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Cumberland Metal Industries

This print version free essay Cumberland Metal Industries.

Category: Business Autor: reviewessays 05 November 2010 Words: 5320 | Pages: 22 I.Case Analysis Overview Cumberland Metal Industries (CMI) is one of the largest metal manufacturers in the world. The company evolved from selling metal as a finished product to one that used it as a raw material, increasing sales from $250,000 in 1963 to over $18,500,000 in 1979. Currently, CMI relies heavily on SlipSeal, which is used as a high-temperature sealant in automobiles. Although CMI dominates the market for this product, corporate sales figures decreased over the last year. As a result, the management at CMI realized the importance of diversifying its product-line so that the company does not rely as heavily on SlipSeal or the automobile industry. With this in mind, CMI management was very interested in a new product that could be used as a cushion pad in pile driving. The cushion pads, consisting of curled metal, were superior in performance to the asbestos pads currently used throughout the industry. The curled metal pads lasted longer then asbestos pads and were easier to change. Furthermore, the growing concern over the health risks associated asbestos gave CMI's pads an added advantage. Government regulations prohibiting the use of asbestos or making them costly to handle, could push pile drivers toward CMI's cushion pads. The prospects prompted Robert Manicucci, the vice president of Engineered Products Division at CMI, to declare: Curled metal cushion pads seem to have more potential than any other product we've ever introduced. A successful market introduction could as much as double the sales of this company, as well as compensate for the decline of some existing lines. It almost looks too good to be true. II.Problem Thomas Simpson, the manager of the Mechanical Products Group at CMI, was excited about this new product as well. The pads offered CMI an opportunity to diversify its product line and increase its sales volume. Furthermore, initial testing demonstrated the significant performance advantages of the metal pads over asbestos pads. Despite the sales potential of the new product, Simpson is uncertain how he should market the pads in order to reach potential influencers and customers. Furthermore, there are no precedents for advertising or promoting this product line. More importantly, Simpson must determine a price for the product, as he has promised to call Colerick Foundation Company by the end of the week. Effectively pricing these pads and following a well defined market strategy could place CMI as a perennial market leader. The successful development of the new product is especially important to CMI because the firm is facing possible financial difficulties caused by slumping sales figures. III.Critical Issues A.The Market for CMI Curled Metal Pads

1.How large is the market for curled metal pads? Identifying the size of the market will help CMI establish future sales figures and cash flows from the new product. 2.Who are the influencers, channel members, and decision makers in the purchase of the curled metal pads? Would any of these parties be interested in seeing CMI fail? Understanding the nature of the market is vital in CMI's attempt to establish a customer base for its cushion pads. B.Determining the Price of CMI Curled Metal Pads 1.What is the cost to produce the pads? Should CMI invest in new tooling? Determining the costs associated with pad production, CMI can gain a better understanding of its pricing strategy. 2.What is the economic value of the pads to the customers? Determining the economic value will help CMI institute an optimal pricing strategy. 3.What is the price range of the pads depending on market strategy? Estimating the price range will help CMI develop an effective pricing and marketing strategy. 4.What is the optimal price of the curled metal pads? Why? What price should be quoted to a potential buyer such as the Colerick Foundation? This is an important step in determining the marketing strategy. C.Marketing Strategy 1.Is it more important for CMI to strive for high profits or build for market share? How price sensitive is the market? CMI must determine whether it is better to strive for high profits or high market share. Defining market sensitivity and profit potential will help CMI make this decision. 2.How should CMI market the pads? What is the plan for effectively reaching the proper influencers, decision makers, and channel members? Developing a plan to reach the potential market is a key to CMI's success. 3.Does this product reflect the needs of the customer and is it technically sound? What are the risks associated with marketing this product? Answering these questions is important for the long term strategy of the firm. IV.Analysis A.The Market for CMI Curled Metal Pads 1.How big is the market for curled metal pads The first critical issue for CMI to consider is the market for its curled metal pads. The company should study the market size, existing distribution channels, and competition. Thomas Simpson, the Group Manager at CMI, had few statistics available to determine the potential U.S. market for the cushion pads. Based on industry sources and a 1977 Construction Engineering magazine report, he estimated that approximately 13,000 pile hammers were owned by companies directly involved with pile driving, with another 6,500 to 13,000 leased. He also assumed that the total of 19,500 to 26,000 hammers would operate about 30 hours per week and 25 weeks per year, which equates to 750 hours per hammer per year. He further assumed that most jobs would average 20 feet of pile driving per hour. According to these figures, a range of 290 million to 390,000,000 of piles were driven annually (calculation: 26,000 hammers x 750 hours/ hammer yr x 20 ft/ hr = 390,000,000 feet/yr). He also assumed that a total of 6 CMI pads would be required to drive 10,000 feet.

