Hanover Bates Chemical Corporation

CASE:

HANOVER- BATES CHEMICAL CORPORATION

Introduction
The Hanover-Bates Chemical Corporation is a major producer of processing chemicals
for the chemical plating industry. The company currently employs 40 sales reps in seven sales
districts, and its products are fashioned in four plants which are located in Los Angeles, Houston,
Chicago, and Newark.

Hanover-Bates prepares its products for customer use by mixing

chemicals from a broad range of suppliers. Hanover-Bates and the majority of the firms in its
industry produce the same line of basic processing chemicals. Minimal quality difference exists
between Hanovers products and those offered by its competitors, however, some of these
chemicals, such as CHX (a protective post-plating chromate dip), provide a much higher gross
margin than others. Hanover- Batess market consists of several thousand job- shop and in- house
plating operations.

Case Facts:

The sales of the Company in 1996 were $23.89 million, an increase from
what it was in 1995, i.e. $21.98 million. Its Net pre-tax profit was $3.169

million in 1995 and $3.822 million in 1996.

Customers found little differences in the quality of Hanover product and
its competitors. Since there is an industry trend of using minimal
advertising expenditures and there is a dire need for sales efforts to be

there in the Companys entire marketing program.

Hank Carver, districts most experienced sales rep, was the potential
district sales manager after the previous one retired; however, he couldnt

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get this position as he would have turned 65 after 3 years and so would

have been replaced by someone else.

James Sprague was the newly appointed Northeast district sales manager for Hanover-Bates
Chemical Corporation. He was in charge of helping that district improve its currently dismal

product performance numbers.

Spragues predecessor was not a good sales manager. He had an attitude of reluctant

compliance to company wishes and was subsequently persuaded to take an early retirement.
Sprague was named the new manager he was told that although the Northeast sales district

ranked third in dollar sales it was the worst district in terms of profit performance.
In searching for an answer to the faltering performance problem, he analyzed his divisions
gross profit quota. He concluded that poor results in this area reflected misallocated sales

efforts either in terms of customer focus or the mix of product line items sold.
Sprague plans to compare his district side by side with the number one performing North-

Central district.
Salaries of Hanover-Bates sales representatives range from $33,000 to $45,000, with fringe

benefit costs amounting to an additional 15% of their salary.

A commission of 0.5 percent is paid, based on dollar sales, on all sales up to established sales

quotas.
Commission on sales in excess of quota is one percent.
District sales managers salaries range from $47,250 to $52,000. They are not paid a
commission in excess to salary.

Core Problem
Misallocation of the sales effort in North East District was the main problem in the case.
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Symptoms:
The symptoms of the core problem are given below:
Gross Profit Quota
James Sprague had been particularly interested in how the district had performed on its gross
profit quota. The gross profit quota for North East District in 2009 was under achieved as it can
be seen from the calculation.
Gross profit quota for North East District = 2,190,000
Actual Gross Profit = 1,858,500
Performance Index

Actual Gross Profit

Gross Profit Quota

= 84 %

The performance index value of 84% proves that the district was underperforming in terms of
gross profit which means that the district was not achieving gross profit quotas. The value
should be equal or greater than 100. This was due to the misallocation of sales effort in North
East District.
Sales Quota
The gross profit quota for North East District in 2009 was underachieved as it can be seen from
the following calculation.
Sales quota for North East District = 5,475,000
Actual Sales = 5,109,000
Performance Index

Actual Sales
SalesQuota

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= 93.3 %

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The performance index value of 93.3% proves that the district was underperforming in terms of
sales which mean that the district was not achieving sales quotas. The value should be equal or
greater than 100. This was due to the misallocation of sales effort in North East District.
Low Morale of Sales Representatives
Another symptom of the main problem can be seen in terms of low morale of sales
representatives. Misallocation of sales efforts to accounts in North East District leads to poor
performance of the sales representatives which in return resulted in the criticism and
dissatisfaction which ended up in the Districts most experienced sales representative threat to
quit.
Sales Expense Ratio
The sales expense ratio combines both salespeoples inputs and the results produced by those
inputs in a single number. Comparing the sales expense ratio of North East District with North
Central District, it comes out to be higher which indicates that sales people in North East
District were covering their expenses inefficiently.

