John W. Ireland, sales manager for the Baby Products Division of Arlington Paper Mills, manufacturer of baby diapers and other baby products, faced a decision on what to do with a number of baby-diaper accounts that had fallen below the “acceptable” profit margin. Since most of the accounts in question returned some profit, he was reluctant to write off these customers just because they did not reach the level of return desired by management. In the past, he had been willing to discontinue sales to those accounts that fell below the acceptable profit margin, but his position had changed during the past year because of the decline in demand for Arlington Comfy diapers. Ireland had strong opposition in this matter from Maurice Conte, vice-president of sales, who had been the prime mover in establishing return-on-profit criteria four years previously.
Arlington Paper Mills, founded in late 1910, was located in Tuscaloosa, Alabama. Over the years, Arlington had acquired three paper companies and grew to an annual overall sales volume of $75 million. Originally, the company had produced only paper bags, but, through acquisitions, it had expanded the product line to include a large array of paper items. The Baby Products Division, organized in the 1950s, manufactured and sold a line of baby diapers, crib linens, bibs, and related items. Baby diapers constituted the single biggest item in the Baby Products Division product line, accounting for $16 million of the division’s total sales of $21 million.
Arlington made diapers on machines that had been developed and patented by the company. The company had been an industry leader in the development of moisture proof and absorbent materials for diapers.
Arlington Paper diapers were distributed nationwide by a sales force of twenty-four persons plus one selling agent. The twenty-four company salespeople sold directly to retail outlets and hospitals. The company sales personnel were salaried and averaged about $22,000 in earnings, excluding bonuses. In addition to distributing its products to retailers and hospitals, Arlington also sold its diapers to Army and Air Force exchanges and Navy ship stores. These sales were handled by a commission selling agent who sold exclusively to the military.
The major competition for Arlington’s Baby Products Division came from Procter and Gamble’s Pampers Division and Scott Paper Company. Both promoted their lines of baby products heavily. In addition, there was competition from numerous other manufacturers in the baby products line. Arlington’s prices were roughly the same as its competition. Selling prices to retailers averaged 16 percent over production cost.
During the past year and a half, an investigation had been made of the profitability of baby-diaper accounts. This investigation was part of an overall revenue cost analysis in the Baby Products Division, and its starting point had been the baby-diapers product line, which accounted for the largest sales volume in the division. The investigation revealed that over 18 percent of the company’s 3,215 baby-diaper accounts (585) fell below the profit goal set by management. Of these 585 accounts, 68, or about 12 percent, were clearly unprofitable (this represented a fraction over 2 percent of the total 3,215 baby-diaper accounts). The remaining 517 accounts, although yielding a profit, were nevertheless below management’s profit return standards and therefore were considered accounts with unacceptable profit margins.
Although company policy dictated the dropping of all accounts with unacceptable profit margins, Ireland contended that certain factors made it logical either (1) to revise the acceptable-unacceptable profit margin standards in view of changing market conditions or (2) to make exceptions to the policy for a period of time to combat the decline in demand for baby diapers. He pointed out that something had to be done soon, because overall demand for baby diapers had declined and Arlington had lost nearly 200 accounts in the past two years.
The two major reasons for the drop in demand were, according to Ireland, the declining birth rate and the stiff competitive pressures in the disposable paper diapers industry, led by names such as Pampers and Kimbies. The birth rate and competitive factors combined to lead the firm’s economic experts to project a drop in demand over the next five years. Besides these conditions, Ireland argued that, regardless of any idealistic standards desired by management, the simple fact that an account was profitable should be sufficient reason to keep it, even if it was below the desired level. There was always the opportunity to do something about increasing the profitability of accounts. Discontinuation of an account, however, meant the loss of this opportunity.
Conte, the vice-president, was adamant in his opposition to Ireland’s suggestion for some sort of change in the profit margin policy. He thought that a program for discontinuing accounts with unacceptable profit margins should be initiated without delay. He maintained that the profit margin policy had resulted from his spending a great deal of time and effort in a thorough analysis of the situation. And he argued that under no circumstances should the policy he changed after being in effect such a short period of time. He also said that he was not at all convinced that the outlook for market and economic conditions was as gloomy as Ireland believed. Consequently, he indicated that he would strongly oppose any attempt by Ireland to have the profit margin policy changed.
Source: Richard R. Still, Edward W. Cundliff, Normal A. P Govoni, Sandeep Puri (2017), Sales and Distribution Management: Decisions, Strategies, and Cases, Pearson; Sixth edition.