Based on these numbers, the potential market demand for pads could range between 174,000 to 234,000 per year. For example, (390,000,000 feet/10,000 feet) x 6 pads = 234,000 pads. In addition, CMI had tested their pads via the Colerick Foundation Company (the 1st test) and Fazio Construction (2nd test). The results bode exceptionally well for CMI. In the first test, Colerick paid $1,000 for a total of 480 asbestos pads required (20 sets x 24 pads/set). In the second test, Fazio paid $2,000 for their total of 600 asbestos pads. Colerick needed 6 CMI pads to do the same amount of work and Fazio needed 5 CMI pads. Without considering savings in time, Colerick would likely be willing to pay $1,000 for the number of CMI pads needed to drive the same amount of miles. Therefore, if the price is $1,000 per set of pads and 6 pads are required per set, the price per pad would be $166.67. For Fazio, where 5 curled metal pads were in a set, and the set was worth $2,000, the price per pad would be $400. Considering a market size estimate of 174,000 to 234,000 pads per year, at a price ranging between $166.67 a pad and $400 per pad, sales would range between $29,000,580 and $39,000,780. At $400 per pad, sales volume would be between $69,600,000 and $93,600,000. The below table, Table 1, summarizes the result of this preliminary revenue calculation: Table 1 Price per padSales (low end)Sales (high end) $166.67 $29,000,580$39,000,780 $400.00 $69,600,000$93,600,000 The potential revenue, based on pricing the curled metal pads equivalent to asbestos pads, is very encouraging when comparing the figures in Table 1 to those of the company in 1979, a year that CMI had net sales of $18,524,428 (see Attachment 3 in the Appendix). Assuming a price of $166.67 per pad, low-end potential sales of $29,000,580 would represent almost 1.6 times CMI's total net sales. This underscores the projections made by Robert Manicucci at a meeting discussing the pads, where he stated that company sales could be doubled by metal pad sales. 2.Who are the influencers, channel members, and decision makers in the purchase of the curled metal pads? Would any of these parties be interested in seeing CMI fail? The first step CMI must take in successfully marketing its new pads is identifying the market players. The key industry constituents are pile manufacturers, architectural/ consulting engineers, soil consultants, pile hammer distributing/ renting companies, engineering/ construction contractors, and independent pile-driving contractors. Each of these players has a key characteristic CMI must be aware of in order to tailor their marketing strategy. Although pile driver manufacturers do not purchase a large dollar volume of cushion pads, they may be very influential in the purchase of pads with their recommendations. The architectural and consulting engineers are also very important purchase influencers. The pile driver distributing and renting companies represent 25% of the market for cushion pads. However, CMI may find it a challenge to convince the rental companies to switch over to the metal pads because the overall rental time would be reduced by contractors who used the pads, thus reducing the operating profits of the rental firms. The construction engineers and contractors are an important potential purchaser of the pads and represent an opportunity for CMI to sell the pads on large construction projects. The independent pile-driving contractors, primarily concerned with making money, would be interested in the metal cushion pads for their cost savings. Table 2 summarizes the purchasers of cushion pads and their primary influencers. Table 2 Purchasers Independent pile-driving contractorsEngineering/ construction contractors

InfluencersArchitectural/ consulting engineersPile Manufacturers Pile hammer distributing/ renting companiesArchitectural/ consulting engineers Louisiana Contractor MagazineLouisiana Contractor Magazine "Piletalk" seminars Professor R. Stephen McCormack Of all the influences listed, the architectural/consulting engineer is probably the most vital. Due to the expertise required in determining the needs of a construction project and risks involved with these very expensive endeavors, he is generally considered "the ultimate authority". They specify the hammers to be used in projects and very often mention the pads. If CMI can convince them to recommend their pads, they can be the most vital purchase influence. They can start by expounding the pad's superior capabilities. Aside from these purchasers and influencers, there are few existing market channels for CMI to advertise or develop consumer awareness. There are no national industry associations or publications that influence the pile driving business and the company is unsure how effective word-of-mouth communication would be in their sales efforts. However, there are a few existing mediums that CMI may be able to exploit. Construction-oriented magazines such as Louisiana Contractor feature occasional trade advertising and Associated Pile and Fitting Corporation sponsor "Piletalk" seminars in various cities regarding