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    Warner Lambert

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    saurabhsaurs
    Warner-Lambert is reviewing its exclusive distribution agreement with Coast Distributors due to Coast's deteriorating financial position. Coast has $1.2 million in outstanding payables to Warner-Lambert but its own financial statements show it to be unprofitable. Options include restructuring credit terms, suspending credit, or finding new distributors. Analysis finds Coast is using Warner-Lambert payments to fund other payables and inventory. The recommendation is to continue the relationship but decrease Coast's credit limit to $200,000, tighten payment terms, and monitor Coast's finances closely going forward. This maintains the distribution relationship while mitigating financial risk for Warner-Lambert.

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    Warner Lambert

    Uploaded by

    saurabhsaurs
    127 views21 pages
    Warner-Lambert is reviewing its exclusive distribution agreement with Coast Distributors due to Coast's deteriorating financial position. Coast has $1.2 million in outstanding payables to Warner-Lambert but its own financial statements show it to be unprofitable. Options include restructuring credit terms, suspending credit, or finding new distributors. Analysis finds Coast is using Warner-Lambert payments to fund other payables and inventory. The recommendation is to continue the relationship but decrease Coast's credit limit to $200,000, tighten payment terms, and monitor Coast's finances closely going forward. This maintains the distribution relationship while mitigating financial risk for Warner-Lambert.

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    Warner lambert

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    Warner-Lambert is reviewing its exclusive distribution agreement with Coast Distributors due to Coast's deteriorating financial position. Coast has $1.2 million in outstanding payables to Warner-Lambert but its own financial statements show it to be unprofitable. Options include restructuring credit terms, suspending credit, or finding new distributors. Analysis finds Coast is using Warner-Lambert payments to fund other payables and inventory. The recommendation is to continue the relationship but decrease Coast's credit limit to $200,000, tighten payment terms, and monitor Coast's finances closely going forward. This maintains the distribution relationship while mitigating financial risk for Warner-Lambert.

    Copyright:

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    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    127 views21 pages

    Warner Lambert

    Uploaded by

    saurabhsaurs
    Warner-Lambert is reviewing its exclusive distribution agreement with Coast Distributors due to Coast's deteriorating financial position. Coast has $1.2 million in outstanding payables to Warner-Lambert but its own financial statements show it to be unprofitable. Options include restructuring credit terms, suspending credit, or finding new distributors. Analysis finds Coast is using Warner-Lambert payments to fund other payables and inventory. The recommendation is to continue the relationship but decrease Coast's credit limit to $200,000, tighten payment terms, and monitor Coast's finances closely going forward. This maintains the distribution relationship while mitigating financial risk for Warner-Lambert.

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    of 21

    Warner-Lambert

    Group no 13

    Case facts
    Warner Lambert: Consumer and health care products Sales: $ 190 million Five divisions: Adams Brands, ParkeDavis, Personal products, Diagnostics, Desert

    Introduction
    Coast distributors: Exclusive wholesale distributors for Vancouver islands Coast had distributed Warner Lambert products for 56 years Company acted for over 50 firms Sales $ 11 million Coast acquired by David Campbell ltd in 1978

    Existing Agreement
    Exclusive agreement signed in 1966 All divisions sold to Coast at list price less any specific discounts Warner Lambert paid 10% of the best wholesale price Quarterly payments

    Credit policy

    Adams and Parke-Davis Divisions


    May 1- Oct 31 Nov 1- Apr 30 60 days 120 days 1% 75 days; net 120 1% 135 days; net 180

    Personal Product Divisions


    May 1- Oct 31 Nov 1 Apr 30

    Credit limit of $1.2 million

    Dependence of WL on Coast
    Coast was exclusive distributor of WL for Vancouver Islands Excellent reputation among customers Good customer base Largest distributor in Vancouver islands

    Trouble in Paradise
    Refusal to give latest financial statement 125 Day sales outstanding by Coast against 59 for other WL distributors

    Options
    Restructure present credit arrangements Suspend all credit to Coast and attempt to collect the outstanding balance Appointing other distributors Setting up own distribution network

    Problem definition

    Need to review credit line and payment terms

    Analysis of financials of Coast


    The company is in red at present The interest burden is very high

    Prior to acquisition interest burden was 70000 Increased to 560000

    Increase in interest has led to erosion of profits Decrease in working capital

    Analysis of financials of Coast


    Operating profit has been restored to prior levels (4%) Gross profit has declined marginally (1%) New investment in PPE and land Buyback of class B Preference shares in 1981

    Analysis of financials of Coast

    Sales performance not affected


    2.3 million

    Decrease in interest burden by 10%


    $555000 to $505000

    Findings from Coast financials

    Total inventory of Coast as on 31 Dec 1981


    2136000

    WL inventory with Coast


    300000

    Others inventory
    1836000

    Findings from Coast financials

    Payables of Coast as on 31 Dec 1981


    1912000

    WL payables by Coast
    744000

    Others payable
    1168000

    Evaluation of options

    Option 1:
    Restructuring of credit limit from 1.2 million to 0.2 million
    Savings in interest = 1000 * 15/100 = 0.150 Will eliminate the time and cost required to set up alternate distribution channels Better supervision of products and funds Increase in shipment cost

    Evaluation of options

    Option 2:
    Suspend all credit to coast and set up alternative distribution channel
    Costs involved: Uncertainty regarding collection of outstanding 1.2 million Decrease in sales by 10% will decrease profit by 90000 annually Increase in shipment cost by: 20000 High cost of setting up own distribution channel

    Evaluation of options

    Option 3:
    Leave the account as it is
    Cost of carrying excess cost receivables at 15% per annum : 58000 Higher degree of risk involved in collection of 1.2 million as Coast has negative networth

    WL money used for WCM


    Others payable: 1168000 as against inventory of 1836000 WL payable 744000 as against 300000 WL payables used to pay others % of WL products in Coast sales: 25

    Recommendations

    Continue the operations with Coast Distributors


    Decrease the credit limit from 1.2 million to 0.2 million (Savings 150000) Revise the DSO of Adams from 129 to 60 days (Savings 15000) Subsequently DSO of Personal products from 120 to 75 days (Savings 1000)

    Greater control of WL in Coast for Distribution of its products Continuous evaluation of Coast financials

    Implications
    Eliminate the time and cost required to set up alternate distribution channel Better understanding of distribution network Decrease in risk of bad debt Greater control over cash and inventory Relationship with Coast maintained

    Thank You

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