Sales Expense Ratio of North East District

Expenses
Sales

552541
5109000

= 0.1
Sales Expense Ratio of North Central District

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Expenses
Sales

452187
4657500

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= 0.09
The high value of sales expense ratio in North East District is the indication of misallocation of
Sales Efforts to the accounts in the District.

Recommendations

Sales Effort Allocation Index

Analyzing the Exhibit 1 and Exhibit 2 of the case it can be observed that sale of the
company have been increasing over the course of years except in year 2007. This was the
year where National Sales Manager developed Sales Program and Account Call Frequency
guidelines for the sales reps to follow. A substantial decline can be observed in the Gross
Profit as well as the in the Net profit of the company in 2007. According to the calculations
done from the Quantitative data given in Ex 2 and Ex 4 respectively the sales from District 3
were in top 3 but so, was the cost of the goods sold. Moreover, the cost of servicing the
account was highest in District 3 as compared to other districts. D3 has highest selling
expenses and third lowest contribution to Gross Profit. This could be due to the fact that
customers were requiring more servicing from sale reps. In order to allocate the sales effort
of sales reps efficiently, We recommend Sales Effort Allocation Index; the firm can rate
each account on each factor deemed critical to the success of the sales call effort and then
develop a sales effort allocation index for each account. This is done by multiplying each
rating score by its factor importance weight, summing over all factors, and then dividing by
the sum of the importance weights. Sales force allocation Index reflects the relative amount
of sales call efforts that should be allocated to each account. Through Sales force allocation

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index, DSM can also allocate the frequency of calls and follow ups to the accounts
respectively
Accounts

Factor

Ratin

Factor importance

Rating x

Sales

Weight

Factor

Effort
Index

Account

Major Account

10

45

450

19.11

A
Account

Medium sized

40

320

21.5

B
Account

Account
Small Account

15

90

57.3

100

860

C
Total
Refocus Account Coverage

Currently, District 3 appears to be focusing more on potential and active C accounts. These are
small accounts, generating $9,000 or less in sales, and they have a low margin of 5.63%, and
District 3 places too much emphasis on their coverage. The Northeast district could benefit from
refocusing their account coverage to include more A and B accounts, which have high margins,
and spend less time focusing on C accounts.
The North-central sales district dedicates 10 to 41% to A and B active accounts, respectively.
Those two account categories generate 79% of total sales. On the other hand, Northeast is only
placing a 9% and 36% emphasis on these two areas. North-Centrals larger gross profit coupled
with its minimal account coverage plan, accounts for an excellent contribution margin per sales
call.

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Use a Combinition of a Bottom up Approach, Comp Plan Adjustment and Training
For this alternative, Sprague must apologize to Carver. It is important that Sprague tells him how
valuable he is to the organization. Through this approach, Hanover retains the support of a
revered salesperson and keeps him on their side as an opinion leader. Perhaps giving Carver a
more important role and implementing a mentoring system would help as well.
This way District 3 can take advantage of his knowledge and experience to train a suitable
replacement in the future. The sales team should be able to gain access to their performance
records, so that they can help management in determining their sales quotas. This can be done
by showing the sales reps how well they did in terms of dollar performance, and how they need
to work on profit performance in the future.
The sales force of District 3 needs to be shown the financial figures of District Seven. The
North-Central district has a gross profit that is $100,000 higher than District Three, but at the
same time has selling expenses of $100,000 less. Using this information in addition to the bottom
up approach, Hanover should be able to narrow the gap between the two districts, and eventually,
eliminate it. The bottom up approach will help to improve employee morale by showing them
that they are a valuable part of the company whose opinions are vital to the decision making
process. In order to make this work, Hanover should announce a change in the compensation
plan.

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Morale Of Sales Representatives

Bonuses must be tied to personal performance in order to keep the sales force aggressive,
and to avoid complacency. This plan will revolve around the implementation of a Point
system that rewards the sale of products with high gross margin as opposed to simply sales
performance. A point value of 1.0 will be assigned to ZBX, CBX, and NBX, the three
chemicals with the lowest gross margin. SPX and BUX will yield 1.25 points and CHX, the
chemical with the highest gross margin, will be worth 1.75 points. In general, the sales
force must be made aware of these changes in the companys sales process and strategy.
This can be done through a re-training program which will take place over one weeks time
away from the company headquarters due to its length.

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