Jain engg.

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Indian Institute of Management MAR110Ahmedabad

JAIN ENGINEERING COMPANY LIMITED

Mr. Ratan Jajodia, Regional Sales Manager, Engineering Division(Northern India) of Jain Engineering Company Limited was talking to M r.Kamal Ajmera, Branch Sales Manager of National Machinery Company in a

New Year eve (1974) Party. They talked about the good time they had together in an executive development programme conducted by the National Institute of Management at Srinagar.

During the conversation Mr.Jojodia described some of the problemswhich were uppermost in his mind.

Kamal, every year, at this time, I run into similar problems. Myheadache begins, really when we are preparing our regional annual sales budget.We in the region discuss, estimate, and arrive at possible aggregate territorialsales volume which we submit to the headquarters. All regional managers meetgeneral manager at the headquarters to discuss and review the territorial salestargets. Most of the time my regions targets are revised and arbitrarily changed(and invariably upwards too). My problem then is how to reallocate this totalregional target amongst various sales territories in my region. An added

problem is how to justify the additional increase in the quota to the salesmenwho are paid a commission on the basis of their performance in relation to therupee quota assigned. Sometimes this budgeting problem results into need for

Prepared by Professors Rakesh Khurana M.N. Arora.

It is based on a term paper written by M/s. Bharat Patni and Subir Bose of PGP (1972-74) for Quantitative Models in Marketing Course. It is drawn up using personal experience.

Case material of the Indian Institute of Management, Ahmedabad, is prepared as a basis for class discussion. Cases are not designed to present illustrations of either correct or incorrecthandling of administrative problems.

Copyright (c) 1974 by the Indian Institute of Management, Ahmedabad.

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extra marketing inputs in terms of new salesmen. I have never been able tocome up with suitable and systematic approach to decide how many additionalsalesmen to recruit. In addition, I depend generally on intuition to guide me interms of the territories to which these additional salesmen should be assigned.

Mr. Kamal Ajmera reminded Jajodia of the series of class discussionsthey had at the Executive Development Programme on various quantitativemodels in marketing. Kamal impressed on Mr. Jajodias mind that there weredistinct possibilities of finding some suitable solutions to Jajodias problems inthe programme material and notes.

Company Background

Jain Engineering Company Limited (JEC) was founded in Bombay bytwo European merchants as a partnership firm in 1850. It was primarily atrading organization. It became a leading agency house in the country by 1920.

The company experienced rapid sales growth after 1945 when it was convertedinto a limited company by sharing equity ownership with a leading Indian business house. Within a short period of time the company diversified its product lines, entered into manufacturing operations and developed into one of the most effective and sought after manufacturing and marketing organizationsin the country. In 1972-73, the companys sales were around Rs. 50 crores.

The company was divided into 3 operating divisions; Engineering,Pharmaceuticals and allied products, and Trading. Each division was headed bya General Manager who was responsible to the Managing Director for thedivisions profitability and growth. Two staff divisions, i) Finance & Accounts,and ii) Administration performed support functions.

ENGINEERING DIVISION

The Engineering Division had 3 product lines, namely portable electrictools, power machine tools, and household appliances. These were produced indifferent manufacturing plants of the company located in Maharashtra and

Gujarat States. There were plans to diversify the product line so as to include anumber of other consumer durable items. The Engineering di visionsorganization chart is presented in Exhibit 1.

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The Portable Tools Product Line

JEC manufactured five kinds of portable machine tools;

1) Drilling machines2) Grinding machines3) Sanding machines4) Blower machines5) Bench grinders (Light-easily movable)

The company sold part of its production as exports (exports were handled by the export department of JEC). The portable tools of JEC had animage of high quality products in the Indian market. The products weresupported by a guarantee against manufacturin g defects and as such therewere very few complaints from the users.

Sales Management and Distribution

The Engineering Division of the company, as also the other two operatingdivisions, was divided into four marketing regions-North, South, East and West-each under a regional manager (R.M.). The regional manager was assisted bytwo Assistant Regional Managers (A.R.M.). Two sales supervisors, one for industrial products and the other for household appliances, assisted therespective A.R.Ms. In addition, there were two technical supervisors, one for each of the groups of the industrial products and the household appliances (SeeExhibit I). Under each sales supervisor, there was a group of 6 to 10 salesmenwho carried out field selling activities.

