Industrials Grinder N.V (Case Study Analysis)


  Which is more important: Selling Machines or Selling Rings?
Inventory Book value $93,000
High
Low
Machine unit price
4500
6820
Ring usage per machine
2
6
Ring average life  
2
2
Ring annual turnover
6
6
Rings per machine yearly
12
36
Price per 100 Rings
320.4
320.4
Price per Ring
3.204
3.204
Estimated Ring Revenue per machine
38.45
115.34
Estimated Ring Revenue as a % of Machine price
0.85
1.69











From (Table 1) the given data can proof that selling rings will be less important from selling machines.

·        Do you think that the competition will stay in 10% of the market?
Of course  the competition will not remain 10% forever and IG has to move based on that. Because IG have a very solid customer base, and it will take time for customers to notice the new product change, competitors only affected 10% of their market. In this situation and as a reaction, IG have to strengthen and enhance their market share by saving their existing customers and making new ones. Therefore, they have to keep up with the competition, and not lose their place.

Hence, as a recommendation based on a competitive and a profit perspective, IG should benefit from the 70% labor cost and produce the steel rings from the remaining inventory only for the first 14 weeks by selling them at $320.40 price and lowering that later.

Finally, They should ask their self's (What if their customers notice the major unique difference between plastic and steel rings in terms of price, life and operation? What will happen?)

·        Should IG produce plastic rings as soon as possible?
The sooner the plastic rings are produced the sooner IG can introduce the new product to the market. IG could manufacture the plastic rings and continue selling the steel rings at the same time till the plastic rings are ready and the steel inventory is over. After that they can start selling the  plastic rings instead to the market.

In this situation and from a marketing perspective customers may still need or ask for the steel rings. Therefore, to meet their requirement the best reaction is to respond. But this reaction must be time framed for the first 14 weeks as a start only, and the plastic rings should be manufactured as the standard rings to replace the demand for steel rings in the upcoming future. Because Industrial Grinders is able to employ labor at 70% and reduce labor cost, a higher profit on the recent manufactured steel rings can occur. This saving will allow IG to offer a flexible discount on the steel sale price if they need. However, the best recommendation here is that IG can begin a marketing campaign supporting their plastic rings by pointing to the improved benefits using them.

(Table 2) is 2 scenarios of profit that IG would benefit if they sell their steel rings based on 690 demand per week.
(Table 2)
First 14 Weeks
Quantity
Price
Revenue
Profit
Steel
9.660
320.4
3.095.064
3.095,064
Plastic
2.415
320.4
773.766
612.927

Next 22 Weeks
Quantity
Price
Revenue
Profit
Steel
15.100
320.4
4.828.040
1.701.921
Plastic
3.775
320.4
1.209.510
612.927

·        What price point should Industrial Grinders sell its steel rings? When should it go to that price point? 
To bring the best outcomes for IG starting from mid of September they can re-evaluate their pricing policy while taking benefit of the 70% labor that will produce the steel rings from the existing inventory, and because they don't have to pay for additional materials they can benefit more.
Since the competition only affects 10% of IG’s market it will be a perfect time to increase the price for plastic rings and be at least 2 times higher than their steel rings. Any price which IG choose to go with for the plastic rings starting from mid September will depend on the competitor price, market change, and demand..etc. the strategy then can be adjusted based on the current circumstances.
Variable Cost
100 Plastic Rings
100 Steel Rings
Material
4.20
76.65
Direct Labor
15.60
46.80
Department variable
12.48
37.44
Total Variable
32.28
160.89

(Table 4)

Per Unit CM
100 Plastic Rings
100 Steel Rings
12% discount on revenue 100
Plastic Rings
Revenue
320.40
281.95
320.40
Variable costs
32.28
160.89
32.28
Weekly Sales
173
690
690
Contribution Margin
49.700
83.531
198.803
(Table 5)

·       Should IG hire the “cheap” German Labor over the summer to produce unfinished steel rings? 
If IG decides not to replace their employees and still employ them at 70% regular wages and still produce the steel rings to keep their employees, the cost per unit will drop from $2.634 to 2.077 and the number of steel rings to be produced will become 12,712.  From a profitability point of view they should take advantage of the 70% labor cost and use them to produce the steel rings from the remaining inventory.


100 Plastic Rings
100 Steel Rings
New production of
steel rings at 70%
labor
Material
4.2
76.65
76.65
Direct Labor
15.6
46.8
32.76
Departmental
31.2
93.6
65.52
Administrative
15.6
46.8
32.76
Total
66.6
263.85
207.69








(Table 6)

·        What action should Bridgman take ? Why?
Deciding which action is the best choice the profits of each option should be known:
Bridgman has 3 options to consider :
1- To keep on selling the steel ring till mid of September and start selling the plastic rings after that.( No more steel rings production after that)
2-  To keep the steel production going on till the steel inventory is finished and start with the plastic rings production at the same time.
3- To sell all the already produced steel rings and start selling the plastic rings after that, which means no more steel production is needed. 
Based on the given choices the profits of  each choice will be as follows :


Choice 1
Choice 2
Choice 3
Material
76.65
4.2

Direct Labor
46.8
15.6

Department Cost
93.6
31.2

Administrative
46.8
15.6

Total Cost
263.85
66.6
0
Selling Price
80.1
320.4
80.1
Profits
-183.75
253.8
80.1
(Table 7)

After analyzing the findings we can notice that to continue  producing steel rings alone a massive loss will be caused. So, the best choice to bring profits would be starting the plastic rings production.