Precision Worldwide,Inc (PWI) is a manufacturing company of industrial machines and equipment for almost 90 years. One of their plants located in Frankfurt, Germany, produces a particular model at a price ranging from $ 18,900 to $ 28,900. Moreover, the plant has another department that manufactures steel retaining rings. These rings are considered as an integrate parts of the machines they are actually manufactured. This department can sell their rings either internally or externally because they are a large market and demand.
The general manager of the German plant, Hans Thorborg has been considering the introduction of plastic rings as a substitute for the steel rings. His idea comes from one of his competitor, Henri Poulenc who has already implemented this new product in the market. There is a lot of potential for this product in this market because there is a lower manufacturing cost and a greater durability compare to steel rings. The company is thinking if it is worth to shift from steel rings to plastic rings. But there are a lot of facts that they need to consider. There has been conflicting views concerning the future of the steel rings departments if they should change to plastic rings in order to acquire competitive advantage in this market and what will they do with the special steel after they have implemented the new product.
This report contains our analysis of the situation of Precision Worldwide, what are the alternatives dealing with the special steel and plastic rings and finally our recommendation.
| |Beneficial |Harmful | |Internal |Strengths |Weaknesses | | |Have a strong connection with the parent company in Ohio |The special steel has not salvage value | | |Accessible to rapid change of technology |They have to buy the special steel in high quantity in order for| | |Plants have a lot of freedom on decision-making. |the supplier accept their demand | | | |Have an excess labor | |External |Opportunities |Threats | | |Acquire a competitive advantage as a first-mover with Henri |Japanese manufacturers- with low-priced spare parts | | |Poulenc in producing plastic rings |Can destroy customer relationship | | |Low manufacturing cost and a higher contribution margin |Unpredictable market |
In order to know how long it will take to recover the cost of changes to make plastic rings only, we have calculated the payback period in Appendix 1. It just takes a little bit more than a week to recover the costs of changing from manufacturing steel rings to only manufacturing plastic rings. Since the cost of the special steel is already a sunk cost, it would not affect our decision of making plastic rings.
As we can see in Appendix 2, by manufacturing only plastic rings, the contribution margin increases from 674.40 to 1,214.45, which is an increase of 80%. By keeping the same selling price, it explains the big difference of 61% of Return on Sales between the two products in Appendix 3.
In Appendix 4, we have the production costs and revenue of the steel rings when using the excess capacity during the next 2-3 months, which includes only variable costs. In appendix 5, the three alternatives discussed...