Industrial Grinders, N.V. has decided to start manufacturing and selling plastic rings for use in their machines. Currently, they manufacture and sell steel rings, along with the machines they also manufacture and sell through another division of the company. They recently discovered that a competitor in France will now be selling plastic rings. These plastic rings will serve the same purpose as the steel rings Industrial Grinders manufactures. However, they cost less to manufacture and they last longer. Management has decided that Industrial Grinders will now start to manufacture plastic rings. Lawrence Bridgeman, General Manager of the German plant, is tasked with deciding whether or not he should scrap a large quantity of steel, manufacture and sell both steel and plastic rings or continue to manufacture and sell steel until their stock of steel is depleted. It was strongly suggested by management from the parent company in Holland that they should try to find some use for their special-stock steel, and if not – they should manufacture the steel rings. This is a potential waste of resources – money spent on manufacturing for rings they might never sell, rather than just scrapping the steel altogether. I see Bridgeman’s main problem being how to convince management of one option over the other(s). Key Issues:
An inventory of steel indicates that the total book value of steel rings and unprocessed stock is valued around $93,000. The unprocessed inventory of steel is valued at $26,400. The steel is manufactured specially for this company and purchased in large quantities so they can get a mill to manufacture it for them. It is doubtful that they can find another use for the remaining $26,400 worth of stock. Selling plastic rings in the competitor’s market while continuing to sell steel in the other markets could potentially harm current sales – as those customers could feel that they are getting an inferior product for the same price as the longer-lasting plastic ring. While this is possible, it is guesswork and since sales have not yet been affected, we have no proof one way or another. The sales manager was also concerned that if customers felt they were getting inferior rings, their attitude could also be reflected in lower sales of IG’s machines. The problem with this argument is that it is merely guesswork, and we were not provided with how many machines IG sells. We have no way of knowing the full impact on sales. We also do not know how much profit each machine contributes, so it is a concern, but not one we can measure based on the information provided in the case study. I know that much of what goes into “new” ideas for a company can be guesswork, as things which have never been tried cannot yet be measured. But you really need to know your market, know your current customers, and be able to accurately predict the future in order to throw everything away on a guess. Since this is a pretty new idea for 1974, some of their guesses seem off-base to me. For one thing, the world was not the same in 1974 as it is today. Borders were not as fluid then, and people did not email or make international calls regularly. Yes, word of plastic rings versus steel ones would eventually get to customers, but probably not nearly as fast as it would in today’s world. Also, plastic was a pretty new material in 1974. It had been used in many things already, but not like in today’s world. Cars were still made out of metal in 1974, weren’t they?
The potential issues mentioned above all boil down to one thing: scrap the steel or manufacture it?
* Manufacture the remaining stock. This would cost $64,584.00 ($263.85 to manufacture 100 rings, minus the $76.65 material costs as the steel is already purchased, times the 345 batches the remaining stock will make). * Scrap the remaining...