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Cumberland Metal

Industries:
Engineered Products
Division, 1990

Members:1. Ankit Nema


2. Md. Waseem Afsar
3. Poorani Ravichandran
4. Saurobrata Chakraborty
5. Sourav Sharma
6. Vishal Vaya

Case Overview
Cumberland

Metal Industries (CMI) - One of


manufacturers of curled metal products in the country.

the

largest

Sales increased from $250,000 in 1963 to over $18,500,000 in 1979.


Currently, CMI relies heavily on SlipSeal, which is used as a high-

temperature sealant in automobiles.


Although CMI dominates the market for this product, corporate sales

figures decreased over the last year.


As a result, the management at CMI realized the importance of

diversifying its product-line so that the company does not rely as


heavily on SlipSeal or the automobile industry.

New product Cushion pads for


pile drivers
CMI management was very interested in a new product that could

be used as a cushion pad in pile driving.


The cushion pads, consisting of curled metal, were superior in

performance to the asbestos pads currently used throughout the


industry (Proved by test results from Colerick Foundation Company
and Fazio Construction).
The curled metal pads lasted longer then asbestos pads and were

easier to change.
Furthermore, the growing concern over the health risks associated

asbestos gave CMI's pads an added advantage.

Issues involved
How to price the product?
How to market the product and reach the

various purchase influences?

Setting the price


(Basis: Colerick test)
To determine the total economic exchange value, the reference

value and the differential value have to be identified.


As per Colerick Test: The job required 300 piles, driven 50 feet

into the ground, 480 asbestos pads were used (Page 3). The costs
for a typical 11 inch pad set is at $50. Asbestos pads worth
$1000 were used (20 pad sets).
In contrast only 6 pads (= 1 set) of CMI were required. Hence the

reference price for the new CMI pad set is at $166.67 (=


$1000/6sets).

Pricing considerations contd....


In the next step we have to identify all factors that differentiate the new product

from the asbestos pad. Obviously the CMI pad lasts about 80 times longer than
the asbestos one, but that advantage has been mentioned at the reference
value.
Speed factor: We see that CMIs pads work faster. Using the CMI pads, we can

drive 200ft./hr (with asbestos only 150ft./hr can be driven) which makes them
33% faster .
To do the job with asbestos pads, 400 mins were needed (20 set changes x 20

mins each).
In total 15000 ft. (=300 piles x 50 ft.) were driven into the ground. Using the
asbestos pads with it took them 100 hrs. i.e. 6000 mins (@150ft./hr) to do the
task. To sum this up it took about 6400 mins (=400+ 6000) to end the job.
In contrast the CMI pads only required 4 mins for one set change. Here also

15000 ft. were driven into the ground. But using CMI pads, it only took 75 hrs
i.e. 4500 mins (@ 200ft./hr). That makes a total work time of 4504 mins i.e.
1896 mins less (=6400-4504) which is equal to 31.6 hrs.

Assuming

that contractors rent the pile-driving


equipment for $138 per hour including costs for labor,
cranes and diesel hammer (Ref: Page-4 of case), they
could save $4360.80 (= $138 x 31.6 hrs) by using 6
pads made by Cumberland Metal Industries.

That leads to a differential value of $726.80 per pad (=

$4360.80/6pads).
Consequentially the total economic exchange value

compared to asbestos pads is $893.47 (= $726.80 +


$166.67).
Thus the pads need to be priced for less than $893.47

to justify its value to the customer.

Calculations on the basis of


Fazio test
There is even a Fazio- test to determine the

exchange value of the CMI pad. We can


proceed in the same manner as we did for the
Colerick Test.
In this case we get a higher exchange value of

$1272.44. That leads from a higher reference


value of $400 and a higher differential value
of $872.44.

Pricing Decision
The

management expects a contribution


margin of at least 40% of selling price.

If CMI purchases permanent tooling for the 11

inch pads for $50000, the marginal


manufacturing costs would be at $69.18 (Page
8 of case).
Adding the margin of 40% of selling price, the

bottom border price would be $115.30.

Conclusion
Regarding to the points already mentioned, the price should be between

$115.30 and $893.47 or $1272.44. To take a conservative view on it,


$893.47 should be taken as ceiling price.
Considering the price for an asbestos pad set, which is at $50, a

considerably high priced cushion pad may deter the customers from buying
the new metal pads. To persuade them to buy CMIs pads, good marketing
tools and distribution channels will be necessary.
By this, all advantages even those non-monetary ones like health or the

weight, can be communicated and the real value of the revolutionary


product can be delivered to the costumer.
We assume that the company would get the new pad patent-protected.

This would keep competitors outside the market and a great market share
would be the result even if the pads are priced closer to the lower border
price (say $350/pad).

Selling CMI pads


Purchasers

Influencers

Independent pile-driving contractors


(Cost saving)

Architectural/consulting engineers

Engineering/construction contractors
(Large construction projects)

Pile Hammer Manufacturers


Pile hammer distributing/renting
companies
Louisiana Contractor Magazine
"Piletalk seminars
Professor R. Stephen McCormack

Major steps & challenges


Architectural/consulting

engineers are the most vital influencers


because of their expertise - Considered Ultimate Authority
Convince them by expounding pads superior capabilities
CMI may find it a challenge to convince the rental companies

because the overall rental time would be reduced thus reducing their
operating profits.
Rental agency could actually take advantage of the faster turnaround,
allowing them to supply the same number of contractors with fewer
pile drivers
Another group that may wish CMI to fail is organized labour since the

new pads reduce the time necessary for pile driving thus saving on
labour costs. May result in less frequent work for the construction
labour or more layoffs.
CMI should contact labour leaders and push the health benefits of their
pads over asbestos.

Major steps & challenges contd...


Very few existing market channels for CMI to advertise or

develop consumer awareness apart from the purchasers


and influencers
Word-of-mouth communication may not be very effective
Construction-oriented

magazines such as Louisiana


Contractor, "Piletalk" seminars and Professor R. Stephen
McCormack are other channels they can pursue

The distribution structure for cushion pads has not been

well established either with no current market leader

Recommendations
CMI should take advantage of the existing networks to distribute their

pads rather than start from scratch with their own direct distribution
The manufacturers' representatives should be trained by a small CMI

sales team on how to market the cushion pads. They should highlight
the following: Cost savings benefit of the curled metal pads
The potential dangers of the asbestos pads
The CMI brand

CMI should also present the quantitative analysis of cost savings

experienced by the two experiments with Colerick and Fazio to all


potential customers
CMI should provide a sample set of pads to the largest pile driving

contractors along with a promotional package explaining the benefits


of the pads

Thank You