THOMPSON DISTRIBUTING COMPANY

The beginning of what was to become the Thompson Distributing Company occurred about 1964 when William Thompson, Jr., the entrepreneur, emerged. Bill continued to drive a wholesale beer route but began to utilize his spare time to service dog food and pet racks in retail stores in the Toledo, Ohio, area. He bought from manufacturers and sold to retailers thus performing the wholesaler function. Additionally, he became the owner and manager of a retail pet store in Maumee, Ohio. A husband and wife proposed managing a retail pet store in a store which was available at a very low rent if Bill would put up the money. He agreed, and the store was rented, but the couple withdrew and Bill became the Manager.

Utilizing the basement of the pet store, in Maumee, as the base of operations for his wholesale business, Bill continued to expand the business. In 1972, he rented a former automobile dealer's garage, in Toledo, because he had outgrown the capacity of the basement with sales of $197,000. By fall 1974, with sales of $779,000, the need for more space caused Bill to buy a warehouse building of approximately 22,000 square feet in a small industrial park on the outskirts of Maumee. Bill discontinued his beer truck route in 1969 in order to devote more time to the wholesale pet supply business and the retail store. The pet supply business was incorporated in October 1975, but is wholly owned by Bill Thompson and continues to be operated as a family business.

THE WHOLESALE BUSINESS

The Thompson Distributing Company sells wholesale pet supplies to retail stores in the Northwestern-Ohio and Southeastern-Michigan area. Most business is done within a 150-mile radius because transportation costs become prohibitive beyond that distance. Bill believes there is plenty of business in his own backyard. Many retailers order weekly from the five salesmen employed by the company. These orders are delivered two days later by drivers who follow a self-designated route.

There are six wholesale competitors in the same market area so competition is intense and is based upon price and service. Fast delivery is stressed, and items out of stock with one wholesaler are quickly purchased from a competitor. The most recent competitor "bought" a share of the market three years ago and has been slowly raising his prices ever since.

A strong wholesale pet supply distributer will do $7,000,000 a year in business. In the fiscal year ending July 1977, Thompson Distributing Company did $1,219,000 in business. Most of the competitors are in the $3 to $6,000,000 range and are, therefore, larger than Thompson.

MARKETING

Most of Thompson's customers are small retail stores whose average order is $100 to $150. Although there are about 400 customers on the customer list, there are only 150 to 200 active customers. There is a rapid turnover of customers. While there is no trouble getting new customers, others are leaving at the same time. Thompson has found its computer useful in determining which customers are not ordering.

Many of the customers are in borderline financial condition and bankruptcy is common. Thus, Thompson must watch its receivables closely. Yet, customers may use credit extension as a reason for changing wholesalers.

Sales are made by customers coming to the warehouse and picking up their order or by salesmen taking orders on their rounds with these orders being subsequently delivered by truck. Thompson employs five salesmen, three full-time and two part-time. Two of the salesmen also deliver part-time. All salesmen, except one, are paid on a straight 7% commission on what their customers buy even though they did not personally take the order. Each salesmen pays his own traveling expenses.

The business done by the warehouse, which is not attributable to a salesman, is 40% of the dollar sales volume. About 10% of the dollar sales volume is picked up by the customer rather than delivered by company truck. A 10% discount is given on all orders over $100 which are picked up by the customer except for dog food. If merchandise is delivered, the following schedule applies to all orders based on volume:

$50	-	$399	-	2%

400	-	699	-	5%

700	-	1200	-	7%

Over	-	1200	-	10%

Bill Thompson estimates the average discount is 5%.

Out of stock items are a problem since no back orders are carried. Recently, out of stock items have been running 10 to 12% of the weekly orders. These items are out of stock because of late shipments from manufacturers and, more frequently, because of working capital limitations (i.e., the previous account payable must be paid before another shipment will be made).

The company has about 3,000 items for sale in its catalog. The number of items are limited by the size of the computer disk since the catalog is printed by the computer. The single best selling item is Science Diet Maintenance dog food which is a premium food used by owners of show dogs, etc. Sometimes an item, which is sold in multiple colors or sizes, has only one product number in the computer in order to conserve memory space.

