Industrial Grinders

Dear Mr. Boetzalaer,

I wanted to follow up with a few suggestions in regards to what can be done with the large quantity of steel rings on hand and substantial inventory of special steel at Industrial Grinders. After analyzing what would be best for both the customers and most importantly, the market share, I think it would be in our best interest to look more closely at the following three options. Before I begin with what I came up with, I do want you to understand, that I did take into account your main concern, which was to find solutions to get rid of as much of the steel inventory as possible.

OPTION 1: Use 70% of labor cost to convert steel inventory into steel rings, while using full time labor to make plastic.

Refer to Exhibit A. (At bottom of email)

As you can see, if we decide to go with this option, we will be able to help make a solid effort to get rid of as much steel inventory as possible (which was one of your main concerns) while also introducing plastic into the market. The cost of producing steel rings by using 70% labor would be $207.69, which is significantly cheaper than producing them at 100% labor which would be $263.85. The total profit to produce plastic would be $253.80 while the profit of the new production of steel rings at 70% labor per 100 would be $112.71.

OPTION 2: Sell steel to 90% of market that we currently already distribute to and plastic to 10% of untapped market (Poulenc)

Refer to Exhibit B. (At bottom of email)

Again, this option would allow us the opportunity to venture out into Poulenc’s market, where he is the main competitor in selling plastic. On our behalf, we can continue running through our steel inventory. One of my concerns in this particular scenario is that customers in the 90% market may get word that there’s plastic out in the market and it’s cheaper. So to combat that, what we can do is sell steel at a discount (I’m thinking 50%). By selling steel 50% off, we can sell through our entire remaining inventory of steel rings. This will allow us to continue to control the market, as the customer will be satisfied with the pricing and the opportunity to continue buying steel, until they convert fully over to plastic.

Although this scenario results in a net loss, it allows for us to get rid of steel inventory vs. people 100% stop buying steel and converting strictly to plastic without even making a solid attempt to deplete some of the steel inventory.

Option 3: Scrap all steel inventory and sell plastic to 100% of the market

Refer to Exhibit C. (At bottom of email)

By deciding to scrap steel completely and make no use of the inventory we currently have on hand, we would immediately be suffering a net loss of $64,584. However, by deciding to focus all of our energy on plastic rings, under the assumption that we continue to sell 690 rings per week, we would make a net profit of $43,780.50. We would still be looking at a huge net loss here, but the most important thing is that we would be getting into 10% of a market that we were not in before, with a cheaper product. So, essentially this wouldn’t be a bad idea if we would be willing to eat the huge loss in year 1 under the assumption that this newer product (plastic) which cost us less and has more life, would pay out huge dividends in the future.

In my opinion, the smartest of these 3 options would be option A because we wouldn’t have to adjust the selling price and we can produce plastic rings as soon as possible (which is extremely important). Once it becomes heavily demanded, we can then increase the prices (if we solely choose to) of plastic, as we move away from the steel ring market, as we will be the dominant player in the market and own majority share.

Let me know what you think of the following suggestions!

Best,

Lawrence Bridgeman

General Manager, Industrial Grinders N.V.

Exhibit A.

(This chart breakdown shows that if we decided to use 70% of our labor to focus on production of steel inventory and all of the full time workers labor was used to make plastic rings, it would cost us $207.69, which is much cheaper if we had used 100% of our labor to focus on steel rings, which would cost us $263.85)