02/27/2014

Curled Metal Inc.- Engineered Products Division: Case Study

Analysis

Francesco Panazzolo

Fall 2013-2014
Case Presentation

Curled Metal Inc. (CMI) faced a pricing and channel marketing decision for metal pile cushions utilized
during pile driving. CMI’s approach to metal pads has significant efficiency advantages over currently used
pads available in the market. However, CMI has to take into account several barriers to entry into this
market. The primary barrier is that most companies viewed role of pads as a necessary accessory or
tangent item instead of viewing them as a potentially value adding or cost reducing part of pile driving. In
order to penetrate the market, CMI has to alter the point of view of pile driving pads for the opinion
leaders, engineering firms, and contractors involved in the decision process.

There is several stakeholders to consider, first CMI that need a new successful product to the continued
success of the company. The decisions regarding pile cushions could greatly increase the company’s
revenues and profits. 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 pads may be
hazardous to their health due to heat related injuries and weight. The following table summarizes some of
the stakeholders; their projected importance to CMI’s marketing decisions, and their projected attitudes to
switching from current pads to higher efficiency metal cushions.

Projected Attitude Importance Who?

Neutral High Pile Hammer Manufactures
Positive High Architectural/Consulting Engineers
Positive Medium/Low Soil Consultants
Negative High Pile Hammer Distributing/Renting Companies
Positive High Engineering/Construction Contractors
Positive Medium/Low Independent Pile-Driving Contractors
Positive Medium (To CMI) Workers
Positive Medium/Medium High Unions
Positive High Curled Metal Inc.

Key Issues
CMI needs to consider several marketing decisions. First, they must determine a method for pricing and
ultimately a price for the new metal pads. Second, the company must decide which channels to market the
pads based on the selected pricing strategy. Third, CMI 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.

The market
Based on Sanwal's assumption we can estimate the maximum number of set of metal pads requested
annually by the market. Since the feet of piles driven amounted to between 290 and 390 million and the
new CMI set of pads would drive 10,000 feet, we can easily calculate that the market should be in a range
of 29,000 to 39,000 sets per year.

Analysis
CMI’s new metal pile driving pads provided several benefits over the current 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 pads. Second, efficiency characteristics will be
analyzed and compared. Third, two 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
The new metal pads are much safer than conventional pads. Workers often had to handle super heated
pads and risked the possibility of being severely burned. Also micarta pads are much heavier than metal
pads, thus increasing the risk of back and other weight related injuries. Conversely, CMI pads are
significantly reduced the possibility of heat related injury, and are much lighter than the others pads.

Efficiency
CMI pads also provide several efficiency advantages over others 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.
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
$714. It further asserts that pile drivers average 150 feet per hour. Therefore, the cost of pile driving can be
estimated at $4.76 per foot driven. This calculation considers only the average cost related with equipment
rental, labor and overhead costs.

To obtain the real cost per foot driven we have also to consider the time spent to change the set of pads, in
this case the labor requested a total of 20 changes and every change took 20 minutes for a total time of
400 minutes. We also know that it was a labor for a total of 15,000 feet driven with a mean of 150 feet per
hour. Than the total time for the job, not considering delays and moving, can be estimated in 6400 minutes,
equal to 106.67 hours.

Therefore the real cost per foot driven can be estimated at:
$∗ .

= 5.08 $ per foot

It can be noted that the down time impact for only a 7% to total cost. Hence 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 $4,700 per
300-55 ft. piles, or approximately 31.5 cents per foot driven. However, the cost-benefit from a 33% increase
in efficiency based on an $5.08 per foot base is $1.2 per foot, a significant savings. The total quantitative
value to the customer of $1.52 per foot (29.92%) can be calculated by adding all of the benefits per foot
from efficiency increases.

The cost of purchasing conventional pads in the first test was $150 per set of pads. Further, it took 20 sets
of pads to place 300 piles of 55 feet. Therefore, the conventional pads cost $150*20 to drive 15,000
(300*50) or 20 cents per foot driven. This can be compared to the CMI pad manufacturing costs showed in
the following table, notice that this calculation in based on the assumption that a set of metal pads can
drive 10,000 feet.

