Curled Metal Products, Inc. Jennifer Phillips

Economic Environment Early 1990’s Economy emerging from recession Slow growth

Curled Metal Products, Inc. Producer of engine parts for auto industry Auto industry in recession Sales had dropped 10% from 1991 to 1992 Net income had decreased 39% during that time New product developed by engineering department Cushion pad used in driving piles Able to use same manufacturing technology

Pile Driving Industry Used wood blocks or asbestos as pads Inefficient and unsafe Three 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

Issues How should CMP price the pads? How should CMP market the pads? Use existing equipment or Purchase $50,000 new tooling How should CMP market the pads? Target which segments Distribution channels

Determining Price Costs Competitive products Customer Demand 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

Existing Tooling and Equipment Estimated with Purchase of Cost Assumptions Estimate 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 Additional capacity of 3,000 pads per year can be added at a cost of $75,000 for additional equipment and tooling. Total cost reduction of about 53%

Marketing Assumptions No manufacturers dominating business No structure to distribution Dealers and renters of hammers provided pads Heavy construction supply houses sold them Pile manufacturers offered them Pads were a necessary part of business Asbestos pads were priced at $2 to $3 each

Analysis

Price is based on desired 45% gross margin

Results from Colerick Test X Table A

Results from Colerick Test Lowest possible price to cover costs and still obtain 45% gross margin Table A 13

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 14

Recommendations

Set initial price at $250/pad Results from Colerick Test Table A

Invest in $50,000 New Tooling Maintain 3,000 pad capacity initially Over 60% higher profit by investing in new tooling. Achieve 65% gross margin

Marketing Strategy Get a Patent Target mostly Segments 1 and 2 Usually own equipment Segment 3 rented equipment; pads provided by rental company Buy from supply companies

Distribution Channel Find representatives that sell to supply houses and distributors of materials Offer commission of 1.5% for each set of 6 pads sold Offer distributors an initial 15% discount for first order of 50 pads Keep avenues open for direct sales to contractors Sell on benefits of product Safer than asbestos More efficient Saves substantial amount of time Less time for each job = more jobs Representatives and distributors will have to know of these qualities

At end of Year 1, determine whether additional capacity is necessary.

Sources Norton, R. “The U.S. Economy Begins to Crawl From the Mire.” Fortune Magazine. November 1, 1993.