applications in pile driving. Another purchase influence and potential asset for CMI's marketing strategy is Professor R. Stephen McCormack, a respected authority in the industry who is familiar to many sophisticated engineering/construction firms and consultants. His endorsement could go a long way in helping CMI gain credibility. The distribution structure for cushion pads has not been well established either. No manufacturers currently dominate the pad business and the existing pads in the market are mostly unbranded, cut by small, anonymous shops from larger pieces of asbestos or micarta. The pads are sold by heavy construction supply houses, hammer sales and rental shops, pile manufacturers, and a variety of other outlets. The smaller pads are sold for a mere $2 to $3 each, while larger pads can sell for as much as $10. Although the profit margins for the distributor are considered reasonable, their total profits are small. Furthermore, the pads are viewed merely as a necessity and are not featured as work-saving tools. As a result, the pile-driving industry has ignored the cushion pad even though all pile drivers use numerous sets of them on each job. The below table, Table 3, summarizes the distributors and their main influencers. Table 3 DistributorsInfluencers Heavy Construction Supply HousesEngineers, Magazines, "Piletalk", Professor R. Stephen McCormack Hammer Sales and Rental Shops Pile Manufacturers In addition to rental companies, a group that may wish to see CMI pads fail is organized labor. As was made obvious in the two tests, CMI pads reduce the time necessary for pile driving. As a result, the main savings are in labor costs. Reductions in labor costs will help the contractors and engineers, but they may result in less frequent work for the construction labor or more layoffs. Once labor figures this out, they could attempt to sabotage further testing or pressure purchasers. Although the

health concerns arising from asbestos could minimize this possibility, CMI must be aware of the potential threat. CMI therefore should contact labor leaders and push the health benefits of their pads over asbestos. B.Determining the Price of CMI Curled Metal Pads 1.What is the cost to produce the pads? Should CMI invest in new tooling? Mr. Simpson had projected cost data developed by his manufacturing engineers. The engineers had provided We have two sets of data: one set using existing equipment and a second set using new permanent tooling. As shown in Attachment 4, Part A, The cost of manufacturing using existing equipment for 11 inch pad is about $148.12 and the 30 inch pad is about $640.15. As shown in Attachment 4, Part B, the cost of manufacturing has gone down by use of new permanent tooling equipment. The cost to produce an 11 inch pad is $74.78 and $359.30 for a 30 inch pad. By using this special tooling, the cost of manufacturing is reduced by 45%. In Attachment 4, Part B, the cost for manufacturing only 250 pads per month and depreciation cost is spread over three years. Attachment 4, Part C, reflects the cost of manufacturing more than 15,000 pads per month. Manufacturing more than 250 pads per month had additional equipment cost of $75,000. Therefore, the manufacturing cost of the 11 inch pads is $77.47 and equipment cost is spread over three years. Based on the cost savings, CMI needs to invest in permanent tooling. To achieve 180,000 pads per year production, CMI will need to buy 60 sets of tooling equipment, which would cost $ 4,475,000. When this cost is spread over three years, with 180,000 units produced annually, the fixed cost per pad will be $8.28. The actual cost of manufacturing all size pads is shown in Attachment 4. This cost could be lower if CMI is operating in three shifts, reducing costs by twothirds. 2.What is the economic value of the pads to the customers? The 1st test comparing the performance of CMI pads versus asbestos pads was done at Colerick Foundation Company in Baltimore, MD. The job required driving 300, 55-foot piles 50 feet into the ground, contracted at $5 per foot of pile driven. The piles were 10 inch and 14 inch steel H beams, using 11- inch helmets and 11- inch cushion pads. The 18 pads were placed in the helmet and driven until they lost resiliency and pads were added until a complete set of 24 were sitting in the helmet. The same test was done using 6 CMI pads. The result of test data is shown in Attachment 1 in the Appendix. The test results show that a 33% higher efficiency was achieved when using CMI pads. Asbestos pads were changed 20 times and each time it took 20 minutes to change. A total of 6.67 hrs of extra time was required throughout the job simply to change the pads. However, when the CMI pads were used, a set of 6 pads was able to finish job without the need to change them. In addition to the time saved in changing the pads, the curled metal pads were also more efficient, saving the contractor a total of 31.67 hrs. As show in Attachment 1, if the savings in variable cost of equipment, labor and overhead cost is included with the cost of the asbestos pads, the total economic valve to the consumer value (EVC) is $8537. This figure is 30% of the total costs associated with the asbestos pads. If the EVC is divided by the number of pads, a value of $1423 is associated with each pad. According to this, the customer should be ready to pay approximately $1400 for one 11 " CMI pad. The 2nd test was performed at Fabio Construction in New Brighton, PA. The job required 300, 45foot concrete piles to be driven 40 feet into ground. 