Med-Mart, Transitioning The Business Model (A)

Peter Kelly became CEO of Med-Mart, a home health supply company, shortly after his search fund acquired it in 1993. Unfortunately, the first two years running Med-Mart were fraught with disappointing discoveries. At the time of purchase, Med-Mart’s sales growth, inventories, and receivables had been grossly overstated, leading to a precarious financial situation once these errors were discovered after the acquisition was completed. During the summer of 1995, Kelly hired Tim Martin as Med-Mart’s vice president of sales, in order to boost sales and help rescue Med-Mart from financial peril. However, Martin’s proposal to increase sales involved refocusing Med-Mart from thousands of products down to just a few high-margin products, eliminating over 80 percent of current revenues. Kelly was wary of implementing such a drastic plan and knew that success was wholly dependent on the ability of the sales force to dramatically increase sales of the few remaining products. Kelly thought they could re-orient the sales force to effectively implement Med-Mart’s proposed change in strategy by changing the commission scheme. Kelly’s next step would be to design this new commission plan, considering the dollar value and timing of commission payments, as well as any thresholds, caps, or ramping of commissions. He wondered how the sales force would react to a compensation revamp and handle selling only one primary product.