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Industrial Grinders

Marshawn Pettes
With a large quantity of steel rings on hand, what would happen if the demand for steel rings was completely destroyed by new plastic rings over taking the market?

5/07/2013

Industrial Grinders N.V. Case Analysis


Problem Statement
Industrial Grinders N.V. (IG) has a large quantity of steel rings on hand and the substantial inventory of special steel for their manufacture with a total book value of the inventories exceeding $93,000. Lawrence Bridgeman, the general manager of the German plant of IG, is concern that the demand for steel rings will be completely destroyed when the plastic rings overtake the market in which could cause a direct hit to the bottom line. Bridgeman has to figure out what to do with the excessive inventory and determine the best action to take that will make a profit and cut deficits.

Identify the Criteria


Low Cost Sale Price High Sales Per Week

Weight the Criteria


Criteria Low Cost Sale Price High Sales Per Week Weight 0.5 0.2 0.3

Generate Alternatives
Produce more steel with the extra material and try to sell as much as possible. Throw away all of the steel rings and materials. Produce and sell only plastic rings. Sell finished steel rings and sell the plastic ring only in markets where competitors sell it.

Rate each Alternative on each Criterion (1-10, 10 being the Best)


Alternative Produce More Steel Drop Steel, Just Plastic Plastic in Selective Markets Low Cost 1 8 8 Sale Price 5 5 5 High Sales Per Week 7 3 6
Marshawn Pettes Industrial Grinders N.V. 05/07/13

Industrial Grinders N.V. Case Analysis

Produce More Steel In terms of using the material to produce more steel rings, I would have to ask, Would you spend $64,628.25 so save $26,400.00? then I would follow with a second and third question What if there is a chance that you could make a profit of $33,783.88 in about two years, if you sale all of the steel, but there is no grantee and the chances are slim to none? Would you change your answer? Figure 3 illustrates the risk of ut ilizing the material on hand to produce more steel. Although IG has $26,400.00 worth of material to produce an additional 34,500 rings, it would cost approximately $68,628.25 in additional cost for direct labor and overhead to actually produce the rings (See Figure 1). This will cause the company to have more rings totaling to approximately 59,742, a greater book value at about $(157,628.25), and ultimately a greater risk to loss even more money. The projected timeframe to sale all 59,742 rings is a little under 2 years with the assumption that IG continues to sell at the same rate of 690 rings per week. When the plastic rings spread throughout the market, it would most likely destroy the demand for steel rings. This would make it very difficult to sell 59,742 rings when no one wants them.

Drop Steel, Just Plastic In mid-September the companys projected amount of steel rings on hand are approximately 15,100. This means that the company is projecting to sell about 10,142 from May to September, in which the profit from those sales should bring the book value down from $(93,000.00) to $(60,506.27). If IG was to throw all of the steel rings and material away at this point, they would have to cover a deficit of about $(60,506.27) with just profit from plastic rings. Due to the fact that plastic rings has a lifespan four times as long as steel rings, selling plastic rings at the same rate of steel rings would be extremely difficult. I would assume that the plastic rings would most likely sale at a rate around 173 per week, which is four times less than the steel rings. The rings are only replaced when they go bad and if the life of the rings expands then it would take longer to get a resale. If this assumption turns out to be true, then it would take approximately 2 years and 3 months to cover the deficit of the steel rings with just the profits from the plastic rings (See Figure 3).

Plastic Only in Selective Markets


Marshawn Pettes Industrial Grinders N.V. 05/07/13

Industrial Grinders N.V. Case Analysis


Customer would begin to question why the plastic rings are only available to certain segment or location. They may also question why they are paying the same amount for steel rings when the plastic rings are portrayed to be better with a greater longevity. This could be taking as unfair to some of the customers in which could eventually harm the sales of IG machines.

Compute the optimal decision


Alternative Produce More Steel Drop Steel, Just Plastic Plastic in Selective 4 Markets Low Cost 0.5 4 Sale Price 1 1 1 High Sales Per Week Totals 2.1 3.6 0.9 5.9 1.8 6.8

According to the information above, the optimal decision in this case is to continue selling steel rings in the normal markets and only sell the plastic rings in the markets that the competitors are already selling them in. This option is best among the three alternatives in terms of making profit and cutting deficits. Producing more steel or just selling plastic rings both scored less against the criteria. Producing more steel rings may sale more per week for a limited of time but the cost of producing steel rings is very high compared to plastic rings. On the other hand, the cost of producing plastic rings in very low but the sales per week is projected to decrease due to the longevity of the product. This results in steel rings and plastic rings being similar to one another in terms of creating revenue in the long run (See Figure 5).

