National Communication Manufacturing (NCM) is a Kansas City-based manufacturer of GPS systems. In recent years, these devices have exploded in popularity as prices dropped to affordable levels. This is due to advancing technology and low-cost production outside the United States. Although NCM continues to manufacture a few of its own products, most production is outsourced to manufacturers in South Korea.

A key element in the NCM success story is the growth of dominant retail chains and club wholesalers such as Wal-Mart, Target, Best Buy, Sam's Club, and Costco. NCM uses major account teams to serve these and other large discounters, which accounts for 75 percent of NCM annual sales. The remaining 25 percent comes from smaller retail accounts that buy either from NCM's manufacture representative or directly from NCM's Web site.

Current Situation

Ann Culligan, NCM's national sales manager, is working on two major issues. First, she is fighting to keep NCM's direct cost of sales at 5 percent of total sales. The 5 percent target has been part of NCM's sales culture for more than 30 years, reflecting the belief that a low-cost operation translates into a more competitive position in the marketplace. Over the past few years, Ann's sales organization has reduced cost in various ways.

E-mail and texting, instead of long-distance phone calls, staying in budget motels, cutting overnight travel to a minimum were just a few of the measures taken to stay within the 5 percent guideline. In spite of Ann's diligent efforts, cost of sales was running at 7 percent for the major account team. Commissions remained fixed for several years at 4.5 percent.

The second issue currently demanding Ann's attention ironically stemmed from a NCM cost-cutting measure that was implemented one year ago. In an attempt to reduce manufacturer's representative costs, NCM has established a Web site as an alternative channel for smaller retailer customers. The reps have protested vehemently, but NCM insisted that selling on the Internet was an essential part of their selling strategy. Not all of NCM's products were available on the Web, a fact that did little to make happy the disgruntled representatives. Cost of sales of the Web site was a modest 2 percent of sales. Sales volume on the Web amounted to 3 percent of NCM's total sales during the past year, but current projections were for volume to increase to 5 percent of total sales this year and perhaps as much as 10 percent the following year. Some of the stronger reps were threatening to leave NCM in favor of the major competitor, which offered its reps a partial commission on all Web sales.

As Ann thought about the situation, she began to wonder if she could hit the 5 percent cost of sales target this year. Ninety percent of the cost of her major account teams was compensation-related salaries and incentive pay. Good salespeople were hard to find, and Ann had found that NCM had to pay the going rate or else NCM's top performers would look for new opportunities. Ann still regretted the recent loss of Barb Sherman, a major account manager, to a competitor who offered a better pay percentage. Sales volume at Sherman's former account had dropped 15 percent after her departure.

Ann didn't like to think about changing her major account strategy, but she wondered if she could move some of her large retail chain accounts to the manufacturers' rep organization. After all, representative commissions ran only 4.5 percent, and essentially there were no other direct sales costs associated with the reps. As she headed home after a long day at the office, Ann thought that the next morning she would try to build a case with the CEO of NCM to revise the 5 percent cost-of-sales target to reflect reality. If the answer is no, Ann thought she just might explore the idea of consolidating her major account teams and handing one selected large retail account to some of the more capable representative firms. She hated the idea of laying people off, but she told herself it may be necessary in this case.

Question

How would you assess NCM's alternative sales channel on the Web? Can you recommend any changes to minimize conflict with the independent reps?