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02/27/2014

Curled Metal Inc.- Engineered Products Division: Case Study Analysis

Francesco Panazzolo

02/27/2014 Curled Metal Inc.- Engineered Products Division: Case Study Analysis Francesco Panazzolo Fall 2013-2014

Fall 2013-2014

Case Presentation

Curled Metal Inc. (CMI) faced a pricing and channel marketing decision for metal pile cushions utilized during pile driving. CMI’s approach to metal pads has significant efficiency advantages over currently used pads available in the market. However, CMI has to take into account several barriers to entry into this market. The primary barrier is that most companies viewed role of pads as a necessary accessory or tangent item instead of viewing them as a potentially value adding or cost reducing part of pile driving. In order to penetrate the market, CMI has to alter the point of view of pile driving pads for the opinion leaders, engineering firms, and contractors involved in the decision process.

There is several stakeholders to consider, first CMI that need a new successful product to the continued success of the company. The decisions regarding pile cushions could greatly increase the company’s revenues and profits. There are also several secondary stakeholders in the pile driving industry. Secondary stakeholders include pile hammer manufacturers, architectural consulting engineers, soil consultants, pile hammer distributing/renting companies, engineering/construction contractors, and independent pile driving contractors. The workers who drive piles are also stakeholders since the current pads may be hazardous to their health due to heat related injuries and weight. The following table summarizes some of the stakeholders; their projected importance to CMI’s marketing decisions, and their projected attitudes to switching from current pads to higher efficiency metal cushions.

 

Projected Attitude

Importance

Who?

Neutral

High

Pile Hammer Manufactures

Positive

High

Architectural/Consulting Engineers

Positive

Medium/Low

Soil Consultants

Negative

High

Pile Hammer Distributing/Renting Companies

Positive

High

Engineering/Construction Contractors

Positive

Medium/Low

Independent Pile-Driving Contractors

Positive

Medium (To CMI)

Workers

Positive

Medium/Medium High

Unions

Positive

High

Curled Metal Inc.

Key Issues

 

CMI needs to consider several marketing decisions. First, they must determine a method for pricing and

ultimately a price for the new metal pads. Second, the company must decide which channels to market the pads based on the selected pricing strategy. Third, CMI must determine how much to invest in manufacturing equipment by estimating market penetration and considering the costs and benefits of investing in pad producing equipment.

The market

Based on Sanwal's assumption we can estimate the maximum number of set of metal pads requested

annually by the market. Since the feet of piles driven amounted to between 290 and 390 million and the

new CMI set of pads would drive 10,000 feet, we can easily calculate that the market should be in a range of 29,000 to 39,000 sets per year.

Analysis

CMI’s new metal pile driving pads provided several benefits over the current cushions. Several Pad features

and

pricing decisions will be discussed and analyzed in this section. First, the safety and heat properties of

the

cushions will be analyzed and compared to current pads. Second, efficiency characteristics will be

analyzed and compared. Third, two methods of calculating the best price in order to match the price to the

value added for the customer will be discussed. Finally, an analysis of the different marketing channels and marketing strategy will be presented.

Safety

The new metal pads are much safer than conventional pads. Workers often had to handle super heated

pads and risked the possibility of being severely burned. Also micarta pads are much heavier than metal pads, thus increasing the risk of back and other weight related injuries. Conversely, CMI pads are significantly reduced the possibility of heat related injury, and are much lighter than the others pads.

Efficiency

CMI pads also provide several efficiency advantages over others pads. It is these efficiency benefits that

provide a strong argument for cost reduction to contractors and should influence purchasing decisions and

market penetration. In pile driving tests the CMI pads exhibited 33% more driving efficiency, a 5 times increase in pad change efficiency, and a 20 times increase in piles per pad efficiency.

In order to determine value to the customer for the increased efficiency, it is best to reduce all cost calculations to a cost-per-foot basis. The case study estimates that the average hourly cost of pile driving is $714. It further asserts that pile drivers average 150 feet per hour. Therefore, the cost of pile driving can be estimated at $4.76 per foot driven. This calculation considers only the average cost related with equipment rental, labor and overhead costs.

