CASE 4

Precision Electronics
Corporation
Manufacturer’s Representatives versus
Industrial Distributors

Background
Seimitu Denki Kogyo Ltd. (SDK) Japan developed the world’s thinnest sealed polarized elec-
tromechanical relay in the early 1970s. This represented a technological breakthrough for at
least three features of such relay devices: First, it was miniaturized, especially with regard to
height (for electronic devices, reducing the height of components that are mounted on
printed circuit boards is critical). Second, it was resistant to adverse atmospheric conditions
due to its plastic enclosure construction filled with dry nitrogen gas. Third, it could be used
for memory functions and other logic circuits because of its polarity.
SDK wanted to sell this new relay in the huge U.S. market, but lacked its own indus-
trial marketing organization. So instead of attempting to sell the relay as an identified
branded component part, SDK tried to market the relays through two U.S. manufactur-
ing firms under their own OEM brands. However, SDK achieved little success doing so.
The first firm, a manufacturer of industrial equipment, lacked experience in the compo-
nent business; hence it was not able to reach the appropriate target markets. The exclu-
sive sales agreement SDK had negotiated with the firm was therefore terminated within a
year. The second manufacturer, a famous maker of military and aviation-related compo-
nents, relegated SDK relays to a minor supplementary role in its product line rather than
that of a featured product that would receive intensive sales effort. After two years of
such neglect, sales were much lower than had been projected.
Having attained little success marketing its new relay component through manufac-
turers that paid little attention to the product, SDK decided to become much more
heavily involved in marketing the relays by establishing its own industrial marketing
organization in the United States.

Establishment of Precision Electronics

Corporation and Its Distribution Goals
Precision Electronics Corporation (PEC) was established in Morristown, New Jersey, on
October 1, 1974, as a wholly owned subsidiary of SDK, Japan. PEC began its marketing
activity for relays with seven employees consisting of four Americans (executive VP,
national sales manager, secretary, and clerk) and three Japanese (planning manager,
accounting manager, and product control supervisor).
PEC’s distribution goal for the relays was to penetrate the U.S. market and attain a
sales volume of $50 million (a 10 percent market share) through its own distribution
network within ten years.
540
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 Case 4: Precision Electronics Corporation 541

The Channel Decision

Management at both SDK and PEC discussed whether the distribution structure of the
new corporation should be composed entirely of its own salespeople or should use out-
side sales forces such as manufacturer’s representatives.
To arrive at a decision, management made some basic calculations: First, PEC wanted
to determine how many of its own salespeople it could afford. To do this, PEC decided
to use typical commission rates that would have to be paid to manufacturers’ representa-
tives to achieve the sales goal as a benchmark and then work backward from there. Thus,
if a 5 percent commission were paid on the projected $50 million in sales, this would
amount to $2.5 million. Assuming each company salesperson would be paid $75,000,
PEC could employ 33 salespeople to match what it would be paying in commissions to
manufacturers’ representatives ($2,500,000/$75,000). Given the huge U.S. market, PEC
had serious doubts about whether 33 salespeople would be sufficient to cover the market.
And, of course, this calculation was made based on achieving $50 million in sales, which
was not expected to occur until the tenth year. Obviously, the number of salespeople that
PEC could afford in the earlier years would be much lower and hence even less sufficient
to cover the giant U.S. market.
PEC decided to do some further calculations to determine the coverage that might be
provided by manufacturers’ representatives at the same level of the projected ten-year
sales target of $50 million. After checking with industry sources, PEC estimated that
each manufacturer’s representative could, on average, provide market coverage equal to
five company salespeople. If this estimate were accurate, PEC could get sales coverage
equivalent to 33 company salespeople by using only six or seven manufacturers’ repre-
sentatives (33/5 ¼ 6.6). Further, by using 18 to 20 manufacturers’ representatives, PEC
could get the equivalent of between 90 and 100 company salespeople (18  5 ¼ 90; 20 
5 ¼ 100).
Yet management did not want to make such an important channel design decision
based only on some rough calculations of ten-year sales projections. They believed that
other qualitative factors also needed to be considered. It was decided that management
should hold a retreat to brainstorm about some of the issues involved in choosing an
appropriate channel structure for distributing the relay in the U.S. market.
At the retreat, which was held at a hotel in nearby New Brunswick, New Jersey, a
freewheeling discussion ensued among the executive vice president (EVP) John Slager,
national sales manager Bob Weinburger, and planning manager Tetsuo Yamaguchi.
Slager pointed out, for instance, that the manufacturer’s own salespeople can be very
productive because they are available anytime exclusively for the manufacturer and can
devote themselves exclusively to its particular products and policies. But offsetting this
advantage, argued Bob Weinburger, is the fact that the manufacturer must pay its own
salespeople regular compensation, which becomes a virtual fixed expense, regardless of
whether there is sufficient sales volume to cover the compensation and provide a profit.
In contrast, by using manufacturers’ representatives, a manufacturer needs to pay com-
mission to the reps only when they produce sales, so the costs are variable rather than
fixed. Therefore, he continued, reps can be the ideal sales channel for a company such as
PEC that seeks to enter the national market in a short time span without making a huge
investment in setting up its own distribution network.
Tetsuo Yamaguchi finally entered the discussion by arguing that manufacturers’ re-
presentatives often have good technical knowledge and complementary product lines
that can be very helpful to the manufacturer. The debate over the merits of the manufac-
turer’s own sales force versus manufacturers’ representatives continued for another hour
or so until John Slager put his hand on his head in a gesture suggestive of “How can we

