Ingersoll-Rand

Managing Multiple Channels

Group - 1

Stationary Air Compressor Market

Total Stationary Air Compressor Market = $ 660 Million
Market Classification by Product Segments Small (below 25 hp) $ 175 Million Medium (25-300 hp) $ 175 Million Large (above 300 hp) $ 110 Million Total Market Products $ 460 Million Parts & Accessories $ 200 Million

Market Leaders by Segment, 1984

Market Leaders in each category Category Small (below 25 hp) Medium (25-300 hp) Ingersoll-Rand Ingersoll-Rand X Large (above 300 hp) Ingersoll-Rand Ingersoll-Rand Ingersoll-Rand

Reciprocating Campbell-Hausfeld Rotary Screw Centrifugal Sullair X

Stationary Air Compressor Market

Market situation:

Air compressor sales declined from $500 Million in 1980 to $460 Million in 1985 The no. of units sold rose from 600,000 to 900,000 Intense price competition in lower horsepower range (< 25 hp)

Ingersoll-Rand

3 Business Groups Stationary Air Compressor Division : a business unit of Standard Machinery Group Performance and Operations:

Company level sales, 1985: $2.6 Billion Manufacturing: 16 Countries Sales offices: 40 Countries selling in total to 120 countries

Share of I-Rs Stationary Air Compressor Market: 30%

The Distribution System

Direct sales force

26 territories Responsible for sales of Recips > 250 hp, Rotaries > 450 hp and all centrifugals Responsible for selling Do-It-Yourself products 5 MRs catering to retail chain stores and catalogue houses Paid 3% commissions on sales

Manufacturers Representatives (for retails)

The Distribution System

Independent Distributors

Responsible for sales of Recips < 250 hp and Rotaries < 450 hp Responsible for technical and service support as well Distributed Ingersoll-Rand as well as competitors products >50% of revenues and profits derived from Ingersand-Roll products

Air Centers

Responsible for sales of Recips < 250 hp and Rotaries < 450 hp Distributed Ingersoll-Rand products only

Independent Distributors vs. Air Center

Differences

Independent distributors network covered same amount of geography as the air centers but amounted to 70% of the sales potential Combined sales to end users and OEMs accounted for 55% of SACD sales revenues, 1985. Invoiced at 20% of the list price Gross margin of 10-15% on compressors; 30-35% on spare parts and services Sales reps paid 20% of Gross Margin on bookings

Combined channel performance

Why multiple sales channels?

Uneconomical to sell machines worth below $5,000 through a direct sales force Complexity due to the differences between compression technologies (more spare parts for Recips vs Rotaries) Buying behaviour

Large compressors Medium and Small compressors Small compressors (< 5 hp)

Why multiple sales channels?

Buying behaviour

Large compressors

Detailed specs, high technical expertise, co-ordinated sales effort Complex service requirements; Machine failures are costly Less demanding specifications, less complex behaviour Off-the shelf availability a priority to meet tight delivery deadlines Locally available spare parts and service for customers without maintenance teams
Used for small jobs Reached through retail outlets

Medium and Small compressors

Small compressors (< 5 hp)

Managing multiple channels

Challenges:

Channels competing with each other at times to complete a sale

Solution implemented: Full partner program (too early to judge effectiveness)

Independent distributors and Air centers perceived the other as receiving favoured treatment

Distributers contended air centers got better prices, information and service since owned by the company Air centers contended that the sales territories were exclusive and air centers had territories with poor potential

New product: Centac-200

Product Specifications:

200 hp centrifugal machine (Medium range) Operated at high speeds (50,000 rpm) Provides oil-free air unlike recips and rotaries Channel Options
Direct Sales Force Recips > 250 hp, rotaries > 450 hp & all centrifugals 35% 11% Highly competent technical selling Independent Distributors Recips < 250 hp & rotaries < 450 hp Air Centers

Product Type

Recips < 250 hp & rotaries <450 hp

Sales revenue generated (%) Cost to company Experience with Centrifugals

30% 21% No prior experience with centrifugals

20% 19% No prior experience with centrifugals

Comparison of Channels for Centac-200

Direct Sales Force Independent Distributors
1.Increase in revenue and profits of distributor 2.Established network 3.Attention to Centac-200 4.Easy accessibility and serviceability 1.Low profit margins for IR 2.Intensive technical training required 3. Lack of attention to other compressors 4.Less I-R control over distribution

Air Centers
1.Increased revenues and profits 2.Higher profit margins for I-R compared to independent dist. 3.Attention to Centac-200

Advantages

1.Minimal sales cost 2.Better service capability 3.No training required 4.Addition to shrinking product line

Disadvantages

1.Partial attention to Centac-200 2.Loss of rotary sales 3.More time to deliver and service

1.Only 19 air centers 2. Less penetration in market compared to independent dist. 3.Intensive technical training required

Product Comparison
Rotaries Costs Unit / % Cost Cost for 200 hp Unit / % Cost Cost for 200 hp Cost of compressor per HP 200 40,000 225 45,000 Centrifugal

Estimated Life
Maximum Estimated Life (in years) Installation cost as a % of initial cost Spare parts and maintenance cost per year Energy costs at 7 cents/KWH and 300 days operation in a year per hp Total Cost of ownership Avg. Cost of ownership per year

5-7 years
7 10% 2.5% 4,000 1,000

10-12 years
12 12% 2% 5,400 900

460

644,000 689,000 98,429

435

1,044,000 1,095,300 91,275

Recommendations

Distributed through the distributor network and air centers.

Better penetration in market considering that ATLAS has already captured 30% market share Better ROI for independent distributors The distribution would be consistent with the hp assignment Advantageous when range is expanded in lower hp segment as distributors and air centers can serve low and mid hp range products better. One time training costs which will also cater in serviceability for future product line expansion