Harvard Business Recurled Metal
CASE STUDY Curled Metal Inc. Engineered Products Division Marketing Management Professor Joao Borges de Assuncao Alexandre Neves, student n? 153011108 Curled Metal Inc. Engineered Products Division CONTENTS The Problem Statement …………………………………………………………………………………………………. 3 Demand Estimation ……………………………………………………………………………………………………….. 3 Cost Estimation …………………………………………………………………………………………………………….. Price Method Proposal …………………………………………………………………………………………………… 5 Strategic Positioning and Pricing ……………………………………………………………………………………… 7 Curled Metal Inc. Engineered Products Division THE PROBLEM STATEMENT Curled Metal Inc. has been given the opportunity to diversify its business portfolio. CMI had an impressive growth in revenues from $750. 000 in 1991 to $55. 000. 000 in 2001.
Strict environmental regulations in automotive sector were successfully addressed by their product Slip-Seal, and as consequence sales increased steadily over a decade. But the future had become a little bit dark, as CMI’s management team felt that Slip-Seal could lose some terrain to their competitors, nevertheless, a new opportunity had risen. Curled Metal Technology could be successfully applied in the driving process of piles. The existent cushion pads weren’t produced in an efficient manner, they had performance problems in transmitting power, and they had to be replaced frequently.
Moreover they were made from hazardous materials that could cause accidents involving human losses and material losses. The CMI’s new product for pile driving had been tested by Kendrick and the results were a major success. Kendrick management team was putting a lot of pressure on CMI so that they established a price to the new product. Although CMI’s management team was eager to launch the new product on the market, they understood that a clear and long-term strategy positioning must be polled up before deciding which price to ask for the new product. DEMAND ESTIMATION
There were virtually no statistics whatsoever that could be used in order to estimate the potential U. S. market size for cushion pads, however, there were some pieces of information that could be used in order to get a sense of scale. First, a report by Construction Engineering magazine estimated that about 13. 000 pile hammers were owned by companies that perform pile driving as their usual business. Secondly Industry sources estimated that another 6. 500 to 13. 000 hammers were leased. From this estimative for the number of pile hammers (19. 500 to 26. 00) and assuming that they worked on average 25 weeks per year and 30 hours per week, they can assume that 290 to 390 Million feet were driven per year. Curled Metal Inc. Engineered Products Division Using a conservative estimation of 10. 000 feet/set for the resilience of a CMI set we have an estimative of demand between 174. 000 units/year and 234. 000 units/year. Market Demand Minimum Maximum Units 290. 000. 000 390. 000. 000 foot/year 29. 000 39. 000 foot/set 174. 000 234. 000 units/year 14. 500 19. 500 units/month COST ESTIMATION Production costs can be computed using the information presented on Exhibit 6.
We can either chose to produce with current equipment on the plan or investing in a new tooling. The tooling investment will approximately halve the production unitary costs from $444 to 208$. Any increment of capacity of 250 units/month will need an investment of $75. 000. A more efficient tooling, which enables cutting unitary costs to half, needs an investment of $150. 000 per any given upgrade of 250 units/month. Total Investment Without Tooling With Tooling Add. Capacity Add Tooling Variable Fixed Unitary Variable Fixed Unitary $0 $150. 000 $133 $311 $444 $82 $126 $208 $75. 00 $375. 000 $133 $311 $444 $82 $126 $208 $150. 000 $600. 000 $133 $311 $444 $82 $126 $208 $225. 000 $825. 000 $133 $311 $444 $82 $126 $208 $525. 000 $1. 725. 000 $133 $311 $444 $82 $126 $208 $825. 000 $2. 625. 000 $133 $311 $444 $82 $126 $208 $1. 125. 000 $3. 525. 000 $133 $311 $444 $82 $126 $208 $1. 425. 000 $4. 425. 000 $133 $311 $444 $82 $126 $208 $2. 025. 000 $6. 225. 000 $133 $311 $444 $82 $126 $208 $2. 925. 000 $8. 925. 000 $133 $311 $444 $82 $126 $208 $4. 425. 000 $13. 425. 000 $133 $311 $444 $82 $126 $208 $5. 925. 000 $17. 925. 000 $133 $311 $444 $82 $126 $208
Units/Month 250 500 750 1. 000 2. 000 3. 000 4. 000 5. 000 7. 000 10. 000 15. 000 20. 000 Curled Metal Inc. Engineered Products Division PRICE METHOD PROPOSAL One important step in defining the price of any given product is to define an interval where it would be beneficial both for the company and for the costumers. The minimum value that we could possible charge for each product is the average production cost, which is $444 (without tooling) and $208 (with tooling). On the upper side of the interval we have the value that is perceived by the customer.
This is the so called Perceived-Value Pricing. Perceived-Value is a multidimensional vector, usually in its dimensions we have: product performance, warranty quality, customer support, company’s reputation, etc… In order to compute Perceived-Value of the CMI cushion pads we are going to compute the saving by using CMI pads instead of the conventional ones. Next will be presented the data related to two experiences where CMI pads were tested against conventional pads. The value delivered to the customers will be essentially composed by time saving on rental machinery and time saving on wages.
Feets driven Driven speed Driven time (hours) Number of changes Time per change (hours) Changing time (hours) Total Time Cost / hour Total Cost Revenue Profit Profit (%) Kendrick Conventional 15. 000 150 100 20 0,33 6,67 107 714 $ 76. 160 $ $ 225. 000 $ $ 148. 840 $ 66% Corey CMI Conventional 15. 000 12. 000 200 160 75 75 1 50 0,07 0,33 0,07 16,67 75 92 714 714 53. 598 $ 65. 450 $ 225. 000 $ 324. 000 $ 171. 402 $ 258. 550 $ 76% 80% CMI 12. 000 200 60 1 0,07 0,07 60 714 42. 888 324. 000 281. 112 87% By breaking down the components of the cost it becomes clear where the value is being delivered.