Pricing is accomplished by multiplying the freight prepaid manufacturer's cost by 1.43 and the non-prepaid freight cost by 1.67. Special items are placed on sale each week. These items are selected by Tom Collins, the Warehouse Manager, based upon slow moving inventory items or items which were purchased at a particularly advantageous price. A sheet listing the specials is printed by the computer and given to the salesmen for subsequent distribution to customers as the salesmen may desire. Some salesmen see the sale price as reducing their commission and do not publicize it.

An example of another form of sales special is shown in Exhibit I. These items were purchased at the special price, which is shown below the exhibit together with the normal cost to illustrate the kind of savings passed on to the customer. The company also has special lower prices on some products if case quantities are purchased.

The company does virtually no advertising but relies on word-of-mouth referrals from satisfied customers. No specific territories have been assigned to salesmen. Each is free to seek additional business wherever he wishes which results in some overlapping.

A new discount has recently been added by Thompson. For those customers who write their own order, which must average over $500 per week, an added 4% discount is given. The salesman does not receive a commission on these orders. Although this new discount was intended to attract the bigger potential customers, with whom Thompson was not presently doing business, few customers have taken advantage of it. Perhaps this is true because the policy has not really been made known to non-customers and is somewhat resented by the salesmen.

Bill Thompson expressed some concern for the need for professional sales management. He believes the salesmen need motivation and direction. A sales forecast is needed, also, he believes, to help the purchasing function get out of its reacting mode. He wonders if he needs to set up detailed sales policies and procedures.

Beginning in October 1977, Thompson Distributing began selling supplies to a wholesaler of tropical fish in Toledo, who wanted to sell fish supplies as well as fish. Bill Thompson reasoned that even though he was a competitor, if Thompson did not sell to him someone else would so Thompson might as well get the added volume. Thompson sells to this wholesaler at 25% above cost and collects cash on delivery so that the 2% discount on the account payable can be taken. The wholesaler pays the freight and the order is supposed to be shipped separately by truck and unloaded directly into the wholesaler's truck. In practice, it does not work this smoothly since shipments are often combined with Thompson's and require sorting when unloading.

This wholesaler does not have to sell at Thompson's prices and has done some price cutting. Thompson's salesmen are not pleased with the arrangement since they receive no commission and the wholesaler is a competitor. He has purchased significant quantities--up to $6,000 per week--while he is building inventory.

Thompson Distributing also sells to two customers who operate a catalog mail order pet supply business. These customers pay the normal prices.

MANAGEMENT

Bill Thompson is the President of the company and is the Chief Executive Officer. Although the company does not have a formal organization chart, the working relationships are depicted in Exhibit II. Bill spends Saturday through Monday working at the company and the balance of his time at his home near Port Sanilac on Lake Huron. He is normally in daily telephone contact with his daughter, Alice Smith, who runs the office.

A number of family members are employed in the business as noted below along with their relationship to Bill:

William Thompson, Sr. - father

Alice Smith - daughter

Barbara Jones - daughter

Dave Thompson - son

Keith Smith - son-in-law

Joe Paterno - brother-in-law

Helen Southward - sister-in-law

Kenneth Jones, CPA - son-in-law

Bill Thompson, who is 47 years old, took about six courses in business at Toledo University in the middle 1950's while he was driving a beer truck and long before he started his wholesale business. When the pet store "was started, he dropped the beer route and devoted most of his time to the retail store business. The retail store was and still is the best customer of Thompson Distributing. It now accounts for 8% of the dollar sales volume.

About the middle of 1976, he sold a 5% interest in the retail pet store to the manager and began to spend less time at the store. The manager subsequently purchased another 5% interest and will buy another 10% on July 1, 1978. A land contract will then be drawn up for the manager to purchase the balance of the retail pet store over a 12 to 14 year period. In recent years, Bill drew a salary of $500 per week from the retail store. Beginning January 1, 1978, he will no longer draw a salary but will charge a management fee. He is spending relatively little time with the store operation now.

Bill spends his time on weekends running and studying various computer reports about the business and determining which accounts payable to pay. He reviews the inventory dollar position as well as the accounts receivable and weekly sales data. His rough measure of the "net worth" of the company, which he uses as a control device, is to add inventory, receivables, and cash on hand, and subtract payables. He does this manually each month and records the figure on a control sheet.

