Case 1Swisher Mower and Machine Company

Case 1Swisher Mower and Machine Company

Chapter 7Chapter 7Chapter 7Chapter 7

Background 1996 Wayne Swisher, President

and CEO received a certified letter from a major national retail merchandise chain inquiring about a private-brand distribution arrangement for SMC’s line of riding mowers.

Wayne Swisher had only recently assumed his position as president

and CEO.

Background

The private-brand distribution proposal was first major decision he faced as president and CEO.

He thought the inquiry presented an opportunity worth serious consideration.

Unit volume sales of the SMC riding mower had plateau in recent years.

Details concerning the proposal would have to be closely studied because it represented a significant departure from SMC’s current distribution practices.

Background

The Swisher Mower and Machine company can be traced to the mechanical aptitude of its founder MAX Swisher.

He received his first patent for a gearbox drive assembly when he was 18 years old.

He started selling mowers to his neighbor after converting his parents’ garage in a small manufacturing operation.

He formed Swisher Mower and Machine company in 1945.

Background

1950s Swisher decided to integrate his drive machine into riding a mower

1956, he started selling these mowers under the Ride King name.

1966, unit volume for SMC riding mowers peaked at 10,000 with sales of $2 million.

1970s sales volume began a downward trend as a result of poor economic conditions in the geographic market served by SMC.

Background

1975-1989, unit volume remained relatively constant.

1990s sales improved with an average unit volume of 4,250 riding mowers.

1995, the company sold 4,200 and recoded total company sale $4.3 million.

Background

Max Swisher has always insisted that his company be customer-oriented in recognizing and providing for both dealer and end-user needs.

Maintaining a small company image had also been an important aspect of Max Swisher’s business philosophy.

This philosophy has resulted in personal relationships with dealers and customers alike.

Background

A special loyalty has been demonstrated to the original SMC dealers and distributors that helped build the sales foundation of the company.

Product Line

SMC produced three types of lawn mower units in 1996.

Ride King, trail-mower T-44 and Push Mower.

The manufacture’s list price for a standard Ride King is $650.

Gross profit margin on this unit is 15%

Reputation high quality, simple design and easy maintenance.

SMC often run for 25 years before having to be replaced.

Product Line

Most current mowers’ parts are interchangeable with the parts of older models that date back to 1956.

Product Line

push mower kits, trail-mowers and riding mowers.

It is also in the process of developing a new product – all-in-one trimmer, edger and mower.

80% of the parts business is generated from the sales of the riding mowers or their spare parts.

SMC’s company’s performance is largely dictated by riding mower sales.

Distribution and Promotion The current market segment served by SMC is

mainly industrial users located in the non-metropolitan areas (75% of the company sales).

SMC employs three different mechanisms for distribution; through wholesale distributors who in turn supply to independent dealers, directly to dealers and through private-labelling arrangements for two buying networks (Midstates and Wheatbelt).

They also have a small presence in Europe and the South Pacific. For the vast American west and pacific region, it virtually has no presence.

SMC has not made any significant attempts to move into the metropolitan areas.

Distribution and Promotion By accepting the Private-Brand

Offer, SMC will be able to revive its stagnant business and immediately

increase sales volume by two folds, from current annual sales of 4,200 units to 12,400 units.

Sales for spare parts will also increase correspondingly.

Distribution and Promotion

In addition, by tapping onto the larger distribution network of the chain, SMC can expand its business into the northern and western United States.

At the present, most of SMC’s distributors are located at central and eastern United States.

SMC is currently under-utilizing its facility at only 42% of total production capability.

Accepting the offer will increase machine utilization rate (based on depreciation expenses) from $0.15 / unit to $0.55 / unit.

Distribtion and Promotion

The offer will also lower the current sales and administration expenses rate, as the Chain will supply all advertising related to the private-branding product.

SMC need not have to employ additional sales representatives.

If this private-branding opportunity turns out well, both parties are likely to extend the boundaries of the contract.

Future contracted annual volume may increase, and SMC can even introduce more products to be included in the distribution.

Distribtion and Promotion

For instance, SMC can bring in its new product, Trim-Max to the expanded distribution network.

Both parties are not bounded by the contract in the long term. In the event that actual losses are more than expected in the first six months, SMC can terminate the contract by giving a 6-month notice and minimize future losses.

On the other hand, it is unlikely that the Chain will not go for a long-term relationship with SMC.

Set-up cost of getting another supplier is high, and ultimate customers may be dissatisfied if products were terminated.

Problems: Accepting Private-Brand Offer

With broaden distribution and higher volume as a result of taking up the private branding offer, there will be greater exposure to liability claims,

although SMC has not experienced any significant product-liability claims for products sold or used since 1956,

thus unlikely that the risk of exposure will increase substantially in the short term.

Problem of Accepting Private-Brand Offer

In addition, existing sales can be cannibalized by private-label sales.

although the negative impact on the income statement as a result of the cannibalization is not material.

SMC will have to incur additional costs to finance its higher cash requirement due to higher inventory and accounts receivable level as a result of taking up the offer.

Financing costs is expected to increase by $78,000 and $59,000 respectively, assuming current 60 inventory days and 45 days credit term.

Cons of Accepting Private-Brand Offer

With private-branding sales, SMC will be able to operate at 24% above its existing production capacity.

If demand were to increase in the future, the factory may not be able to cope with the higher requirement.

SMC may need to consider expanding its production facilities in the future.

In addition, accepting the offer will result in increasing its private-branding sales from existing 40% of current sales to 80%.

Such over-reliance on private-branding sales is dangerous if the organizations were to terminate the contract suddenly.

Problems: Accepting Private-Brand Offer

Cons of Accepting Private-Brand Offer

the most damaging factor is that SMC would suffer huge income losses if the offer were accepted.

In fact, further calculations would show that the company would continue to see financial difficulties for the next 10 years.

Profit would only be made from the eleventh year onwards.

Thus, based on financial grounds, the offer should not be accepted.

Problems: Accepting Private-Brand Offer