HAVERWOOD FURNITURE

(B) CASE ANALYSIS

Ben Crescenzo, Jordan Andert, Justin Ernst

MKT 425 – FALL 2014

WEST CHESTER UNIVERSITY OF PENNSYLVANIA
Professor Paul Arsenault
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Introduction

In April 2008, Haverwood Furniture, Inc. merged with Lea Meadows, Inc., a
manufacturer of upholstered furniture. The company was acquired by Charlton Bates President
of Haverwood Furniture, Inc. after the death of his father-in-law. To make the transition smooth
for both companies, it was decided the firms would remain independent of one another. The real
issue is whether or not Haverwood sales personnel will replace Lea Meadow’s sales agents.
Haverwood Furniture, Inc. owns its sales force, but Lea-Meadows’ depend on agents to sell their
products. Bates will need to determine what makes the best business sense for Haverwood
Furniture. If Haverwood’s sales force replaces Lea-Meadows sales agents, will the company
maintain their reputation within the industry? In addition, Bates must consider the number of
accounts serviced by Lea-Meadows, and the extra responsibilities Haverwood’s sales personnel
would be tasked with.

Current Situation: Industry, Lea-Meadows, Inc., Haverwood Furniture, Inc.

Industry

The home furnishings industry is split between multiple categories including upholstered
furniture and wood furniture. In 2007, upholstered furniture had total manufacturer sales of $15.5
billion. With a projected growth rate of 3.9%, manufacturer sales for 2008 were forecasted at
$16.1 billion. Wood furniture manufacturer sales in 2007 were $12.4 billion. Forecasted sales for
2008 were $12.9 billion showing a predicted 4% growth rate.

Exhibit 1: Industry Manufacturer Sales and Expected Growth

Category 2007 Sales (billion) 2008 Expected Growth rate

Sales (billion)
Upholstered $15.5 $16.1 3.9%
Wood $12.4 $12.9 4%

Lea-Meadows, Inc.

With net sales of $5 million in 2007, Lea-Meadows has had a consistent 3% increase in
sales over the past 5 years and expects continued growth in the foreseeable future. Lea-Meadows
operates by employing 15 sales agents that work on a 5% commission of net company sales.
National sales manager Martin Moorman is a strong advocate for the use of these sales agents
both now and in the future of the company.

Haverwood Furniture, Inc.

In 2007, Haverwood Furniture had net sales of $75 million and a before-tax profit of $3.7
million. John Bott, vice-president of sales, manages a sales force of 10 full-time representatives
that receive both an annual salary of $70,000 and a commission of 0.5% of net company sales.
After expenses, total sales administration costs come out to be approximately $130,000. Based
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on the current expertise and reputation of Haverwood’s sales force, Bott intends to continue with
his sales team and to further their responsibilities by increasing annual account calls.
Exhibit 2: Haverwood Sales Team and Current Work Time Spent on Sales Calls

10 Reps x 10 calls per week x 3 hr calls = 300 sales hours/week

300 hrs per week x 50 weeks/year = 15,000 sales hours/year
15,000 / (2,000 hrs/work week x 10 reps) = 0.75
75% of work time is spent on sales call

Alternatives
1. Keep sales personnel separate for both manufacturers

Choosing to keep the sales personnel separate allows autonomy between the manufacturers.
Both companies have co-existed for more than 75 years. Lea-Meadows, Inc. is a small
manufacturer of upholstered living room and family room furniture. Haverwood Furniture, Inc.
is a manufacturer of medium- to high-priced wood furniture. Consequently, these manufacturers
have non-competing furniture lines.

Haverwood furniture employs 10 full time salespeople and two regional sales managers to
service and maintain its accounts. This is atypical in the furniture industry, but has been quite
successful. Haverwood Furniture’s salespeople are highly regarded in the industry. They are well
respected due to their industry knowledge, willingness to work with buyers and retailers, and
overall professionalism. However, many accounts do not carry the company’s full line of
furniture. In addition, both manufacturer’s sales personnel perform the same functions.

Keeping the sales forces separate means no additional training would be necessary, and
Moorman’s position would remain. This decreases costs associated with salespeople learning a
new product line, as well as the costs of restructuring territories and maintains the current healthy
relationships established with accounts.

2. Integrate Haverwood’s sales force and eliminate Lea Meadows sales agents

Choosing to eliminate Lea-Meadows sales agents follows Haverwood’s policy of having a

company exclusive sales force. Both manufacturers call on all of the same accounts, with the
exception that Lea-Meadows, Inc. has additional accounts. Time allocated to these additional
accounts will be 15-to 25% of a salespersons time.
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Exhibit 3: Sales call work time with Lea-Meadows

Taking on Lea-Meadows
(Add 15% sales time)
10 reps x 10 calls/week x (3 x 1.15) hr calls = 345 sales
hours/week
345 hrs/week x 50 weeks/year = 17,250 sales hours/year
17,250 / 20,000 hrs of work/year = 0.8625
86.25% of work time spent on sales calls

Salespeople at Haverwood Furniture are responsible for making ten calls per week, with an
average call time of three hours. Exhibit 3 shows the difference in work time for Haverwood
Sales representatives when Lea-Meadows products are added to their responsibilities. An
increase in work time spent on sales calls of 11.25% is a huge jump, and employees will be
overworked. Haverwood must hire an extra sales representative to service and maintain
accounts, because each account will now have extra work added to their sales calls.

