Cumberland metal Industries case
...ntractor, a construction-oriented magazine that occasionally reported on pile-driving contractors and their jobs. B) Associated Pile and Fitting Corporation, one industry supplier that sponsored professional-level “Pile talk” seminars in various cities. C) Professor R.Stephen McCormack of Pennsylvania A&M University, a respected authority on pads. His endorsement of the CMI cushion pads would enhance industry acceptance. He was testing CMI pads although the final results were not yet available he had expressed considerable enthusiasm. Competitors: A number of competitors, most are substantially smaller than CMI and none have shown a strong interest or competence in technical, market, or product development. Other manufacturers might discover this new application for curled metal and enter the business before CMI could get patent protection. The pile-driving industry paid little attention to cushion pads before CMI´s involvement. Everyone used them and took them for granted, but no one attempted to promote pads. No manufacturers dominated the business. In fact, most pads came unbranded. Context: Industry paid little attention to pad importance. Hardwood blocks had been used but performance was poor. The industry shifted to asbestos pads or stacks of alternate layers of aluminum plate and micarta slabs. Which came in a variety of diameters. CMI was the pioneer to introduce the curled metal cushion pad in the market. CMI´s pads set life of 10 times more than asbestos and had a 20% of performance increase. No national industry associations influenced this business, but some regional organizations played a minor part. The company was unsure how important word-of-mouth communication would be. 3. Alternatives -Option one: Set Price with existing costs Set cushion pad price at $299 according to the existing equipment capacity and costs with low margins for the company at 34% and 25% for the dealers. Maximum production is 250 pads per month. The Company would not incur in any extra expenses but revenues are limited to max. Production. PROS CONS Not incur in additional expenses so failure would cost less. Dealer Margin remains the same (25%) maintaining incentive and high dollar income. Changes in manufacturing procedures can be augmented depending on sales. Product quality is better than any in the market. Limited manufacturing capacity. Manufacturing costs are high, mainly of because labor costs. Cannot satisfy managements goal to obtain at least 40% margin. Cushion Pad Price is 50% higher due to higher costs. Importance of new product does not give company desired growth. -Option two: Set price with investment and less manufacturing costs. Set cushion pad price at $199 and purchase $50,000 in tooling equipment which will maintain manufacturing capacity at 250 pads per month but costs would decrease substantially thus permitting pad price to be lower because of costs and give higher margins which are 53% for the company of sales price and 25% for the dealers. PROS CONS Manufacturing Costs would go down from $148.12 to $69.18 per unit so that price can be established low and high margins. Can satisfy managements goal to obtain 40% to 50% `profit over sales final price. Gives infra-structural backup for future growth in manufacturing needs and market. Product quality remains the best available. It requires a $50,000 investment for new tools, which will have to be absorbed by extra margin. Manufacturing volume remains the same at max. 250 pads per month. Limited capacity Dealer dollar margin is lower. There is no patent so sales growth is at risk, giving no guarantee to the investment. 4. Recommendation Cumberland’s cushion pads have been very successful for the companies that tested them. Due to this, Cumberland is receiving a lot of pressure in giving them a sales price for the product so that sales expectations can be established. The price determination is seriously linked to several different aspects: The first one is the cost of producing them, which is linked to another decision that is to acquire additional equipment, which could help the company to reduce them. (Exhibit 2) Secondly, the fact that the product allows the users to saves a huge amount of money, principally through time saving. (Exhibit 3) Furthermore, as the product is very innovative and there is nothing similar in the market, we would need some financial resources to advertise and promote it, in order to reach a level of sales similar to our production capacity. (Exhibit 4) It is clear from the different exhibits that the difference between our costs and the savings the product generate is immense, but since the perception of the savings can not be clear before using it and the public price of the asbestos pads are very low, we recommend Cumberland Metal Industries to: 1. Define a Public Price of $199 for the 11-½ inch pads to be produced. Establish a Wholesale gross margin of 25% (wholesale price = $149,25) 2. Acquire the additional equipment for $75.000, which will let the company reduce the cost of producing the pads and increase the production from 250 to 500 units a month. PROS CONS The price of the product is very low compared to the savings it allows. It will attract fewer competitors than if the public price were higher. It generates a contribution margin superior to the one expected by Cumberland’s management. The extra income can be used in promoting and advertising the product. The return on investment is done in less than 2 months if working at full capacity. The company can get a higher market share with the additional equipment, which would position Cumberland in a better way to incoming competitors. Investment could be useless if sales don’t reach our production capacity. There is still a high dollar price difference between asbestos and Cumberland’s pads. The savings in time could not be clearly perceived by the users of the product. Pile hammer renting companies could boycott the product since it reduces the rent time of the equipments. Even with these prices, competitors could realize that the product is worth to produce. Some of the distributors may prefer to sell a higher quantity of cheap asbestos pads than try to convince the customers to use the Cumberland’s ones. 5. Implementation Plan The following details the implementation strategy, budget, timeline and performance data: Goal Strategy Elements ...