The latest financials on Green Acres seed corn sales were $43. 2 million in 2010; however, 2010 profits were $339,000 below those of 2009, which caught management’s attention. The management team began to dig a little deeper, and noticed that all of its costs had been increasing over the period 2006 to 2010, specifically unit cost of sales, administrative costs, and sales costs. As a result, management hired a new national sales manager, Peter Jensen, who would be responsible for preparing a report to present his findings and recommendations on a new sales program to the executive committee.
In reviewing the case, to follow are some items that Jenson must analyze in preparing his recommendations. As Mr. Jensen reviews past data, he must determine what is causing the profit problem. Selling expenses and administrative expenses are not the problem because as a percentage of sales they are both decreasing. However, if you look at profit as a percentage of sales, it is roughly half of what it was in 2006 and a third of what it was in 2007.
The poor gross margin is most likely a result of several factors that includes sales mix, unit contribution, low prices for genetically modified seed, unbalanced accounts receivable versus accounts payable. This has occurred because of a poor gross margin and increase in cost of goods sold. Also, in reference to exhibit 2, if you divide gross margin by total sales, you will find that the gross margin in 2010 was 75 percent and gross margin in 2006 was 30 percent. The farmer dealers make up about 95 percent of the market.
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This is calculated by dividing total sales for stores into total unit sales. We have 45 percent of dealers buying sacks that weigh 25 pounds or less and 23. 6 percent of dealers buying 26-50 pound sacks. This tells us that a large proportion of total sales are to those farmers who are using it for their own fields. This is important from a cost standpoint because if you ship small quantities to many locations, the logistics cost of this is terrible as compared to shipping large quantities to a few number of locations In addition, to the logistics issue, we also need to look at discounts.
In looking at the exhibits, 25 sacks of seed at $210 / sack is equal to $5,250; however, the buyer is essentially only paying for 23 sacks and receives a $10 sales comission. This means that two free sacks of seed are equal to $420 with a commission of $10, which provides a total discount of $430, an 8. 2 percent discount on total purchase. This simply tells us that spending on discounts and the sales force is the bigger expense in terms of the marketing budget.
Acres overall market share is less than two percent.Wisconsin is the best market at 4. percent. Iowa, Illinois, and Nebraska combine up for about 50 percent of the market. In order to determine the impact of gaining sales, let’s hypothetically look at Iowa gaining two percent in sales. Iowas total sacks are 2,521,600. Two percent of that is 50,432 sacks. Green Acres average revenue per sack is $43,229,000 total sales divided by 214,539 sacks equeal $201. 50. Green Acres profit per dollar sack sold is $1,941 profit/$43,229 revenues equals 4. 5 percent. Projected revenue from 2 percent Iowa share is 50,432 sacks multiplied by $201. 50, equals $10,162,048.
Projected profit from 2 percent Iowa share is $10,162,048 multiplied by . 045, equals $457,292. This tells us that Green Acres could potentially grow themselves in the market to gain profit.
Product and Pricing
In looking at the genetically modified and hybrid products that Green Acres sales, neither are superior to competitors. Both of these products perform at industry standards. However, the pricing strategy is different between the hybrid and the genetically modified. No other company is pricing lower than Green Acres on the genetically modified, and the hybrid is priced at market.
Sales person performance
The sales people are not performing evenly across the market. They are overstaffed in the Ohio and Indiana market; however, the Iowa and Nebraska markets are underserved. In addition, the worst performance sales person is in the East. This was determined by looking at market performance, individual sales rank, company sales rank, and the actual individual sales person. Smith is the best performer, so we could potentially have him move to Iowa and replicate his performance there, which sould solve the cash flow ssues for Green Acres.
Green Acres should move forward with rearranging the sales staff and taking someone out of Ohio and Indiana and placing him in Iowa or Nebraska. The first choice for the salesperson should be Smith. In addition, Green Acres should change the discount and commission structure. For example, the organization should only provide discountss when the dealer buys 50 sacks or more. No commission should be provided unless “x” amount of dollars are sold.
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