Cumberland Metals: Case Study Analysis.

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Cumberland Metals: Case Study Analysis

DISCLAIMER: I have, to the best of my abilities, researched, analyzed, organized, and

presented findings for this case study. However, it must be noted that irreconcilable
discrepancies within the available data made some of the calculations both a daunting and
imprecise task. This is especially true in regards to revenue and cost figures. Please be
aware of the influence of unreliable cost and revenue data in regards to the pricing,
production, and marketing recommendations presented in this study. However, it must
also be noted that many of the discrepancies are legitimate differences in data collection
methods and tests used in the case.

Cumberland Metals: Case Study Analysis. 2/12

Introduction
Cumberland Metals faced a both a pricing and channel marketing decision for
metal pile cushions utilized during pile driving. Cumberlands approach to pile cushions
had significant efficiency advantages over other asbestos methods that were currently
available in the 1979 market. However, Cumberland faced several barriers to entry into
the pile cushion market. The primary barrier was that most companies viewed role of
cushions as a necessary accessory or tangent item instead of viewing cushions as a
potentially value adding or cost reducing part of pile driving. In order to penetrate the
market, Cumberland would have to alter the lackadaisical view of pile driving cushion
pads for the opinion leaders, engineering firms, and contractors involved in the decision
process.
Key Stakeholders
There were several stakeholders in the both in the pile driving industry and within
Cumberland Metals. First, Cumberland Metals and the welfare of its employees were
major stakeholders in the pile driving cushion pricing and marketing decision.
Cumberland metals faced a declining market in Slip Seal, their main source of revenue.
A new successful product was imperative to the continued success of the company. The
decisions regarding pile cushions could greatly increase the companys revenues and
profits or assist in its decline.

Cumberland Metals: Case Study Analysis. 3/12

There are also several secondary stakeholders in the pile driving industry.
Secondary stakeholders include pile hammer manufacturers, architectural consulting
engineers, soil consultants, pile hammer distributing/renting companies,
engineering/construction contractors, and independent pile driving contractors. The
workers who drive piles are also stakeholders since the current asbestos pads may be
hazardous to their health due to asbestos and heat related injuries. Exhibit A summarizes
some of the stakeholders; their projected importance to Cumberlands marketing
decisions, and their projected attitudes to switching from asbestos to higher efficiency
metal cushions.
Exhibit A
Projected Attitude
a.
Neutral
b.
Positive
c.
Positive

Importance
High
High
Medium/Low

d.

Negative

High

e.

Positive

High

f.

Positive

g.

Positive

h.
I.

??
??

Medium/Low
Medium (To
Cumberland)
Medium/Medium
High
High

Who?
Pile Hammer Manufactures
Architectural/Consulting Engineers
Soil Consultants
Pile Hammer Distributing/Renting
Companies
Engineering/Construction
Contractors
Independent Pile-Driving
Contractors
Workers
Unions
Cumberland Metals

Key Issues
Cumberland needs to consider several marketing decisions. First, they must
determine a method for pricing and ultimately a price for the new metal pads. Second,
Cumberland must decide which channels to market the pads based on the selected pricing
strategy. Third, Cumberland must determine how much to invest in manufacturing
equipment by estimating market penetration and considering the costs and benefits of
investing in pad producing equipment.

Cumberland Metals: Case Study Analysis. 4/12

Analysis
Cumberlands new metal pile driving pads provided several benefits over the
current asbestos cushions. Several Pad features and pricing decisions will be discussed
and analyzed in this section. First, the safety and heat properties of the cushions will be
analyzed and compared to current asbestos pads. Second, efficiency characteristics will
be analyzed and compared with current asbestos pads. Third, several methods of
calculating the best price in order to match the price to the value added for the customer
will be discussed. Finally, an analysis of the different marketing channels and marketing
strategy will be presented.
Safety
Cumberlands metal pads were probably much safer than the current asbestos
pads (Exhibit 2). Asbestos was proving hazardous to health and the federal government
was starting to recognize it as a hazardous material during the late 1970s and early 1980s.
Legislation introduced in the late 1970s by Millicent Fenwick and formerly adopted as
House Resolution 5224 required manufacturers and distributors of asbestos products to
be responsible to pay benefits to anyone who was injured by asbestos as a result of their
actions.
[H.R. 5224] Requires the Secretary of Labor to direct responsible parties
(parties engaged in the manufacture, import, sale, or distribution of
products or substances containing asbestos or cigarette tobacco) to pay
benefits with respect to the disability or death of any person caused by an
asbestos-related disease and occurring before January 1, 1983. (H.R. 5224,
Asbestos Health Hazards Compensation Act, Title II 1)