The markets for these products were primarily industrial belts of thecountry. Amongst the four regions, the Western region ranked first in terms of number of portable tools sold followed by the Northern region.

In addition to the salesmen assigned to various territories in the differentregions, the company had appointed accredited distributors and dealers invarious parts of the country. As a matter of policy, all sales to customers (actualusers) were to be made through accredited distributors or dealers. Thedistributors were reputed firms operating in a large area and generally employedat least one salesman exclusively for the purpose of Jain Engineering portabletools. Under each distributor there were several accredited dealers.

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Each distributor or dealer was given an exclusive franchise. They were,however, allowed to trade in other related items. For some of the distributors,JEC products were bread and butter while for others portable tools were a

prestige line. They knew that this prestige line attracted customers andindirectly generated business for their other products.

Each distributor was allocated a geographical territory. The companyssalesmen worked with the distributors and dealers in developing the sales ineach territory. The salesmen were responsible to the regional office for their sales activities and performances of their territories. The distributors and dealerswere required, under the terms of their contract, to sell the portable tools only atthe companys list price. The distributors were given a trade discount of 15%.The distributors in turn gave 10% of the list price as discount to the dealers. Alarge proportion of distributors sales volume came from direct sales to actualusers. Approximately 60%* of distributors sales were over-the counter saleselicited through enquiries generated by their salesmen and by the companyssalesmen. The remaining 40% represented the sales to dealers (20%) and thesales against firm orders booked by the divisions salesmen in the field (20%).

The Northern Region

The Headquarter of Northern region was situated in New Delhi. Up-country offices and/or warehouses existed in the cities of Jaipur, Ludhiana,Chandigarh, Ambala and Kanpur. Exhibit 2 gives the location of distributors

and dealers in the Northern region. For the year 1972-73, the Northern regionssales were 9600 units (See Table 1 below) of tools and approximately Rs.74lacs in sales revenue. Sales in the Northern region were growing at a faster rate

because of the rapid industrialisation taking place in the area.

Exhibit 3 gives details about sales, prices, variable costs and typical product-wise sales distribution in each of the territories of the Northern region.

The entire engineering division staff in the Northern region consisted of 65 people engaged in both sales and office work.

*As this was a high ticket item, customers generally did not like to book directorders with the salesmen, but preferred to visit the distributors located in larger cities and order the equipment after personal inspection and discussion.

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Table 1Engineering Division North Zone

Portable Tools Actual Sales in the Year 197 2 - 73

Area* No. of Units Value(Rs.) No. of salesmen Salary/PerSalesmen

Soth Punjab 1 500 10,45,000 1 8 50 North Punjab 11 00 7,85,600 1 600 Rajasthan 600 4,2 7 ,000 1 1 ,000 West U.P 7 00 4, 99 ,000 1 7 00 East U.P 1 050 7,4 8 ,400 1 650 Delhi Complex 4650 3 8 ,72,600 4 550

9600 73, 77 ,600 9

*The territories included the following canters and areas around thesecanters.1. South Punjab : Ludhiana , Chandigarh , Ambala , Patiala , SouthernHimachal Pradesh.

2 . North Punjab : Srinagar(Jammu & Kashmir) , Amritsar , Jullunder , and Northern Himachal Pradesh.

3 . Rajasthan: Jaipur , Kota , Jodhpur , Udaipur , Bikaner , Ajmer.

4 . West U.P : Bareilly , Dehradun , a part of Delhi , Rampur , Moradabad , Roorkee , Muzzafarnagar , Saharanpur.

5 . East U.P: Kanpur , Lucknow , Gorakhpur , Banares.

6 . Delhi Complex : This covered a large industrial belt includingDelhi , Faridabad , Karnal , Meerut , Ghaziabad.