For three years, beginning in 1973, Bill Smiley , who is now a salesman, was General Manager of the company. Bill Thompson describes him as from the "old school" as far as management style - that is, he is a perfectionist and expected everyone to do exactly as he said. During this time, all salesmen were on straight salary since Bill Smiley does not "believe in commissions." His previous experience included managing a grocery store. Bill also did the purchasing.

About two years ago, Otto "Bud" Van Weiss was brought into the company to set up the computer operations. He did this and subsequently became Sales Manager. Bill Smiley saw Bud as a threat and resisted the coming of the computer. Their personalities seemed to be incompatible--Bill is slow and plodding, and Bud is fast-acting and intellectually bright.

Within a six-month period, Bill Thompson moved Bill Smiley to a salesman's job on straight salary and resumed full control of the business himself.

The purchasing was divided among three people, one of whom was Bud. Unfortunately, the company was unable to pay Bud a large enough salary so he left the company to teach computer courses at the University of Toledo. He still does computer consulting work for Thompson Distributing when requested.

When Bill Thompson is not at the company, no one person is left in charge. Everyone does their own job as they understand it. In fact, Bill Thompson's management philosophy is to "work through people" and to "give them their head." He has not set up a rigid organizational structure.

Tom Collins, the Warehouse Manager, comes the closest to being in charge of operations. He and Joe Miller split the purchasing and the order picking duties. Joe keeps track of the drivers. Tom handles customer telephone orders and is particularly good at telephone selling. Tom also supervises the packers who are both part-time employees.

Tom, who is 47 years old, attended Ohio State University for two years and took a specialized agriculture course. He began working for Bill Thompson in 1970 as a pet-rack serviceman and salesman and continued in that capacity for 20 months. Because of his son's ill health, he left Thompson to move to Florida and later Utah for the next four years. During this time, he worked as an industrial salesman of abrasives and as a foreman in a plant making abrasives. He also has had retail sales experience in selling building supplies and farm and garden supplies. He returned to Thompson, in his present capacity, in October 1975.

Joe Miller, who is 28 years old, began working for Thompson Distributing Company in June 1976. Previously, he had worked for Bill Thompson in the retail pet store in Maumee for 2½ years. He also attended Ohio State University for 2½ years, majoring in biology, before he was drafted into the army for 18 months. He served as a clerk in the army.

In addition to purchasing and picking orders, Joe supervises the delivery drivers and fills in as necessary for drivers and salesmen when they are absent. He sets up the delivery sequence for routes into Toledo and Detroit which account for 8 of the 13 route days. A route in the city usually has about 15 customers per day. The remaining 5 route days are to out-of-state areas along the major expressways. The driver decides on the delivery sequence for these out-of-state routes.

Keith Smith, who is 23 years old, will become the Sales Manager in January 1978. He has been a salesman for nine months after beginning work at Thompson as a delivery-truck driver. He attended Kent State University, majoring in music. He dropped out of college and worked as a carpenter and in a machine shop before joining Thompson Distributing. Although Keith has not had much experience in sales, his father is a sales manager, and Bill hopes he has inherited some talent in this area.

Alice Smith, Bill's 24-year old daughter, attended Kent State for a year majoring in special education before she married Keith. After marrying, she worked in the retail pet store in Maumee until 1972 when she joined Thompson Distributing.

Barbara Jones, Bill's 26-year old daughter, attended Dennison University for a year majoring in commercial art. After leaving school she worked in the pet store and then opened her own gift shop in the basement of the store when Thompson Distributing moved to the rented building in 1972.

She operated the gift store for a couple of years and then worked in a clothing store in the Southgate Shopping Center near Maumee for awhile. She joined Thompson Distributing in 1976 and learned to work with the computer.

OPERATIONS

The basic operations of Thompson Distributing Company are purchasing, warehousing, order picking, packing, invoicing and delivery. Office and record-keeping activities are substantially handled by a computer the company owns.

