Fairness to both buyer and seller the keynote

What policies must the far-sighted manufacturer or distributor formulate to govern his relations with his dealers? At least seven questions of policy usually arise which must be considered and about which some comprehensive decision must be reached. These policies involve: returned goods, claims and allowances, cancellations, sales on approval, sales on consignment, credits, and collections.

The manufacturer or distributor cannot expect to formulate policies by which every request of the dealer will be granted. He can decide upon policies, however, that assure fair treatment to both parties in a selling transaction and then make sure that his sales force works in strict accordance with these policies.

Returned-goods policies

Often the volume of goods returned to manufacturers or distributors amounts to about three to six per cent of total sales. In department stores it sometimes runs as high as 20 per cent.

Policies covering the practice of returning goods vary. Some companies allow dealers almost unlimited freedom in returning goods (except, of course, where the return cannot be allowed for hygienic reasons) . Others allow the dealer to make no returns whatsoever without the permission of the seller, such permission being granted only when it can be proved that the seller has made a mistake. The seller following such a policy usually limits his responsibility to the filling of orders exactly as specified and to insuring safe shipment of goods.

An intermediate but somewhat burdensome practice is to consider each request to return goods on its individual merits. Companies following this practice usually take into account factors other than sellers' mistakes. Allowance may be made even for poor judgment in ordering on the part of the dealer. Finally, certain manufacturers and distributors have adopted the rule of making a service charge of from five to ten per cent on the amount involved in the return of the goods. They try to make as few exceptions as possible to this rule.

Strict returned-goods policy compels sounder selling

The adoption of a definite and strict returned-goods policy is considered commendable if for no other reason than that it compels sounder selling. It demands a much more careful supervision of the sales force. The return of goods due to a mistake or misrepresentation by the seller is unavoidable, but a highly efficient sales force should reduce these instances to a minimum. Such a policy will tend to emphasize the meeting of the dealer's needs rather than merely getting the order, a trend characteristic of modern intelligent salesmanship.

The manufacturer who has thus stepped up the performance of his sales force can afford to impose strict returned-goods regulations upon his customers. The buyer who has had a fair opportunity to inspect goods or samples, who has been given complete and accurate information, and whose order has been filled correctly and in accordance with the terms of the agreement, should not have the opportunity of returning goods without, at the very least, defraying the extra cost involved in such returns. He, not the seller, should be penalized for his own faulty judgment.

Sellers of foodstuffs, particularly canned goods, sometimes have a special problem concerning those commodities that are guaranteed for a period against spoiling. Some wholesale grocery concerns have their salesmen merely remove the labels from the cans that have spoiled on the dealer's shelves within the guarantee period. The removed labels are sent to the manufacturer as proof of the dealer's right to a deduction and the shipping charges for returning the spoiled goods are avoided.

Claims and allowances

Claims and allowances are most frequently made by dealers upon distributors or manufacturers for damage or loss of goods. They are handled usually in one of three ways. The manufacturer or distributor may handle all correspondence and other details in making and collecting claims against a railroad company, for instance, but will not credit the amounts to the dealer's account until the claims are collected.

In the second place, the manufacturer or distributor may go through the same procedure, except that the dealer's account is credited as soon as the claim is made.

In the third place, the responsibility for making and collecting the claim may be placed entirely upon the dealer who obtains all documents and evidence and carries on all correspondence and other communication. Under this method no credit is allowed by the seller. By either of the first two methods a salesman may have to ad just the claims with the dealer. These methods therefore make necessary the employment of highly responsible and capable sales representatives.

Whatever policy regarding claims and allowances is adopted, it should insure the dealer liberal consideration in any case where the seller may have been responsible for the conditions giving rise to the claim. The particulars of the policy decided upon should be made very plain to the sales force.

The need of an order-cancellation policy

The business depression of 1920 and 1921 showed plainly that most sellers had no cancellation policy. The need was then realized by manufacturers and distributors, and no less keenly by many salesmen who awakened to the fact that an order is not an order if cancellations are to be permitted freely and indiscriminately.

Three policies in regard to cancellation are open to adoption by the seller. He may specify in his sales contract that no cancellations are allowed ; he may allow unlimited cancellations, believing that a request for cancellation is always justified and that the granting of it is an investment in good will; or he may adopt no definite policy, in the belief that each case should be treated on its merits.