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Mr.Jajodia spent half of his time on administrative duties, such as signingvouchers for expenses, granting leave, looking into lease problems of his

warehouses and /or offices, sending daily, weekly and monthly statements to thedivisional headquarters. The other half of his time was spent on selling. Hereceived customers and distributors in his office, attended group demons trationsarranged by salesmen and/or distributors, looked into the bulk enquiries fromthe Government departments and worked on planning campaigns, off -seasondiscount offers for household appliances, figuring out competitive moves, etc.Mr. Jajodia spent 60% of the time available to him for selling on the householdappliances and 40% on the portable tool.

Annual Sales BudgetThe budgeting exercise began in the month of June every year.*Each

salesman was asked to provide an estimate of his likely sales next year. He usedcompany sales to the distributors in his area as a starting point. Considering theexpected natural growth of sales the salesman increased his target by a

judgmental percentage. He also made adjustments for expected bulk orders andfor possible expansion or purchase plans of some of his customers. Finally hecame up with expected aggregated sales estimates (units) broken down by

product groups (5times). Then followed a divisional conference of salesmen of divisional staff at New Delhi. The salesmens figures were aggregated and

revised marking an allowance for each salesmans optimism or pessimismobserved in the past.

The regions expected sales figures were next sent to the divisionalheadquarters for review by the Marketing and Sales Manager, who aggregatedall-India report before submitting them to the General Manager. Estimated

profitability figures were also worked out before the General Manager discussedhis annual budget with the factory representative and the Managing Director.

Around the end of July, the revised figures (invariably higher thanaggregated by RM) were presented to the four Regional Managers at the annual

RMs conference. A lively discussion on the achievability of the higher figuresfor regions was followed by finalization of the regions annual sales targets and profits.

*The financial year used was September 1 to August 31.

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On return to Delhi, Mr. Jajodia usually worked closely with his AssistantManager (Portable Tools) and Sales Supervisor (Portable Tools) to reallocatethe regions target amongst the various territories. The final break-up arrived atwas next conveyed to the salesmen, who were asked to give details as to howthey intended to achieve their sales targets. These were then reviewed at the

regional headquarter, and any changes or suggestions made therein were againdiscussed with the salesmen by the supervisor when the later visited the territorynext time.

The entire sales budgeting exercise was completed by August 15 and the plan became effective from September 1.

Quota Determination

Under the present sales budgeting procedure, the head office generallyincreased the sales targets of the region. The regional manager, then allocatedthis extra target to various salesmen using his own judgement and on advice of

his assistants. Mr. Jajodia was very unhappy with the present method of determination of sales quota. He thought that the method used now was rather arbitrary and dependent more on the targets being forced down by the headoffice. The salesmen were unhappy with this method of determination of their sales quota as they felt they did not have any say in the matter. This affected, attimes, their motivation to achieve their targets. Mr. Jajodia was aware of salesmens dissatisfaction-with the present method and was therefore on thelook-out for a better and more acceptable procedure for sales quotadetermination. He hoped to involve the salesman somehow in the quotadetermination process.

NEW THINKING: THE PROPOSED METHOD

Quota Determination

Mr. Jajodia went back to his notes and materials he had collected on theQuantitative Models in Marketing class sessions at the Srinagar Programme.Mr. Jajodias attention was drawn to Boninis model of the sales process. Thismodel is described in Exhibit 4. Mr. Jajodia felt that th is model fitted very well

with respect to solving his sales target re-allocation problem. Therefore, hedecided to run an exercise for a territory using this method. The exercise isreproduced in Exhibit 5. This convinced Mr. Jajodia that such an approachwould find an easy acceptance among his salesmen. Specifically he thought hehad an approach which required participation by the salesmen in the quotadetermination process, and it allowed necessary adjustments of the quota inaccordance with the salesmens view.

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Compensation

The salesmen were paid a fixed salary plus a commission which variedwith the salesmens actual performance in relation to his sales quota. If asalesman achieved 100% of his quota, he received commission equivalent to

two months salary. The following table gives the commission structure.

Table 2Salesmen Incentive Commission

Target Achieved (in Rs.) Commission(Rs.)75% None80% 50090% 950

100% 1150110% 1600120% 2200

Mr.Jajodia was not sure whether the present compensation system provided necessary motivation to the salesmen to put in their best efforts. Hesuspected that junior salesmen whose salaries were low were not motivated.Mr.Jajodia thought that better basis for calculating commission would be the

profit contribution made by each salesmen. Ideally he thought that a

commission system should provide maximum motivation to the salesmenwithout an unfavourable effect on the regions profitabil ity.

