Industrial Grinders

Marshawn Pettes
With a large quantity of steel rings on hand, what would happen if the demand for steel rings was
completely destroyed by new plastic rings over taking the market?

5/07/2013
Industrial Grinders N.V. Case Analysis

Problem Statement
Industrial Grinders N.V. (IG) has a large quantity of steel rings on hand and the
substantial inventory of special steel for their manufacture with a total book value of the
inventories exceeding $93,000. Lawrence Bridgeman, the general manager of the
German plant of IG, is concern that the demand for steel rings will be completely
destroyed when the plastic rings overtake the market in which could cause a direct hit to
the bottom line. Bridgeman has to figure out what to do with the excessive inventory and
determine the best action to take that will make a profit and cut deficits.

Identify the Criteria

Low Cost

Sale Price

High Sales Per Week

Weight the Criteria

Criteria Weight
Low Cost 0.5
Sale Price 0.2
High Sales Per Week 0.3

Generate Alternatives
Produce more steel with the extra material and try to sell as much as possible.

Throw away all of the steel rings and materials. Produce and sell only plastic rings.

Sell finished steel rings and sell the plastic ring only in markets where competitors sell it.

Rate each Alternative on each Criterion (1-10, 10 being the Best)

High Sales
Alternative Low Cost Sale Price Per Week
Produce More Steel 1 5 7
Drop Steel, Just Plastic 8 5 3
Plastic in Selective Markets 8 5 6
Marshawn Pettes
Industrial Grinders N.V.
05/07/13
Industrial Grinders N.V. Case Analysis

Produce More Steel

In terms of using the material to produce more steel rings, I would have to ask,
“Would you spend $64,628.25 so save $26,400.00?” then I would follow with a second
and third question “What if there is a chance that you could make a profit of $33,783.88
in about two years, if you sale all of the steel, but there is no grantee and the chances are
slim to none?” “Would you change your answer?” Figure 3 illustrates the risk of utilizing
the material on hand to produce more steel. Although IG has $26,400.00 worth of
material to produce an additional 34,500 rings, it would cost approximately $68,628.25 in
additional cost for direct labor and overhead to actually produce the rings (See Figure 1).
This will cause the company to have more rings totaling to approximately 59,742, a
greater book value at about $(157,628.25), and ultimately a greater risk to loss even more
money. The projected timeframe to sale all 59,742 rings is a little under 2 years with the
assumption that IG continues to sell at the same rate of 690 rings per week. When the
plastic rings spread throughout the market, it would most likely destroy the demand for
steel rings. This would make it very difficult to sell 59,742 rings when no one wants
them.

Drop Steel, Just Plastic

In mid-September the company’s projected amount of steel rings on hand are

approximately 15,100. This means that the company is projecting to sell about 10,142
from May to September, in which the profit from those sales should bring the book value
down from $(93,000.00) to $(60,506.27). If IG was to throw all of the steel rings and
material away at this point, they would have to cover a deficit of about $(60,506.27) with
just profit from plastic rings. Due to the fact that plastic rings has a lifespan four times as
long as steel rings, selling plastic rings at the same rate of steel rings would be extremely
difficult. I would assume that the plastic rings would most likely sale at a rate around 173
per week, which is four times less than the steel rings. The rings are only replaced when
they go bad and if the life of the rings expands then it would take longer to get a resale. If
this assumption turns out to be true, then it would take approximately 2 years and 3
months to cover the deficit of the steel rings with just the profits from the plastic rings
(See Figure 3).

Plastic Only in Selective Markets

Marshawn Pettes
Industrial Grinders N.V.
05/07/13
Industrial Grinders N.V. Case Analysis
Customer would begin to question why the plastic rings are only available to
certain segment or location. They may also question why they are paying the same
amount for steel rings when the plastic rings are portrayed to be better with a greater
longevity. This could be taking as unfair to some of the customers in which could
eventually harm the sales of IG machines.

Compute the optimal decision

Low High Sales
Alternative Cost Sale Price Per Week Totals
Produce More Steel 0.5 1 2.1 3.6
Drop Steel, Just Plastic 4 1 0.9 5.9
Plastic in Selective
Markets 4 1 1.8 6.8

According to the information above, the optimal decision in this case is to

continue selling steel rings in the normal markets and only sell the plastic rings in the
markets that the competitors are already selling them in. This option is best among the
three alternatives in terms of making profit and cutting deficits. Producing more steel or
just selling plastic rings both scored less against the criteria. Producing more steel rings
may sale more per week for a limited of time but the cost of producing steel rings is very
high compared to plastic rings. On the other hand, the cost of producing plastic rings in
very low but the sales per week is projected to decrease due to the longevity of the
product. This results in steel rings and plastic rings being similar to one another in terms
of creating revenue in the long run (See Figure 5).

Marshawn Pettes
Industrial Grinders N.V.
05/07/13
Industrial Grinders N.V. Case Analysis
Recommendation

It is too risky to utilize the $26,400.00 worth of material to produce more steel
rings and the special steel could not be sold even for scrap. Bridgeman should throw out
the $26,400.00 worth of special steel and focus more so on selling all of the finish rings.
The projected time it would take to sell the remaining 15,100 rings, in September, is five
months (See Figure 2). If all of the steel rings sale, the net book value will go down from
$(60,506.27) to about $(12,125.87) in February. A small investment of $4,320.55 can
cover the $(12,125.87) debt left over from the steel rings.