Considerations involved in an order-cancellation policy

What cancellation policy should the seller adopt? Necessity may dictate that it be a policy allowing little or no cancellation. How many customers will he lose by a comparatively strict non-cancellation policy? How many customers who insist on cancellation are worth keeping? What can the seller do to eliminate requests for cancellation?

All these considerations should be weighed when the manufacturer or distributor formulates his policy. Many difficulties may be avoided by a change in broad sales policies and practices. On this point Harry Tosdal, Professor of Marketing at Harvard University, has said:

It is obvious that the salesman who has properly sold his customer without misrepresentation, honestly and fairly, and has attempted to fill the needs of the customer, suffers much less danger of having his orders cancelled than the salesman who attempts to overstock, who, through high-handed methods or attempt to dominate the buyer, secures orders which remain firm only so long as the buyer is under the personal influence of the salesman. In such cases, the buyer may justify cancellation in his own mind by the assertion that the salesman gave him bad advice. The policy of no cancellation of orders without permission of the seller rests on a sound ethical basis, and on a sound economic basis ; only on the assumption, however, that the sale has been properly made.

Reasons for a strict order-cancellation policy

If his sales are properly made, the manufacturer or distributor can certainly afford to adopt a strict cancellation policy. The company through its salesmen can impress on its customers that an order is a contract and that by all precedent and in all fairness release from a contract is allowable only by mutual consent of both parties.

The seller's consent should not be given unless it is demonstrated that there has been some mistake on his own part or on that of his qualified agent; the mistaken judgment of the buyer is not sufficient justification for cancellation. In some cases the seller reduces the likelihood of cancellation by making a price guarantee part of his price policy.

In many lines of trade the permitting of cancellations on anything approaching a large scale involves serious risks because orders received are made the basis for production plans. The manufacturer who for this reason is considering the adoption of a stricter policy may follow the practice of a well-established maker of men's clothing in making the change.

The clothing manufacturer decided to do away with cancellations and listed all customers who had made cancellation requests in the past. When the new policy was adopted he required these dealers to confirm by letter all orders given to salesmen. Not until this confirmation was received was production on the order started. The new policy was carefully explained by the company's salesmen.

Sales on approval and consignment

The question of whether or not to sell goods to dealers on approval is a debatable one. If the policy is pursued on a large scale, the seller must have considerable capital. His selling costs will probably increase. The policy is justified only where a new dealer cannot make a decision about the seller's product until he has placed it on his shelves and tested it on his customers. A new product must sometimes be tested in this manner even by dealers who have long been customers of the seller.

Sales on consignment are sometimes the only method whereby the manufacturer can persuade a dealer to try a new line. This plan may also be necessary when the seller wishes to be assured that his standard prices will be maintained. This policy, like that of selling on approval, requires substantial capital. The two policies have this further common disadvantage : the retailer may not push the products for which he has not paid, and for which he knows he does not have to pay.

The credit policy

A credit policy must be formulated with extreme care. One that is too conservative may increase selling resistance and selling costs. In the desire to keep losses at a minimum the expense of doing business actually may be increased. Too liberal a credit policy naturally defeats its own ends.

Under a highly scientific marketing system, however, the market research department and the finance research department will be able to inform the credit manager of any impending period of business depression in ample time for him to ad just his policies accordingly. The credit policy should no longer be isolated but should be correlated with the other marketing policies and activities.

The sources of credit information

A primary requisite to the formulation of a scientific credit policy is a thorough acquaintanceship with the various sources of credit information. The selling company's credit department should obtain a statement of each individual dealer's business condition which should include: The excess of current assets over current liabilities, the ratio of debt to worth, the ratio of worth to property investment, the condition of accounts receivable, the amount of inventory, and the rate of turnover.

Established credit-information agencies

At least partial information about the credit standing of a particular dealer may often be obtained from certain established credit agencies. The mercantile agencies, represented by such firms as Dun and Bradstreet, Inc., are sources of this type. These concerns issue quarterly rating books and, upon application from a subscriber to their regular services, compile special reports on individual dealers. The mercantile agencies usually maintain extensive organizations that are able to collect credit information at a much lower cost than would be possible for an individual concern.

Trade associations representing various lines often have their own credit bureaus. They render much the same service as mercantile agencies, and, while they may not be so extensively developed, they do offer the advantage of intimate knowledge of the business conditions in a particular trade. Finally, there are the numerous cooperative credit associations.