Mr. Jajodia happened to locate an interesting article* on this subject inhis programme materials.

*Ralph L. Davy and Peter D. Bennett Should Salesmens Compensation BeGoarod to Profits, Journal of Marketing Research, (May 1984), pp.39-43.

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Using this article, Mr. Jajodia prepared a procedure to arrive at optimalcompensation assuming certain operating conditions. This procedure is

presented as Exhibit 6.

Assigning Territories to Additional Salesman.

The sales as well as the potential of the Northern region were expandingrapidly .To effectively tap this market substantial were expanding rapidly. Toeffectively tap this market substantial increase in the selling effort was required,Mr. Jajodia had estimated that he would require additional six salesmen. He hadsent in a request to headquarters for expanding his sales force and in turn wasgranted such permission. Mr .Jajodia, however, was not clear about the way in

which he should reassign these 15 salesmen to the existing territories.

Mr. Jajodia again was lucky to be able to place together an approach tosolve this problem using the program materials . This approach required anassessment of sales potential for each territory. Using an exponential functionhe could arrive at a satisfactory reassignment of salesman to particular territories.

Mr. Jajodia using company , industry , and other information arrived atthe sales potential figures for each territory .

Table 3 gives estimated sales potential for each territory.

Table 2Estimated Sales Potential(S)

Territory Sales Potential(Units)South Punjab 3200 m/cs.

North Punjab 2500 m/Rajasthan 1500 m/cs.West U.P. 1800 m/cs.

East U.P. 200 m/cs.Delhi Complex 12,000 m/cs

Total 21,200m/cs.

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Using this approach, he arrived at a reassignment solution. In Exhibit 7this is described. Mr. Jajodia thought that he finally found a way to reassignall the salesmen consistent with maximizing his regions profitability.

Although Mr. Jajodia had been able to find methods for tackling three

problems of quota determination, salesman compensation, and territory re allocation on a piecemeal basis, he was wondering about the implica tions of using them individually as well as simultaneously.

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Exhibit 2

Intensive of Distributors/Dealers for Portable Tools Line

Distributors Dealers

1. Delhi A 1. Meerut2. Ghaziabad

2. Delhi B 1.Faridabad2. Karnal

3. Delhi C

4. Srinagar

5. Amritsar

6. Jullunder

7. Ludhiana 1. Patiala

8. Chandigarh

9. Ambala

10. Jaipur 1. Jodhput2. Udaipur 3. Bikaner 4. Ajmer

11. Kota

12. Bareilly 1. Rampur 2. Moradabad

13. Dehradun 1. Muzzafarnagar 2. Roorkee3. Saharanpur

14. Kanpur A

15. Kanpur B

16. Lucknow 1. Benaras

17. Gorakhpur

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Exhibit 3

Sales, Prices,Variable costs and Percentage of Sales Contributed by Each Product Group. 1

Sales

Territory Drills Grinding Sending Blower BenchTotal

machines Machines machines Grinder Rs. Rs. Rs. Rs. Rs. Rs.

South Punjab 4,26,000 3,40,000 97,500 88,500 93,000 10,45,000 North Punjab 3,13,000 2,68,000 71,500 64,900 68,200 7,85,600Rajasthan 1,70,400 1,46,000 39,000 34,000 37,200 4,26,600

East U.P 2,93,200 2,55,000 63,200 62,000 65,000 7,38,400West U.P 1,98,800 1,70,000 45,000 41,300 43,400 4,98,500Delhi Complex 18,88,600 11,30,000 3,02,000 2,74,000 2,78,000 38,72,600Total 32,90,000 23,09,000 6,18,200 5,64,700 5,84,800 73,66,700

Typical pro-ductwise salesdistributionin terri-

tories (%) 40 30 10 10 10

List price(Per unit)(Rs.) 710 830 650 590 620

Variable 2 Cost(Rs.) 540 680 510 500 545

Per UnitContribution(Rs.) 170 160 140 90 75

1.There were various types and sizes of tools in each category.For convenience here, we have only referred to a kind of "Average tool".