12 asbestos pads were used per set, which had to be changed 50 times during the course of the job. The same 5 CMI pads were used to finish the full job. As shown in Attachment 2 in the Appendix, CMI had a 25% higher efficiency then the asbestos pads, finishing the job 15 hrs faster. Further savings occurred with the time wasted changing the asbestos pads, a total of 17 hrs. The total time saved was 32 hrs when the CMI pads were used. As shown in Attachment 2, if the variable cost of equipment, labor, and overhead are combined with the cost of the asbestos pads, a total EVC for a set of pads is $9523. Therefore, the value of each 11 " pad is $1,900.

3.What is the price range of the pads depending on market strategy? The economic value for the tests involving 11 " pads ranged from $1400 to $1900, which represents the maximum a customer would pay in either case. Because there is not enough data to adequately determine whether the true value for an 11 " pad is $1400 or $1900, we should select the lower of the two as the maximum price. Therefore, the upper price limit for CMI's curled metal pad is $1400. On the other hand, if CMI decided to price their product based only on material costs of the existing product, the price would be closer to $167 (6 CMI pads used, $1000 worth of asbestos pads). This results in a pricing range of $167 to $1400, with the lower price recovering fixed costs and a small profit. 4.What is the optimal price of the curled metal pads? Why? What price should be quoted to a potential buyer such as the Colerick Foundation? In choosing the optimal price, CMI should take advantage of the performance and operational benefits that its product offers. Not only are the pads more efficient and last longer, they are easier to handle, reaching temperature that are almost three times less then those of asbestos. There was significant savings gained by using CMI pads in both tests, ranging from 29 to 35%. Customers should be willing to pay for these benefits, especially when presented to them in terms of their economic value. Therefore, CMI should price the product as close as possible to the economic value for the customer. In pricing the pads, CMI should follow a differential pricing strategy with an effort to maximize the amount of consumer benefit captured with the price. The differential pricing strategy would also allow CMI to reward early purchasers and help them create relationships. It would also help CMI negotiate distribution deals. For example, CMI could quote to the Colerick Foundation a relatively low price of $800 per pad as a first time customer purchasing directly from CMI. Colerick will be happy to pay this price because they are familiar with the benefits and the EVC, reducing costs by $600 per pad. Over time, as the market was established, distributors would be handled differently. Allowing for the traditional 30% margin that a distributor would carry, CMI should sell to them for a price of $900 or more. With the mark-up, the customer would pay $1,170 per 11 " pad. The distributor would make $270 per pad, while the customer would realize a benefit of $230 per pad. Both of these profits are reasonable portions of the total EVC. CMI should estimate the price of the larger based on their size relative to the 11 " as shown in the below table, Table 4. Table 4 Pad SizePrice/pad 11 1/2"$1,170 14"$1,424 17 1/2"$1,780 19"$1,933 23"$2,340 30"$3,052 C.Marketing Strategy

1.Is it more important for CMI to strive for high profits or build for market share? How price sensitive is the market? CMI should pursue a marketing plan based on high profits versus gaining market share. Critical to this strategy is the assumption that patent protection will keep substitutions from entering the market for 3-4 years. This will protect CMI from competition that may undercut the price for the cushion pads. The below table, Table 5, shows the profit potential from selling 11 " cushion pads through each of the two strategies. Table 5 Market ShareHigh Profits Price2001400 Market Size243,000243,000 Market %100%25% Total Sales48,600,00085,050,000 Variable Costs7070 Margin31,590,00080,797,500 Difference49,207,500 The high profit strategy needs to obtain a mere 10% of the market in order to breakeven with the market share strategy, in which 100% of market share is captured. The market for cushion pads is generally not price sensitive. Although small contractors are more money conscious then the larger firms, assuming no suitable substitutes are available, the market will bear any price up to the point of economic value gained through the cost savings of the curled metal pads versus the asbestos pads. This will be an effective way for CMI to view the market in the short term. In the long term, when the patent expires, the market's price sensitivity may increase. 