Cumberland Metal Industries free essay sample

The table below breaks down the economic value in use of the CMI pads according to both the Colerick and Fazio tests. I used the data from each case to derive the number of hours of driving required to complete the job with both the asbestos and CMI pads. The difference in time to complete the job multiplied by the cost per real hours was one part of the economic value in use. The economic value that is created by use of the CMI pads is different in total dollars between the Colerick and Fazio tests. However, when you divide those values by the number of feet driven in each test you derive the same economic value in use of $0. 46/ft. When you examine the breakdown of savings associated with a decrease in project time between the 2 tests you find that the Colerick test had a saving of $. 0/ft, and Fazio $. In the current state the pads are a commodity product manufactured by several small firms. The fragmentation of the distribution channel combined with the commodity nature of the product has put most of the channel power in the hands of the equipment distributors who despite carrying the products mostly as a matter of necessity are still enjoying a 30-40% gross margin on the sale of the pads. CMI is in the situation where they can circumvent the channel and provide their product direct to the market. CMI is able to offer their product direct to the market because they have a very specific consumer target engineering/construction contractors, and independent pile-driving contractors. It would be easier to create awareness among these consumers by direct sales than trying to have the various outlets that exist in the conventional channel do so. This also allows CMI to avoid the situation of having their distribution limited by the number of outlets that they can get to carry their product. If CMI is able to gain a monopoly in the market then they can approach distribution through the conventional outlets because they will have a strong brand and will be able to put pressure on distributors to accept a lower price. The nature of the CMI pads makes them much longer lasting than the asbestos pads. Thus one assumes that CMI would be looking for a high EBIT on this product rather than ATR. By circumventing the distributors they are able to capture more of the Total Channel Margin and increase their EBIT. Segmentation of the market can be done by applying the variables of willingness to pay, benefit, and the heavy half or 80 / 20 rule. Willingness to pay is appropriate but needs to be approached in an abstract way. There are many contractors in the pile driving business that are looking to maximize their take, of these some are not sophisticated enough, or their business is not large enough to realize substantial gains on the time savings through use of the new pads. They are going to be your smaller independent construction contractors and pile driving operations. They will typically see the lower price of the asbestos pads and choose them. You can also look at willingness to pay in another way the more sophisticated outfits will realize that by paying more for the CMI pads they will realize savings on time and cost on their projects over all. The players in this segment are likely to be the larger international construction contractors like Conmaco and Raymond International, as well as larger independent pile driving firms. The market can be segmented by benefit because there are those consumers or purchase influencers who look at the impact the pads can have from an engineering standpoint. Because CMI pads transfer the energy from the pile more efficiently they were less likely to result in damage to the pile that may affect the integrity of the foundation. The players that would be in this segment would be the architectural and consulting groups, as well as the more sophisticated of the larger engineering/construction contractors. There is a second benefit segment that you can identify as well. This group would be defined by there need or want for a safer work environment. The use of asbestos pads would be undesirable to this segment, and would be more likely to choose the CMI pads. This segment would be harder to identify because they would be spread out amongst the different size firms. It is likely that at the time of the case larger firms were not yet concerned about the major litigation issues surrounding the use of asbestos. Since it is most likely site workers that would be identified in this segment’ it is likely that smaller firms were the principle is on site at the projects would be the major part of the segment. The last segment would be the heavy half. This is appropriate b/c there is likely to be a small number of larger firms that handle multiple pile driving project at a time, as well as the larger ones. It is then logical to ssume they are going to consume a majority of the pads in the market. This segment is likely to consist of a few of the larger engineering/construction firms. When looking to price the CMI pads they would first need to look at the equivalent cost of the asbestos pads. Using the total number of sets used between both tests (70) and the total number of feet driven (27000) you get and average of 386 ft per set. Given the conse rvative estimate of the CMI set of pads having a durable life of 10,000 we can calculate that you would use 26 sets of asbestos pads over the durable life of one set of CMI pads. Multiplying that figure by and average price of $45/set you get $1170, providing a good base. But this would put them at 24% margin per pad if using current equipment and 55% after retooling(retooling adds $16. 7/pad to total manufacturing cost), without adding extra capacity over 250 pads per month. If they choose not to retool they would have increase their price, they have room to do so because they are creating project cost savings at an average of $. 35/ft or $3,500 per set of pads. If they increased their price to $1800/set or $300/pad they would be realizing 50% margins per pad without retooling, and 71% after retooling. They would also be providing about $2,900 in project cost savings to the consumer. CMI should distribute these directly to the consumer for the reasons mentioned earlier in this analysis. There key segment should be the heavy half users consisting of the larger engineering and construction firms. They should also focus on the benefit segment of Architectural/Consulting engineers who can drive demand for the new pads. Key to gaining this segment would be a favorable review by Dr. McCormack. The NATRU listed bellow estimates the volume of pads that should be produced in each of the first five years. I used a rough estimate on the number of pile hammers existing in the market of 22,750. This number was then decreased in each of the five years by the number of trial from the previous year. This assumes that the market is not growing and that non repeat customers will not trial the product again. The steady state volumes of repeat customers are captured in the total of each year. Because there is a lot of uncertainty about how to gain awareness of the new product in the market I kept awareness very low at 15% in the first year increasing of the next five to 55%. Much of the growth in awareness would be contributed to extended time in the market of and active sales force and word of mouth amongst market players. I assumed a moderate amount of trial given the evidence available about the superiority of the pads. This rate would increase over time as well because there would be more evidence based information available to the market. Because the pads are somewhat of an experience good, and all evidence points ot a favorable experience I weighted the repeat rate heavily at 80%.