Masterdon Carpet Mills
Subject: Possibility of establishing private distribution centers or wholesale operation Overview Cardon Carpet Mills, Inc is a privately held manufacturer of a full line of medium to high price carpet primarily for the residential segment. Cardon has been around for over 30 years and have great long term relationships with its wholesalers. But, Cardon is lagging behind with the industries sales growth. The current wholesaler’s sales force only uses 40% of their sales call time towards Cardon products.
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If they eliminate the wholesaler by going with their own direct distribution center, Cardon Carpet Mills can reserve the wholesale markup and other expenditures for themselves. The opportunity of forward vertical integration by newly established distribution practices, in the long run, is a viable and attractive option proven in the following qualitative and quantitative analysis. Recommendation 1. Establish private direct distribution centers focusing on residential business to eliminate wholesalers and maximize profits.
Rationale Through a 25% wholesale markup, there is currently $13. 5 million spent at the wholesale level. The margin of $13. 5 million paid out to wholesalers could be preserved by Cardon Carpet Mills, Inc. to support the change in the distribution channel using internal capital. This satisfies conditions set out by Robert Meadows, President of Cardon Carpet Mills, Inc. and company policy to finance programs from internal funds except for capital expansion (Appendix). If Cardon Carpet Mills, Inc. aintains the same retail production presently on hand through the wholesale channel currently used, $2,240,000 should be spent on the salaries of 32 sales representatives and an additional $320,000 should be spent on the salaries of 4 overseeing managers if each sales manager manages eight individual sales representatives (Appendix). The total spent on sales administration, which is 40% of the salaries of the total sales force and management costs per year, total $1,024,000. The cost to carry inventory and accounts receivable total 10% each of sales.
With the current preferred inventory turnover of 4 times per year, inventory carrying costs would total $1,350,000 and accounts receivable carrying cost would be $1,662,561 (Appendix). Transportation expenses equal 4% of sales and total $2,700,000. The total estimated cost of Cardon Carpet Mills, Inc. transition to direct distribution would be considerably less expensive, with $14,196,561 spent in the distribution to retail accounts, than maintaining the current wholesale distribution.
Advantages of direct distribution include: 1. Allow the services provided to buyers through a sales force that is tailored to their needs. 2. Relocation of distribution centers closer to Dallas Fort-Worth and Atlanta metropolitan areas will allow for better service those areas. 3. Already involved in direct distribution, but currently only in contract sales. Those contract sales 28% of current company sales. Disadvantages of direct distribution include: 1.
Threat of mass exodus of wholesalers after opening of first company warehouse. 2. Increase of fixed costs. 3. Implementation of marketing strategies, promotion, and advertising typically done by wholesaler’s sales force. 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 Cardon Carpets.
This new distribution system will also benefit the 1200 members of buying groups that demand lower prices. The initial difficulties of change maybe challenging due to the time constraints involved in implementing a direct distribution system. However, the long run benefits of direct distribution will surpass its current disadvantages. Next Steps •Search for suitable locations for the distribution centers at the seven metropolitan areas •Hire and train knowledgeable personnel for each 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. •It is imperative to inform the retailers of the change in 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.