you can compute the average accounts receivables and, since accounts receivable carrying costs are 10%, the accounts receivable carrying costs readily follows. 2 A discussion of the different types of margins is contained in the KP chapter on financial analysis. Based on the above, the total estimated cost of wholesale distribution is: CG Table 1. Estimated Costs of Indirect Distribution Costs of Indirect Distrubution Margins Provided $___________ Service Cost $___________ Accounts Receivable Carrying Cost $___________ Total Estimated Cost $___________ Costs of Direct Distribution: 1. Warehouse Expenses are ___________? (Fill in the blank) This number should be directly available from the case. Find the cost of setting up a single warehouse and extrapolate to the total number required. 2. Costs associated with maintaining a sales force need to be computed. Start with determining the number of sales reps required and then, with a knowledge of the salary structure, you can compute the cost per rep. How to determine the number of reps required is discussed at length in the Kerin and Peterson chapter on integrated marketing communications. 3. Sales Managers will cost? Number should be directly cited. 4. Sales Administration can be expected to cost about? The administrative costs are given in the case. 5. Inventory Costs. CI will likely assume some additional inventory carrying costs at the warehouses which it did not incur when it simply "sold" inventory to wholesalers. These inventory costs are somewhat "hidden." There are at least two ways of thinking about handling inventory and its carrying cost. If Crafton treats its warehouses as "profit centers" it might conclude that they are simply wholesalers and price the inventory the same way that it sold to these wholesalers. Alternatively, Crafton might simply transport the inventory at cost without a mark-up to its warehouses. Note that the difference between the two inventory carrying costs is small. Therefore you may use either figure and your decision will not be materially affected. However, you must show your computations. 6. Accounts Receivable. Accounts receivable costs are calculated as' before. Note however that the dollar value of accounts receivable will be higher since sales will be to retailers at wholesale prices. 7. Transportation Costs. The amount should be easily determined from case numbers. Based on the above worksheet, you should be able to summarize the total probable costs of going direct: CG Table 2. Costs of Direct Distribution Cost of direct distribution are Warehouse Expenses Sales Representatives Sales Managers Sales Administration Inventory Carrying Cost (higher number) Accounts Receivable Carrying Cost Transportation $__________ $__________ $__________ $__________ $__________ $__________ $__________ Total Estimated Cost $__________ Can Crafton "afford" the conversion? The case states that Crafton would have to finance the conversion from internal funds. You should be able to estimate CI’s working capital from case Exhibit 3. What additional DFs exist in the case? There are a number of additional critical DFs in the case. These DFs are equally critical, if not more so, than the above cost considerations. You should be able to identify these based on your examination of the readings and the case. You must address these DFs in your report. I grade these under the ‘qualitative’ heading in the grading form.
