The Case of the Constant Customers

This case is written by Donald Shriver Jr & Ralph Robinson Jr. Published in Harvard Business Review in 1963.

The scene is the conference room in the executive offices of Heyward Mills, a relatively small –
25,000-spindle-cotton-combed yarn plant in North Carolina. The time is the morning of a
day in the near past. Like many of the 100-odd cotton mills that dot the landscape in that
part of the United States, Heyward Mills is controlled by a family. The company, whose
current weekly production is 125,000 pounds of knitting yarn, has committed itself to a 20%
expansion because of greater demand. Shipment of the increased output will start in seven
months.

Three men enter the room. The first, who sits down at the head of the table, is Richard
Heyward, age 53, the son of the founder and president and chief executive officer of the
company. The other two men seat themselves on either side of him. One is Frank Melton, 32,
Heyward’s son-in-law and vice president in charge of sales; and the other, not a member of
the family, is Lucius McGrath, 61, vice president in charge of manufacturing and a veteran of
39 years with the company.

Heyward: You fellows know what we’re here to consider. Frank has been keeping us informed about the
higher demand and price of yarn. We have to cover our present customers for the third and fourth
quarters, but we’re going to have another 25,000 pounds of production available around the first
September. We’ll have to decide who we’ll sell that extra yarn to, as well as the prices we’ll set.

Melton (learning forward ): I’d rephrase the question to make the answer simpler: Who will we not sell
that extra yarn to? For a year now I’ve been complaining about a half dozen customers who are more
trouble than profit to us. We couldn’t ask for a better time to upgrade our list by cutting them off. Then
we could take on those big outfits who are crying for yarn from us.

McGrath (scratching an ear): Not a bad idea. Take those Evernit people. They’re a nightmare for
production. They take yarn for 35 weeks out of the year and then nothing for the other 17 weeks. But
they will expect us to cover their requirements, whether they take the yarn or not. How can you plan your
production in a situation like that? And we have several other outer-wear customers that do the same
thing.

Melton: Evernit’s always insisting we give them several days’ option on price and poundage while they
shop the entire market. And when business slows down for them, they stop shipments and take in lower
priced yarn from other suppliers. Remember when yarn dropped two cents a pound? They stopped
shipment on all their contracts and bought at depressed prices from a completely new set of suppliers.

Heyward: They did follow through on their contracts, didn’t they?

Melton: Yes, but not until the market price went back up to the previous level.

Heyward: Well, as you know, that’s not my style of doing business; but if you approached them on the
subject, I bet they’d say, “It is a free market, isn’t it?”.

Melton: Sure, and that’s exactly what I’m prepared to tell them when I say “no” on a contract with them
for next year. For the first time, doors I’ve been knocking on for years are opening. A number of
substantial firms are willing to pay a premium price to get a position with us. They’re consistent users of
yarn-just the kind of people we want. With the service we offer, we can keep them on the books even
when the boom is off the market. So, let’s drop the dead wood, the confirmed price hagglers, and take on
somebody we can trust.

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Heyward (with a sigh): Now that’s where you begin to worry me. Trust, loyalty. Who’s to say that we
shouldn’t show a little of that even to an outfit like Evernit?

McGrath: I’m one to say it. We’ve shown more than our share of loyalty to them over the years. Now it’s
time they learned a lesson. The market is free to punish as well as reward, isn’t it?

Heyward: Yes, and with Evernit you may have a point. But while we’re on the subject of upgrading the
customer list, what other companies did you have in mind for giving the axe, Frank?

Melton (waving his hand): Oh, Fiberlon, Southern Yarn, McLeod Industries, and the like. They may not
be as bad as Evernit, but they all have the same policies.

Heyward: Why “policies,” Frank? Better to say they all have the same problems. I know those firms from
‘way back. In the thirties we were all small-scale producers, and we had an informal understanding that
we’d be flexible about occasionally cutting off contract shipments on the one hand and occasionally
inventorying un-needed production on the other. That’s the only way we survived.

McGrath(earnestly): Dick, I know how you feel about our old friends, but times have changed. The
competition is tighter than ever, and the market’s dominated by the big companies. If we don’t take every
chance to establish ourselves with them, we’ll go under.

Heyward: That’s a matter of judgment. I expect the small yarn consumers to be around for quite a while.
Right now they have 75% of our business. Even with their vulnerability to market fluctuations, many of
them are now expanding. And they expect us to increase shipments to them in the same production as
their rate of expansion. Besides, if we don’t show some consistent service to these customers, when the
Vietnam war eases off we’ll be the first supplier they drop.

Melton (showing signs of impatience): All right, give them some fraction of what they want to buy, and
then sell the rest to my hot prospects. At least we’ll be keeping their names on the books.

McGrath: Or tell them that military priorities for yarn prevent us from offering them as much as they’d
like.

Heyward (brightening): You’ve got something there. We have it on good authority that we may get
directives from D.O.D.( Department of defense ) that will force us to cut down on civilian customers. But
even then we’ll have the same basic problem. Whom will we penalize the most and whom will we hurt
the least when we cut back or expand deliveries?

Melton (looking up at the ceiling): Just imagine: military requirements forcing a shortage of yarn for
civilian knitwear, buyers willing to pay a ten-cent premium just to keep their mills running, and us with an
airtight excuse not to ship to some of our customers. We could sell to the highest bidder and make a
killing.

