Merton Industries

Case Analysis: Merton Industries

Problem Statement

The U.S. carpet and rug industry has gone through some vast changes in the past decade. The number of U.S. carpet and rug manufacturers has dropped greatly due to changes in consumer preference and foreign competition. The type of retailers and the retailer purchasing strategies have changed drastically also. Currently, Merton Industries, a small carpet and rug manufacturer has had to face these changes in a re-evaluation of their distribution process. They have given Suzanne Goldman, special assistant to the president of the company, the task of assessing their current distribution system. They currently use 7 wholesalers to distribute to their 4,000 retailers; however, they are now evaluating the possibility of cutting out the wholesalers (who get a cut of about 6% of sales) and setting up their own distribution channels in the form of 5-7 warehouses with sales teams working out of each site. Suzanne Goldman must now perform a detailed comparison between both distribution options. She must find out which system is most economically feasible and best strategically fits into Merton’s plan to remain competitive and sustainable.

Analysis

Strategically, at first glance the option of Merton forward integrating to distributing its own products seems like a great idea. It would give the company more control over inventory, prices, and communication with retailers while giving Merton a higher profit margin on sales from cutting out the middleman wholesalers. However, in the same strategic context when one delves deeper into the logistics of forming their own distribution network, the disadvantages far outnumber the benefits. First of all, Merton has little to no experience in dealing directly with retailers; it has used some of its current wholesalers for over 30 years. Besides being experienced, Merton’s current wholesalers also handle extension of credit to retail accounts and manage experienced sales teams. Also, the wholesalers understand the current industry situation and are willing to work with Merton to ensure that the product remains competitive and profitable in the highly aggressive market, especially as more retailers engage in retail buying groups.

If Merton were to establish its own distribution network it would have to do it all at once in a swift transition. This inability to slowly change distribution systems is due to Merton’s current wholesalers already threatening to drop the company’s products as soon as one of Merton’s own warehouses opens. This is an extreme disadvantage for Merton who would be forced to basically “put all of its eggs in one basket.” Leaving no room for an eased transition where Merton would be able to gain knowledge and analyze its movements as each warehouse was opened. In the bigger picture of things Suzanne Goldman needs to also factor in the following expenses:

o Managing accounts receivable and extending credit to retailers

o Paying the necessary number of sales representatives and managers

o Transporting the products to the retailers

o Retail warehouse fixed costs

o Backlash from the retailers that are used to doing business