To obtain the real cost per foot driven we have also to consider the time spent to change the set of pads, in this case the labor requested a total of 20 changes and every change took 20 minutes for a total time of 400 minutes. We also know that it was a labor for a total of 15,000 feet driven with a mean of 150 feet per hour. Than the total time for the job, not considering delays and moving, can be estimated in 6400 minutes, equal to 106.67 hours.

Therefore the real cost per foot driven can be estimated at:

$∗ .

= 5.08 $ per foot

It can be noted that the down time impact for only a 7% to total cost. Hence the cost-per-foot saved by decreasing the down time to exchange pads is negligible compared to the cost-per-foot savings actuated by the increase in driving efficiency. The cost benefit from decreased pad change time runs about $4,700 per 300-55 ft. piles, or approximately 31.5 cents per foot driven. However, the cost-benefit from a 33% increase in efficiency based on an $5.08 per foot base is $1.2 per foot, a significant savings. The total quantitative value to the customer of $1.52 per foot (29.92%) can be calculated by adding all of the benefits per foot from efficiency increases.

The cost of purchasing conventional pads in the first test was $150 per set of pads. Further, it took 20 sets of pads to place 300 piles of 55 feet. Therefore, the conventional pads cost $150*20 to drive 15,000 (300*50) or 20 cents per foot driven. This can be compared to the CMI pad manufacturing costs showed in the following table, notice that this calculation in based on the assumption that a set of metal pads can drive 10,000 feet.

 

Existing

New Equipment (without cost of investment)

New Equipment (depreciation of machinery in 1 years)

New Equipment (depreciation of machinery in 2 years)

Equipment

Total variable

7,99 cents

4,91 cents

7,91 cents

6,41 cents

Total manufacturing cost

26,66 cents

12,45 cents

15,45 cents

13,95 cents

It is important to note that the manufacturing costs are less or align to the actual costs of pads per foot. It should be remembered that the CMI pads save for clients 1.52$ per foot from efficiency increases.

Since the total market for pile driving cushion pads exceeds 17,000 pads per month and it is estimated that

CMI should be able to capture a significant share of the market, a better calculation of manufacturing cost

per foot is to use the break-even point based on the $150,000 equipment investment per additional 250 pads per month. Assuming that the $150,000 is basically a fixed cost, the third and fourth column of the previous table showed the breakeven price per foot with two different payback period The calculated breakeven manufacturing cost is still below the cost of the selling price for other pads. Note that in

proceeding years the $150,000 investments would not be required, further increasing profits.

The following table shows the break-even price per foot considering the two different period and

increasing constantly the monthly capacity. It is assumed that every increase of 250 pads per month required a further investment in equipment equal to $75,000 and also that the cost of labor and materials

increase proportionally (double the capacity, double cost of labor and material and so on). The third and

the fifth column show the break-even price considering economies of scale, minus 15% of labor and

material cost. Prices are expressed in cents of dollars.

   

1

1 Year economies of scale

2

2 Year economies of scale

Cost

Capacity

Year

Years

Total variable

250

7,91

7,91

6,41

6,41

Total manufacturing cost

250

15,45

15,45

13,95

13,95

Total variable

500

12,07

11,33

10,95

10,21

Total manufacturing cost

500

27,15

25,29

26,03

24,16

Total variable

750

16,73

15,26

15,73

14,26

Total manufacturing cost

750

39,36

35,62

38,36

34,62

Total variable

1000

21,52

19,31

20,58

18,37

Total manufacturing cost

1000

51,68

46,08

50,75

45,14

Total variable

1250

26,35

23,41

25,45

22,51

Total manufacturing cost

1250

64,06

56,59

63,16

55,69

Total variable

1500

31,21

27,53

30,34

26,65

Total manufacturing cost

1500

76,46

67,13

75,59

66,25

Total variable

1750

36,09

31,67

35,23

30,81

Total manufacturing cost

1750

88,88

77,67

88,02

76,82

Total variable

2000

40,97

35,81

40,13

34,97

Total manufacturing cost

2000

101,31

88,23

100,46

87,39

Total variable

2250

45,86

44,12

45,03

39,13

Total manufacturing cost

2250

113,74

109,36

112,90

97,96

Total variable

2500

50,75

48,29

49,93

43,30

Total manufacturing cost

2500

126,17

119,93

125,35

108,54

Total variable

2750

55,65

52,45

54,83

47,47

Total manufacturing cost

2750

138,61

130,51

137,79

119,12

Total variable

3000

60,55

56,61

59,74

51,64

Total manufacturing cost

3000

151,05

141,08

150,24

129,69

The corresponding minimum selling price per set can be obtained multiplying the cost per foot showed in

the table per 10,000 (feet driven by a set of CMI pads).