Heyward(jabbing a finger at Melton): Which is exactly Evernit’s point of view when they do all that
shopping around! How can you complain of their policies if you plan to do the same kind of thing?

Melton: It’s not a fair comparison, Dick, especially if we’re trying to decide what to do with our expected
surplus. In spite of our old customers’ expansion plans, what obligation do we have to them beyond our
present level of service? (Vehemently.) Our new production is ours to dispose of to our own benefit, not
theirs.

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McGrath(Smiling): Before you two in-laws come to blows, would you permit me to suggest what we’re
trying to decide? I would agree with Frank that the 25,000 pounds is the proper subject of decision. Then,
the really touchy part is how we rank the claims on that extra production. First our old and fickle
customers; second, our old and faithful customers, third, our top-drawer prospects and fourth, the
government. Now, how do we shuffle that list to keep ourselves ethical and profitable?

Melton: That’s well put. But why no cut the list to three to reduce the agony? The government is going to
force us to supply its needs for fighting the war. There’s hardly any decision to make there. Then, what
about the dog customers? I’m for cutting them off our list, period. But for sure they don’t have any claim
on our new surplus.

Heyward(frowns): That would be fine, Frank if we could just agree on definition for “dogs.” As I’ve said,
what looks like a dog to you looks like a small company with problems to me. I think it’s an open question
whether even Evernit might not be a candidate for a little generosity from us.

Melton: If you look at Evernit’s published report’s for last year, you’ll find that their net profits increased
10%-partly at our expense.

Heyward: But Southern Yarn, to take another case, laid off workers last month and will lay off some more
if we can’t supply them with yarn during the last two quarters. Don’t forget, Frank, you are always looking
at another company through its purchasing department. A few sharp dealers there, and you get a destroyed
image of the whole company.

McGrath (breaks in): Well, it’s all very charitable to be concerned about Southern Yarn’s laid-off workers.
But what about our own workers? Maybe it’s unjust to penalize another company just for the antics of its
purchasing department. But if we don’t penalize them, we may pass up a chance to upgrade our own work
force. That’s the best reason I know for giving lots of attention to Frank’s blue-chip prospects.

Melton: Exactly! They’re our source of higher wages, higher dividends, higher bonuses, higher everything
else. Isn’t that what you fellows tried to drill into my head when you trained me for this job? “In this
business,” you said, “stop growing and you stop, period.” Well the big outfits are our growth potential.
And we’d be doing our own workers, stockholders, and management an injustice if we didn’t take
advantage of this seller’s market right up to the limit.

Heyward: Limit? What sort of limit?

Melton: The limit of the market itself-the point where things turn down again.

Heyward: Would you allow the possibility of another sort of limit imposed on us by the one group among
Lucius’ five that you haven’t mentioned yet?

Melton: You mean the old faithfuls?

Heyward (gazing out the window): Yes, I’ll grant you part of your case against Evernit. And I’ll grant the
importance of looking our for our own growth through expanded business with premium customers. But
the test of our sense of business responsibility comes in what we do for or against the small companies that
have stuck by us at-least as well as we have stuck by them. (turning to Melton) You argue that the big
companies can reward us more in the future than anyone else. But I say that these small companies have
already rewarded us more in the past than anyone else, and they deserve some consideration from us now
that we don’t need them quite as much as we used to.

Melton: But surely you don’t favor writing off my fat prospects all in the name of loyalty.

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Heyward: No. but I don’t favor writing off the small prospects all in the name of our future growth, either
We’ve got to decide if we still have the loyalty we’ve been asking for from our customers large and small.

McGrath (glancing at his watch): We’ve got to decide, all right. Would it be overhasty to ask how you
gentleman would recommend we decide this matter? I’ve got an appointment with the first-shift foreman
at ten.

Heyward (also looking at his watch): Fair enough. Taking everything into consideration, I’ll settle for a
compromise: offer 15,000 to just about our whole present customer list, according to the percentages of
their orders with us over the past year, and give Frank the remaining 10,000 to attract new business.

Melton: Now, that’s a pretty tepid compromise, Mr. President (Gesturing toward Heyward) unless you give
me at least 20,000 to play with, we can’t expect much to happen. I’ll give you 5,000 for your old faithfuls.
That’s generous isn’t it?

Heyward (looking at McGrath): And how do you vote, Mr. Vice President?

McGrath(Smiling): I pass, sir, It’s ten o’clock, and I’ve got to get back to producing the stuff so that you
guys can decide what to do with it. You know, I’d rather run those frames for eight hours than spend one
hour here weighing things that can’t be weighed.

Melton (smiling, too): I think he’s tried of making decisions, Dick!

McGrath: You bet, youngsters! Someday you will be, too.

Heyward: Well, let’s be chicken and postpone the final decision until next Tuesday. Meantime, Frank,
send me some data on the companies you want to sack and the ones you want to recruit.

Melton: May I send carbon copies to Lucius and take him out to launch on Monday?

Heyward (rising from his chair): Yep, just so you remember that I intend to say around here Tuesday to
keep you ethical.

Melton (clapping Heyward on the Shoulder): And I intend to stay around to keep you profitable!

The three men laugh and walk out the door together.