CASE ANALYSIS:

The Case of the Constant Customers

This case is written by Donald Shriver Jr & Ralph Robinson Jr. Published in Harvard Business Review in 1963.

The scene is the conference room in the executive offices of Heyward Mills, a relatively small 25,000-spindle-cotton-combed yarn plant in North Carolina. The time is the morning of a day in the near past. Like many of the 100-odd cotton mills that dot the landscape in that part of the United States, Heyward Mills is controlled by a family. The company, whose current weekly production is 125,000 pounds of knitting yarn, has committed itself to a 20% expansion because of greater demand. Shipment of the increased output will start in seven months.

Three men enter the room. The first, who sits down at the head of the table, is Richard Heyward, age 53, the son of the founder and president and chief executive officer of the company. The other two men seat themselves on either side of him. One is Frank Melton, 32, Heywards son-in-law and vice president in charge of sales; and the other, not a member of the family, is Lucius McGrath, 61, vice president in charge of manufacturing and a veteran of 39 years with the company.

Heyward: You fellows know what were here to consider. Frank has been keeping us informed about the higher demand and price of yarn. We have to cover our present customers for the third and fourth quarters, but were going to have another 25,000 pounds of production available around the first September. Well have to decide who well sell that extra yarn to, as well as the prices well set.

Melton (learning forward): Id rephrase the question to make the answer simpler: Who will we not sell that extra yarn to? For a year now Ive been complaining about a half dozen customers who are more trouble than profit to us. We couldnt ask for a better time to upgrade our list by cutting them off. Then we could take on those big outfits who are crying for yarn from us.

McGrath (scratching an ear): Not a bad idea. Take those Evernit people. Theyre a nightmare for production. They take yarn for 35 weeks out of the year and then nothing for the other 17 weeks. But they will expect us to cover their requirements, whether they take the yarn or not. How can you plan your production in a situation like that? And we have several other outer-wear customers that do the same thing.

Melton: Evernits always insisting we give them several days option on price and poundage while they shop the entire market. And when business slows down for them, they stop shipments and take in lower priced yarn from other suppliers. Remember when yarn dropped two cents a pound? They stopped shipment on all their contracts and bought at depressed prices from a completely new set of suppliers.

Heyward: They did follow through on their contracts, didnt they?

Melton: Yes, but not until the market price went back up to the previous level.

Heyward: Well, as you know, thats not my style of doing business; but if you approached them on the subject, I bet theyd say, It is a free market, isnt it?.

Melton: Sure, and thats exactly what Im prepared to tell them when I say no on a contract with them for next year. For the first time, doors Ive been knocking on for years are opening. A number of substantial firms are willing to pay a premium price to get a position with us. Theyre consistent users of yarn-just the kind of people we want. With the service we offer, we can keep them on the books even when the boom is off the market. So, lets drop the dead wood, the confirmed price hagglers, and take on somebody we can trust. 2

Heyward (with a sigh): Now thats where you begin to worry me. Trust, loyalty. Whos to say that we shouldnt show a little of that even to an outfit like Evernit?

McGrath: Im one to say it. Weve shown more than our share of loyalty to them over the years. Now its time they learned a lesson. The market is free to punish as well as reward, isnt it?

Heyward: Yes, and with Evernit you may have a point. But while were on the subject of upgrading the customer list, what other companies did you have in mind for giving the axe, Frank?

Melton (waving his hand): Oh, Fiberlon, Southern Yarn, McLeod Industries, and the like. They may not be as bad as Evernit, but they all have the same policies.

Heyward: Why policies, Frank? Better to say they all have the same problems. I know those firms from way back. In the thirties we were all small-scale producers, and we had an informal understanding that wed be flexible about occasionally cutting off contract shipments on the one hand and occasionally inventorying un-needed production on the other. Thats the only way we survived.

McGrath(earnestly): Dick, I know how you feel about our old friends, but times have changed. The competition is tighter than ever, and the markets dominated by the big companies. If we dont take every chance to establish ourselves with them, well go under.

Heyward: Thats a matter of judgment. I expect the small yarn consumers to be around for quite a while. Right now they have 75% of our business. Even with their vulnerability to market fluctuations, many of them are now expanding. And they expect us to increase shipments to them in the same production as their rate of expansion. Besides, if we dont show some consistent service to these customers, when the Vietnam war eases off well be the first supplier they drop.

Melton (showing signs of impatience): All right, give them some fraction of what they want to buy, and then sell the rest to my hot prospects. At least well be keeping their names on the books.

McGrath: Or tell them that military priorities for yarn prevent us from offering them as much as theyd like.

Heyward (brightening): Youve got something there. We have it on good authority that we may get directives from D.O.D.( Department of defense ) that will force us to cut down on civilian customers. But even then well have the same basic problem. Whom will we penalize the most and whom will we hurt the least when we cut back or expand deliveries?

Melton (looking up at the ceiling): Just imagine: military requirements forcing a shortage of yarn for civilian knitwear, buyers willing to pay a ten-cent premium just to keep their mills running, and us with an airtight excuse not to ship to some of our customers. We could sell to the highest bidder and make a killing.

