Om Scott and Sons Company

O.M SCOTT AND SONS

1 Case Background

O.M. Scott & Sons – the early years The Scotts Company was founded in 1868 by the Civil War veteran Orlando McLean Scott, who moved to Marysville, Ohio in 1866. Scott worked at a seed elevator for several years before purchasing his own business, a hardware shop, in 1870.

1.1 History

Figure 1. History Flow

1.1 Products and Magazine

Figure 2. Grass Seed Product

Figure 3. Scotts Lawn

2 Statement of the Problem

How can O.M. Scott & Sons improve its collection period and hit the targeted growth of 25% on sales each year?

3 Objectives

1. To analyze Scott's financial condition and performance given its current policies.

2. To outline changes that should be made to Scott's payment term policies

3. To establish a wider market reach

4 SWOT Analysis

Table 1. SWOT Matrix

STRENGTHS WEAKNESSES

1. Pioneer in the industry, with experience since 1868.

2. Strong Research and Development Team

a. Processed the United States' first clean, weed-free grass seed.

b. Innovations in product improvement.

3. Offers a wide array of products.

4. Provides complete garden and lawn programs.

5. Aggressive in terms of advertising its products.

1. Was not able to develop and tap the potential inherent in the national lawn care market.

2. Customers can't buy its products easily, where and when they expected to find them.

3. Poor distribution method.

4. Lack of adequate dealers for the company's products.

5. Inability of dealers to increase inventory products because of dealers' small size and often weak working capital position.

6. Perceived ineffective way of marketing the products.

OPPORTUNITIES THREATS

1. Increased Sales by offering better incentives to retailers.

2. Push for greater market penetration. 1. Sales are subject to seasons.

2. Retailers selling at wholesale to discounters.

3. Delayed payments by Retailers.

4. Chemical firms that are expected to compete with Scott.

5 Areas for Consideration

A. With Respect to Retailers

1. Because of the seasonal nature of the business and the fact that most dealers were thinly capitalized, payment was not often received by Scott until the merchandise involved was sold.

2. No right to reclaim goods when Dealers start selling at wholesale to a discounter.

B. Collection Systems Employed

1. Seasonal Datings System

• Collection scheme:

a. Winter and Early Spring Shipments – due April and May (depending on geographical area)

b. Summer Shipments – due October and November

• To enable and encourage as many dealers as possible to be well stocked in advance of seasonal sale peaks

• 0.6% a month discount offered on payments made in advance of seasonal dates

• Disadvantages:

a. Scott was only paid when inventory was actually sold by retailers.

b. Retailers were continually asking for credit extensions, irrespective of terms of sale.

c. Scott retained little or no effected security interest in the goods involved.

2. Trust Receipt Plan

• 3 important aspects:

a. Immediate transfer to dealer of title to any Scott products shipped in response to a dealer order.

b. Retention of a security interest by Scott in merchandise so shipped until sold by the dealer acting in his capacity as a retailer.

c. Segregation of a sufficient proportion of the funds received from such sales to provide for payment to Scott as billed.

C. Market

1. Scott had shifted its marketing emphasis from selling individual products to one of selling complete lawn and garden programs.

2. Scott hasn't penetrated deeper yet the market. If this will be done, they can outgrow the potential competitors

D. Manpower

1. Scott had grown their sales force from 6 to 150.

2. The salesmen also act as the company's trainers to the dealers on how to do better in selling Scott's products.

E. The dealers were mainly department stores and small hardware stores and garden supply centers.

F. Several nationally known chemical firms had either begun or were expected to begin competing against Scott in certain lines.

G. 25% growth increase in sales and profits is the known reasonable benchmark for Scott.

6 Decision Options

As can be seen in the Financial Statements for the years 1957 to 1961, the following are areas that need to be addressed:

1. As Sales have increased, there has been significant increase in Accounts Receivable. Per year, the Accounts Receivable accounts are greater than that of Cash.

2. The Collection Period for each year is increasing as Sales increase. The Collection Periods per fiscal year are:

Table 2. Collection Period per Year

YEAR COLLECTION PERIOD

(days)

1957 52

1958 74

1959 70

1960 150

1961 182

Decision Option #1:

FLEXIBILITY OPTIONS: Provide flexible payment scheme for dealers. Scott had extended support in dealers by means of financing to increase inventory, generous seasonal datings, etc. This in return, jeopardize the company's growth in terms of sales and turnover. The flexibility option in payment scheme will protect the company's interest while supporting dealers at the same time.

• Sales projected to 25% growth from 1961 to 1962.

• Interest expense of 1961 was maintained for the 1962 projection because more debt will not be taken on to finance the Retailer's cost of selling the products.

• The 1962 Cost of Products Sold, General and Administrative, Research and Development Expenses as well as Depreciation and Amortization have been projected using the linear regression model.

Figure 4. Projections

Figure 5.Income Statement Projection

Advantage:

? Minimal risk of low sales returns

? Win-win for both the company and dealers

? Faster turnover for Scott

Disadvantage:

? Potential decline in dealer interest and potential shifting to other competitors who can provide a payment scheme that has a long payment terms

?

Decision Option #2:

CREATING DEMAND: FROM