2.This includes commission (15%) given to the distributors.

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Exhibit 5

Quota Determination for Delhi Territory,

An Exercise Attempting to Apply Boninis

The process starts with each salesmans making a forecast for theforthcoming quarter. He bases his forecast on his actual sales during the last fivemonths. Salesmans forecast is not a straight forward weighted average butrather the following conditional relationship:

= Max ( , ) if and (1)

= S if or

= + if (3)2

where

Salesmans forecast for the quarter,

Average sales for the last five months (months t-1,.........., t-5),sales in last month, and

sales in month before last.

i) The salesmans forecast for a particular territory are then summed up by the regional sales manager and forwarded to the head office for necessaryapproval

ii) Once the head office makes the necessary modifications then theregional manager reallocated the quotas on the basis of the following quota

determination rule:

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= ( 0.65 + 0.35 ) x 1.02 x (4)

where,

= Regional Quota,

= Proposed quota for salesman= Number of salesmen in region d,

= sales of salesmen j in last 5 months, and

= sales of all salesmen in the region in last 5 months

This rule states that each salesmans quota is some percentage of thedistrict quota. The percentage is a weighted average (0.65 and 0.35 respec tively)of the two fractions. The district quota is inflated by 2 per cent in order to

provide the district sales manager leeway in making necessary adjustment.Quotas are adjusted according to the following rules:

= 0.95 if 1.15 rule 1 (5)

= 1.10 if 0.75 rule 2 (6)

= otherwise rule 3 (7)

where,

: Adjustment quota for salesman j.

: Proposed quota of salesman j.: Forecast of salesman j.

Mr. Jajodia thought that the quota allocation be made on the quarterly basis so that the targets could be made more realistic and appropriate. He then proceeded to apply the model for a p articular territory (Delhi) in order tounderstand the working of the model. Following calculation is for a month.

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Delhi Territor

= n of salesmen = 4

= sales per month per salesman

(Total sales per year x

= + 4650 x. 40 x 710

+ 4650 x. 30 x 860 12 x 4 =

+ 4650 x. 10 x 650

+ 4650 x. 10 x 590 = Rs. 70,525

+ 4650 x. 10 x 620

From company records,

= Rs. 80,000 and = Rs. 68,000

Applying rule 2 (2), we fet the forecast as:

= Rs. 70,525 Since > >

Let, the regional quota set by head office = Rs. 2, 96,000

Then, proposed quota for any salesman would be given by

= (0.65 x + 0.35 x ) 1.02 x 2.96,000 = 75,480

The adjusted quota by application of rule 3 (6) would be

= = Rs.75,480.

Mr. Jajodia thought that this method was more rational and would findready acceptance among the salesmen. Moreover, adjustment factor of scalingdown the quota by 5 per cent if quota was higher than salesmans estimates andincreasing it by 10 per cent otherwise ( as already explained ) would provide anunderstandable basis for revising quota.

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Exhibit 6

SCHEME FOR OPTIMAL COMPENSATION

Mr. Jajodia was thinking about the various aspects of commissionstructure. He thought that while commissions should be such that theymotivate salesmen, on the other hand profitability of branch operationshad to be guarded. He listed down the appropriate variables and describedthe procedure for qualification of the problem.

Let ,

= Companys gross profit in rupees,

S =Salesman commission in rupees,

=Commission rate ( percentage ) paid on product i,

=Time devoted to selling product i,

=Qty. Of product i sold in units,

=Selling price of product i,

=Variable non selling cost per unit of product i,

=Gross Margin - - of product i,

=Total time the salesman devotes to selling -

fixed for a salesman,n =Number of products.

Let the quantity of product i sold in period t is a function of the time devotedto selling in the period, i.e.,

= ( ) ,

where,

0 over a wide range of t,

( ); a continuous and differentiate function in ,

and C = + + + ..........+ =

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Maximum Profit for Company

Company Profit would be given by:

= [( = - ( - ) x ) ]

=

The following formulation maximises total company profit given the constrainton time availability to the salesman.

