Hoffman Discount Drugs Incorporated

Background

Hoffman Discount Drugs Incorporated (HDDI) is a large US chain of retail drug stores. The stores are dispersed throughout the country with over 400 locations in the west and over 180 stores in the southwestern region. The average store serves approximately 800,000 customers per year, with annual sales of $10 million and net income of $500,000. Every HDDI store holds a wide array of products including pharmacy, liquor and general merchandise. Although the company is experiencing its highest sales level in its history, increased competition has caused return on sales to be only 5 percent.

Although all stores have the same basic layout, in which inventory is shipped from one of three regional warehouses and a minimum level of pharmacy-related inventory must be held, the company operates in a primarily decentralized manner. Every store manager has the autonomy to adapt their product offerings to their local market and is given the freedom to make local advertisement decisions.

Store-level managers receive a salary that is below that of managers in comparable firms; however, the company aims to compensate for this fact by providing bonus opportunities that are based on predetermined sales and net income objectives for each store. If sales and net income objectives are achieved, managers at the store each receive a certain sharing percentage determined by the level of responsibility associated with their position. The majority of the bonus payment (75%) is earned by achieving the objective set for net income, while the remainder (25%) is achieved by successfully meeting the revenue objective. Furthermore, Bonuses are adjusted depending on whether a positive or negative variance is realized. If annual sales are less than 90% of budget, no sale bonus is earned regardless of net income and the maximum total bonus payable is 500% of the pre-set bonus objective.

Despite HDDI’s effort to offer a competitive bonus package, the company is concerned that their managers will start switching to other companies due to the recent decrease in profit margins and unadjusted losses that occur due to uncontrollable events that affect managers’ performance evaluation. As HDDI is currently struggling to attain high profit levels, Matt LeGeyt, the president of the company, hopes to implement a new strategy to reach the company objectives. He wants to improve operations at the store level through more effective local marketing, better customer service and more efficient operations. With these goals in mind, LeGeyt believes that there will be increased customer traffic in stores, resulting in higher sales and profit levels.

Objective

The primary objective of the company is to be profitable, as HDDI’s owners want to see positive returns on their investment. Managers want to attain high profit levels as well as to increase the likelihood that they will