Exhibit 4: Additional Sales Representative

Taking on Additional Sales Rep

11 reps x 9 calls/week x 3.45 hrs/call = 310.5 sales hrs/week

310.5 hrs/week x 50 weeks/year = 15,525 sales hrs/year
15,525 / 20,000 hrs of work/year = 0.7763
77.63% of work time spent on sales calls

Exhibit 4 shows exactly what an additional sales representative would do; reduce work time
spent on sales calls. With the accounts allocated across 11 employees rather than 10, work time
spent on calls only increases 2.63% when adding in the Lea-Meadows product lines.

Recommendations

In the current situation, choosing between options is a tough choice, but one that needs to
be made as fast as possible. The best option for the Haverwood & Lea-Meadows merger would
be to use the current Haverwood sales force with the addition of one sales representative.
Although the 15 sales agents would be dropped from the Lea-Meadows sales force, they are
agents that have multiple product lines and will be able to find other manufacturers to pick them
up. You can see below in Exhibit 5 the current cost of each of the sales forces, which clearly
indicates the more cost effective choice is the Haverwood sales reps. It also shows that each
sales agent only makes $16,667 off of Lea-Meadows products, and they won’t be completely out
of a job if they are let go.
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Exhibit 5: Cost of Sales Forces

Cost of Sales Forces (Lea-Meadows)

Agents
$5 mil net sales x 5% commission = $250,000
$250,000 / 15 sales agents = $16,667 per agent
Total cost = $250,000/year

Haverwood Sales Reps (1 additional rep)

$5 mil net sales x 0.5% commision = $25,000
$25,000 / 11 sales reps = $2,273 per rep
1 additional rep = $70,000/year salary
Total cost = $95,000/year

When looking at the additional $5 million in net sales, the cost of each sale
representatives is much lower than the cost per sales agent. These numbers can be calculated
easily because the number of accounts is the same for both sales forces. Even with the additional
salary of one more sales representative, it is still $155,000 cheaper to continue using the
knowledgeable Haverwood sales team. The sales representatives already have a relationship
with 100% of the accounts and can easily make the transition. Although they don’t have much
experience selling the Lea-Meadows products, they have been in the furniture sales industry for a
long time and training them will not be costly or difficult. The addition of the new sales
representative, bringing the total to 11, is necessary. The work time spent on calls will rise only
2.63% with 11 reps, while it would rise 11.25% per rep with the current sales force.

Exhibit 6: Sales Representative Income

Change in Sales Rep Income

Overall Sales Rep Commission with Lea-Meadows

$80 mil total net sales x 0.5% commission = $400,000
$400,000 / 11 sales reps = $36,364 commission/rep
$36,364 + $70,000 salary = $106,364 yearly income/rep

Current Sales Rep Commission

$75 mil total net sales x 0.5% commission = $375,000
$375,000 / 10 sales reps = $37,500 commission/rep
$37,500 + $70,000 salary = $107,500 yearly income/rep

Exhibit 6 above shows the change in yearly income per sales representative if the team is
to also acquire Lea-Meadows products. Although the work load would increase, the rep
commission would decrease due to the addition of another representative. The solution to this
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problem is to increase all yearly salaries by $5,000 to $75,000 per sales representative. Each
sales rep’s yearly income would be around $111,364, a $4,000 increase from the previous year.
Although this would be an increase in costs of $140,000 to Haverwood, the company is still
saving $110,000 compared to using the Lea-Meadows sales agents; a large amount of savings for
the company. The increase in salary will also help motivate

The last predicament for consideration is Mr. Martin Moorman. In order to still keep a
good reputation with many of the current accounts, Moorman should somehow stay on the sales
force. It looks bad in a merger/acquisition if one team gets completely let go, and when the
employee is family it may bring a bad reputation to Mr. Bates personally. It is suggested that
Mr. Moorman be hired as the new additional sales representative for Haverwood. As national
sales manager he has plenty of experience dealing with the many accounts that both Haverwood
and Lea-Meadows currently have, and he has plenty of knowledge in the furniture industry. It
will be inexpensive to train Mr. Moorman and he most likely already knows most of what
Haverwood produces. Even though he will have to let go of his relationships with the 15 sales
agents he employs, with a salary of $111,364 and more direct interaction with the customers he
should not have much of a problem transferring positions.