PURCHASING

Purchases are made from approximately 130 vendors. Purchasing is divided between Tom Collins and Joe Miller. Bill Thompson has established a total inventory limit of $120,000 because of the company's financial constraints. Actually, the inventory has generally been around $125,000 and has exceeded that number in five of the last eighteen months. In fact, inventory has been as high as $160,000 during the middle of a month. The vendors are divided by Tom and Joe so that Tom handles those who generate about two-thirds of the inventory and Joe handles the remainder.

As an aid for ordering, a computer report called an Order Posted Report is printed for each vendor on request by either buyer and contains the following data:

Item Number	Quantity on Hand

Description	Quantity on Hand

Vendor Number	Quantity Sold - Past Quarter

Master Pack Size	Quantity Not Sold - Past Quarter

Sales - Current Quarter	Total Quantity Demanded

Sales - Previous Three Quarters	Average Weekly Sales - Last Fiscal Year

by Quarter	Fiscal Year

Sales - Previous Four Quarters	Weeks in Stock

Date Last Ordered	Weeks in Order

Cost of Each	Cost of One Week's Sales

The report is used as a worksheet by Tom and Joe to place orders and then the report is re-run in order to show the current quantities on order. Most of the data shown on the report is not actually used by the buyers because they find the on-hand and on-order figures are not necessarily accurate.

The receiving reports, which are run on the computer at a convenient time, show the following data:

Item Number	Quantity on Hand After

Description	Quantity on Order Before

Vendor Number	Quantity on Order After

Quantity on Hand Before	Total Quantities Received

Quantity Received

The items to be ordered are selected by Tom and Joe based upon their knowledge of the physical quantities in stock. They have a mental picture of the quantities on the shelves since they do all of the order picking personally each day. The quantity which is ordered is based upon the inventory value constraint and their feel for recent movement of each item. Quantities to be ordered from each vendor are increased if necessary to the minimum dollars required to get prepaid freight.

All orders are placed by telephone and no formal purchase order is subsequently sent to the vendor. Each buyer makes notations of the quantities he ordered on the Order Posted Report. No price notations are made. These sheets are then used to update the report and to generate a Quantity on Order Report which contains the following data:

Item Number	Quantity on Order Before

Description	Quantity Ordered

Vendor Number	Quantity on Order After

Each buyer tries to make the best deal possible with each vendor. Sometimes they are able to make special buys at reduced prices. These items then often become the basis for special sales offers by Thompson.

In order to find inventory errors, which are evident on the Order Posted Report, Tom Collins checks through the Inventory Value Report at home in the evening about once a week using his memory of what was on the shelves to spot errors. He informs Bill Thompson of these errors who in turn makes a physical count on the next weekend and corrects the computer record. A complete physical inventory has not been taken since the computer records were initiated eighteen months ago.

Bill Thompson notes that when he first began checking inventory items that appeared incorrect, he found more large items in that category. Now he is finding smaller items are incorrect. When Bud von Weiss was at Thompson, an inventory of a given category on a rotating basis was made using warehouse employees to count. These employees seemed to make many errors so the program was discontinued. Theft could be a possibility since Bill has been liberal with the keys to the building. In fact, he says, "feedback from the family is that I should be tougher in general." He does note less traffic in and out on weekends now that he is regularly in the building on weekends.

The Inventory Value Report is run about twice a month and contains the following data:

Item Number	Quantity on Hand

Description	Extended Value

Vendor Number	Sub Total by Vendor

Unit Cost	Grand Total

The report is a typical example of Pareto's Law in action. Of the inventory on hand from 131 vendors on the October 16, 1977 report totaling $130,941, twenty-five of the vendors supplied inventory exceeding $100 which accounted for 78% of the total inventory. In fact, inventory from seven vendors accounted for 50% of the total inventory.

WAREHOUSING

The warehouse is arranged in rows of pallet racks three tiers high. Items are stocked and subsequently picked using three-digit location numbers. The first digit indicates the aisle number, the second digit indicated the pallet section number, and the third digit indicates which of the three shelves the item is placed upon. All stocking and order picking is done by Tom and Joe. Items are usually stocked at the end of the day they are received. They are stocked in the containers received and only one box is opened at a time.

Orders are picked by using a computer-generated picking form which shows the location number of each item. The order information is entered by Barbara Jones from another computer- generated order form on which the salesman or customer has indicated the items desired. Orders can also be noted on three other forms; a blank form, an add-on-to order form, and a special order form. Orders for a few items taken on the telephone or by salesman often are recorded on the more compact blank form. Locations are not shown on these last three forms.