Existing New Equipment New Equipment New Equipment

Equipment (without cost of (depreciation of (depreciation of
investment) machinery in 1 years) machinery in 2 years)
Total variable 7,99 cents 4,91 cents 7,91 cents 6,41 cents
Total manufacturing 26,66 cents 12,45 cents 15,45 cents 13,95 cents
cost
It is important to note that the manufacturing costs are less or align to the actual costs of pads per foot. It
should be remembered that the CMI pads save for clients 1.52$ per foot from efficiency increases.

Since the total market for pile driving cushion pads exceeds 17,000 pads per month and it is estimated that
CMI 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 $150,000 equipment investment per additional 250
pads per month. Assuming that the $150,000 is basically a fixed cost, the third and fourth column of the
previous table showed the breakeven price per foot with two different payback period The calculated
breakeven manufacturing cost is still below the cost of the selling price for other pads. Note that in
proceeding years the $150,000 investments would not be required, further increasing profits.

The following table shows the break-even price per foot considering the two different period and
increasing constantly the monthly capacity. It is assumed that every increase of 250 pads per month
required a further investment in equipment equal to $75,000 and also that the cost of labor and materials
increase proportionally (double the capacity, double cost of labor and material and so on). The third and
the fifth column show the break-even price considering economies of scale, minus 15% of labor and
material cost. Prices are expressed in cents of dollars.

1 1 Year 2 2 Year
Cost Capacity
Year economies of scale Years economies of scale
Total variable 250 7,91 7,91 6,41 6,41
Total manufacturing cost 250 15,45 15,45 13,95 13,95
Total variable 500 12,07 11,33 10,95 10,21
Total manufacturing cost 500 27,15 25,29 26,03 24,16
Total variable 750 16,73 15,26 15,73 14,26
Total manufacturing cost 750 39,36 35,62 38,36 34,62
Total variable 1000 21,52 19,31 20,58 18,37
Total manufacturing cost 1000 51,68 46,08 50,75 45,14
Total variable 1250 26,35 23,41 25,45 22,51
Total manufacturing cost 1250 64,06 56,59 63,16 55,69
Total variable 1500 31,21 27,53 30,34 26,65
Total manufacturing cost 1500 76,46 67,13 75,59 66,25
Total variable 1750 36,09 31,67 35,23 30,81
Total manufacturing cost 1750 88,88 77,67 88,02 76,82
Total variable 2000 40,97 35,81 40,13 34,97
Total manufacturing cost 2000 101,31 88,23 100,46 87,39
Total variable 2250 45,86 44,12 45,03 39,13
Total manufacturing cost 2250 113,74 109,36 112,90 97,96
Total variable 2500 50,75 48,29 49,93 43,30
Total manufacturing cost 2500 126,17 119,93 125,35 108,54
Total variable 2750 55,65 52,45 54,83 47,47
Total manufacturing cost 2750 138,61 130,51 137,79 119,12
Total variable 3000 60,55 56,61 59,74 51,64
Total manufacturing cost 3000 151,05 141,08 150,24 129,69

The corresponding minimum selling price per set can be obtained multiplying the cost per foot showed in
the table per 10,000 (feet driven by a set of CMI pads).
Marketing Channels
There are several different channels available to market the CMI pads. For example, the company 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. It can be reasonably assumed that CMI should be
able to capture more than 1.4% of this market – 250 pads per month. Therefore, it will require several
$75,000 investments for equipment to produce enough of the total market demand to be effective.
Fortunately the low cost of production per foot, 15.45 cents with a 1 year breakeven point and payback
period on investment enables CMI to investigate two different pricing options.

Alternative 1: General Markup

The first alternative is for Curled Metal Inc. to select a general markup price where a specific margin is
reached. Since the cost of breakeven production over one year is $1,545.24 and the required corporate
margin is 50%, a good selling price might be 1.5*$1,545.24 = $2,317.86 per set of pads. Assuming the
distributors and retailers required a 30% margin, the retail price would be $3,13.21 or 31.21 cents per pile
foot driven. This alternative is in line with the price of current used pads in the test scenario, hence
competitive. The advantage of this method is it fulfills the company objective of 50% markup, is easy to
calculate, and competes well with other pads. Furthermore, proceeding years will realize a greater than 50%
margin since the $150,000 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 current used, CMI needs
only to convince consumers of the efficiency and safety advantages to convert them to the new 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: 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 $1.52 per foot driven.
If CMI look to earn the 33% of the cost savings, then they could potentially charge $1.52*.33 = $0.5 per foot
driven. Final price will be 31.21 cents (from previous solution) plus 50 cents equal to 81.21 cents per foot
driven. This would result in a very high cost of $8,120 per set of pads. Although the cost is completely
justified, it would take considerable marketing to convince potential customers to upgrade from $150 per
micarta set to $8,120 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 equipment
investments would be minimized based on the low market penetration and production needs.
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, CMI must show that pads are an integral part of pile
driving efficiency and thus an industry cost driver. Second, the company 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 micarta pads, $150, against the price
of a set of metal pads, exceeding $3,000, without considering the per foot ramifications. CMI needs to
make sure that customers understand the $3,000 pads are actually cheaper on a per-foot basis than the
$150 micarta pads.

