Cardon Carpet Mills Inc. Case

Cardon Carpet Mills Inc. Case Study

The Cardon Carpet Mills Inc. is a reputable player within the United States carpet and rug industry. They sell their products through intermediaries, but they are currently considering the creation of a direct distribution system. The aim of this study is that of identifying the dimensions of the current situation, the identification of the most viable solution and the creation of an implementation plan. This objective would be achieved through an eight step analysis, organized into three stages:

Stage 1: the analysis of the case and the identification of the facts; the search for the problem roots, and the identification of the problem components

Stage 2: the generation and evaluation of alternatives, the choice for the best alternative solution

Stage 3: the creation of an implementation plan and the choice of an alternative solution

Stage 1: Problem Identification

Step 1: The Facts

During the most recent board meeting, the Cardon Carpet Mills executives have raised the issue of the company opening its own distribution and wholesale facilities. This proposition is constructed on various facts, such as the following:

The industry reveals positive perspectives

The company's financial strength is sustainable, but it remains behind industry averages

The carpet industry is declining as the demand for these types of products decreases. Analysts argue that the decline is also attributed to carpet companies which implemented poor marketing strategies.

The industry is becoming more concentrated as the mergers and acquisitions intensify

The company currently distributes through seven wholesales, which then sell to 4,000 stores across the country. "80% of residential segment sales were made through 50% of its retail accounts"

The wholesalers met with the Cardon Carpet Mills executives and requested that they decrease the prices for the carpets. The intermediaries also agreed to a modest decrease in their 125% mark up.

The costs of operating a new distribution center would rise to an estimated $700,000, plus other expenses and efficient operations would require minimum traded volume of 7 million carpets.

Wholesalers found out about the company's interest in direct distribution and threatened to all leave the company when the first distribution center is opened in their detriment.

Step 2: The Root of the Problem

The root of the problem is composed of the elements which led to the necessity for a direct distribution channel. The more relevant of these reasons include:

The high mark up implemented by retailers, which increases the retail prices to the consumer and decreases revenues for the organization

The poor communications and interactions with the customer base

The decline of the demand for rugs at an overall national level, modification which implies processes for enhanced organizational efficiency

The ongoing changes which impact the carpet and rug industry and which require immediate answers from the part of the Cardon Carpet Mills Inc.

Step 3: The Components of the Problem

The components of the problem represent the various elements which need to be taken into account in the analysis of the problem and in the making of a decision. Some of the more relevant components include the following:

a) the seven intermediaries used by the company raise retail prices and reduce Cardon's overall revenues and profits

b) the seven intermediaries however also handle other operations outside actual sales. These intermediaries for instance handle logistics or inventory operations, which are also expensive and which would additionally increase the costs of a direct distribution channel. "Wholesaler sales representatives performed a variety of tasks, including checking inventory and carpet samples, arranging point-of-purchase displays, handling retailer questions and complaints, and taking orders. About 25% of an average salesperson's time was spent on nonselling activities (preparing call reports, acting as a liaison with manufacturers, traveling and so forth). About 40% of each one-hour sales call was devoted to selling Cardon Carpet Mills carpeting; 60% was devoted to selling noncompeting products. This finding disturbed company management" (Kerin and Cox, 2002).

Stage 2: Decision Making

Step 4: Generating Alternatives

Based on the issues previously identified, two alternative solutions are contoured. The first sees that Carpet Mills goes ahead with their creation of a direct distribution channel, whereas the second alternative sees that they maintain their current status quo. Each of these alternative solutions presents the company with additional risks and rewards. A more thorough analysis of them would be conducted throughout the following section.

Yet, before this step is developed, it has to be noted that, derived from these two alternatives, it is also possible for the company to choose a future course of action based on a combination of direct and indirect distribution. Such a solution would imply negotiations with the distributors and the identification of the more flexible or least powerful intermediaries. When this is possible, distribution agreements with the wholesalers would be closed and the company would open its own distribution centers. In other instances, the current wholesalers would be maintained.

Step 5: Evaluating Alternatives

Alternative 1: Creation of a direct distribution channel

Pros: Increased control over company operations; increased financial results; lack of intermediary pressure

Cons: entire responsibility for sales and failures (loss of shared risk possibilities); lack of adequate expertise in the field of wholesale retailing; the necessity to implement a quick and aggressive restructuring plan due to wholesaler threats; increased complexities of the operational and administrative act

Alternative 2: Maintenance of the status quo

Pros: no additional costs with change implementation; continued collaboration from the part of the wholesalers; the wholesalers have developed their own retail channels and the products get to the final customer without major efforts from Cardon Carpet Mills

Cons: continued pressure from the part of the distributors; ongoing necessity to reduce prices and profits; dependence on distributors; lack of control over the distribution process

Alternative 3: The combined approach to distribution

Pros: the risks are partially shared with some of the wholesalers; the company begins to experience the direct distribution system to a lower scale and to identify if the direct distribution system is a beneficial choice for Cardon Carpet Mills Inc.;

Cons: significantly increased operational and administrative complexities due to the dual distribution system; additional costs and additional risks.

Step 6: Choosing an Alternative

Based on the analysis previously conducted, the choice falls between the second and third alternatives and the elimination of the first is pegged to the company's revealed necessity to readjust its business model in order to increase its revenues and its competitive power. Given this determination, combined with organizational and industrial considerations, the proposed alternative is that of creating their own distribution centers and eliminating intermediaries. In a context in which it is possible to implement this solution at a smaller scale for testing proposes, then the third alternative ought to be chosen. If on the other hand the wholesalers pressure the organization with signing off their agreements, the executives at Cardon should not become intimidated. All wholesalers are obliged to comply with their contractual stipulations and only when these contracts expire will they be able to leave the company.

Stage 3: Action Planning

Step 7: Implementation

1. The executives at the Cardon Mills Company need to conduct an audit of the wholesale contracts and identify which ones are the most profitable, the most valuable, the most powerful and so on.

2. Based on the audit, the executives would select those wholesalers which ought to be maintained and those which are to be renounced.

3. Negotiations with the distributors would commence.

4. The first agreements with the wholesalers would be signed off and the company would open its own distribution facilities.

5. Before this happens however, it would be necessary to audit the regions in which the company wholesale facilities would be opened. At this stage, the company would verify the availability of a suitable location, the availability of qualified sales staff to handle the adjacent operations (including nonsales operations) and would created cost estimates.

6. As the new wholesale facilities are opened, the company needs to reconnect with its customers. In a context in which industry analysts partially blame the decay of the rug industry on the poor marketing endeavors of the industry players, it could be a useful approach to develop and implement stronger marketing campaigns which promote the company, attract new buyers, and reestablish and reaffirm the company within the market. These include elements such as promotions, communications with the customer base, advertising and so on.

Step 8: Alternative Choice

As the direct distribution system is being planned and created, the Cardon Carpet Mills Inc. executives need to constantly conduct control and monitor activities in order to ensure that the implemented strategies are in accordance with the established ones. Additionally, they need to ensure that the implemented strategies lead to the creation of the pre-established goals. If any mistakes occur in the process, it is necessary for the managers to identify them and to propose solutions to fix them.