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In addition, the asbestos posed other health hazards due to their heat properties.
Workers often had to handle super heated pads and risked the possibility of being
severely burned. Finally, asbestos pads were much heavier than metal pads, thus
increasing the risk of back and other weight related injuries. Conversely, CMI
pads were not made of asbestos, significantly reduced the possibility of heat
related injury, and were much lighter than the asbestos pads.
Efficiency
CMI pads also provided several efficiency advantages over asbestos pads.
It is these efficiency benefits that provide a strong argument for cost reduction to
contractors and should influence purchasing decisions and market penetration. In
pile driving tests the CMI pads exhibited 33% more driving efficiency, a 5 times
increase in pad change efficiency, and a 20 times increase in piles per pad
efficiency (Exhibit 3).
In order to determine value to the customer for the increased efficiency, it
is best to reduce all cost calculations to a cost-per-foot basis. The case study
estimates that the average hourly cost of pile driving is $238. It further asserts
that pile drivers average 20 feet per hour. Therefore, the cost of pile driving can
be estimated at $11.90 per foot driven (Exhibit 4).

The cost-per-foot saved by decreasing the down time to exchange pads

is negligible compared to the cost-per-foot savings actuated by the increase in
driving efficiency. The cost benefit from decreased pad change time runs about
$1,600 per 300-55 ft. piles, or approximately 9 cents per foot driven (Exhibit 9).
1

Note the literary discrepancy between the average revenue per foot presented in the case of $5 or greater
and the average cost per foot of $11.90. For the purposes of this case we will assume the numbers are
correct even though it would be impossible for a company to function indefinitely at a substantial loss.

Cumberland Metals: Case Study Analysis. 6/12

However, the cost-benefit from a 33% increase in efficiency based on an $11.90
per foot base is $3.93 per foot, a significant savings. The total quantitative value
to the customer of $3.83 per foot can be calculated by adding all of the benefits
per foot from efficiency increases (Exhibit 9).
The cost of purchasing asbestos pads in the first test was $50 per set of
pads. Further, it took 20 sets of pads to place 300 piles of 55 feet. Therefore, the
asbestos pads cost $1000 (50*20) to drive 16,500 (300*55) or 6.06 cents per foot
driven (Exhibit 9). This can be compared to the CMI pad manufacturing costs of
5.39 cents per foot using existing equipment or 2.52 cents per foot after
purchasing new equipment. It is important to note that the manufacturing costs are
significantly less than the actual costs of asbestos pads per foot.
Since the total market for pile driving cushion pads exceeds 17,000 pads
per month (Exhibit 5) and it is estimated that Cumberland should be able to
capture a significant share of the market, a better calculation of manufacturing
cost per foot is to use the break-even point based on the $75,000 equipment
investment per additional 250 pads per month (Exhibit 10). Assuming that the
$75,000 is basically a fixed cost, i.e. the payback period is set to 1 year, and the
Variable Costs and Overhead Expenses amount to 69.18 per pad, the breakeven
price per set of pads is 565.08. Assuming each set can pound 300-55 foot piles or
16,500 feet, the breakeven price per foot is 3.42 cents per foot. The calculated
breakeven manufacturing cost is still just over half the cost of the selling price for
asbestos pads (compare 3.42 cents for CMI vs. 6.06 cents for asbestos). Note that

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in proceeding years the $75,000 investments would not be required, further
increasing profits.
Marketing Channels
There are several different channels available to market the CMI pads.
For example, Cumberland could hire a sales force and attempt to directly sell to
customers or attempt to go through distributors. Hiring a sales force seems to be
an unnecessary expense. Since the pads are not considered a high profile product
by the users, the leverage held by current distributors should be enough to drive
sales. In fact, an internal sales force may confuse the purchasing process because
contractors may not be willing to take the time or effort to talk to salesmen for
such a small factor in their overall project. The purchasing decision is as such
that if a distributor recommends or supplies a certain brand of pads, the
construction crews are likely to use it without much consideration.
Decision Alternatives
The total market for pile driving averages 340 million feet per year. If each set of
metal pads, containing 6 pads each, can withstand 10,000 feet of pile driving, then the
total estimated market would be 204 thousand pads per year or 17 thousand pads per
month (Exhibit 5). It can be reasonably assumed that Cumberland should be able to
capture more than 1.4% of this market 250 pads per month. Therefore, it will require
several 75,000 investments to produce enough of the total market demand to be effective.
Fortunately the low cost of production per foot, 3.42 cents with a 1 year breakeven point
and payback period on investment enables Cumberland to investigate several pricing
options.