The person picking the order uses an enlarged and strengthened supermarket shopping cart. The cart is pushed down the indicated aisles and items on the order are placed in the cart like a supermarket shopper would do. As shipping cartons are emptied, they are thrown on the floor to be cleaned up at the end of the day. For large orders, more than one cart will be used. The picker indicates the quantity picked on the picking sheet. Items not in stock are recorded as zero since items are not back ordered.

Once the order has been completely picked, the cart or carts are moved to the packing area located adjacent to the truck loading area. Part-time employees pack the individual items on the order into large boxes which are obtained from incoming shipments. The packer does whatever wrapping or padding he feels is necessary to prevent damage in delivery. The packer also verifies the quantity being shipped.

The shipping cartons are subsequently loaded into the two trucks, or one van, by the truck drivers for delivery to the customer the following day. Customers' orders are loaded on to the truck in reverse order of delivery to facilitate unloading. Orders taken on Monday, for instance, are picked on Tuesday and delivered on Wednesday.

INVOICING

The preparation of the invoice is done by the computer using the form shown in Exhibit III. Input data for the invoice is entered into the computer by Barbara Jones using a keyboard input device with a CRT display. She enters the picked quantity, description, etc., from the picking form. The invoice is taken along with the merchandise for delivery and cash is collected at the time of delivery unless credit has been extended.

The prices applied by the computer to the order are established using the markups previously mentioned. This information is put into the computer, including any changes, by Bill Thompson on weekends, using manufacturers' price lists for the cost figure.

The computer applies the appropriate discounts by order size. The discount for picking up the order is entered by Barbara.

A Daily Invoice Register is printed by the computer which shows the following data:

Customer Number	Cost

Customer Name	Discount Amount

Invoice Number	Percent

Amount	Salesmen

Total for columns above

Summary at the end of the report:

Total Sales by Salesman

Profit After Expenses

Items Not Shipped

Description

Number Out Quantity

Dollars by Category

Total Dollars in Adjustments

Total Dollars in Out-of-Stock

Total Dollars in No Charges

The profit after expenses figure is calculated by the computer by subtracting the estimated daily expense figure, supplied by Kenneth Jones, from the net margin figure. Bill uses the total dollars in out-of-stock as a rough measure of the adequacy of inventory.

OFFICE ACTIVITIES

Cash receipts are turned in by the drivers at the end of each day along with the invoice papers. Alice Smith is responsible for verifying the cash count against the invoice and depositing the money. Bill Thompson believes it is particularly important to have a member of the family handle this key job. Alice and Barbara also handle credit memos, walk-in business (although the customer picks his own order) and checking of accounts receivable.

FINANCE

The accounting for Thompson Distributing Company is handled by Kenneth Jones, an independent CPA, who is Bill's son-in-law. Ken graduated from Toledo University. While attending college, he worked for Bill in the retail pet store in Maumee. He also worked for the accounting firm that handled Bill's records through the 1977 fiscal year, so he is quite familiar with the business.

Ken prepares monthly income statements and balance sheets as well as general ledger and journal entries on his firm's computer. The Thompson Distributing Company was incorporated in October, 1975, but the fiscal year was changed to July - June 1976.

Exhibit IV shows income statements for the period October 1975 through December 1977, by quarter. During the period from October 1975 through June 1976, the company's financial records were maintained by another accountant. As a result, the expense reporting is on a less-detailed basis. Exhibit V shows balance sheets for the company during the same time interval. The financial results of the pet store, in Maumee, have been excluded from all of the figures shown in the exhibits since it has been operated independently since incorporation.

In the liabilities portion of the balance sheet, the Note Payable, under Current Liabilities, is payable to a Toledo bank. Under Long-Term Debt, the installment loans are payable to Ford Motor Company and General Motors Acceptance Corporation for trucks. The note payable, is payable to a computer leasing firm. The stockholder and officer's loans are payable to Bill Thompson. The mortgage payable on the warehouse building is payable to a Toledo bank.