Marshawn Pettes Industrial Grinders N.V. 05/07/13

Industrial Grinders N.V. Case Analysis


Recommendation It is too risky to utilize the $26,400.00 worth of material to produce more steel rings and the special steel could not be sold even for scrap. Bridgeman should throw out the $26,400.00 worth of special steel and focus more so on selling all of the finish rings. The projected time it would take to sell the remaining 15,100 rings, in September, is five months (See Figure 2). If all of the steel rings sale, the net book value will go down from $(60,506.27) to about $(12,125.87) in February. A small investment of $4,320.55 can cover the $(12,125.87) debt left over from the steel rings. Bridgeman should take $4,320.55 from labor to purchase the tools and equipment to make plastic rings and cover the cost of 3,785 plastic rings. If IG sales approximately 3,785 plastic rings, they would break even of the total debt left over from the steel rings. The projected timeframe of selling 3,785 plastic rings is also five months (See Figure 4). Therefore, Bridgeman should offer both steel and plastic rings with the assumption and hope that some customers would fall into the status quo trap and continue buying steel rings. The plastic rings are currently only affecting about 10% of IGs markets. This gives IG the room needed to sell off their finish steel in which could result in them solving their inventory problem. If IG provides the customers with the opportunity to choose between plastic or steel themselves, the whole idea about the customers finding out and harming sales would be irrelevant because they made the choice themselves. Those that fall into the status quo trap will buy the steel until they try the plastic for the first time. This is a good thing because it would bring the inventory for steel down and allow the customers to become more comfortable with the plastic rings, because the steel rings is projected to discontinue.

Marshawn Pettes Industrial Grinders N.V. 05/07/13

Industrial Grinders N.V. Case Analysis


$320.40 Price Per 100 Units 690 Steel Rings Sold per week Life 2 months 173 Plastic Rings Sold per week Life 8 months

Figure 1:

STEEL
MAY
On hand Book Value Cost of Finish Goods Unit Per $ Finished Rings $93,000.00 $66,600.00 0.38 25,242

Produce More Steel Cost of Material Rings Produce Cost to Produce 100 Additional Cost to Produce Total Cost to Produce 34500 Total Finish Rings Total Cost Weeks To Sell Months Sunk Cost Poss. Profit

$26,400.00 34,500 $263.85 $64,628.25 $91,028.25 59,742 $157,628.25 87 22 $191,412.13 $33,783.88

Marshawn Pettes Industrial Grinders N.V. 05/07/13

Industrial Grinders N.V. Case Analysis

Figure 2: Mid-September
Finished Rings Weeks to Sell Months Rings Sold Profit from Rings Sold Book Value Sunk Cost Poss. Lost 15,100 22 5 10,142 $32,493.73 $60,506.27 $48,380.40 $(12,125.87)

Produce More Steel Book Value Total Rings Weeks to Sell Months Sunk Cost Poss. Profit Break Even Units Weeks Months Profit after 5 months Total Lost after 5 months

$125,134.52 49,600 72 18 $158,918.40 $33,783.88 39,056 57 14 $45,112.32 $(80,022.20)

Figure 3: Just Plastic


Book Value Break Even Unit Weeks Months Cost $60,506.27 18,885 109 27 $12,577.15
Marshawn Pettes Industrial Grinders N.V. 05/07/13

Industrial Grinders N.V. Case Analysis


Figure 4: Just Plastic After Steel on hand is Sold
Book Value Break Even Unit Weeks Months Cost Additional cost Total cost $12,125.87 3,785 22 5 $2,520.55 $1,800.00 $4,320.55

Figure 5: Steel Vs. Plastic From September to December


Steel Sell (mid Sept-Dec) Sales Cost Tools and Equipment Net Income in Dec $6,243.12 11,040 $35,372.16 $29,129.04 Plastic 2,768 $8,868.67 $1,843.49 $1,800.00 $5,225.18

Steel Vs. Plastic Rings for 1 Year


Steel Sales Cost Net Income $114,959.52 $94,669.38 $20,290.14 Plastic $28,823.18 $5,991.34 $22,831.85 $21,031.85 $2,541.71 Plastic After tools $ $741.71 equip
Marshawn Pettes Industrial Grinders N.V. 05/07/13

Net Difference

Industrial Grinders N.V. Case Analysis

Calculations
Book Value 93000 Rings Produce X 34500 X Cost of Material = $ 26,400.00 Total Cost of Rings /100= 263.85/100 = Cost of Finish Goods = $ 66,600.00 Total Cost to Produce 34500 units $ 91,028.25 Cost of Material = Additional Cost 26400 = 64,628.25

Total Cost to Produce 34500 Units 91028.25 Rings Produce / 34500 /

Total Cost to Produce = Unit Per $ 91028.25 =

0.38

Cost of Finish Goods X Unit Per $ = 66,600 X Finish Rings + 25242 + Book Value + 93000 + Sunk Cost: Poss. Profit: Weeks to Sale: Months to Sale: Break Even: Sales: Cost: Poss. New Rings

Total Finish Rings 0.38 = 25,242 = Total Finish Rings 34500 = 59742

Additional Cost = Total Cost 64628.25 = 157628.25 Total of Profit that could have been made from the Units Total Profit less the Cost of the Units Total Units divided by the Rings Sold per Week Total Weeks to sale divided by 4 Book Value divided by Price per Unit Number of Units times Price per Unit Number of Units times Cost per Unit

Marshawn Pettes Industrial Grinders N.V. 05/07/13