With the introduction of less costly plastic rings by company, Henri Poulenc, Industrial Grinders is faced with a decision of a total changeover from steel rings to plastic rings for their machines that would also fit similar machines manufactured by other companies. Henri Poulenc has introduced the less expensive plastic rings in a small market affecting 10% of Industrial Grinders’ sales . Industrial Grinders believes the market will eventually change-over to all plastic rings. Industrial Grinders must decide a timeline for changing production. It is estimated that production could begin by mid-September. With raw steel and steel rings already in inventory, IG must sell-off existing inventory before changing total production to all plastic rings.
a. Plastic Rings versus Steel Rings
Steel rings last approximately 2 months
Plastic rings last approximately 8 months
100 steel rings cost $263.85 to produce
100 plastic rings cost $66.60 to produce
At a weekly profit/Loss, Net income for 690 steel units would be $390.00 At a weekly profit/Loss, Net income for 172.5 plastic units would be $437.80
If sales continue at 690 units per week from May to mid-September, 10,350 units will have been sold, leaving 15,100 steel rings in inventory at a cost value of $39,713. This would require approximately 22 more weeks of sales to deplete inventory. As steel rings will last for two months, the sale of existing steel rings will have a faster turn- around time for continued depletion of stock. Knowing that Henri Poulenc is affecting sales in only a small portion of Industrial Grinders’ territory, retooling for plastics should also begin while steel rings are being phased out. Industrial Grinders can continue to charge the same amount, or more, for its plastic rings, as Henry Poulenc has set the standard in pricing. During the upcoming slack period, the company will employ workers at 70% of regular wages to finish all steel production, while full-time staff completes retooling on available machines.
Examine alternative theories, assumptions and ideas:
a. Rings account for a substantial portion of Industrial Grinder’s revenue. b. Plastic rings, sold by Henry Poulenc, are sold for at least the same amount as
Industrial Grinder’s steel rings.
c. Only 10% of Industrial Grinder’s market is affected by Henry Poulenc. d. Henry Poulenc is the only company producing plastic rings. e. Shipping weight for plastic rings is less than steel rings. f. As plastic ring use spreads, the customer will demand the longer lasting plastic ring. g. Steel ring production will be phased out due to market demand for plastic rings.
As the future production of rings within the industry will undoubtedly change from steel to plastic, Industrial Grinders must take swift action to keep up with industry changes and customer needs – jumping ahead of further competition. However, taking into consideration the 8 month life of plastic rings and their lower production cost as opposed to the 2 month life of steel rings at a higher production cost, sales must increase to sustain the higher profit margin of plastic rings. Determine the appropriate actions, alternatives or conclusions for the case:
Industrial Grinders should change to plastic ring production. As plastic
rings have been introduced by competitor, Henry Poulenc, rings with a longer life will be in increasing demand by customers. Industrial Grinders must forge ahead and heavily market the plastic rings as a better product for their customers. The plastic rings are less expensive to make, less costly to ship but have a longer life on machines. Although some revenue will be lost due to the longer life of plastic, Industrial Grinders will recoup losses with added sales.
Analyzing the cause of the problem or situation
A changeover to plastic rings poses a problem for Industrial Grinders. Its inventory of special steel and inventory of produced steel rings must be dealt with before or during the production of plastic rings. a. Raw Steel
The raw steel inventory cost value is $26,444. The steel cannot be sold to another party and will have to be used or counted as a loss to the company.
b. Steel Rings
The steel ring inventory cost value is $67,149. These rings could be sold within the existing market.The total cost of raw steel and steel rings inventory exceeds $93,000.00. The decision whether to use all raw steel and sell all existing steel rings becomes a major concern within Industrial Grinder’s management. Examine alternative theories, assumptions and ideas:
a. Industrial Grinders wants to change from steel rings to more cost effective plastic rings. b. Management does not want to absorb the cost of unused inventory. c. Not all management agrees on use of raw steel inventory.
d. The introduction of plastic rings will spread throughout the industry. e. Industrial Grinders could produce steel rings while retooling some machines for plastic production. f. Industrial Grinders could sell existing steel rings and take a loss on raw steel. Determine the appropriate actions, alternatives or conclusions for the case:
Industrial Grinders is faced with a financial decision regarding disposition of current inventory. Believing that the future lies with the more cost effective plastic rings, IG should continue to sell existing steel ring inventory while producing further steel rings, using the raw steel inventory on hand. The plant down time could use excess labor to deplete the raw steel. During this period, retooling could also occur and plastic ring production would begin. The machining changeover would be possible with a minimal cost of $1800.With Henry Poulenc affecting only 10% of IG sales, Industrial Grinders should deplete stock and introduce plastic rings. 3. Management Concerns
Analyzing the cause or problem of the situation:
Within management, it is agreed that plastic rings should be produced. However, the disposition of inventory on hand is not agreed upon between sales management / engineering and plant management/ parent company management. a. Sales Manager, Harry Greiner, believes inventory could be counted as a loss. Plastic production should begin and steel rings should no longer be sold. Selling both steel and plastic would be cause for market retaliation. b. Development Engineer , Anders Ericsson, is concerned about inventory not being depleted by plastic ring production in September. c. German Plant General Manager, Lawrence Bridgeman, is concerned about inventory. He believes, at the onset, that plastic rings should only be sold in markets affected by Henry Poulenc. d. Parent Company Head, Hein Van Boetzalaer, agrees to plastic rings but states that IG must use inventory. Examine alternative theories, assumptions and ideas:
a. All but the Sales Manager are concerned about inventory cost. b. Selling plastic rings within some markets may cause steel ring sales to slump when other customers learn of the plastic rings and their longer life. c. The raw inventory could be in production during plant down time. d. The existing steel rings could be sold while the raw steel could be accepted as a loss. e. Henry Poulenc is the only company producing plastic rings. f. IG has time within the industry to sell all existing inventory while retooling for immediate production of plastic rings. Determine the appropriate actions, alternatives or conclusions for the case:
Industrial Grinders upper management should implement the course of using and selling the existing inventory while retooling for plastic rings. Although sales and engineering opinions are taken into account, the idea of taking a loss for inventory on hand is unacceptable in IG’s current position. Henry Poulenc only affects 10% of IG’s current market. Upper management must make the decision on the company’s future operations. It is not proven that IG’s total market must immediately receive plastic rings. Depleting inventory, while offering plastic rings in the affected market , is an acceptable alternative. Depleting inventory first, then changing to all plastic rings is also an acceptable alternative. However, the parent company must decide the fate of inventory and future plastic production.