Alternative 2 provides the highest markup but 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 1,
directly competing with micarta, would severely limit competitive entry and have the greatest market
penetration and it meet the company required 50% margin. It is a simple price scheme that should yield
high market penetration and significant profits. CMI would only need to convince contractors of the price-
per-foot comparison to micarta pads and show the cost savings based on efficiency. Therefore, pursuing
market penetration via an alternative 1 approach could be probably the best alternative for Curled Metals
Inc. .

The main concern about a high market penetration is related with the production cost, equipment
investments can be easily amortized with the increasing volumes but the cost of fixed factory overhead
play the main role in determining final price because they are based on direct labor. With high volume,
economies of scale have to be pursued and also a decreasing of the percentage charged to the product.

If after a further evaluation of production cost, the cost per driven foot is increasing in a slightly
proportional way with the quantity produced, the best alternative will be the second one that apply a
premium markup to the costumer and keep a low market penetration.

Channel Recommendations

It is further recommended that CMI market the new 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 micarta pads provides
another marketing opportunity. The company should lobby the labor unions to push for higher safety
standards and abandon the hazardous used pads. 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 $150,000 and six additional $75,000 investments or $ 600,000 to produce
1,750 pads per month. The total revenue generated during the first year would be (1,750/6)*$8120 =
$2,368,333.33. The cost to produce the pads, including equipment investment is estimated at
$207.54*1,750 + $600,000 = $963,195.

The total profit is estimated at $2,368,333.33- $963,195 = $1,405,138.33.

As said alternative 1 is not actionable with high volumes unless CMI do not find a way to reduce the
incidence of labor and markup related to fixed cost. Also alternative 2 is not very suitable with high
volumes because the cost of production increase quite proportionally. Accordingly CMI should review its
price politics increasing them to cover the costs, but this is not an desirable solution because alternative 2
already apply a premium price to costumers.

Without more information about the possibility to reduce production costs with increasing volumes and
the proper amortization period for machinery, my suggestion for CMI is to pursue a low penetration in the
market using the second alternative for pricing the pads and target premium costumers for bigger and
more sophisticated job.

Marketing decisions
Once pricing policy is established (premium price), marketing decisions must support the business strategy.
Marketing has to focus on the product differentiation underlining that the CMI cushion pads eliminate
downtime making them a work-saving tool, represent a safest solution for the health of the workers and
more important allow a significant cost savings for the costumer.
The main person whom can boost the company name among the high specialized engineers and the bigger
companies is Professor Stephen McCormack. As a scientist he can easily recognize the superior quality of
CMI pads and be a fundamental resource for company’s brand building and promoting. Asking to him to
show to the community (writing a paper or with a conference) the properties of the new pads, the
company can reach the main target of its marketing that is the “Soil consultants” and engineers that work
to the most expensive projects. This strategy should enable the company to gain a market share large
enough to generate a substantial profit and simultaneously small enough to keep low the investment and
production costs. Also make a partnership with Prometheus Iron Works, asking to them to use the pads on
their top level product can be a good marketing strategy..
For the long period, considering the product life cycle, CMI has to focalize his effort in cost reduction to
allow a progressively decreasing of the price. In fact, the CMI should be aware that other competitors could
enter into the market as the product is easily imitable. Building a strong brand image of quality with
alternative 2 can bring to a major market penetration when the price will be lowered. For this future
opportunity, marketing has to focus on publication in magazines like “Oklahoma Contractor”, sponsor
seminars like “Piletalk” and on the importance of word-of-mouth communication.