Bates Manor

Category: Business Autor: peter 29 March 2011 Words: 2148 | Pages: 9

INTRODUCTION In April 2008 BatesManor ("BM") merged with Lea-Meadows, Inc. ("LM"), an upholstered furniture manufacturer for living and family rooms. This merger was the result of the death Charlton Bates' father-in-law, who left Charlton's wife controlling interest in LM, a line that will fill the gap in BM's product mix. Lea-Meadows' is a 75+ year old company, selling upholstered products made of the finest fabrics and frame construction in the industry. Its net sales in 2007 were $5m and have increased 3% annually for the past 5 years. The total upholstered industry had sales of $15.5b and is anticipated to have sales reach $16.1b in 2008. LM has 15 sales agents, who represent several manufacturers of noncompeting lines. These agents spend approximately 10-15% of their in-store time on LM products. Those agents get 5% of sales as commission and there is little other cost associated with them. BatesManor sells medium-to high priced wood for bedroom, living room and dining room furniture. The company had net sales of $75m in 2007 and a before tax profit of $3.7m. The industry sales of wood furniture in 2007 were $12.4b and are projected to be $12.9b in 2008. The company currently employs 10 full time sales reps, who work off of an average salary of $70,000 (plus expenses) and a commission of .5% of net sales. The total sales admin costs in 2007 were $130,000. BM's sales reps are highly regarded and known for their knowledge of wood furniture and their willingness to work with buyers and sales personnel. On average the reps are making 10 calls per week and each call averages 3 hours. VP of Sales, Bott, is recommending an annual increase per account per year to 7 calls (7,000 calls total). PROBLEM STATEMENT While attempting to maintain as much autonomy as economically justifiable, the company is faced with the dilemma of whether or not to give the LM line to the current BM salesforce or to continue to use agents. BM believes the line should be given to the salesforce, but doesn't like the idea of increasing the current team. Moorman, the sales manager for LM, would like to remain with the agents. There is an additional problem of Moorman's future. At 58 years old, he has worked for LM for 30+ years, is a family friend and godfather to Bate's youngest child. If the salesforce absorbs LM, his role would be eliminated. PROBLEM ANALYSIS

The problem faced by these two entities is a challenge because both are wellestablished, family-operated businesses that have successfully marketed under their current sales models for many years. Marrying, changing, or displacing either or both of them could have the effect of exponentially increasing performance, or of spelling disaster for the future of these brands. This problem is also relevant to brand identity. Selling outlets for both of these brands have come to expect not only familiar faces, but a high level of knowledge about brand offerings and furniture characteristics. Changing the current arrangement could alter the perceived brand identities to one that is more "cookie-cutter" or mass market than the high quality reputation they both enjoy today. ASSUMPTIONS Regardless of BM's sales decision to take on LM, the assumption was made that its salespeople will continue to work 40 hours a week, but will increase their average annual sales calls from 5 to 7 for each location based on Bott's recommendations. This could potentially put an unquantifiable strain on the sales force. It was also assumed that the $130K of sales administration expenses are evenly attributable to the 10 existing sales people, so any increase in the salesforce would result in a proportional increase in these costs. That is, $13K per additional salesperson. If BM takes over LM selling, it is understood that its salespeople will need to be trained on upholstered furniture in general and LM line specifically. Expenses associated with this cannot be adequately quantified and were not included in our feasibility calculations, but BM should consider such costs when making their decision. An important component to this problem is the aggressive sales goals that Bates has placed on his salesforce. Although BM furniture and its sales reps are highly regarded among their clients, not all 1000 clients carry the full BM line. Bates is asking that his sales forces increase the number of client visits to seven per year in order to have their full line represented by all clients. While neither Bott nor Moorman seem exactly sure of how much time the independent sales reps spent on LM during each sales call, we assumed it was fifteen percent of the total call, or approximately thirty minutes. With the proper training and product knowledge the BM reps would spend an equal amount of time if they were to take over LM sales. This time would be part of the three hours, not in addition to. We also assumed that if they were to sell the LM line the BM sales reps would receive their current commission structure, .5% of LM and BM sales. It seemed that the sales managers also differed in opinion about the client overlap between the two companies. Both sold to specialty furniture and department stores, and did not condone selling to discount houses. Bott argued that there was a 100% client overlap, while Moorman seemed to think that his independent reps were selling to clients that BM was not. In our analysis we assumed that both LM and BM sold to exactly the same clients. ALTERNATIVE SOLUTIONS

