Embed Size (px)
Citation preview
Jennifer Phillips
Curled Metal Products, Inc.
Economic EnvironmentEarly 1990’sEconomy emerging from recessionSlow growth
Curled Metal Products, Inc.Producer of engine parts for auto industry
Auto industry in recessionSales had dropped 10% from 1991 to 1992Net income had decreased 39% during that
timeNew product developed by engineering
departmentCushion pad used in driving piles
Able to use same manufacturing technology
Pile Driving IndustryUsed wood blocks or asbestos as pads
Inefficient and unsafeThree segments
Segment 1: 20% of market; pile driving contractors with jobs scheduled far into future; own about 20 rigs apiece
Segment 2: 30% of market; large general contractors; usually own a pile driver for larger projects and use own employees
Segment 3: 30% of market; small general contractors; rent equipment as needed and hire pile driving crews
Testing the Product
Convinced Colerick Foundations to test the pads on a papermill expansion
CMP pads drove piles 33% faster than asbestos
Eliminated downtime for changeover
IssuesHow should CMP price the pads?
Use existing equipment orPurchase $50,000 new tooling
How should CMP market the pads?Target which segmentsDistribution channels
Determining Price Costs
Cost-plus pricing based on total costs Achieve desired 45% gross margin
Competitive products Adding value to CMP pads
Time-saving qualities Safety Efficiency
Customer Demand No statistical data available Research did indicate that average job
was 10,000 feet with 345 million feet of piles driven each year
Cost AssumptionsEstimate per Pad with
Existing Tooling and Equipment
Variable Costs
Material $15.64
Labor 28.80
Total 44.44
Fixed Factory Overhead
@ 360% of direct labor 103.68
Total Manufacturing cost $148.12
Estimated with Purchase of
$50,000 of New Tooling
Variable Costs
Material $15.64
Labor 11.64
Total 27.28
Fixed Factory Overhead
@ 360% of direct labor 41.90
Total Manufacturing cost $69.18
Total cost reduction of about 53%Additional capacity of 3,000 pads per year can be added at a cost of $75,000 for additional equipment and tooling.
Marketing AssumptionsNo manufacturers dominating businessNo structure to distribution
Dealers and renters of hammers provided pads
Heavy construction supply houses sold themPile manufacturers offered them
Pads were a necessary part of businessAsbestos pads were priced at $2 to $3 each
Analysis
Existing Tooling New Tooling
Output (Annual) 3000 3000
Total Fixed Costs @ 360% of Direct Labor $311,040.00
$103.68 per unit $125,700.00
$41.90 per unit
Total Variable Costs $133,320.00$44.44 per unit $81,840.00
$27.28 per unit
Extra Tooling Requirements $50,000.00
Average Total Costs $148.12 $85.85
Average Revenue (Price) $269.31 $156.08
Total Revenue $807,927.27 $468,254.55
Total Costs $444,360.00 $257,540.00
Profit/(Loss) $363,567.27 $210,714.55
Price is based on desired 45% gross margin
Feet driven per hour (does not consider downtime) 150 200Piles driven per set of pads 15 300Number of pads per set 24 6Number of sets required 20 1Number of set changes 20 1Time required to change a set 20 mins. 4 mins.Cost per set $50 $0
Cost per pad (cost per set/# of pads per set) $2.08Cost based on # of sets required (cost per set X # of sets required) $1,000 $0
Total time for set changes (time required to change set X # of set changes) 400 4Conversion to hours 6.67 0.07
Total feet driven 15,000 15,000Hours to drive total job (total feet/feet driven per hr.) 100 75Time for set changes 6.67 0.07Hidden costs: Repositioning (30 min. for each hour of drive time) 50 37.50Total Hours for job 156.67 112.57
Total hours saved 44.10
Average cost per job hour:Labor $26 4,073.42 2,926.82Crane Operator $18 2,820.06 2,026.26General Overhead $100 15,667.00 11,257.00
Total cost of pads 1,000.00 0.00
Total cost of job 23,560.48 16,210.08
Total costs saved $7,350.40
Asbestos CMP
Results from Colerick Test
X
Table A
Feet driven per hour (does not consider downtime) 150 200Piles driven per set of pads 15 300Number of pads per set 24 6Number of sets required 20 1Number of set changes 20 1Time required to change a set 20 mins. 4 mins.Cost per set $50 $942
Cost per pad (cost per set/# of pads per set) $2.08 $157Cost based on # of sets required (cost per set X # of sets required) $1,000 $942
Total time for set changes (time required to change set X # of set changes) 400 4Conversion to hours 6.67 0.07
