Curled Metal Inc Engineered Products Division

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Curled Metal Inc Engineered Products Division
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   9-709-434 REV: MARCH 14, 2011 ________________________________________________________________________________________________________________ Professor Emeritus Benson P. Shapiro and Research Associate Jeffrey J. Sherman prepared the srcinal version of this case, “Cumberland Metal Industries: Engineered Products Division,” HBS No. 580-104. This version was prepared by Senior Lecturer Frank V. Cespedes and Professor Benson P. Shapiro. This case was made possible by a company that prefers to remain anonymous. All data have been disguised and updated. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2008, 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. BENSON P. SHAPIRO FRANK V. CESPEDES Curled Metal Inc.—Engineered Products Division  Joseph Fernandez, vice president of the Engineered Products Division of Curled Metal Inc. (CMI), and Rajiv Sanwal, group manager of the Mechanical Products Group, had spent the entire day (January 2, 2008) reviewing a new product CMI was about to introduce. (See Exhibit 1  for organization charts.) Fernandez pondered all that had been said and, turning to Sanwal, commented: Curled metal cushion pads seem to have more potential than any product we’ve ever introduced. A successful market introduction could 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. Sanwal responded, “The people at Kendrick Company are pressing us to sell to them. Since their srcinal test, they’ve been anxious to buy more. I promised to contact them by the end of the week.” “Fair enough,” Fernandez said, “but talk to me before you call them. The way we price this could have a significant impact on everything else we do.” The Company CMI had grown from $750,000 in sales in 1991 to over $55 million by 2007. ( Exhibit 2  shows CMI’s income statement.) It srcinally custom-fabricated components for chemical process filtration and other highly technical applications. Company strategy soon evolved from selling metal as a finished product to selling products that used certain types of metal as a raw material. A big boost came when, in responding to stricter environmental regulations, U.S. auto manufacturers required a high-temperature seal to prevent the escape of very hot exhaust gases. CMI developed a product that it called Slip-Seal.  Because it could meet the demanding specifications of the automakers, the product captured a large percentage of the available business and CMI had grown rapidly over the past decade. Company management was not confident about maintaining its 80% market share, however, and moved to diversify away from its heavy reliance on Slip-Seal   and the auto industry. Thus, when a sales representative from Houston approached CMI’s managers with a new application for curled metal technology, management examined it closely.   This document is authorized for use by Wasim Azhar  , from 8/1/2015 to 12/18/2015, in the course:MBA 269: Pricing - Azhar (Fall 2015), University of California, Berkeley. Any unauthorized use or reproduction of this document is strictly prohibited.  709-434 Curled Metal Inc.—Engineered Products Division 2 The Product The product discussed by Fernandez and Sanwal was a cushion pad—a key part of the process for driving piles. Piles were heavy beams of wood, concrete, steel, or composite material pushed into the ground as support for a building, bridge, or other structure. They were necessary where ground could shift under the weight of an unsupported structure. Pile driving was typically done with a large crane, to which a diesel or steam hammer inside a set of leads was attached. The leads were suspended over the pile for direction and support. The hammer drove the pile from the top of the leads to a certain depth in the ground (see Exhibit 3 ). The cushion pads prevented the shock of the hammer from damaging hammer or pile. They sat in a circular “helmet” placed over the top of the pile and were stacked to keep air from coming between striker plate and ram, as shown in Exhibit 3 . Of equal importance, the pads transmitted energy from the hammer to the pile. A good cushion pad had to transmit force without creating heat, and still remain resilient enough to prevent shock. With an ineffective pad, energy transmitted from the hammer would be given off as heat, and the pile could start to vibrate and possibly crack. Despite their importance to the pile-driving process, little attention had been paid to pads by most of the industry. Originally, hardwood blocks were used. Their cushioning was adequate, but availability was a problem and performance was poor. Constant pounding quickly destroyed the wood’s resiliency, heat built up, the wood often ignited, and blocks had to be replaced frequently. Most of the industry eventually shifted to stacks of alternate layers of ½-inch-thick aluminum plate and 1-inch-thick micarta slabs. (These were not fabricated, but simply pieces of aluminum and micarta cut to specific dimensions.) By 2008, micarta slabs, and some phenolic plastic pads, were the conventional