Heyward(jabbing a finger at Melton): Which is exactly Evernits point of view when they do all that shopping around! How can you complain of their policies if you plan to do the same kind of thing?

Melton: Its not a fair comparison, Dick, especially if were trying to decide what to do with our expected surplus. In spite of our old customers expansion plans, what obligation do we have to them beyond our present level of service? (Vehemently.) Our new production is ours to dispose of to our own benefit, not theirs. 3

McGrath(Smiling): Before you two in-laws come to blows, would you permit me to suggest what were trying to decide? I would agree with Frank that the 25,000 pounds is the proper subject of decision. Then, the really touchy part is how we rank the claims on that extra production. First our old and fickle customers; second, our old and faithful customers, third, our top-drawer prospects and fourth, the government. Now, how do we shuffle that list to keep ourselves ethical and profitable?

Melton: Thats well put. But why no cut the list to three to reduce the agony? The government is going to force us to supply its needs for fighting the war. Theres hardly any decision to make there. Then, what about the dog customers? Im for cutting them off our list, period. But for sure they dont have any claim on our new surplus.

Heyward(frowns): That would be fine, Frank if we could just agree on definition for dogs. As Ive said, what looks like a dog to you looks like a small company with problems to me. I think its an open question whether even Evernit might not be a candidate for a little generosity from us.

Melton: If you look at Evernits published reports for last year, youll find that their net profits increased 10%-partly at our expense.

Heyward: But Southern Yarn, to take another case, laid off workers last month and will lay off some more if we cant supply them with yarn during the last two quarters. Dont forget, Frank, you are always looking at another company through its purchasing department. A few sharp dealers there, and you get a destroyed image of the whole company.

McGrath (breaks in): Well, its all very charitable to be concerned about Southern Yarns laid-off workers. But what about our own workers? Maybe its unjust to penalize another company just for the antics of its purchasing department. But if we dont penalize them, we may pass up a chance to upgrade our own work force. Thats the best reason I know for giving lots of attention to Franks blue-chip prospects.

Melton: Exactly! Theyre our source of higher wages, higher dividends, higher bonuses, higher everything else. Isnt that what you fellows tried to drill into my head when you trained me for this job? In this business, you said, stop growing and you stop, period. Well the big outfits are our growth potential. And wed be doing our own workers, stockholders, and management an injustice if we didnt take advantage of this sellers market right up to the limit.

Heyward: Limit? What sort of limit?

Melton: The limit of the market itself-the point where things turn down again.

Heyward: Would you allow the possibility of another sort of limit imposed on us by the one group among Lucius five that you havent mentioned yet?

Melton: You mean the old faithfuls?

Heyward (gazing out the window): Yes, Ill grant you part of your case against Evernit. And Ill grant the importance of looking our for our own growth through expanded business with premium customers. But the test of our sense of business responsibility comes in what we do for or against the small companies that have stuck by us at-least as well as we have stuck by them. (turning to Melton) You argue that the big companies can reward us more in the future than anyone else. But I say that these small companies have already rewarded us more in the past than anyone else, and they deserve some consideration from us now that we dont need them quite as much as we used to.

Melton: But surely you dont favor writing off my fat prospects all in the name of loyalty. 4

Heyward: No. but I dont favor writing off the small prospects all in the name of our future growth, either Weve got to decide if we still have the loyalty weve been asking for from our customers large and small.

McGrath (glancing at his watch): Weve got to decide, all right. Would it be overhasty to ask how you gentleman would recommend we decide this matter? Ive got an appointment with the first-shift foreman at ten.

Heyward (also looking at his watch): Fair enough. Taking everything into consideration, Ill settle for a compromise: offer 15,000 to just about our whole present customer list, according to the percentages of their orders with us over the past year, and give Frank the remaining 10,000 to attract new business.

Melton: Now, thats a pretty tepid compromise, Mr. President (Gesturing toward Heyward) unless you give me at least 20,000 to play with, we cant expect much to happen. Ill give you 5,000 for your old faithfuls. Thats generous isnt it?

Heyward (looking at McGrath): And how do you vote, Mr. Vice President?

McGrath(Smiling): I pass, sir, Its ten oclock, and Ive got to get back to producing the stuff so that you guys can decide what to do with it. You know, Id rather run those frames for eight hours than spend one hour here weighing things that cant be weighed.

Melton (smiling, too): I think hes tried of making decisions, Dick!

McGrath: You bet, youngsters! Someday you will be, too.

Heyward: Well, lets be chicken and postpone the final decision until next Tuesday. Meantime, Frank, send me some data on the companies you want to sack and the ones you want to recruit.

Melton: May I send carbon copies to Lucius and take him out to launch on Monday?

Heyward (rising from his chair): Yep, just so you remember that I intend to say around here Tuesday to keep you ethical.

Melton (clapping Heyward on the Shoulder): And I intend to stay around to keep you profitable!

The three men laugh and walk out the door together.

Q. What will you decide in this situation if you were Heyward ???