Option 1: Separate Salesforces The current BM sales force of ten representatives currently makes ten client visits per week, visiting each client five times a year. To meet Bates' sales goal of 7 client visits per year with his current staff of ten, each rep would need to increase to fourteen client visits per week. Assuming that the length of the visit and the percentage of time spent on travel and administrative activities were the same, his sales team would need to work fifty-six hours a week. If Bates were to maintain the forty hour work week and increase two client visits per year, he would need to add four representatives to his team. This staff increase would cost him $332,000 in salaries and administration, excluding commission. If Bates keeps the fifteen LM independent sales agents for LM, it allows his BM salesforce to concentrate on achieving the aggressive goals that he has put in place. It also keeps the two companies autonomous. Keeping the salesforces separate saves Bates the cost of training the BM reps on the LM line. It also avoids the hassle of restructuring territories, and letting go of several people he has developed a good relationship with, including Moorman. The LM sales agents have a good reputation and have been successful in selling the line and are highly regarded in the industry. Also because the LM salesforce represents other companies they may have access to potential new clients. Independent, straight commission agents arguably drive sales more than salaried sales reps who only make an additional .05% commission. However, according to 2008 projections, LM will pay its salesforce $257,500; if BM reps reached the sales projections for the LM line the commissions paid would be $231,750 less. Option 2: The current BM salesforce sells both lines If Bates were to do away with the independent salesforce that currently sells the LM line and have the ten BM reps sell both lines to their accounts, they would maintain the three hour sales call time, devoting 15 % of that time to selling LM and the remaining two and a half hours would be for BM products. If Bates holds his salesforce to the goal of making seven client visits per year, or 21 hours with each client per year, then the thirty minutes of each call spent on LM should not interfere with the BM sales goals. BM should still be able to increase the number of products they sell to each account because they are still spending almost three additional hours per year on each account. If the BM reps are able to maintain or grow LM sales numbers then it makes sense to cut the LM sales agents and the $257,500 in commission they are paid, and pay the BM sales commissions of $25,750 instead. However, if the BM reps are already working an additional sixteen hours a week to increase sales, there is a risk that taking on the LM line may be too strenuous. They may not devote the time needed to learn the LM products and sales could suffer. There is also the risk that the additional commissions from LM sales, about $2,500 per rep, be may not be enough incentive to aggressively sell the LM line. Another option would be for the BM salesforce to incorporate the LM line but maintain the five client visits per year instead of seven. Doing this would keep the sales reps from being overworked, and it would allow them the necessary time to familiarize themselves with the LM line and effectively maintain LM sales goals. However, taking on the LM accounts would then lessen the amount of time spent

selling the BM line by two and quarter hours per year. This may have a negative impact on the BM sales goal of increasing the amount of the BM line each client carries. Since the BM salesforce was unable to reach this goal when they spent fifteen hours a year with each client, it is likely they will have difficulty reaching it when they spend less time with each client per year. Option 3: Increase the BM sales force and have them sell both lines Another option would be for Bates to maintain his sales goal of seven visits per account per year, and bring on an additional two sales representatives. This compromise would have each rep making eleven to twelve calls per week, and working a 47 hour work week. With the additional two reps the BM sales force could take on the LM account without putting too much strain on the representatives. The extra representatives would allow the BM reps the time to become familiar with the LM products so they could reach LM and BM sales goals. The fixed cost of the additional two reps and the additional administration would be $156,000. Using this fixed cost and a .05% commission, the level of LM sales needed to justify having two salaried sales reps versus an independent sales force is $3.7 million or higher. If BM were to add three reps the sales volume needed would be $5.5 million or higher. Since projected sales are $5.15 mil adding two company sales reps would be the most cost efficient. Recommendations It is our recommendation that Bates should proceed with option 3, eliminate the LM sales agents, have the BM salesforce sell both lines and hire two additional sales reps. We believe that option one, keeping both salesforces separate, may be appealing but is not cost effective. Although it would allow Bates to keep Moorman's position, as well as those of the other fifteen reps, at the current LM sales volume and growth rate it is less costly to have two additional salaried reps. Combining the sales forces will hopefully eliminate the "us and them" problem between the two companies, and tension over differences in commission structure. The second option of having the current ten reps from BM take over the LM line may save on initial costs but it will likely result in a decrease in morale among the overworked sales reps, and potentially huge sales loss for both companies. By choosing option three and having a larger full time salesforce, Bates could keep control over the sales reps, ensuring the commitment to service that BM was founded on. Although it will require Bates to restructure the territories, this is needed every few years with company growth. Option three also would require the BM reps learn the many facets of the upholstery line; but as the leading sales reps in the furniture industry they should pick up the LM product information very quickly. BM reps will be pushed to work a little harder, but will also give them the opportunity to increase their commission from both the increase in BM sales as well as the LM line. This option may have some other downsides, such as eliminating Moorman's position, however when weighed against the possible negative effects of the other two, these

were the least damaging, and provided the most opportunity to meet sales goals and increase profits for both companies.