Bridgeman should take $4,320.55 from labor to purchase the tools and equipment
to make plastic rings and cover the cost of 3,785 plastic rings. If IG sales approximately
3,785 plastic rings, they would break even of the total debt left over from the steel rings.
The projected timeframe of selling 3,785 plastic rings is also five months (See Figure 4).

Therefore, Bridgeman should offer both steel and plastic rings with the
assumption and hope that some customers would fall into the status quo trap and continue
buying steel rings. The plastic rings are currently only affecting about 10% of IG’s
markets. This gives IG the room needed to sell off their finish steel in which could result
in them solving their inventory problem. If IG provides the customers with the
opportunity to choose between plastic or steel themselves, the whole idea about the
customers finding out and harming sales would be irrelevant because they made the
choice themselves. Those that fall into the status quo trap will buy the steel until they try
the plastic for the first time. This is a good thing because it would bring the inventory for
steel down and allow the customers to become more comfortable with the plastic rings,
because the steel rings is projected to discontinue.

Marshawn Pettes
Industrial Grinders N.V.
05/07/13
Industrial Grinders N.V. Case Analysis
Price Per 100 Units $320.40
Steel Rings Sold per week 690
Life 2 months
Plastic Rings Sold per week 173
Life 8 months

Figure 1:

STEEL
MAY
On hand
Book Value $93,000.00
Cost of Finish Goods $66,600.00
Unit Per $ 0.38
Finished Rings 25,242

Produce More Steel

Cost of Material $26,400.00
Rings Produce 34,500
Cost to Produce 100 $263.85
Additional Cost to Produce $64,628.25
Total Cost to Produce 34500 $91,028.25

Total Finish Rings 59,742

Total Cost $157,628.25
Weeks To Sell 87
Months 22

Sunk Cost $191,412.13

Poss. Profit $33,783.88

Marshawn Pettes
Industrial Grinders N.V.
05/07/13
Industrial Grinders N.V. Case Analysis

Figure 2:

Mid-September
Finished Rings 15,100
Weeks to Sell 22
Months 5
Rings Sold 10,142
Profit from Rings Sold $32,493.73
Book Value $60,506.27

Sunk Cost $48,380.40

Poss. Lost $(12,125.87)

Produce More Steel

Book Value $125,134.52
Total Rings 49,600
Weeks to Sell 72
Months 18

Sunk Cost $158,918.40

Poss. Profit $33,783.88

Break Even Units 39,056

Weeks 57
Months 14

Profit after 5 months $45,112.32

Total Lost after 5 months $(80,022.20)

Figure 3:

Just Plastic
Book Value $60,506.27
Break Even Unit 18,885
Weeks 109
Months 27
Cost $12,577.15
Marshawn Pettes
Industrial Grinders N.V.
05/07/13
Industrial Grinders N.V. Case Analysis

Figure 4:

Just Plastic After Steel on hand

is Sold

Book Value $12,125.87

Break Even Unit 3,785
Weeks 22
Months 5
Cost $2,520.55
Additional cost $1,800.00
Total cost $4,320.55

Figure 5:

Steel Vs. Plastic From September to December

Steel Plastic
Sell (mid Sept-Dec) 11,040 2,768
Sales $35,372.16 $8,868.67
Cost $29,129.04 $1,843.49
Tools and Equipment $1,800.00
Net Income in Dec $6,243.12 $5,225.18

Steel Vs. Plastic Rings for 1 Year

Steel Plastic Net Difference
Sales $114,959.52 $28,823.18
Cost $94,669.38 $5,991.34
Net Income $20,290.14 $22,831.85 $2,541.71 Plastic
After tools $
$21,031.85 $741.71 equip

Marshawn Pettes
Industrial Grinders N.V.
05/07/13
Industrial Grinders N.V. Case Analysis

Calculations

Book Value - Cost of Material = Cost of Finish Goods

93000 - $ 26,400.00 = $ 66,600.00

Rings Produce X Total Cost of Rings /100= Total Cost to Produce 34500 units

34500 X 263.85/100 = $ 91,028.25

Total Cost to Produce 34500 Units - Cost of Material = Additional Cost

91028.25 - 26400 = 64,628.25

Rings Produce / Total Cost to Produce = Unit Per $

34500 / 91028.25 = 0.38

Cost of Finish Goods X Unit Per $ = Total Finish Rings

66,600 X 0.38 = 25,242

Finish Rings + Poss. New Rings = Total Finish Rings

25242 + 34500 = 59742

Book Value + Additional Cost = Total Cost

93000 + 64628.25 = 157628.25

Sunk Cost: Total of Profit that could have been made from the Units
Poss. Profit: Total Profit less the Cost of the Units
Weeks to Sale: Total Units divided by the Rings Sold per Week
Months to Sale: Total Weeks to sale divided by 4
Break Even: Book Value divided by Price per Unit
Sales: Number of Units times Price per Unit
Cost: Number of Units times Cost per Unit

Marshawn Pettes
Industrial Grinders N.V.
05/07/13