Case 6

Michigan Liquor Control Commission

Overview

A central issue in this case is the unique role that the Michigan Liquor Control Commission finds
itself. The state agency is asked to simultaneously regulate sales of liquor in Michigan while
taking an active position in the distribution of products. It may be argued that a conflict of
interest is apparent in this situation. A number of other governmental bodies experience similar
circumstances, however.

The Federal Aviation Administration (FAA), for instance, must balance its responsibility of
ensuring the safety of every passenger that boards an aircraft in the United States while also trying
to maintain the vitality of the industry. One similar example from the private sector is the
hospital that promotes a certain brand of medication. Students should readily identify and
consider the social and ethical responsibilities that the agency faces in addition to cutting costs
and generating profits.

Solutions to Questions

1. Answers to this question will vary though all positions should be supported adequately.
Responses should consider the social, ethical, and competitive issues faced by the Commission.
As the text notes, changes should reflect key operational issues. Possible solutions might
include:

Downsizing and consolidation of facilities: It might be worthwhile to investigate the possibility

of reducing the number of warehouse locations and state stores. Also, direct shipping from the
warehouses to retailers might reduce some unnecessary storage at the state stores. It could be
more damaging to “put people out of work” though than to let the system’s inefficiencies go
uncorrected. Union membership by a vast majority of MLCC employees would be extremely
resistant to downsizing efforts.

Privatization: Eliminate the state’s competitive involvement in the industry altogether.

Considering that the state generates considerable amounts of revenue from liquor distribution, it
would not be likely to take this course of action. The moneys gathered from distribution and
taxation of liquor are directed toward several worthwhile programs in Michigan. Taxation alone
would fall short of maintaining current returns.
Investment in management information systems (MIS): The MLCC may find that investment in
information systems provides for better assessment of customer needs and logistical control within
the system. By sharing information with distillers and retailers, service could be improved with
minimal levels of inventory required at all levels of the channel, reducing costs significantly.

Reevaluate relations with channel participants: The state could try to negotiate new, more
favorable agreements with distillers, retailers, and transportation providers. Currently, distillers
assume ownership of inventory until time of shipment to state stores, but the expense is passed
along in the form of higher selling prices. The MLCC could make an effort to reduce distillers’
needs for inventory (see “Investment in MIS” above). The markup price that the state charges
retailers might be altered to generate higher margins. The state might also limit the number of
retail licensees that it should serve. In addition, transportation should be reviewed to ensure that
expected service levels are met at the lowest possible cost.

2. This question is a supplement to Question 1. The student should acknowledge the risks
and potential disadvantages of a chosen design alternative as well as its benefits. Pending upon
the desired changes in the distribution system and policy, any number of considerations might
exert strong influences. A brief description of influences that might exert stronger influences
include:

Political: The political system truly serves as the means toward policy change and enactment.
Though it is the right and responsibility of citizens to elect and voice opinions to political leaders,
it is ultimately these leaders that effect change. As the vehicle of change, political considerations
can never be overlooked.

Economic: Along with social considerations, economics will be a major driver in policy change.
The revenues that the state generates from liquor control and distribution are sizable. The
commission employs a number of people and reinvests returns in the state. The MLCC is
directed toward policy that maximizes these returns. Evaluating the social costs of making
liquor readily available for responsible public consumption should be a consideration as well.

Geographic: This case has implications for people throughout Michigan. Not only are
customers dispersed throughout the state but so are facilities and employees. Geography is
significant in determinations of facility location and transportation alternatives. Though the
analysis of MLCC’s distribution is limited to Michigan, the state’s proximity to Canada adds an
international dimension of influence to the case as well.

Special-interest groups (SIGs): These are typically well-organized assemblies of citizens.

Though they may not represent majority opinions, SIGs’ skills and success in gaining awareness
of their positions on issues often make them very influential. There are a number of special-
interest groups at work on both sides of this issue with religious groups and MADD mostly
making up one side and affiliations representing distillers, retailers, and state employees on the
other.
3. A number of considerations may still be important. First and foremost, the state learned
from its prohibition policy that despite its efforts to prevent bootlegging, liquor would be
produced and distributed in Michigan. It was determined that the state could best benefit from
active participation in the industry and derive significant revenues in the process. It appears that
the state has come to rely on these hefty monetary returns and wishes to maintain its involvement
in the business.

Though “druggists” may not be the political force that they were at the time of the state’s original
control of the industry, small retailers of all kinds still benefit from the uniform pricing policy that
treats them as equals to the large retailers.

Whether the government is any more efficient than private middlemen is questionable.
Competitive pressures would most likely prevent private enterprises from charging “excessively”
high prices that were feared originally.

In addition, as noted in previous questions, the state’s extensive network employs many people.
Should state involvement in liquor distribution cease, many citizens would lose the relatively high-
paying jobs that they have relied upon.

4. This is a question of opinion. Some may feel that it is unjust to participate and derive
moneys from what may be considered a “vice” in the first place. The state finds itself in a unique
position in that it does participate in product placement and makes money from the sale of alcohol
yet it cannot actively promote the product’s consumption. Others may feel that so long as the
products are being traded, the state should derive some benefit from the trade and put the money
to work for the state. Opinions are likely to vary across these two general extremes.

5. This question addresses the student’s ability to not only determine the content of the
report but its presentation as well. As the case illustrates, the issue of state-controlled
distribution of liquor is a sensitive subject and source of much debate in Michigan. The report
must at least address the following key areas:

A clear explanation of how each of Joseph’s stated general and specific objectives will be
achieved under the new policy.

Justification of the new policy as being best for the state, considering all stakeholders in the issue
(distillers, retailers, MLCC employees, consumers, state programs that are recipients of the
revenues, and the general public).