Paul Poundstone, president and founder of Poundstone Supply, was justifiably proud of his firm's growth to annual sales of nearly $50 million in only 20 years of operation. But a sense of uneasiness was growing as the company got larger. Except for a few old-timers, employees didn't stay very long. Worse yet, profits were going to be negligible for the coming year. That uneasiness, though grew into definite crisis proportions the day Paul got the call from Maria Gutierrez, VP of purchasing at Hillcrest Medical Corporation, a company that runs over 30 major hospitals.

"Mr Poundstone, I've been a customer nearly as long as you've had a company. In fact, I was the one that got you to consider blanket purchasing agreements that made us a half-million-dollar customer. But I want to tell you personally that I'll not renew our agreement at the end of the month."

Paul almost dropped the phone, but he managed to blurt out, "Why?" Then Maria described defective products that resulted in nearly a 20 percent return, invoices that double-billed for the returned products and their replacements, and other problems. Try as he could, he could not get Maria to agree to even give him a shot at keeping her business. Her last words were, "Paul, you've got problems, big problems. And I'm disappointed that I have to even point these out to you – this shouldn't be a surprise."

After hanging up the phone, Paul began hunting and got the following information: Average days to receive payment came to 65 days; returns equaled 18 percent of sales for the past 90 days, equally divided among incorrect shipments and defective products; inventories grew to 20 days worth of sales, except for four top sellers that were backlogged one to two weeks; and average contribution margin was 16 percent, less than the target of 25 percent. Cost of goods sold had increased almost 10 percent in the previous six months, without any increases in the prices the company charged. On the bright side, however, overall sales were 10 percent over projections.

1. What are the key problems and what are possible causes? How would he find out if those causes were in fact the actual causes?

2. If the problems involve working relationships between departments, what can Paul do to improve those relationships? How can he create a culture based on a market orientation?

3. Poundstone has two other customers equal to Hillcrest in annual revenue and all other customers spend about $50 to $100 thousand per year with Poundstone. Devise an organizational structure suited to this situation that can also handle the inter-departmental issues. Be specific as to who should report to whom and create one-sentence job descriptions for each person.