Background: A manufacturer presently sells approximately $60 million of industrial fasteners

through a network of 50 specialized distributors. In total, presently these distributors have 5,000

end-user customers who purchase the fasteners to be used in the manufacture of various products

(i.e. pumps, motors, hoists and conveyors). Each customer is visited at least once every other

month by a sales representative for the distributor.

The distributors average a 17% markup on sales of the fasteners to the end-user customers. The

distributors provide the following services, on behalf of the manufacturer:

1. Sales and customer support for the end-user customers
2. Warehouse an inventory of fasteners of $10 million (which is 5 times the inventory at the

manufacturer)

3. Ship direct from their warehouse to the end-user customer. The shipping costs are not

separately charged to the end-user customer they are absorbed by the distributor. These

costs are thought to be approximately 5% of the selling price.

4. Finance the end-user purchases

New management team: The manufacturer has a new management team looking to improve

sales and profits. One idea they are exploring is to change the manner in which their product is

sold to end-user customers. Essentially, the new management team believes they can eliminate

(disintermediate) the present network of distributors and replace with an in-house sales

organization. They believe, all things being equal, that for the 17% markup the distributors

receive, they can provide the same level of service at a lower cost, and thus earn a higher profit.

The management team assumes the following will occur:

1. Each salesperson hired will be expected to make 5 sales calls/day to existing customers

for 48 weeks/yr. Salespeople will be paid a flat salary of $70,000/year, plus

$2,000/month for expenses.

2. Five sales managers will be hired with an annual salary plus expenses of $150,000 for

each.

3. Inventory carrying costs are estimated to add an additional 20%.
4. Financing of accounts receivable is estimated at 10% with terms of net 30 days.

Using the above information, the following calculations can be made:

The gross profit earned in total by the distributors from the sale of fasteners to the end-user

customers.

Formula: sales to distributors x average markup % = gross profits earned

$60 million x 17% = $10.2 million gross profit

The total number of sales calls made each year

Formula: # of customers x # of times visited/called upon = # sales call/year

5,000 x 6 = 30,000 sales calls/year

The number of sales call each salesperson is expected to make each year

Formula: # sales call/day x # days devoted to sales calls =

# sales calls/year/salesperson

5/day x 5 days/wk x 48 wks/year = 1,200 sales calls/year/salesperson

Answer the following three questions based upon the above information.

A. At a minimum, how many salespeople will the manufacturer need to hire to match the

number of sales calls made currently by the distributors?

B. Calculate the costs the manufacturer would incur to replace the distributors based upon

the assumptions and information described above. (Hints: there are 5 separate costs

new salespeople, sales managers, shipping costs, additional inventory carrying costs, and

accounts receivable financing costs - the total is around $9 million)

1. $$ of new sales people

Formula: # of salespeople x $/salesperson = $

2. $$ of sales managers

Formula: # of sales managers x $/sales manager = $

3. Shipping costs

Formula: annual sales $$ to end-users x 5% = $

(Hint: annual sales is not $60 million)

4. Additional inventory carrying costs

Formula: $$ of additional inventory x 20% = $

5. Accounts receivable financing costs

Formula: 30 day sales $$ to end-users x 10% = $

C. The new management team assumes all things being equal. List three examples of

things which may not be so equal. You may approach this from the viewpoints of the

end-user customers and/or the present distributors.