Total feet driven 15,000 15,000Hours to drive total job (total feet/feet driven per hr.) 100 75Time for set changes 6.67 0.07Hidden costs: Repositioning (30 min. for each hour of drive time) 50 37.50Total Hours for job 156.67 112.57
Total hours saved 44.10
Average cost per job hour:Labor $26 $4,073.42 $2,926.82Crane Operator $18 2820.06 2026.26General Overhead $100 15667.00 11257.00
Total cost of pads 1000.00 942.00
Total cost of job $23,560.48 $17,152.08
Total costs saved $6,408.40
Asbestos CMP
Results from Colerick Test
Lowest possible price to cover costs and still obtain 45% gross margin
Table A
Feet driven per hour (does not consider downtime) 150 200Piles driven per set of pads 15 300Number of pads per set 24 6Number of sets required 20 1Number of set changes 20 1Time required to change a set 20 mins. 4 mins.Cost per set $50 $7,350
Cost per pad (cost per set/# of pads per set) $2.08 $1,225Cost based on # of sets required (cost per set X # of sets required) $1,000 $7,350
Total time for set changes (time required to change set X # of set changes) 400 4Conversion to hours 6.67 0.07
Total feet driven 15,000 15,000Hours to drive total job (total feet/feet driven per hr.) 100 75Time for set changes 6.67 0.07Hidden costs: Repositioning (30 min. for each hour of drive time) 50 37.50Total Hours for job 156.67 112.57
Total hours saved 44.10
Average cost per job hour:Labor $26 $4,073.42 $2,926.82Crane Operator $18 2820.06 2026.26General Overhead $100 15,667.00 11,257.00
Total cost of pads 1,000.00 7,350.00
Total cost of job $23,560.48 $23,560.08
Total costs saved $0.40
Asbestos CMP
Results from Colerick Test
Theoretically, this is the highest price.
No savings are provided to customer and marketing at this price would be nearly impossible.
Table A
Recommendations
Feet driven per hour (does not consider downtime) 150 200Piles driven per set of pads 15 300Number of pads per set 24 6Number of sets required 20 1Number of set changes 20 1Time required to change a set 20 mins. 4 mins.Cost per set $50 $1,500
Cost per pad (cost per set/# of pads per set) $2.08 $250Cost based on # of sets required (cost per set X # of sets required) $1,000 $1,500
Total time for set changes (time required to change set X # of set changes) 400 4Conversion to hours 6.67 0.07
Total feet driven 15,000 15,000Hours to drive total job (total feet/feet driven per hr.) 100 75Time for set changes 6.67 0.07Hidden costs: Repositioning (30 min. for each hour of drive time) 50 37.50Total Hours for job 156.67 112.57
Total hours saved 44.10
Average cost per job hour:Labor $26 $4,073.42 $2,926.82Crane Operator $18 2820.06 2026.26General Overhead $100 $15,667.00 $11,257.00
Total cost of pads $1,000.00 $1,500.00
Total cost of job $23,560.48 $17,710.08
Total costs saved $5,850.40
Asbestos CMP
Results from Colerick Test
Table A
Set initial price at $250/pad
Invest in $50,000 New Tooling Maintain 3,000 pad capacity initially
Existing Tooling New Tooling
Output (Annual) 3000 3000Total Fixed Costs @ 360% Direct Labor $311,040.00 $125,700.00
Total Variable Costs $133,320.00 $81,840.00
Extra Tooling Requirements $50,000.00
Average Total Costs $148.12 $85.85
Average Revenue (Price) $250.00 $250.00
Total Revenue $750,000.00 $750,000.00
Total Costs $444,360.00 $257,540.00
Profit/(Loss) $305,640.00 $492,460.00
Marketing StrategyGet a PatentTarget mostly Segments 1 and 2
Usually own equipmentSegment 3 rented equipment; pads provided
by rental companyBuy from supply companies
Distribution ChannelFind representatives that sell to supply
houses and distributors of materialsOffer commission of 1.5% for each set of 6 pads
soldOffer distributors an initial 15% discount for
first order of 50 padsKeep avenues open for direct sales to
contractorsSell on benefits of product
Safer than asbestosMore efficientSaves substantial amount of time
Less time for each job = more jobsRepresentatives and distributors will have to know
of these qualities
At end of Year 1, determine whether additional capacity is necessary.
Year 1# of Units Manufactured 3,000 6,000 9,000 Net Sales ($250/pad) 750,000$ 1,500,000$ 2,250,000$
Costs and Expenses Cost of sales Materials 15.64$ 46,920 93,840 140,760 Direct Labor 11.64$ 34,920 69,840 104,760 Manufacturing Overhead 41.90$ 125,700 251,400 377,100
Selling and Marketing Expenses 11,250 22,500 33,750
Extra Tooling 50,000 75,000 150,000
Profit/(Loss) 481,210$ 987,420$ 1,443,630$
Year 2
SourcesNorton, R. “The U.S. Economy Begins to
Crawl From the Mire.” Fortune Magazine. November 1, 1993.
