Rci Case Analysis

RCI Master Distributor guidance, 12/1

1. How should Danny Schwartz respond to Component Manufacturing? 

-create an alternate supplier, like RCI once did with Component Manufacturing. This would take 6-12 months. Have enough contactors in stock to meet needs for next 6 months.

2.  To Masato's demands? 

         - give up exclusivity & co exist at lower profit margin. Seems like the lowest-risk option.

3.  What does the channel model look like? Costs? Prices? Markups? Conflicts?  Value added?

4.  More general, what's the strategic thrust for RCI as it moves into the future?

• Integrate downstream?  (buy wholesaler)
• Integrate upstream?  (buy manufacturer)
• Merge horizontally?
• Stay the course and find a niche?
• Get out of the business?

RCI CASE

Key Players:        Danny Schwartz – 2nd gen CEO of RCI; son of Mark Schwartz

                Mark Schwartz – founder of RCI; very innovative person        

Arnold Levy – CEO of Component Manuf. Corp (removing RCI’s distribution exclusivity)

RCI –         master distributor for motor repair parts, & later for contactors (the on & off switches) for AC units & fridges. At beginning of case, were Component Manuf. Corp’s exclusive distributor. Now Component Manuf Corp wants to sell directly to wholesalers & repair shops, removing RCI’s exclusivity

Component Manufacturing Corp -  manuf. of motors, contactors, relays, starters, etc. In business thanks to Mark Schwartz’ support for Levy’s start-up back in the day.

Masato – Japanese co to which GE sold its leak detector business in 1990s. Masato invested heavily to increase & improve. In doing so, price of detectors doubled from $125 to $250/unit.

Introductory Situation:        Arnold Levy calls Danny Schwartz to tell him he (the manufacturer) is merging with Arrow-Hart, another manufacturer, thus altering distribution arrangements so that RCI would no longer be an exclusive distributor for Component Manufacturing Corp. Arrow Hart already has its own distributors; Levy is planning to use them.

        Schwartz’ opinion: “despite our best efforts to make suppliers aware of the value distributors add, suppliers continue to think they can increase profits by taking on product distribution themselves” (pg. 2, top paragraph).

RCI’s Current Operations

• 6,000 products
• 1992 revenues: $35.8 million with operating profits of $3 million
• Distributor for General Electric, Texas Instruments, etc.
• Typically sells to AC & fridge wholesalers who in turn sell to contractors and repair houses = the customer

RCI Sales Process

• Uses network of independent manufacturer’s reps to sell to electrical wholesalers
• 14 rep companies
• 45 salespeople in total
• Average salesman commission: 3.5%
• 5 warehouses; all electronically linked & operated on real-time inventory basis
• Order fill rate: 92%
• Avg. backorder fulfillment time: 3 days

RCI History

        Mark Schwartz – the Entrepreneur

• Founded motor repair business in 1946, eventually secured GE franchise for parts
• Created service revolution: one of the first to provide customers with fully working motor in exchange for estimated repair fee when customers brought motors for repair

• Customer did not have long repair delays
• Main business until 1962 when GE developed new contactors (on&off switches)
• Schwartz convinced GE to give him exclusive distribution for contactors
• Much of RCI’s success due to innovations Mark Schwartz implemented

• All parts individually repackaged under RCI umbrella
• Product innovations: worked with GE’s engineers to design; was later able to distribute these new products exclusively

Danny Schwartz – Accidental Ascension

• Graduated in Bio & Chem in 1973, age 22. Came to work for dad @ family business b/c needed the money and b/c business was short-staffed during summer.
• Dad (Mark) said “here’s your desk, find out what people do”
• Older bro died unexpectedly 1974; Danny began to take more responsibility of business
• Dad taught him to rely on supplier relationships. Build trust, do not have contracts. Rely on verbal trust

GE & RCI: The Turbulent Years

        Round 1 – GE Appliance Control: Exclusive no Longer (1976)

• Tom Brown, new marketing manager of GE Appliance Controls told RCI that it would no longer be exclusive distributor for cold controls (fridge thermostats)

• This was first time RCI had lost exclusivity on GE product

• GE’s decision proved to be good for them; found distributor who sold 10 times more volume than RCI. Led GE to question RCI’s exclusivity on other products
• GE increasingly concerned over future of RCI; Mark nearing retirement, company being directed by Danny (age 25) with limited experience.

• GE approached different distributors with full range of products
• 1 by 1, RCI lost exclusivity on all products

Round 2 – GE Motors: The Distribution Study (late 1970s)