Precision Worldwide Inc

•Producer of Industrial machines and equipment

for nearly 90 years
•Repairs and replacements which accounted for
substantial part of the companies revenues
,were sold separately
•Produced steel retaining rings ,which were a
regular replacement item for some models of
the machines the company sold.
 Threat for Precision Inc
• The availibility of plastic rings(launched by a
competitor ,namely Henri Poulenc) that
threatened the existence of the steel rings.
• The plastic rings would last at least 4 times the
life of steel rings and it costs almost 4 times less
that of steel rings.
• The carrying inventory cost of the steel
rings(finished as well as unfinished) was too
large to be completely ignored.
 Action Plan for Precision Inc
• Stop the production of Steel Rings completely and start
production of Plastic rings at the earliest.
• Finish the inventory of steel rings completely before switching
over to plastic rings.
• Supply of steel rings and plastic rings separately to separate
markets.
• Find some other utility for the unfabricated steel, probably for
in-house production or fabrication.
• Manufacture steel rings until mid-September and try to sell the
steel at throwaway prices .
• Reengineer production process to bring down the cost of Steel
rings.
 Action Plan 1
Stop the production of Steel Rings completely
and start production of Plastic rings at the earliest.
• The cost of the unfinished steel inventory is
$110,900
• The cost of the finished Steel rings are=$167292.9
(151*$1107.90)
• The total cost of the inventory =$278192.9
• The profit per 100 of the plastic rings =$1070.35
(assuming s.p=$1350)
 Action Plan 1
Considering that after the phase out of the steel
rings, Precision inc would be selling 690 Plastic
rings per week, It would take them less than 9
weeks to recover the cost of inventory.
Calculation:
The no of rings sold per week=690
The profit gathered in 1 week=$7385.415
No of weeks required to recover the inventory
costs=$ 278192.9/$7385.415=37.6
 Action Plan 2
Finish the inventory of steel rings completely
before switching over to plastic rings.
If the inventory has to be completely used up, the
total amount of steel rings that the company
would have to sell would
be=15100+34500=49600
At 690 rings /week,it would take 72 weeks(1.3yrs)
for the company to sell of all the inventory.
 Drawbacks of Action Plan 2
• For 72 weeks
profits from steel rings=4960*$242.1=$120081.6
• For 72 weeks
profits from plastic rings= 6.9*72*1070.35=$531749.88.
• This compensate for about 75% of the cost of production of the
finished steel rings.
• Moreover, the time spent on selling these steel rings would be precious
time wasted ,than trying to grab the market for the plastic rings .
• The competitor would try increase his market base of plastic rings and
the plastic rings being the future ,would eventually phase out Precision
Inc out of market.
• Again, the above calculations have been done at the assumption that
the company would be able to sell steel rings at $1350 and plastic rings
at same volume.
 Action Plan3
• Supply of steel rings and plastic rings separately to
separate markets.
• For this to be possible, Precision inc would require
separate production lines for Steel and Plastic Rings at
the same time ,at least till the inventory of Steel rings
are over.
• By doing this, the company won’t be able to achieve
economies of scale in both the production lines.
• Moreover, selling different rings to different
customers would create customer animosity which
would again adversely affect the their business.
 Action Plan 4
• Find some other utility for the unfabricated
steel, probably for in-house production or
fabrication.
• From the data given in the case ,it is highly
unlikely since the quality of steel is of a special
variety.