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542 Part 5: Cases

all be so dumb?” “Why are we only debating the merits of our own salespeople versus
manufacturers’ representatives?” he practically screamed. “We are missing another very
important and possibly highly feasible alternative for distributing our relay in the U.S.
market—industrial distributors.” The other executives in the room, with noticeable
embarrassment at their apparent oversight, nodded their heads in agreement. The discus-
sion then moved to include industrial distributors.
Tetsuo Yamaguchi, who had experience working with U.S. industrial distributors in a
previous job, led off the discussion by pointing out some key advantages of using this
type of intermediary: First, they offer complete sales and distribution operations to the
manufacturer by purchasing their stock in bulk quantities, taking title from manufac-
turers, and reselling to many different kinds of customers because of their broad market
coverage. Also, their external sales forces often have strong knowledge of local markets,
which can be very helpful to distant manufacturers. The full range of services provided
by industrial distributors and their substantial market knowledge can also be invaluable
for the manufacturer seeking to increase its customer base and penetrate the market
without being burdened by order processing, credit checking, and other functions needed
to service many new and often small accounts. Of course, there are also disadvantages to
using industrial distributors that were pointed out by Yamaguchi. The most serious
drawback he referred to is the fact that most industrial distributors carry directly com-
petitive products, so PEC’s products might not get the full attention of the distributors or
could even get completely lost in the shuffle. Furthermore, industrial distributors de-
mand high margins, often two or three times higher than reps, and the quality of their
salespeople, especially with regard to their technical expertise, may not be as high as the
reps who focus on fewer types of products.
The discussion/debate continued for about an hour until John Slager suddenly began
waving his arms to get the group’s attention. When all eyes were focused on him, he said
in a polite but forceful manner: “I’ll tell you what, I’m getting a little tired of this debate.
It’s too unstructured so we are wasting a lot of time. What we need is a more systematic

EXH IB I T 1 Comparative
Analysis of Manufacturers’ Manufacturers’ Industrial
Representatives versus Criteria Representatives Distributors
Industrial Distributors
Salespeople
Academic background High Low
Technical knowledge High Low
Income level High Low
Professional status High Low

Functional Performance Capabilities

Inventory stocking No Yes
Credit and collections No Yes
Technical sales Yes No
Value-added service No Yes
Territorial coverage Clear Mixed
Title No Yes
Products carried 8–12 Many
Customer relations Good Good
Compensation Commission Sales margins

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 Case 4: Precision Electronics Corporation 543

comparison of alternatives. But let’s limit it to a comparison between manufacturers’

representatives and industrial distributors, because it is now pretty obvious to all of us
that using our own sales force would be out of the question from the standpoint of
costs.” The other executives again nodded in agreement and decided to adjourn, return
to the office, and spend the next several weeks doing some research, talking with consul-
tants, and reviewing the minutes of the retreat to develop a comparative analysis. John
Slager agreed but with one stipulation: He did not want a long report. Instead, he asked
the executives to prepare a simple and succinct comparison chart that would focus on
key criteria and rate manufacturers’ representatives and industrial distributors on those
criteria. The results of the group’s efforts are shown in Exhibit 1.

Discussion Questions
1. Do you agree with John Slager’s statement that Develop an argument for the use of industrial
“it is now pretty obvious to all of us that using distributors.
our own sales force would be out of the question 3. Could a combination of manufacturers’ repre-
from the standpoint of costs”? sentatives and industrial distributors be used in
2. Develop an argument for the use of manufac- the channel design?
turers’ representatives to distribute the relay.

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.