Marketing Channels

There are several different channels available to market the CMI pads. For example, the company could hire a sales force and attempt to directly sell to customers or attempt to go through distributors. Hiring a sales force seems to be an unnecessary expense. Since the pads are not considered a high profile product by the users, the leverage held by current distributors should be enough to drive sales. In fact, an internal sales force may confuse the purchasing process because contractors may not be willing to take the time or effort to talk to salesmen for such a small factor in their overall project. The purchasing decision is as such that if a distributor recommends or supplies a certain brand of pads, the construction crews are likely to use it without much consideration.

Decision Alternatives

The total market for pile driving averages 340 million feet per year. If each set of metal pads, containing 6 pads each, can withstand 10,000 feet of pile driving, then the total estimated market would be 204 thousand pads per year or 17 thousand pads per month. It can be reasonably assumed that CMI should be able to capture more than 1.4% of this market – 250 pads per month. Therefore, it will require several $75,000 investments for equipment to produce enough of the total market demand to be effective. Fortunately the low cost of production per foot, 15.45 cents with a 1 year breakeven point and payback period on investment enables CMI to investigate two different pricing options.

Alternative 1: General Markup

The first alternative is for Curled Metal Inc. to select a general markup price where a specific margin is reached. Since the cost of breakeven production over one year is $1,545.24 and the required corporate margin is 50%, a good selling price might be 1.5*$1,545.24 = $2,317.86 per set of pads. Assuming the distributors and retailers required a 30% margin, the retail price would be $3,13.21 or 31.21 cents per pile foot driven. This alternative is in line with the price of current used pads in the test scenario, hence competitive. The advantage of this method is it fulfills the company objective of 50% markup, is easy to calculate, and competes well with other pads. Furthermore, proceeding years will realize a greater than 50% margin since the $150,000 equipment investment will be eliminated. This approach would work best for a strategy of extensive market penetration. Since the price of the pads are the same current used, CMI needs only to convince consumers of the efficiency and safety advantages to convert them to the new pads.

However, this pricing method does not consider the possibility of premium pricing due to efficiency cost savings or value added to the customer by using the CMI pads.

Alternative 2: Value Added to Customer Approach

Another alternative is to attempt to split the cost benefit or value added by using the new metal pads with consumers. This scenario charges a premium price based on how much value and cost savings the new pads present to the customer. It is estimated that the metal pads should save contractors $1.52 per foot driven. If CMI look to earn the 33% of the cost savings, then they could potentially charge $1.52*.33 = $0.5 per foot driven. Final price will be 31.21 cents (from previous solution) plus 50 cents equal to 81.21 cents per foot driven. This would result in a very high cost of $8,120 per set of pads. Although the cost is completely justified, it would take considerable marketing to convince potential customers to upgrade from $150 per micarta set to $8,120 per CMI set, especially if the job requires driving less than 300 piles. This approach could be considered a skimming approach and may yield high profits with low market penetration. Another advantage to this method is that initial investment and risk would be low since the number of equipment investments would be minimized based on the low market penetration and production needs.

Recommendation

Pricing Recommendations

Regardless of the alternative selected, marketing the new steel pile cushions will require redefining consumer perceptions of pile pads in two ways. First, CMI must show that pads are an integral part of pile driving efficiency and thus an industry cost driver. Second, the company must change the way consumers view pricing of pile driving pads from a price-per-pad or set of pads mind-set to price-per-foot driven mindset. Some companies may directly compare the price of a set of micarta pads, $150, against the price of a set of metal pads, exceeding $3,000, without considering the per foot ramifications. CMI needs to make sure that customers understand the $3,000 pads are actually cheaper on a per-foot basis than the $150 micarta pads.