Many of these are operated under the National Retail Credit Association and head up in the Central Credit Exchange Bureau located at St. Louis. They typify the increasingly popular tendency toward extensive exchange of credit information.

Supplementary channels of credit information

The manufacturer or distributor who wishes the most complete information on his dealers' credit standing which it is possible to obtain will not depend merely on established agencies. He will have his credit department make its own investigation. Additional information will often come through certain obvious channels.

The bank with which the dealer does his financial business is often in a position to know his credit situation, but usually will keep the information to itself. If specific facts are desired the seller usually must ask his own bank to make the inquiry. However, a bank hesitates to give even another bank information about the business position of its clients. Local attorneys, particularly if they specialize in collections, are apt to prove a much more fruitful source.

Depending on salesmen for credit information

Salesmen in the field are often the only representatives of the seller who come into contact with the buyers. The individual salesman is in a splendid position to gain a great amount of credit information scarcely obtainable otherwise. If he is a keen observer he can evaluate the comparative importance of the location of the dealer, the appearance of his establishment, his methods of doing business, his needs, and his market.

Temperamentally, a salesman may not measure up to his opportunities as a collector of credit information. He is, of course, interested in selling, in sales volume, and in being as friendly as possible with his customers and prospective customers. If the salesman is to be required to, collect credit information, he should be specially trained for it and specially paid for it.

Credit data from market research

The credit information gathered by the field force of a company's market research department will often be worth the expense of maintaining such a force. Research men as collectors of credit information have the advantage of absolute lack of bias. They are trained to size up the merchant, his store, his method of doing business—all with absolute impartiality.

Their reports will have none of the uncertainty and impersonality of the stereotyped credit report. Neither is the credit relationship emphasized since, the research man collects his information only in conjunction with other purposes.

Factors to be investigated in analysing credit

In collecting credit information, the first factor to note is the line of business in which the dealer-customer is engaged. Certain lines, like jewellery, have a comparatively slow turnover. Groceries, on the other hand, have a relatively quick turnover. Seasonal businesses are usually coupled with long credit. If the credit standing of particular haberdashers is high, production plans may be much more easily made by taking their orders for men's straw hats in January and allowing them to pay in July.

Information must also be obtained regarding the volume of the dealer's business. He should not be sold on credit, or for cash, a larger lot than his market will demand. The advice of the market research specialist will prove valuable on this point.

Salesmen and the credit department should cooperate in determining the dealer's ability to pay. The salesman should not sell to a dealer who cannot pay when payment is due, who is overstocked, or who for any reason should not buy the product. The credit department should help both the salesman and the prospective buyer to determine whether the purchase is within the buyer's capacity and ability to pay.

Character and ability

Character is of definite value. Honesty, integrity, willingness to meet obligations, and willingness to cooperate—these qualities make the buyer a good risk. Bad habits should immediately disqualify an applicant for credit. The dealer, however, should be more than a good man with honest intentions to be deserving of credit.

He should have unquestioned merchandising ability. The far-seeing credit man will also consider the special factors involved in a particular case. Perhaps the dealer is located in a town that is suffering a temporary local depression. The dealer of normally good credit standing should probably be carried over the depression. Numerous other special factors may modify a particular case.

Considerations necessary in making collections

Collection is really a part of the credit function although it should be in charge of a separate individual or subordinate division. Collecting is almost a psychological task, a task for someone who has, at least, a deep and usable knowledge of human nature. The collection division of a company is faced with the delicate problem of inducing the buyer to pay without losing his good will.

The handling of that problem demands in the first place the realization that whenever a customer is made to pay, however just the obligation, he may resent it. Tactfully, without trace of threat or intimidation, he must be shown that it is to his advantage to pay. Furthermore, every collection policy must take for granted that the debtor is honest. In interviews and personal letters it should always be assumed that he is willing to pay.

Enterprising companies may offer the services of merchandising and marketing specialists who will help the delinquent dealer build up his business and hence his ability to pay.

The more personal and individual, the more cooperative and the less insistent a collection policy can be, the better. If possible every dealer should be given individual attention. If the collection business bulks so large that form letters must be used, every letter should be worded in a personal fashion. In every case it is advisable to try to find exactly why the dealer has not paid. It is farsighted business judgment for the manufacturer or distributor to do everything possible to help the dealer help himself.

Only in cases of definite unwillingness to pay, or actual disinterest should legal steps be taken to collect, either through the company's attorney or a collection agency.

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