2.How should CMI market the pads? What is the plan for effectively reaching the proper influencers, decision makers, and channel members? CMI should expect the hammer rental companies to resist promoting the curled metal pads due to the decreased time in equipment rentals. With 75% of all pile drivers owned rather then rented, these manufacturers deal with a majority of the pile driver users. Therefore, CMI should focus on the manufacturers' representatives that sell directly to the supply houses and distributors as the primary distribution channel. In the short term, CMI should take advantage of the existing networks to distribute their pads rather then start from scratch with their own direct distribution. The manufacturers' representatives should be trained by a small CMI sales team on how to market the cushion pads. The focus of the training should be the cost savings benefit of the curled metal pads, the potential dangers of the asbestos pads, and the CMI brand and product name. The pads currently in use are generic and not marketed or branded. Establishing a product name is important in promoting the diffusion of the product in the marketplace. Although word of mouth is difficult to measure, a branded product can be asked for by name and referred to by contractors and engineers. When the market develops, CMI may consider setting up its own distribution networks as a way to gain more of the EVC.

A more sophisticated marketing strategy is necessary to reach the architectural and consulting engineers. This group is critical because of their influence over the engineering and construction contractors that work on large projects and are most likely to purchase pads from heavy construction supply houses. Print advertisements in magazines such as Louisiana Contractor should be utilized to promote the name, cost savings of the new pads as well as exposing the dangers of the asbestos pads. CMI should attend the "Piletalk" seminar sponsored by Associated Pile and Fitting Corporation and sponsor Professor R. Stephen McCormack of Pennsylvania A&M to present on his research regarding the CMI pads. CMI should also present on the cost savings experienced by the two experiments with Colerick and Fazio. This would also be a good venue to increase the awareness of the health issues associated with asbestos. Even with the print ads and the "Piletalk" seminar the opportunity for promotion is limited. Therefore, CMI should provide a sample set of pads to the largest pile driving contractors along with a promotional package explaining the benefits of the pads. If the experience with Colerick and Fazio is an indicator of the reaction to the pads, the enthusiasm for the pads will spread quickly through the pile driving industry once they initially try the pads. To further promote the brand and establish the product in the industry, CMI should establish relationships with the large pile manufacturing companies such as Vulcan Iron Works and begin a national association for the pile driving industry. Currently Vulcan hammers have established themselves as the standard with architectural engineers whom are the most influential group for the large contractors and also influence the smaller contracting firms. Professor McCormack should be asked to work with the organization in exchange for grants for further research in the pile driving industry. This organization would allow CMI pads to reach a large group of influencers and purchasers and also align the pads with the current standard in pile hammers. While the rental companies are not the primary target for CMI pads, they are a necessary distribution channel to reach the smaller contractors that rent pile driving equipment. Furthermore, rental companies could actually undermine CMI's marketing efforts if they view pad sales as threatening their bottom line. Because the CMI pads allow a contractor do the same amount of work in less time, revenues from equipment rental could be reduced. Therefore, CMI should enter into contract with the rental companies and sell the pads to them at a discounted price to make-up for the loss in equipment rentals. An agreement such as this would entice the rental companies to promote metal pads to their renters. However, this deal means that CMI would be selling pads to rental companies at a lower price then other distributors, which could prove risky if the differential is discovered. Consequently, CMI must be prepared to renegotiate the deal with rental companies once the market has been established or limit its duration. There is another aspect that CMI could use to persuade rental companies to promote their pads. Although the pads would lead to a reduction in equipment rental time, the rental agency could actually take advantage of the faster turnaround, allowing them to supply the same number of contractors with fewer pile drivers. For example, if a pile driving job would take three weeks with the asbestos pads, the contractor would2 most likely rent the equipment for a month (see Table A in the case document). This would occur because traditional rental pricing essentially gave the contractor a free week as the same price was charged to rent for both three and four weeks. If the CMI pads reduce the pile driving time to two weeks, the rental company could rent the same equipment out twice in one month rather then once. Not only would the rental company not lose on the free fourth week, they would actually be able to rent an additional unit. Therefore, they would be able to reach the same number of consumers with less equipment. 