Cumberland Metal Industries Essay

This essay has a total of 5312 words and 24 pages.

Cumberland Metal Industries


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 ½ 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 ½ 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 ½ 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 two-thirds.


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 11-½ inch helmets and 11-½ 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 ½" CMI pad.


The 2nd test was performed at Fabio Construction in New Brighton, PA. The job required
300, 45-foot 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
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