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Alternative 1: General Markup
The first alternative is for Cumberland to select a general markup price where a
specific margin is reached. Since the cost of breakeven production over one year is
565.08 and the required corporate margin is 45%, a good selling price might be
1.45*$565.08 = $819.366. Assuming the distributors and retailers required a 30%
margin, the retail price would be 1,065.18 or 6.46 cents per pile foot driven. This
alternative is slightly more expensive than the price of asbestos pads in the test scenario,
but still competitive in nature. The advantage of this method is it fulfills the company
objective of 45% markup, is easy to calculate, and still competes well with asbestos pads.
However, this pricing method does not consider the possibility of premium pricing due to
efficiency cost savings or value added to the customer by using the CMI pads.
Alternative 2: Compete with Asbestos
Cumberland has the option of competing directly with the asbestos pads on a
price-per-foot basis. In this scenario a single set of CMI pads would retail at the same
price-per-foot as asbestos pads; therefore assuming a 30% markup, the pads would
wholesale for $769.23. Although this approach is $50 less than the required 45% markup
for Cumberland, it allows Cumberland to compete directly with asbestos pads on a costper-foot basis. Furthermore, proceeding years will realize a greater than 45% margin
since the $75,000 equipment investment will be eliminated. This approach would work
best for a strategy of extensive market penetration. Since the price of the pads are the
same as asbestos, Cumberland needs only to convince consumers of the efficiency and
safety advantages to convert them to the new pads.

Cumberland Metals: Case Study Analysis. 9/12

Alternative 3: Value Added to Customer Approach
Another alternative is to attempt to split the cost benefit or value added by using
the new metal pads with consumers. This scenario charges a premium price based on
how much value and cost savings the new pads present to the customer. It is estimated
that the metal pads should save contractors $3.83 cents per foot driven. If Cumberland
skimmed 33% of the cost savings, then they could potentially charge $3.83*.33 = $1.26
per foot driven. This would result in a very high cost of $20,790 per set of pads.
Although the cost is completely justified, it would take considerable marketing to
convince potential customers to upgrade from $50 per asbestos set to $20,790 per CMI
set, especially if the job requires driving less than 300 piles. This approach could be
considered a skimming approach and may yield high profits with low market penetration.
Another advantage to this method is that initial investment and risk would be low since
the number of $75,000 equipment investments would be minimized based on the low
market penetration and production needs.
Exhibit 12: Pricing Comparisons, Wholesale, Retail, and Cost Per Foot
Wholesale
(Set)
$819.37

Retail (16,500
feet)
$1,000.00
$1,065.18

Cost Per
Foot
$0.0606
$0.0646

$769.23
$15,992.31

$1,000.00
$20,790.00

$0.0606
$1.2600

Measure
Asbestos Pads*
Alternative 1: Markup
Alternative 2: Asbestos
Comp
Alternative 3: Efficiency

*Asbestos pads calculated for 20 sets to cover the same footage as one Metal Set

Recommendation
Pricing Recommendations
Regardless of the alternative selected, marketing the new steel pile cushions will
require redefining consumer perceptions of pile pads in two ways. First, Cumberland

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must show that pads are an integral part of pile driving efficiency and thus an industry
cost driver. Second, Cumberland must change the way consumers view pricing of pile
driving pads from a price-per-pad or set of pads mind-set to price-per-foot driven
mindset. Some companies may directly compare the price of a set of asbestos pads, $50,
against the price of a set of metal pads, probably exceeding $1,000, without considering
the per foot ramifications. Cumberland needs to make sure that customers understand
the $1,000 pads are actually cheaper on a per-foot basis than the $50 asbestos pads.
Alternative 3 provides the highest markup, $15,992.31/$565.08 or 2,800%,
however, it would yield low market penetration. Although the cost could be justified, I
believe it would be hard to convince contractors that the premium price is worth the cost
savings based on efficiency. Furthermore, competitors might take advantage of the high
price and penetrate the market with a similar performing product at a much lower price.
Alternative 2, directly competing with asbestos, would severely limit competitive entry
and have the greatest market penetration; however, it would not meet the company
required 45% margin.
Alternative 1 both meets the markup criteria and still competes very well with
asbestos. It is a simple price scheme that should yield high market penetration and
significant profits. Cumberland would only need to convince contractors of the price-perfoot comparison to asbestos pads and show the cost savings based on efficiency.
Therefore, pursuing market penetration via an alternative 1 approach is probably the best
alternative for Cumberland Metals.
Channel Recommendations

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It is further recommended that Cumberland market the CMI pads through
distributors using a push method. They should also market directly to contractors and
engineering firms by educating them on the efficiency and safety benefits of the new
CMI pads (a pull approach). The safety hazard posed by asbestos pads provides another
marketing opportunity. Cumberland should lobby the labor unions to push for higher
safety standards and abandon the hazardous asbestos pads. The labor unions could
justify the possible increase cost of the pads to construction companies by showing a
reduction in costs based on legislation requiring companies to be liable for asbestos
related injuries. This avenue may prove to be an affective long-term strategy to force
adoption of the new pads and increase market penetration.
Production Recommendations
Production should be calculated by expected market penetration per year. It is not
unreasonable to assume that CMI pads could capture 10% of the market during the first
year or 1,700 pads per month. This would require an initial investment of $50,000 and
six $75,000 investments or $500,000 to produce 1,750 pads per month. The total revenue
generated during the first year would be 1,750*$819.37 = $1,433,897.50. The cost to
produce the pads, including equipment investment is estimated at $69.18*1,750 +
$500,000 = $621,065. The total profit is estimated at $1,433,897- $621,065 =
$812,832.50.

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