# Cumberland Metal Industries

Topics: Price, Economics, Costs Pages: 6 (1724 words) Published: October 22, 2008
The table below breaks down the economic value in use of the CMI pads according to both the Colerick and Fazio tests. I used the data from each case to derive the number of hours of driving required to complete the job with both the asbestos and CMI pads. The difference in time to complete the job multiplied by the cost per real hours was one part of the economic value in use. The other portion was the cost of the asbestos pads for each project. Colerick Test

Feet driven 15000
HoursCost per real hr(\$238) x total hrs
Asbestos100\$23,800
CMI75\$17,850
Difference25\$5,950

Cost of pads20 Sets @ \$50 ea\$1,000

Economic value in use\$6,950
Per foot\$0.46

Fazio Test
Feet driven 12000
HoursCost per real hr(\$238) x total hrs
Asbestos75\$17,850
CMI60\$14,280
Difference15\$3,570

Cost of pads50 Sets @ \$40 ea\$2,000

Economic value in use\$5,570
Per foot\$0.46

The economic value that is created by use of the CMI pads is different in total dollars between the Colerick and Fazio tests. However, when you divide those values by the number of feet driven in each test you derive the same economic value in use of \$0.46/ft. When you examine the breakdown of savings associated with a decrease in project time between the 2 tests you find that the Colerick test had a saving of \$.40/ft, and Fazio \$.30/ft. Where the total economic value becomes equal is in the number of pads used. This speaks greatly to the inconsistency of quality of pads that are manufactured. Though the Fazio test drove 300 fewer feet they used more than twice the number of pads.

CMI is able to approach the distribution of their pads to the market in a manner different than that of the conventional channel because of the value that their pads create for the end user, the contractor. In the current state the pads are a commodity product manufactured by several small firms. The fragmentation of the distribution channel combined with the commodity nature of the product has put most of the channel power in the hands of the equipment distributors who despite carrying the products mostly as a matter of necessity are still enjoying a 30-40% gross margin on the sale of the pads. CMI is in the situation where they can circumvent the channel and provide their product direct to the market.

CMI is able to offer their product direct to the market because they have a very specific consumer target engineering/construction contractors, and independent pile-driving contractors. It would be easier to create awareness among these consumers by direct sales than trying to have the various outlets that exist in the conventional channel do so. This also allows CMI to avoid the situation of having their distribution limited by the number of outlets that they can get to carry their product. If CMI is able to gain a monopoly in the market then they can approach distribution through the conventional outlets because they will have a strong brand and will be able to put pressure on distributors to accept a lower price. The nature of the CMI pads makes them much longer lasting than the asbestos pads. Thus one assumes that CMI would be looking for a high EBIT on this product rather than ATR. By circumventing the distributors they are able to capture more of the Total Channel Margin and increase their EBIT.

Segmentation of the market can be done by applying the variables of willingness to pay, benefit, and the heavy half or 80 / 20 rule. Willingness to pay is appropriate but needs to be approached in an abstract way. There are many contractors in the pile driving business that are looking to maximize their take, of these some are not sophisticated enough, or their business is not large enough to realize substantial gains on the time savings through use of the new pads. They are going to be your smaller independent construction contractors and pile driving operations. They will typically see the lower price of the asbestos pads and...