U.S. Pharmaceutical of Korea (USPK) was formed in 1969. Its one manufacturing plant is located just outside Seoul, the capital. Although the company distributes its products throughout South Korea, 40 percent of its total sales of $5 million were made in the capital last year.
There are no governmental restrictions on whom the company can sell to. The only requirement is that the wholesaler, retailer, or end user have a business license and a taxation number. Of the 400 wholesalers in the country, 130 are customers of Ball-McCulloch-Frantz- Geringer-Minor:
The Swiss pharmaceutical global corporation Hoffman-La Roche has made a major breakthrough in the relief of a serious disabling disease that affects 3 percent of the world’s population. Its new product Tigason is the first product that effectively controls severe cases of psoriasis and dyskeratoses, skin disorders that cause severe flaking of the skin. Sufferers from this disease frequently retreat from society because of fear of rejection, thus losing their families and jobs. Tigason does not cure the disease,
but it causes the symptoms to disappear. There is one potential problem. Because of the risk of damage to unborn babies, women should not take the drug for one year before conception or during pregnancy. Hoffman-La Roche is well aware of the potential for harm to the company if the product is misused. It has seen the problems of another Swiss firm, Nestlé. After much discussion, the company has decided the product is too important to keep off the market. It is, after all, the product that gives the greatest relief to sufferers.
The marketing department is asked to formulate a strategy for disseminating product information and controlling Tigason’s use. As the marketing manager, what do you recommend? *This is an actual situation. USPK, accounting for 46 percent of the company’s total sales. The company also sells directly to 2,100 of the country’s 10,000 retailers; these account for 45 percent of total sales. The remaining sales are made directly to high-volume end users, such as hospitals and clinics.
Tom Sloane, marketing manager of USPK, would prefer to make about 90 percent of the company’s sales directly to retailers and the remaining 10 percent directly to high-volume users. He believes, however, that this strategy is not possible because there are so many small retailers. Not only is the sales volume per retailer small, there is also a risk involved in extending them credit. USPK tends to deal directly with large urban retailers and leaves most of the nonurban retailers to the wholesalers.
However, the use of wholesalers bothers Sloane for two reasons: (1) He has to give them larger discounts than he gives retailers that buy directly from the firm, and (2) because of the intense competition (300 pharmaceutical manufacturers in Korea), his wholesalers frequently demand larger discounts as the price for remaining loyal to USPK. This intense competition affects another aspect of USPK’s operations—collecting receivables. USPK has found that many wholesalers collect quickly from retailers but delay paying USPK. Instead, they invest in ventures that offer high shortterm returns. For example, lending to individuals can bring them interest rates of up to 3 percent a month. The company’s receivables, meanwhile, range from 75 to 130 days. Wholesalers are also the cause of another problem. Many are understaffed and have to rely on “drug peddlers” for sales. The drug peddlers (there are perhaps 4,000 just in Seoul) make most of their money either by cutting the wholesalers’ margins (selling at lower than recommended prices) or by bartering USPK’s products for other pharmaceuticals. They do this by finding retail outlets where products are sold for less than the printed price. They exchange USPK’s products at a discount for other drugs, which they sell to other retail outlets at a profit. As a result, USPK’s products end up on retailers’ shelves at prices lower than those that the company and its reputable wholesalers are selling them for.
The pharmaceutical industry has made some progress in persuading wholesalers and retailers to adhere to company price lists, but nonadherence is still a serious problem. One issue that manufacturers have not been able to resolve yet is the manner in which demands from hospitals and physicians for gifts should be handled. Sloane believes the industry can do much to solve these problems, although intense competition has thus far kept the pharmaceutical manufacturers from joining together to map out a solution.
1. What should Tom Sloane and U.S. Pharmaceutical of Korea do to improve collections from wholesalers?
2. How would you handle the distribution problem?
3. Can anything be done through firms in the industry to improve the situation?
4. How would you handle the demands for gifts?