Steel and Steel Ring Inventory Recommendations

Beonka L. Robinson

MBA 622: Critical Thinking

November 23, 2015

To: Van Boetzaleaer

From: Lawrence Bridgeman

Subject: Steel and Steel Ring Inventory Recommendations

Good afternoon Mr. Boetzaleaer,

        After our recent meeting in regards to plans for production of plastic rings and steel inventory, I have reviewed pertinent factors to assist in making our final decision. We are both in agreement that the production of plastic will start as soon as possible in order to get this product in stock for manufacturing our machines by mid- September of this year. The initial total investment cost for equipment and tools necessary to get production started will be roughly $1,800. This production plan would be the perfect time to implement the make-work project. Using this method of producing the steel at 70% of the cost, we would be able to be cost effective for the low labor cost will decrease the cost of production and result in a higher profit as displayed in Table A (Barrett, 1988).

Key problems and issues to be addressed:

1. Excess inventory of special steel and steel rings
2. Finding an alternative use for the steel
3. Production of unfinished steel and sell both plastic and steel or not

Key data

Plastic versus Steel Rings

• Steel rings last about 2 month
• Plastic rings last about 8 months
• At 100 rings , steel rings cost $263.85 to produce
• Plastic cost $66.60 to produce

One of the major problems we face is with the large quantity of steel rings and special steel in inventory. The current inventory on hand has a total book value of $93,000. The unprocessed inventory of the special steel cost about $26,400 and could produce roughly 34,500 rings and the finished goods are valued at $66,600 (Barrett, 1988). Since the survey found that the special steel could not be sold for scraps, it may also be difficult to find new uses for the steel as well. It is fair to assume that the top French competitors  would be the only company with the plastic rings circulating for some time, so this give us some time to catch up to the rising customer demand and still sell steel rings in the meantime.

 In addition, there are financial concerns with manufacturing the steel rings. It is important to take into consideration that the introduction of the less costly plastic rings would only affect 10% of our sales. To better analyze the potential effect, we would need to know how much of our revenue comes from this market. If sales stay at 690 rings per week, we would only have 15,100 finished rings that would be sunk cost of about $39,841.35 ((15,100/100 rings) *$ 263.85) in the decision to stop all production and sales by mid-September (Barrett, 1988).

On the contrary, if we risk potential black lash from customers and sell both plastic and steel, it would only take approximately 22 more weeks to sale the steel inventory (15100/690 units per week).  The 2 month life span would work to our advantage for the turnaround time would reduce the inventory at a slightly faster rate. Production cost savings would allow us to later offer the steel rings at discount if necessary to get rid of any remaining inventory. This would also give us leverage when we start selling the plastic rings at the original price of steel if we lower its price of steel before the launch of plastic rings. This data is important because it paints a vivid picture of the financial burden and the time frame of our final decision. This data illustrates the cost associated with each option. Throwing away all the inventory as we start making plastic rings would leave us at a disadvantage financially and from a customer service standpoint. This option would put us in a position where our company is not a feasible alternative for customers.

Recommendation:

1. Manufacture the remaining steel inventory since the rings account for a substantial portion of revenue and the raw steel valued at $26,400 cannot be sold.
2. Phase out the steel rings until reduction of stock to decrease the risk of high sunk cost of the steel rings that could still be sold within the existing market.
3. Take the risk of selling the steel rings while producing and selling plastic rings for only 10% of the market is affected. The profit from the low production cost of the plastic will offset any potential loss due to market retaliation by producing the steel products at 70% of labor cost.
4. Sell both plastic and steel at the same price and we should market and promoting steel as better quality and plastic as longer life span. Some customer will still pay the price for a product that they value as high quality. As demand increases for the longer lasting plastic rings the steel inventory will potentially decrease by then and inventory cost would have reduced from the current $93,000 to about $53,158.65 by mid-September and the remaining units over a 22 week period with sales being constant.  .
5. Alternative, option to selling both is to only sell the steel inventory completely before starting the sale of plastic, but continue working on the production of plastic rings until the steel units are sold.

Very Respectfully,

Lawrence Bridgeman

References

Barrett, M. Edgar. (1988) Industrial Grinders N.V. Harvard Business School. 1-3