3.Does this product reflect the needs of the customer and is it technically sound? What are the risks associated with marketing this product? Currently, the needs of the customer are met with the asbestos pads. Cushion pads are not marketed, branded or probably even given much consideration; they are simply a necessity rather then a work saver. Furthermore, the market for curled metal pads is not market driven but rather technology driven. While the product is technically sound, as was proven by the initial two tests, there is a risk

that the industry will not try the CMI pads due to the lack of clear distribution channels and existing attitudes towards pads. The cost saving message of the CMI pads must penetrate the market in order for the pad to be successful. In addition to changing this attitude, CMI must also overcome the initial shock that customers will experience when seeing a ten fold increase in price over asbestos pads. Although it will be challenging for CMI to change the attitude towards pads, the multi-tiered marketing strategy outlined above should prove effective. Another concern and potential risk for CMI is competition. In the short run, patent protection will be effective in preventing second movers from capitalizing on the promotion and research conducted by CMI. Assuming CMI has a patent for a time period of a few years, the threat of a new type of pad making the curled metal pads obsolete is not en immediate threat. However, once the patent expires, competition will be able to enter the market. Therefore, CMI must focus on building brand recognition for its pads, developing distribution channels and gaining the trust of industry influencers. By gaining wide spread brand acceptance of the curled metal pad, CMI will become the standard and will gain some protection to future threats. In addition to cornering the distribution channels and industry influencers, the firm can invest in permanent tooling. This would decrease manufacturing costs by as much as 55 % (see Attachment 4 in the Appendix). This will position the firm to deal more effectively with the price competition that may result in the future. V.Recommendations The management at CMI is excited about this new product. The pads offer CMI an opportunity to diversify its product line and increase its sales volume. In addition, initial testing demonstrated the significant performance advantages of the metal pads over asbestos pads. Obviously, there is a tremendous potential for this product and it could pay huge dividends for the company. To reap these rewards, CMI must understand market for cushion pads, settle on an optimal price, and develop a market strategy that will bring it all together. The market and distribution network for cushion pads is not well established or defined, as cushion pads are viewed only as a necessity. CMI must change this attitude by spreading word of its benefits as a potential work-saver through industry influences. A large portion of their marketing efforts should focus on architectural and consulting engineers because of their influence over the contractors who will use the pads. Manufacturers are also important influencers, as CMI can use their representatives to both market and sell the pads, taking advantage of their existing relationships with 75% of pile driver users. CMI should also utilize print advertisements in outlets such as the Louisiana Contractor and host seminars at venues such as "Piletalk." Professor McCormack may prove a useful influencer as well. Along with his leadership and the backing of the large manufacturing agencies, CMI could promote a national pile driving association. This would help establish the pads as a brand name and align CMI with the industry standard. All of this should work toward the goal of cornering the market for the next generation cushion pad, one that not only is safer then asbestos but a tremendous cost saver. In establishing a price for the pad, CMI should follow a high profit strategy. Potential profits are much higher with this strategy then for one in which market share is the goal. With the tremendous cost savings obtained by using the metal pads and absence of current competition, CMI should price as high as possible up to the EVC. For the 11 " pads this would mean a price of $1170, which would leave the customer a value of $230 per pad. However, as a first time buyer, CMI may offer Colerick a price of only $800, while selling to distributors for $900 so they can obtain a 30% margin in selling to contractor