Akash Bansal OM-II Section - A Verklar Austria

Answer 1: The main reasons behind the drop in Verklars market share in Austria from 85% to approximately 75% are as follows:

1) More aggressive strategies from competitors.

As per the case, competitors have started going after contractors and smaller and mid-tier dealers leaving Verklar- particularly focusing on major housing co-operatives and industrial construction companies- where repeat orders are likely to be high. They have managed to offer customized discounts based on order size and willingness to pick up from warehouse, which are more flexible in nature than Verklars existing discount scheme for its customers. In particular, Karlis has emerged as the 2nd largest player in the market by focusing on low prices as a differentiator, and gives bulk quantity orders a 10% higher discount than that offered by Verklar- thus weaning away the price conscious segment of the market.

2) Commoditization of Brand

As Verklar has occupied most of the market share (85%) in roof windows in the Austrian market for a long period of time, most end users now associate the Verklar brand name generically for the entire roof window segment. Thus, Verklar loses out as sometimes, dealers might supply roof windows from other companies, passing them off as Verklar windows. In addition, Verklars primary focus on just business-to-business market and maintaining a very small sales staff has potentially led to lower brand recall among the end customer.

3) Issues with the current discount system

The existing discount system is disproportionally skewed towards large dealers- as they are the only segment which can set aside the adequate capital to purchase in bulk and handle

large numbers of inventory for a long period of time. This is because in the current deal offered to dealers, several slow-moving items are also sold alongside more popular items, whose inventory builds up over time.The dealers would ideally like to maintain a less diverse product line, which conflicts with Verklars strategy of being a quality provider of providing diverse solutions. In addition, overstock is also expensive for the dealers due to the high maintenance, transportation and handling costs inherent in such a fragile product like roof windows.

There is lesser incentive for smaller dealers and window-fitters to purchase directly from the Verklar factory, as delivery from the Verklar factory can take as long as 2 weeks. Thus, medium and smaller size dealers are purchasing from larger Verklar dealers, rather than Verklar directly. For Verklar, this means lesser revenue per unit window sold than in the past, as they are now selling windows at a higher discount of 31% to the large dealers, who are in turn passing off a part of this discount to downstream retailers. A few number of dealers have switched to competitor products rather than deal with Verklars policies. In addition, a few others place an order only after pooling multiple orders, thus indirectly leading to a negative impression of Verklars tardiness in the minds of the end consumer, thus impacting future sales. Aslo, since large dealers can sell to both end users as well as small dealers, small dealers face a profit squeeze while having to compete against large dealers in selling to window fitters.

Additionally, this concentrates buying power with the few remaining large dealers, which enables them to negotiate aggressively on prices, often ending up exporting products from other countries if the price becomes cheaper.

Answer 2

Currently the channel flow is a mix of hierarchical and direct flows. The bulk of the sales are to large dealers- who in turn act as both wholesalers and retailers. They act as wholesalers by selling Verklar products to medium and smaller size dealers, who in turn sell these to the window fitters. They also act as retailers by selling to window fitters directly. In addition, around 20% of Verklar sales come directly from building contractors on large scale construction projects, where the order specifications are typically made by the architect and window fitters.

After the quote system is implemented, the channel flows are expected to be less hierarchical and made more directly with Verklar. Verklar plans to attract small and medium size dealers to engage directly with its centralized warehousing and ordering system, thus aiming to eliminate their dependency on the large scale dealers. Also, this will also increase the sheer number of channel partners, allowing for more diverse and widespread channel flow. In addition, they plan to strongly attract infrequent buyers like building contractors by giving them the option of quantity discounts as well. They also plan on increasing the speed of channel flows, by faster shipping from the centralized warehouse, as well as increasing the volume of the flow, by stimulating increasing demand from the existing channels.

Answer 3: The new quota system will be more efficient as it will firstly reduce costs of warehousing by economies of scale. By aggregating inventory at a central warehouse, it can better prevent stockouts and overstocks in the entire supply chain, by pooling in orders from diverse segements. In addition, this will lead to lower handling and distribution costs throughout the system, as orders will be shipped only on demand arising from the end user, and not from intermediaries. While labor costs and promotional costs are expected to increase in the short run, this will have a positive impact on building the Verklar brand and securing more buy-in from end consumers in the long run.

The new quota system will be effective because of the following reasons

Because of better margins, there will be greater incentives for dealers of all sizes to carry and recommend Verklar products to end consumers, rather than the current inadvertent policy of creating a negative brand image of Verklar

Greater consumer satisfaction because of lower costs, better promotion and more emphasis on pre-and after sales services.

More accurate control over inventory will help it assess demand for different SKUs in its product line. Thus, it can better identify if some products are no longer viable to carry.

For infrequent users, the older system of quantity discounts is still allowed as an option, giving consumers greater flexibility to choose the best value proposition.

Answer 4: The new quota system provides an innovative solution for Verklar. However, there are several potential problems that need to be addressed.

a) Will be difficult to secure buy-in for this program from large dealers, as they stand to lose a large section of their volume sales from the smaller dealers moving directly to Verklar. In addition, they are skeptical about Verklars expertise in managing large amounts of inventory and delivering on time. Thus, Verklar should focus on educating large dealers about the improved profit margins per window under the new scheme, as they no longer have to deal with high carrying costs, and will make a higher aggregate profit.

b) Due to greater variability of demand, now that it has to deal directly with more smaller orders, Verklar will find demand forecasting difficult

c) Verklar will also have to invest in a sophisticated inventory management system, now that all of its regional warehouses will close down and move to a larger central warehouse, with guaranteed faster shipping time.

d) Might also face HR problems with hiring a large number of new staff so quickly, so will have to invest in team-building activities and goal clarity programs.

e) It will still be difficult to match competitor discounts on bulk orders (like Karlis)should emphasize superior quality instead

f) Higher initial fixed costs might impact cash flows and decrease flexibility of operations

g) There wont be enough of a price discount per window for smaller dealers- Verklars can address this by emphasizing the larger number of volumes they can now sell- thus increasing aggregate profit.

h) Verklar is assuming aggregate demand for roof windows in Austria will remain constant. However, it could also decline significantly if construction industry declines, as it typically does disproportionately in recessionary periods. Thus, it need to also study macroeconomic conditions to estimate their impact on potential demand, which might offset the positive effects from all these new policies.