Question

Dynamic Energy Wares (DEW) manufactures and distributes products that are used to save energy and to help reduce and reverse the harmful environmental effects of atmospheric pollutants. DEW relies on a relatively complex distribution system to get the products to its customers. Large companies, which account for nearly 30% of the firm’s total sales, purchase directly from DEW. Smaller companies and retailers that sell to individuals are required to make their purchases from one of the 50 independent distributors that are contractually obligated to exclusively sell DEW’s products.

DEW’S accountants have just finished the firm’s financial statements for the third quarter of the fiscal year, which ended 3 weeks ago. The results are terrible. Profits are down 30% from this time last year, when a downturn in sales began. Profits are depressed primarily because DEW continues to lose market share to a competitor that entered the field nearly 2 years ago.

Senior management has decided it needs to take action to boost sales in the fourth quarter so that year-end profits will be “more acceptable.” Starting immediately, DEW will (1) eliminate all direct sales, which means that large companies must purchase products from DEW’s distributors, just as the smaller companies and retailers do; (2) require distributors to maintain certain minimum inventory levels, which are much higher than previous levels; and (3) form a task force to study and propose ways that the firm can recapture its lost market share.

The financial manager, who is your boss, has asked you to attend a hastily called meeting of DEW’s distributors to announce the implementation of these operational changes. At the meeting, the distributors will be informed that they must increase inventory to the required minimum level before the end of DEW’s current fiscal year or face losing the distributorship. According to your boss, the reason for this requirement is to ensure that distributors can meet the increased demand they will face when the large companies are no longer permitted to purchase directly from DEW. The sales forecast you have been developing over the past few months, however, indicates that distributors’ sales are expected to decline by almost 10% during the next year. As a consequence, the added inventories might be extremely burdensome to the distributors. When you approached your boss to discuss this potential problem, she said, “Tell the distributors not to worry! We won’t require payment for six months, and any additional inventory that remains unsold after nine months can be returned. But they must take delivery of the inventory within the next two months.”

It appears that the actions implemented by DEW will produce favorable year-end sales results for the current fiscal year. Do you agree with the decisions made by DEW’s senior management? Will you be comfortable announcing the changes to DEW’s distributors? How would you respond to a distributor who says, “DEW doesn’t care about us. The company just wants to look good no matter who gets hurt—that’s unethical”? What will you say to your boss? Will you attend the distributors’ meeting?

Answer 1

Do you agree with the decisions made by DEW’s senior management?

No, I do not agree with the decisions made by DEW's senior management based on the facts:

• Results of the third quarter were terrible as profits were down 30%.
• The third quarter had ended 3 weeks ago, the implication being we are still left with at least 3 months to fiscal year closing.
• Dew's action plan requires distributors to maintain certain minimum inventory levels, which are much higher than previous levels, this will increase sales to the distributors but this may not actually result in cash sales as according to sales forecast, sales are expected to decline by 10%.
• Distributors are required to take delivery in the next 2 months.

It can be clearly seen that management is using the tactic of inflating its sales to drive the year-end profit, but this is temporary in nature, as balance sheet in next year will contain a large number of sales return due to the fact that distributors will return the inventory back which they were not able to offload.

Thus, this is not a tenable measure in a long-term and I do not agree with the decision.

Will you be comfortable announcing the changes to DEW’s distributors?

No, I will not be comfortable in announcing the changes to DEW's distributors as the added inventories might be extremely burdensome to the distributors. It is a question of morals and leads me into discomfort in even indulging in the idea to deceive others.

How would you respond to a distributor who says, “DEW doesn’t care about us. The company just wants to look good no matter who gets hurt—that’s unethical”?

I would also present the other side of the argument that DEW is doing away with the complex distribution system to get the products to its customers and is streamlining the process which will help DEW to increase its operational and inventory management efficiency level. This can be beneficial to distributors as well as the company as distributor's survival is also intrinsically linked with company's.

What will you say to your boss?

My advice to my boss would be to give up on a temporary solution and nudge my boss towards a more permanent and realistic change. Further advising about the merits of directing the newly created task force towards ways to improve market share in the long run.

Will you attend the distributors’ meeting?

I would try to avoid the situation if possible.

If it is absolutely needed and directed by my boss then I would go to the meeting.