FinalCase_MACC5P21_.pdf - Fiwm LPrSE PRESENTWION(Mmirsm...

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Unformatted text preview: - Fiwm LPrSE PRESENTWION (Mmirsm Sin-D @ Lancaster Corporation is a distributor of a variety of industrial equipment and supplies in the Wisconsin area. Lancaster’s president, Keith Dav1s, had taken over management of the company in 1960, and in the next 15 years, grew the company’s sales from $140,000 to over $3 million a year. In 1975, he hired Bill Edwards as Vice President and General Manager to, in his words, “help out with the detailed organizational and management problems brought on by rapid growth and a change in our product mix.” Lancaster began as an industrial hardware store, moved to a specialist in air-driven products under Keith Davis’ leadership, and by the late 1960s, had 64% of the sales volume in Alliston-Cambrldge line of compressors. In the 19708, Keith Davis became concerned with this over-dependence on one manufacturer and diversified, first into nails and nailers and then into a new product line area, urea formaldehyde foam—see Exhibit 1. » EXHIBIT 1 Lancaster Corporation (A & B) Sales by Product Line (thousands of dollars) M 1973 1974 1975 Alliston-Cambridge (air compressors) 946.7 32.2% 1,118.2 34.7% 986.9 Wakefield Equipment (spray painters) 369.3 12.6 379.7 1 1 .8 312.8 Minnesota Pumps (air driven pumps) 212.6 7.2 203.5 6.3 280.1 8.5 Nailhead - . (nails & nailers) 842.2 28.6 798.5 24.8 604.9 18.4 Melrose Paint Equipment (electrostatic painting) 292.9 1 0.0 1 99.5 6.2 128.8 3.9 Revere Foam (foam) ? 585.4 17.8 Other 276.3 941 522.5 16.2 393.9 12_.0 TOTAL 2,940.0 10 .0% 3,221.9 100.0% 3,292.8 100.0% ——-——*———— The Proposal - When Bill Edwards arrived in 1975, he faced a weak sales forecast and a deteriorating relationship with Alliston—Carnbridge—it had increased Lan— caster’s 1975 sales quota to 240% of its 1974 performance. Keith and Bill believed that the profits on Alliston-Cambridge equipment were less than on other lines and that the sales force was “selling sales dollars rather than gross profit.” As Bill told Keith, “We are making money this year, but we really don't know how much comes from where. Our gross margin is averaging 25% yet on the spot checks I have made, the margins vary fipm 10 to 40% .” Thus, in 1976, Cambridge began developing and implementing an information system designed to help management improve profitability. The first phase of this effort involved providing management and the sales force with cost and gross margin information for 1977 by product line, by customer, by territory and by salesperson. Then for 1977, they planned to give the sales force the sales and cost information they de— veloped, give them authority to set prices at any level above 125% of cost without prior approval, and provide the motivation for profit mardmization by paying the sales force a commission of 17% of gross profit on sales. The “pricing authority“ decision was greeted with some concern. The sales manager was afraid that the sales force would cut prices to get volume and “Lancasterwould lose all its margin.” Bill Edwards counteredby saying , pm; (Jag freggntni-ibn: MMCESPJ SWZI (i) that the 17% commission on gross margin was incentive enough to keep this from happening. Further, rewarding the sales force on margin rather than sales dollars would motivate the sales force to sell the high margin products which was what the company wanted. 'The Results Lancaster installed the new sales reporting system in November of 1976 and instituted the proposed pricing and compensation systems for 1977. In early 1978 Bill Edwards was reviewing the results of the policy changes. It’s been quite 'a year. We beat our sales and gross margin budgets and made record profits—see Exhibit 2 [on page 362]. The new information system is working the way we planned it; all but one of the salespeople took to the new commission system like ducks to water—and they seem to have made more money in the bargain. We had good luck with our pricing policy, too. Instead of the salesmen coming back and saying, “Oh boy, I’ve got a $500 order," he now comes in saying, ‘I got an order for $375 and more profit' in it than last year’s order at $500. ” He’s thinking in terms of profit and that is the key. ' I still have work to do to get the salesmen to fully understand the information they are getting—but they are learning. Take a look at the product line results—Exhibit 3 [on' page 363]. AlliSton—Cambiidge is down on budget. But if you would break that down further, you’d see that we made 115% of our small compressor quota but only 60% of quota on the big ones. Now, Alliston-Cambridge is blaming this on “that guy Edwards paying more on small compressors,” but it is not true. The salesmen are finding out that on a small $3000—compressor, they can get 25% to 30% gross but on a $20,000—compressor, particularly in last year’s market, you’re lucky to get 7%. The emphasis of our sales force has changed and Alliston—Cambridge doesn’t like it. Overall, we made 19% gross on compressors and that is pretty close to break even on a net basis—which we figure is around 15%. We are pleased with the system. While we knew in general what was going on, we learned a few things. Alliston-Cambridge presents their product line as being, in the big compressors, a 20% profit item. We know that in the competitive press of the market, it is less than 15%. Nails proved to be even fnore profitable than I thought and foam, of course, was a panacea. We also get monthly sales and gross product figures and that is a big help when things are changing. , We have some ideas for expansion. We are forming a subsidiary for installing the foam we sell and exploring another “air—related prod- uct line" but with a broader market. Our systems will help us here but its real impact is in moving our salespeople to rethink what they are doing. I think we’re on the right track. EXHIBIT 2 Lancaster Corporation (A & B) Statement of income 4 for the year ended December 31,1977 (Thousands of dollars) Sales 5 560 Cost of Sales 3 901 ' Gross Margin 1,659 Operating Expenses 1,404 Operating Income. . 255 Non-operatin'g' income less Interest Expenses fl Net Income Before Taxes ' . 246 2.538% 238 mega $980 23on $.on _ 2358a Emma _ 8908 $58 $.35 “58$ E3. :3me 42.08 43.3“. an?“ .3953 mom; mama: £8.80 V 4.8993 32$ 032 _ $993 +8.08 3:8? 593.. 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