The company has elected to be taxed as a proprietorship under subchapter S of the Internal Revenue Code so no income taxes are shown on the income statement. The company is on a cash basis for accounting purposes.

The cost-of-goods sold entry on the income statement, according to Kenneth Jones, is obtained by adding the items purchased to the beginning inventory plus the change in accounts payable and then subtracting the ending inventory. However, Bill Thompson understands the figure to be the purchases actually paid for during the time period of the income statement. The accounts payable figure is supplied to Ken by Bill Thompson. Between the time that a purchase order is placed and the bill is received, there is no record of the amount owed. Any variations in the accounts payable figure, as reported and as finally determined, is debited or credited to the "over and short" account on the income statement.

The Management Fee account is the draw that Bill Thompson takes from the business each month to cover his management work. He will begin drawing a regular salary of $800 per week in January 1978.

Kenneth Jones noted that he believes a cash receipts journal should be instituted. The internal control which is now exercised is carried out by Bill's two daughters. Without the presence of the daughters, he believes there could be control problems since the computer does not tie everything together at the present time.

Bill Thompson has been trying to improve the company's image as far as the paying of bills. The company has been unable to take advantage of a rebate program by the manufacturer of one of Thompson's major product lines because the manufacturer required the customer's bills to be paid up currently. Thompson is now able to get the rebate and is actually taking advantage of the 2%/10 days terms from that particular manufacturer.

Thompson Distributing occupies about 65% of the building. The remaining 7,000 square feet are rented to two other firms.

Exhibit VI shows the sales and gross margin by month for the past eighteen months. Exhibit VII shows the 28 highest selling product lines which account for 80% of Thompson's sales indicating the average weekly sales, the cost of the items sold, the markup-on-cost factor, the inventory of the product line as of January 3, 1978, and the number of weeks of inventory in stock.

Blue Cross hospitalization insurance is provided for Tom Collins, Joe Miller, Alice Smith and Barbara Jones. Vacation time is also provided for these employees.

An Accounts Receivable report is prepared on the computer once a week. It contains the following information:

Customer Number	Current Amount

Customer Name	Over 30 days Amount

Telephone Number	Over 60 days Amount

Salesman Code	Over 90 days Amount

Invoice Number	Sub Total by Customer

Type of Invoice or Payment	Summary Grand Total

Date	Amount

A card is maintained in the office for each customer stating their status for credit purchases. Comments like "checks consistently ok" or "credit ok--pay in 30 days" are put on the cards. Bill Thompson finds it hard to make firm policies regarding credit extension because he is concerned about losing customers.

THE FUTURE

Bill Thompson is quite optimistic that the business is finally moving into profitable territory after many months of unexpected losses or poor profits. He knows the business is there to be had but is still plagued by the uncertainty of profits.

Bill has planned a month-long mid-winter vacation in Hawaii to rest and gather a fresh perspective on his company. The December loss of $4,300, on a high sales volume, made him wonder if he should cancel his reservations after all.

Exhibit I

Dear Thompson Friend:

It's our very real pleasure to bring you these Thompson coupon selections for 1977...ideas developed especially with you in mind, our good friends, for the Holiday Season.

Bringing you this wide selection of saving coupons from many of the companies that Thompson distributes for---at substantial savings---is our way of saying a sincere "Thank You"...

...you see, last year, many more sales than ever before were the direct result of referrals, and kind words on the part of our customers.

YOU are helping us grow! That's why we owe you our sincerest thanks.... and why we looked for some way we could express those thanks to you.

You'll find many wonderful money-saving coupon ideas attached. Books from Westers Publishing, air stones from Hagen, corner filters from Geisler, BJ's 40 count chew stix to mention a few. All at special savings!

Although all of these special coupons are in effect until December 16th, we do strongly suggest that you order right away...the earlier the better, so you can have the merchandise for the Holiday season.

With the very best Holiday wishes from all of us here at Thompson Distributing to you and your family....

Sincerely,

William Thompson, Jr.

P.S.	I'm also enclosing my personal gift to you--a special certificate that brings you a
little extra "Thank You" if you help us beat the rush by ordering and redeeming	your coupons before December 1st .

THOMPSON DISTRIBUTING COMPANY

650 Illinois Avenue	Maumee, Ohio

Tel:	(419)429-5000