Journey's End, Inc. |
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In February 2005, managers at Journey's End, Inc. were debating the
relative profitability of the company's three distribution channels:
catalog sales, corporate sales, and retail sales. Some managers thought
that catalog sales were the company's most profitable channel and that
investments should be made to grow this channel. Others were not so
sure. To address this issue, the managers asked Marie Ablondi, a
financial analyst on the corporate staff, to conduct a channel
profitability analysis. They decided to await the results of Marie's
analysis before they continued their discussion of the company's
distribution strategy.
Journey's End sold active clothing wear. The company contracted out the
manufacturing of all products to outside suppliers, located mostly in
Asia and in the Dominican Republic. Journey's End employees maintained
a large catalog mailing list. Catalog buyers, mostly individuals,
placed generally small quantity orders by phone or over the Internet.
All of the corporate sales orders, which were generally large quantity
special orders of logo apparel, were brought in through Journey's End's
field sales force. About three-quarters of the corporate orders
required the sales people, and usually some design experts and
managers, to engage in time-consuming order specification and/or price
negotiation work. The field sales force also brought in most of the
retail orders. The sales people called regularly on the retail outlets'
buyers. The buyers generally purchased medium quantities of goods at
wholesale prices. Some of the retailers required special product
labeling and packaging.
Journey's End managers had been monitoring the performances of their
businesses and distribution channels at the gross margin level. At this
level, all three distribution channels looked profitable, as is shown
in Table 1.
A few managers, though, suspected that the gross margin-level measures
might be presenting misleading performance indications. These managers
noted that the company's selling, general and administrative (SG&A)
expenses were “below” the gross margin line. Their intuition was that
if the SG&A costs were allocated to distribution channels, a quite
different performance picture might result. Their concern led to Marie
being assigned to do a study.
Marie's first task was to identify the relevant SG&A expenses. She
found that the direct sales force was paid a 10% commission on the
sales revenue that they brought in. In addition to the commissions, the
material amounts of Journey's End's corporate selling, general and
administrative expenses (SG&A) for the fiscal year 2004 were as
shown in Table 2.
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