Problem
Magnolia Pharmaceuticals is a distributor of prescription drugs to independent retail and hospital-based pharmacies. Management believes that top-notch sales representatives (individuals selling to their customers) are the key factor in determining whether Magnolia will be successful in the future. These sales representatives serve as the Company's liaison with customers-helping pharmacies monitor their stocks, delivering drugs when customer stocks run low, and providing up-to-date information on drugs from many companies. Sales representatives must be ultra-reliable and are highly trained. Good sales representatives are hard to come by and are not easily replaced.
Sales representatives routinely record the amount of time they spend on serving each pharmacy. This time includes travel time to and from Magnolia's central warehouse as well as time spent replenishing stocks, dealing with complaints, answering questions about drugs, informing pharmacists of the latest developments and newest products and so on. Some pharmacies require more hand-holding than do others and consequently they consume more of the sales representatives time.
Recently, sales representatives have increasingly complained that it is impossible to do their jobs without working well beyond normal working hours. This has led to an alarming increase in the number of sales representatives quitting for jobs with other organizations. As a consequence, Magnolia's management is considering dropping some customers to reduce the workload on their sales representatives. Data concerning a representative sample of the Magnolia's customers appear as follows:
|
Willows Pharmacy
|
Swedish Hospital Pharmacy
|
Georgetown Clinic Pharmacy
|
Kristen Pharmacy
|
|
Total revenues
|
$344,880
|
$1,995,200
|
$1,414,170
|
$164,800
|
|
Cost of drugs sold
|
$263,340
|
$1,446,520
|
$1,047,660
|
$120,960
|
|
Customer service costs
|
$ 12,240
|
$ 62,640
|
$ 39,800
|
$ 4,500
|
|
Sales representative time
|
180
|
1,160
|
570
|
90
|
Customer service costs include all of the costs-other than the costs of the drugs themselves-that could be avoided by dropping the customer. These costs include the hourly wages of the sales representatives, their sales commissions, the mileage related costs of the customer representatives'' company provided vehicles and so on.
Required:
1. Rank the four customers in terms of their profitability; (Hint: calculate a profitability index based on the constraint involving sales representative's time and the incremental profit of the preceding four pharmacies).
2. Sales representatives are currently paid $25 per hour plus a commission of one per cent of sales revenues. If these preceding four pharmacies are indeed representative of Magnolia's customers, could the Company afford to pay its sales representatives more in order to attract and retain sales representatives?