Precision Electronics Corporation Case Discussion

Product Background SDK (a Japanese electronics component manufacturer) Major technology breakthrough - created an improved component part Desired U.S. sales but lacked expertise selling here Pursued relationships with two U.S. manufacturing companies: Industrial equipment manufacturer did not understand the selling needs of a component type part so this relationship was terminated Discussion Question: How is selling a component part product different from selling a finished good product? Military/aviation component part manufacturer did not make the SDK product a priority so each did not reach it’s sales potential across a wider market.

Precision Electronics Corporation (PEC) Created as a wholly owned SDK subsidiary Began marketing the relays on their own Distribution goal was sales volume of $50 million (10% market share) within 10 years Discussed two options: Own sales people Outside sales forces (manufacturer’s reps) What are the pros and cons of using your own sales force versus using manufacturer’s reps?

Option 1: Own Salesforce Assuming a 5% commission paid to reps (industry standard) paid on $50 million would result in salesforce allotment of $2.5 million in salaries Assuming each salesperson salary of $75,000 Could pay 33 salespeople given the costs of the reps’ commission that would be paid PEC was concerned that 33 would not be enough to achieve the $50 million Additionally this money would be accumulated over a ten year period so the amount of money available to hire salespeople is significantly lower at the beginning What is PEC not factoring in for these calculations?

Option 2: Manufacturer’s Reps Each rep could provide the same market coverage of 5 company salespeople To get the same coverage of the estimated 33 salespeople they would only need 6 or 7 reps. Using 18 – 20 reps would generate market coverage of 90 – 100 company salespeople What is missing from these calculations? Why do they assume a 5 to 1 market coverage ratio?

Brainstorming Arguments Salespeople pro: available anytime exclusively for their products Salespeople con: become a fixed expense even if there are no sales Reps pro: variable costs so it’s ideal to make sales in a short time span without a huge investment Reps pro: good technical knowledge Reps pro: may sell complimentary products helping generate sales Dist. Pro: complete sales and operations Dist. Pro: salesforce has high knowledge of local markets Dist. Pro: additional services provided like order processing and credit checking Dist. Con: carry directly competing products Dist. Con: require high margins

Comparative Analysis of Reps vs. Dist. CriteriaManufacturer RepsDistributors Salespeople Academic backgroundHighLow Technical knowledgeHighLow Income levelHighLow Professional statusHighLow Functional Capabilities Inventory stockingNoYes Credit and collectionsNoYes Technical salesYesNo Value-added serviceNoYes Territorial coverageClearly DefinedMixed Take titleNoYes Products Carried8 - 12Many Customer relationsGood CompensationCommissionSales Margin

Discussion Questions Did they make a good decision to by-pass their own salesforce? Between Reps and Distributors which choice would you make? Why? Are there other options? Assuming product success, is it likely they should consider other distribution methods in the future?