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 ring production.
