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Reichard

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Submitted By mrperfect
Words 469
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Case Title: Reichard Maschinen

SHORT CYCLE PROCESS

Who: Mr Kurtz, director of Grinding Machines Division

What: Has to decide if/when to convert to plastic rings from steel rings

Why: They cost less to produce and last longer

When: Decision needs to be made quickly

LONG CYCLE PROCESS

Issues

Immediate | Basic | -excess steel ring inventory | -will be more demand for plastic rings than steel | -competitor already selling plastic rings in one area | -need to adapt products to benefit consumer | -cost to produce rings | -steel rings have lower contr. margin |

Qualitative Analysis

-focusing on selling the plastic rings will be critical to the success of the company because of the increased quality

-although there is a company selling plastic rings in one market in Europe, Reichard can gain a first mover advantage of many of the other markets across Europe and North America by introducing the plastic ring before other competitors

-the introduction of a plastic ring will likely cannibalize sales of their steel rings. They can offset this by putting value on the steel rings to consumers by selling them at a much cheaper rate until they sell out of the steel rings. The discounted rate of steel rings will definitely entice some buyers because of the lower price.

Quantitative Analysis

(per 100 rings) | Plastic | Steel | Selling Price | 340 | 325 | Material | 4.2 | 76.65 | Direct Labor | 15.6 | 46.8 | Variable Overhead | 37.44 | 112.32 | Contribution Margin | 282.76 | 89.23 |
-plastic rings contribution margin is greater by $193.53 per 100 rings. Based on the sales rate of 690 rings per week, that is $69,438.56 additional income per year.

-if the current ring inventory was to be scrapped, the money saved by converting to plastic rings would be recovered in less than 2 years.

Alternatives

1. Finish producing/selling the steel rings until inventory runs out. 2. Scrap the steel rings and take the loss, start selling plastic rings as soon as possible. 3. Convert the steel to finish rings during the slow period, but begin selling plastic rings as soon as possible then sell the steel rings at a discount.

Decision Criteria

1. Ensure customers are satisfied with their products 2. Maximize contribution margin in the long-run 3. Gain first mover advantage in markets rather than following competitors

Preferred Alternative

-begin production of the plastic rings as soon as possible to make them available to the market where there is competition and to gain first mover advantage in other markets

-markets where there are no plastic rings will realize the quality of the plastic rings are better and will purchase the rings because of their increased longevity

-produce the steel rings during the summer slow period and sell these rings at a discount to other customers where they’re more price sensitive

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