Anacely Ledezma

ayl0015

Individual Case Summary for

Crafton Industries, Inc.

MKTG 5150.007
Marketing Management
Spring 2016

Attached is my summary for the Crafton Industries case. Included are four tables which
provide supporting data for my recommendations.
The Problem. Crafton Industries, Inc. faces the following problem with regards to deciding what
their target distribution channel is:

 Should Crafton industries modify its distribution channel in light of intensifying price
competition and increasingly costly demands from its current wholesalers?

Recommendation. Based on the analysis below of the costs associated with a wholesaler versus
direct distribution channel, Crafton Industries should not modify its current distribution
process. Crafton Industries should consider the following decision factors as proof that direct
distribution would be the wrong transition.

Profit Potential and Market Share. Presently, Crafton Industries is operating with a net profit of
$3 million dollars despite not being in the top five of U.S Carpet and Rug Manufacturers. The
top five manufacturers account for 75% of the market sales. Crafton is a not a dominant force
and could be risking the small market share that it has been acquired through the years. Crafton
Industries conversion could be a very risky move because present wholesalers have threatened
a mass exodus. The exodus would affect the profit potential for the coming year of the
company and negatively affect consumers until the new direct distribution centers were built.
Due to the 2007 recession much of the floorcovering industry had to deal with significant losses
in sales. The number of manufacturers decreased significantly and yet Crafton Industries
managed to survive. Making a drastic change to a new form of distribution could further impact
Crafton’s potential to obtain more market share, which was limited already.

Working Capital. Presently, Crafton Industries has working capital of $16,625,000 million which
technically would suffice to cover the estimated direct distribution costs. However, it is
important to note that Crafton could possibly not be accounting for all the costs associated with
the new distribution channel since it is an estimate. Adopting direct distribution would require
Crafton to assume all new costs. Some direct distribution costs Crafton would assume would be
inventory losses, sale losses during transition, fixed costs, as well as any development and
training challenges with the sales team. The wholesaler distribution costs, on the other hand,
are more predictable and discussed with wholesalers prior to service beginning. The unplanned
costs could lead Crafton to have a working capital deficit where liabilities exceed the assets of
the firm.

Competition. In prior years, the largest manufacturer of carpets and rugs, Shaw Industries,
attempted to engage in direct distribution by purchasing some retail chains. Many wholesalers
and other retailers boycotted and switched to other manufacturers in response. Shaw
Industries sold the acquired retail chains after only three years due to a significant loss of sales.
Crafton Industries should use Shaw Industries as a primary example of why direct distribution is
not a preferred method to reduce costs. Crafton should see the same expected response
engaging in direct distribution from present retailers.

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Buying Groups. Many retailers formed buying groups in pursuit of lower prices based on
purchasing larger quantities directly from the manufacturer. Although buying groups serve as
an incentive to focus on direct distribution for Crafton Industries because of the larger
quantities increasing sales. Retail groups could become increase Crafton Industries delivery and
transportation costs because of the many retailers in one buying group. Buying groups could
make delivery costs significantly variable which could require Crafton to seek financing to cover
product costs.

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 Table 1: Wholesaler vs. Direct Distribution Costs - Side by Side

Wholesaler Direct
Distribution Costs1 Distribution Costs2
Margins Provided $ 13,500,000 Warehouse Expenses $ 4,900,000
Service Cost $ 3,240,000 Sales Representatives $ 2,240,000
Accounts Receivable $ 1,330,049 Sales Managers $ 320,000
Carrying Cost
Total Estimated $18,070,049 Sales Administration $ 1,024,000
Costs
Inventory Carrying Cost $ 1,013,000
Accounts Receivable Carrying $ 1,664,000
Cost
Delivery/Transportation $ 2,700,000
Total Estimated Costs $ 13,681,000

______________________________________________________________________________
Wholesaler vs. Direct Distribution Costs Computations
1
All relevant computations are located on Table 2.
2
All relevant computations are located on Table 3.

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 Table 2: Costs Associated with Wholesaler Distribution

Wholesaler Distribution Costs

Margins Provided1 $ 13,500,000
Service Cost2 $ 3,240,000
Accounts Receivable Carrying Cost3 $ 1,330,049
Total Estimated Costs4 $18,070,049
Average Accounts Receivable5 $ 133,004,923
Total Accounts Receivable6 $ 54,000,000

______________________________________________________________________________
Wholesaler Distribution Costs Computations
1
Margins Provided = $54,000,000*0.25 = $13,500,000
2
Service Cost = $54,000,000 * 0.06 = $3,240,000
3
Accounts Receivable Carrying Cost = 133,004,923*.10 = $1,330,049
4
Total Estimated Costs = Margins Provided + Service Cost + AR Carrying Cost
5
Average Accounts Receivable = 54,000,000/4.06 = $133,004,923
6
Total Accounts Receivable = 75,000,000*.72 = $54,000,000

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 Table 3: Costs Associated with Direct Distribution

Direct Distribution Costs

Warehouse Expenses1 $ 4,900,000
Sales Representatives2 $ 2,240,000
Sales Managers3 $ 320,000
Sales Administration4 $ 1,024,000
Inventory Carrying Cost5 $ 1,013,000
Accounts Receivable Carrying Cost6 $ 1,664,000
Delivery/Transportation7 $ 2,700,000
Total Estimated Costs8 $ 13,681,000
Total Accounts Receivable9 $ 67,500,000

______________________________________________________________________________
Direct Distribution Costs Computations
1
Warehouse Expenses = Fixed Cost $700,000*7 warehouses = $4,900,000
2
Sales Representatives = 32 reps. *$70,000 = $2,240,000
3
Sales Managers = 4 managers * $80,000 = $320,000
4
Sales Administration = $(2,240,000+320,000) *0.40 = $1,024,000
5
Costs of Residential Sales =(COGS*0.72) = $56,250,000*0.72=$40,500,000
Average Inventory = $40,500,000/4 = $10,125,000
Inventory Carrying Cost = $10,125,000*.10 =$1,012,500 ≈ $ 1,013,000
6
Accounts Receivable Carrying Cost = $67,500,000*(90/365 days) = $16,643,835.62 ≈
16,644,000*0.10 =$1,664,000
7
Delivery/Transportation Cost= $67,500,000*0.04=$2,700,000
8
Total Estimated Costs = Costs #1 through #7 added =$13,681,000
9
Total Accounts Receivable = $54,000,000 * 1.25 = $67,500,000

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 Table 4: Working Capital Available

Fiscal Year Ending June 30, 20101

Current Assets $ 26,937,500
- (Current Liabilities) $ (10,312,500)
= Working Capital Available2 $ 16,625,000

______________________________________________________________________________
Working Capital Computations
1
Figures obtained from Exhibit 3 in case, Pg. 434
2
Working Capital = Current Assets - Current Liabilities