Alternative 2 provides the highest markup but however it would yield low market penetration. Although the cost could be justified, I believe it would be hard to convince contractors that the premium price is worth the cost savings based on efficiency. Furthermore, competitors might take advantage of the high price and penetrate the market with a similar performing product at a much lower price. Alternative 1, directly competing with micarta, would severely limit competitive entry and have the greatest market penetration and it meet the company required 50% margin. It is a simple price scheme that should yield high market penetration and significant profits. CMI would only need to convince contractors of the price- per-foot comparison to micarta pads and show the cost savings based on efficiency. Therefore, pursuing market penetration via an alternative 1 approach could be probably the best alternative for Curled Metals

The main concern about a high market penetration is related with the production cost, equipment investments can be easily amortized with the increasing volumes but the cost of fixed factory overhead play the main role in determining final price because they are based on direct labor. With high volume, economies of scale have to be pursued and also a decreasing of the percentage charged to the product.

If after a further evaluation of production cost, the cost per driven foot is increasing in a slightly proportional way with the quantity produced, the best alternative will be the second one that apply a premium markup to the costumer and keep a low market penetration.

Channel Recommendations

It is further recommended that CMI market the new pads through distributors using a push method. They should also market directly to contractors and engineering firms by educating them on the efficiency and safety benefits of the new CMI pads (a pull approach). The safety hazard posed by micarta pads provides another marketing opportunity. The company should lobby the labor unions to push for higher safety standards and abandon the hazardous used pads. This avenue may prove to be an affective long-term strategy to force adoption of the new pads and increase market penetration.

Production Recommendations

Production should be calculated by expected market penetration per year. It is not unreasonable to assume that CMI pads could capture 10% of the market during the first year or 1,700 pads per month. This would require an initial investment of $150,000 and six additional $75,000 investments or $ 600,000 to produce 1,750 pads per month. The total revenue generated during the first year would be (1,750/6)*$8120 = $2,368,333.33. The cost to produce the pads, including equipment investment is estimated at $207.54*1,750 + $600,000 = $963,195.

The total profit is estimated at $2,368,333.33- $963,195 = $1,405,138.33.

As said alternative 1 is not actionable with high volumes unless CMI do not find a way to reduce the incidence of labor and markup related to fixed cost. Also alternative 2 is not very suitable with high volumes because the cost of production increase quite proportionally. Accordingly CMI should review its

price politics increasing them to cover the costs, but this is not an desirable solution because alternative 2 already apply a premium price to costumers.

Without more information about the possibility to reduce production costs with increasing volumes and the proper amortization period for machinery, my suggestion for CMI is to pursue a low penetration in the market using the second alternative for pricing the pads and target premium costumers for bigger and more sophisticated job.

Marketing decisions

Once pricing policy is established (premium price), marketing decisions must support the business strategy. Marketing has to focus on the product differentiation underlining that the CMI cushion pads eliminate downtime making them a work-saving tool, represent a safest solution for the health of the workers and more important allow a significant cost savings for the costumer.

The main person whom can boost the company name among the high specialized engineers and the bigger

companies is Professor Stephen McCormack. As a scientist he can easily recognize the superior quality of

CMI pads and be a fundamental resource for company’s brand building and promoting. Asking to him to

show to the community (writing a paper or with a conference) the properties of the new pads, the company can reach the main target of its marketing that is the “Soil consultants” and engineers that work

to the most expensive projects. This strategy should enable the company to gain a market share large enough to generate a substantial profit and simultaneously small enough to keep low the investment and production costs. Also make a partnership with Prometheus Iron Works, asking to them to use the pads on

their top level product can be a good marketing strategy

For the long period, considering the product life cycle, CMI has to focalize his effort in cost reduction to allow a progressively decreasing of the price. In fact, the CMI should be aware that other competitors could enter into the market as the product is easily imitable. Building a strong brand image of quality with alternative 2 can bring to a major market penetration when the price will be lowered. For this future opportunity, marketing has to focus on publication in magazines like “Oklahoma Contractor”, sponsor seminars like “Piletalk” and on the importance of word-of-mouth communication.