Max:

Subject to: C =

Using the Langragian method to solve the formulation:

Lagrangian function: L ( = - C )

Differentiating L ( w.r.t and

= 0 = (

= 0 = - - C )

Solving these equations we get:

= = (2)

for all i, j .

Maximum commission for salesman: The same exercise could be done for maximising salesman commission:

Max S = ,

Sub . to

C =

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Lagrangian : = - - C )

Since = ( )

= ( ) - - C )

= 0 =

- C )

Solving these equations, we get:

(4)

For Optimum Commission Rates the same ratios of first derivatives for company as well as the salesman not hold. So,

should be the same for both salesmen and the company.

This implies

Mr. Jajodia was wondering how to utilize this scheme for commission structurein his region.

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Exhibit 7

OPTIMUM SALESMEN ALLOCATION EXCERCISE

Mr. Jajodia thought that the basis of allocating salesman should not only be the present sales but also potential of the territory. (Refer to Exhibit 3 for sales figures of various territories end Table 3 for estimated sales potential).

He figured that a modified Exponential function of the form = (1-should be used, where a is the rate at which demand approaches

potential in response to marketing effort X.

Thus, for example:

Punjab = Punjab (1 - Punjab)

Here the number of salesmen in S. Punjab ( . Punjab ) is a proxy variable for

the marketing effort.Sample calculation for finding a

The previous years sales together with the estimated potential were usedto arrive at this figure.

S= S (1- ), as N =1 in S. Punjab and

S = 1500 m/cs. Since constant percentage of product mix sal es isassumed.

So,1500 = 3200 (1- )

which gives,

a= 0.638

Similarly the constants for other areas were calculated.

South Punjab 0.638

North Punjab 0.575

Rajasthan 0.567

West U.P 0.502

East U.P 0.744

DLI complex 0.124

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Sample Collection for optimum salesman Allocation

Our objective was to optimize profits by allocating marketing effort ( inthis case , salesman) to various territories in the optimal manner.

Let profit Z , is given by

Z 0.3 ( + + + + + )-C (1)

Where:

CT : Average salary of salesman (650 ) ( + + + + +) + Fixed Cost

= 24, 59,133 (1- ),

= 19, 20,000 (1- ),

= 11, 53,000 (1- ),

= 13, 85,000 (1- ),

= 15, 40,000 (1- ), and

= 92, 00,000 (1- )

The problem then becomes :

Max: Z (eqn. 1 above )

Subject: + + + + + 15Setting up the Lagrangian function:

= Z ( + + + + + - 15 ).

Equating first derivatives of w.r.t etc. , equal to zero. We got, for South Punjab:

= .3 * 24, 59,133 * 0.638 * - 650 = 0

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or

= (4, 70,000 x NSP - (650) ( ) - (2)

Similar calculations were made for the other territories.

= .3*.575*19, 20,000 N NP 650 -

= 3, 32,000 N NP 650 - (3)

= 0.3* 0.567*11, 53,000 NR 650 -

= 1, 96,000 NR 650 - (4)

= 0.3* .502 * 13, 85,000 NWUP 650

= 2, 08,000 NWUP - 650 - (5)

= 0.3* .744 * 15, 40,400 NEUP 650

= 3, 44,000 NWUP 650 - - (6)

= 0.3* .124 * 9, 24,000 NDLI 650

= 5, 12,000 NDLI 650 - - (7)

Solving equations (2)

NSP + N NP + N R + N WUP + N EUP + N DLI = 15 - (8)

We get:

NSP =

N NP = 1.21 * 2 0.602

= 2.42 0.602 2

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NR = 1.12 * 2 1.54

= 2.24 1.54 1

NWUP = 1.27 * 2 1.62

= 2.54 1.62 1

NEUP = 0.86 * 2 0.42

= 1.72 0.42 1

NDLI = 5.15 * 2 2.56

= 10.30 2.56 8

Therefore, optimum assignment of the 15 salesmen including the additionalsix salesmen would be as follows.

South Punjab 2

North Punjab 2

Rajasthan 1

West U.P. 1

East U.P. 1

Delhi 8

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