Colin Drury, Management and Cost Accounting – Reichard Maschinen GmbH
Reichard Maschinen, GmbH
Professor John Shank, The Amos Tuck School of Business Administration Dartmouth College This case is reprinted from Cases in Cost Management, Shank, J.K., 1996, South Western Publishing Company. The case was adapted by Professor John Shank, from an earlier case published by IMEDE (now IMD in Lausanne, Switzerland) and revised by Professor M. Edgar Barrett of the American International Graduate Business School. This case was originally set in Western Europe in 1974, just after the Arab oil shocks of 1972 and 1973. National borders were still very important business barriers. But, the concept of open trade borders (EC-1992) was beginning to grow. In June of 2000, Mr. Kurtz, managing director of the Grinding Machines Division (GMD) of Reichard Machines, was considering how he should handle a meeting that afternoon that would involve his sales manager, his controller, and his product engineering manager. The meeting concerned the introduction by a Belgian competitor, Bruggeman Grinders, SA, of plastic rings to take the place of steel rings which were a standard component in many grinding machines, including many of the machines made and sold by GMD. The new plastic rings, which had only been introduced in April, not only appeared to have a much longer life than the steel rings, but also apparently were much less expensive to manufacture. Mr. Kurtz' problem in responding to the new ring was complicated by the fact that he had 25,000 steel rings in inventory and 26 tons of special alloy steel purchased recently for the sole purpose of making more rings. He knew that this raw steel could not even be sold as scrap because of the special alloys in it. He had been required to buy a full year's supply in order to convince a steel mill to make the special product. Overall, he was holding about $93,000 worth of inventory related to steel rings (see Exhibit 1). For almost 100 years, Reichard had manufactured industrial machines which it sold throughout Europe and North America. It enjoyed a reputation for high quality, technology leadership, and excellent customer service. There were dozens of companies of all sizes who competed, one way or another, in industrial machines in Europe. Reichard was one of the leaders in several segments. Each division operated as a fairly autonomous profit centre. Corporate management, headquartered in Frankfurt, operated mainly as a holding company. The Grinding Machine Division (GMD) had about a ten percent marketshare in Europe, its principal market area. GMD's one plant was located in Cologne and employed 400 production workers. Its different models were priced between $4500 and $7000, averaging about $6000. The machines were used in metal working plants in many industries. Their useful life was about ten years with normal maintenance. Replacement parts in aggregate accounted for more than half of GMD's turnover. As is common for industrial machinery, margins on machine sales are often reduced in anticipation of higher margins on replacement parts over the life of the machine. This creates the opportunity for price discounting by parts suppliers on those replacement parts which are interchangeable across models and across manufacturers. The steel rings were one of the standard component items which were interchangeable. In recent years Japanese manufacturers had entered Reichard's markets with lower priced spare parts. Other companies had entered with lower quality and lower priced machines and parts. Kurtz felt sure that competition would continue to intensify in the future. But, he was fully committed to Reichard's strategy of high quality, innovation and excellent service, at a price. The steel rings manufactured by GMD had a useful life of about two months under normal machine use. A worn-out ring could be replaced in a minute or two. Different machine models required from two to six rings, but the...
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