For example the most significant contribution is the reduction of “overhead” costs, which accounts $9. 480 per set of CMI pads. Summing up the total components of the cost and dividing by the number of CMI pads in a set (the experiences used only one CMI set each) we obtain the value delivered by each CMI cushion pad. Curled Metal Inc. Engineered Products Division Conventional pads Labor costs Labor added value Renting costs Renting added value Overhead Overhead added value CMI total added value Added value per unit Kendrick $3. 000 $132 $4. 171 $282 $8. 11 $300 $9. 480 $25. 562 $4. 260 Corey $6. 000 $4. 171 $8. 911 $9. 480 $28. 562 $4. 760 For sake of simplicity we are going to considering the Added value per CMI unit as the average of the added value of the Kendrick and Corey experiences, which is approximately $4. 500. Therefore from now on we are considering the following price interval [$444 ; $4. 500] and according to a coherent Strategic Positioning for the company, a price will come up “naturally”. Another important measure of value, especially for pile hammer owners, is the profit/hour.
As the working time is decreased by the usage of CMI Pads, contractors are able to do provide more services per unit of time. We can consider time burdening, using conventional pads, as an opportunity cost of losing another project by inefficient usage of time in the current project. So I believe that the previous computation of “Added value per unit “ is a very conservative estimation for the value provided to the customer. Profit / foot Profit / hour Time Standard/Time CMI Added value per unit Kendrick Corey Conventional CMI Conventional CMI $ 9,92 $ 11,43 $ 21,55 $ 23,43 $ 1. 95,38 $ 2. 283,34 $ 2. 820,55 $ 4. 680,01 1. 43 (107h/75h) 1. 53 (92h/60h) $6. 092 $7. 298 Curled Metal Inc. Engineered Products Division STRATEGIC POSITIONING AND PRICING The final decision concerning the price per unit of CMI pad is intrinsically related to CMI’s strategic positioning in the Industry and how this position could be threatened over the long-run. As we know, by Porter’s work on Competitive Advantage, there are only three generic sustainable strategies over the long-run, which are: Cost Leadership, Differentiation and Focus.
As the result of launching this new and completely different product, CMI had the opportunity to positioning themselves in the Differentiation quadrant. Therefore the main goal of CMI is to create value to customers through product innovation and product unique quality, resilience and durability. This sense of uniqueness will permit CMI to create a competitive advantage over the long-run because customers will have no alternative product, with approximately the same quality/price ratio, in the market.
Over the long-run this Competitive Advantage will be threatened by competition, as they perceive the large profit margins of CMI’s cushion pads. As far as I am concern CMI has two moves to make in the short-run. One is to protect this product with a patent, so that they will create an entry barrier to new competitors. Nevertheless, if a competitor develops a new and more efficient technology, CMI Differentiation Competitive Advantage will be threatened. As a response to this competitor’s move CMI could chose to move to a Cost
Leadership positioning. So it is very important that CMI invest now in proving its plants with efficient tooling, so that over the long-run they can push their prices to a level where virtually eliminate the incentives to new competitors or ultimately drive the competition out of the market. The next table shows the estimated Market Share, Investment (plants and tooling), unitary cost, unitary Price, Revenue and Annual Profit for the next 4 years. The Investment figure accounts for the total investment for a given capacity in units/month.
In a deeper analysis Investment should be depreciated over the life period of plants/tooling and divided by the units produced in a given year and that result should be incremented to the unitary price. The initial investment could be financed using net profits of previous years and in the first year with 25% market share a profit of $107. 547. 600 is expected, which can be used to finance the investment in the following years. Year Units/Month 1 5. 000 2 10. 000 3 15. 000 4 20. 000 Share 25% 50% 75% 100% Investment Cost $4. 425. 000 $208 $8. 925. 000 $208 $13. 425. 000 $208 $17. 925. 000 $208 Price $2. 000 $2. 000 $2. 00 $2. 000 Revenue Annual Profit $120. 000. 000 $107. 547. 600 $240. 000. 000 $215. 095. 200 $360. 000. 000 $322. 642. 800 $480. 000. 000 $430. 190. 400 Curled Metal Inc. Engineered Products Division Next it is presented the comparison in terms of Profit / foot and Profit / hour between the Conventional Pads and CMI Pads for the chosen price of $2. 000 per unit. These are very important figures for the sales force team. Feets driven Driven speed Driven time (h) Number of changes Time per change (h) Change time Total Time Cost / hour Pads Total Cost Revenue Profit Profit increase (%) Profit / foot Profit / hour
Kendrick Conventional 15. 000 150 100 20 0,33 6,67 107 714 $ 3. 000,00 $ $ 79. 160 $ $ 225. 000 $ $ 145. 840 $ 9% $ 9,72 $ $ 1. 367,25 $ CMI 15. 000 200 75 1 0,07 0,07 75 714 12. 000,00 65. 598 225. 000 159. 402 10,63 2. 123,48 Corey Conventional 12. 000 160 75 50 0,33 16,67 92 714 $ 6. 000,00 $ $ 71. 450 $ $ 24. 000 $ $ 252. 550 $ 7% $ 21,05 $ $ 2. 755,09 $ CMI 12. 000 200 60 1 0,07 0,07 60 714 10. 000,00 52. 888 324. 000 271. 112 22,59 4. 513,52 The unitary price will be $2. 000 per unit of cushion pad, with unitary cost of $208, which turns out into a contribute margin of 90% after deducting all the manufactory costs.