pads most often used and had cost and performance characteristics similar to each other. Current pads came in a variety of standard diameters, the most common being 11½ inches. Diameter was determined by the size of the helmet, which varied with the size of the pile. CMI Cushion Pad Curled metal was continuous metal wire that was flattened and then wound into tight, continuous ringlets. This allowed the metal to stretch in length and width and gave it three-dimensional resiliency. Because it could be made of various metals (e.g., copper, Monel, and stainless steel), curled metal could be made to withstand almost any temperature or chemical. Stacking many layers could produce a shock mount, an airflow corrector, or a highly efficient filter. Tightly compressed curled metal produced the Slip-Seal for auto applications or, when calendered (i.e., curled metal ringlets were compressed between rollers to make a smooth, tight band) and wound around an axis, a cushion pad for pile driving. CMI purchased wire from outside vendors and performed the flattening and curling operations in-house. The CMI pad started with curled metal calendered to about 1 inch thick and wound tightly around the center of a flat, metallic disk until the desired diameter was reached. A similar disk was placed on top, with soldered tabs folded down to hold it all together. The pad was then coated with polyvinyl chloride to enhance its appearance and disguise the contents (see Exhibit 4 ). 1  This manufacturing process allowed any diameter pad, from the standard minimum of 11½ inches to over 30 inches for a custom application, to be produced from the same band of curled metal. 1  Managers at CMI were concerned that other manufacturers might discover this new application for curled metal and enter the business before CMI could get patent protection. CMI had a number of competitors; most were substantially smaller than CMI and none, thus far, had shown a strong interest or competence in technical, market, or product development. This document is authorized for use by Wasim Azhar  , from 8/1/2015 to 12/18/2015, in the course:MBA 269: Pricing - Azhar (Fall 2015), University of California, Berkeley. Any unauthorized use or reproduction of this document is strictly prohibited.  Curled Metal Inc.—Engineered Products Division 709-434 3   Comparative Performance After struggling to find a responsible contractor to use the product and monitor its performance, CMI persuaded Kendrick Foundation Company of Baltimore, Maryland, to try its pads on a papermill expansion in Newark, Delaware. The job required 300 55-foot piles driven 50 feet into the ground. The piles were 10-inch and 14-inch steel H-beams; both used an 11½-inch helmet and, thus, 11½-inch cushion pads. The total contractor revenue from the job was $225,000 ($15 per foot of pile driven). Kendrick drove a number of piles using conventional ¼ -inch-thick cushion pads to determine their characteristics for the job. Eighteen were placed in the helmet and driven until they lost resiliency. Pads were added, and driving continued until a complete set of 24 was sitting in the helmet. After these were spent, the entire set was removed and the cycle repeated. The rest of the job used the CMI pads. Four were initially installed and driven until 46 piles had been placed. One pad was added and the driving continued for 184 more piles. Another pad was placed in the helmet, and the job was completed. Comparable performances for the entire job were extrapolated as follows: Conventional Pads CMI Pads 1. Feet driven per hour while pile driver was at work (does not consider downtime) 150 200 2. Piles driven per set of pads 15 300 3. Number of pads per set 24 6 4. Number of sets required 20 1 5. Number of set changes 20 1 6. Time required for change per set 20 minutes 4 minutes 7. Kendrick cost per set $150 Not charged Although the CMI pads drove piles 33% faster and lasted for the entire job, Sanwal felt these results were unusual. He believed that a curled metal set life of 10 times more than conventional pads, and a performance increase of 20%, were probably more reasonable, because he was uncertain that CMI pads in larger sizes would perform as well. Industry Practice Industry sources indicated that about 75% of pile-driving contractors owned their hammers, and most owned at least one crane and set of leads. To determine contractors’ costs, CMI studied expenses of smaller contractors who rented equipment for pile-driving jobs. These data were available and avoided the problem of allocating the cost of a purchased crane or hammer to a particular job. Standard industry practice for equipment rental used a three-week month and a three-day workweek. 2  This was simply tradition, but most equipment renters set their rates this way. The cost of renting the necessary equipment and the labor cost for a job similar to that performed by Kendrick were estimated as shown in Table A .   2  This means that a contractor who rented equipment for one calendar month was charged only the “three-week” price, but had the equipment for the calendar month. The same was true of a “three-day week.” Contractors tried to use equipment for as much time per week or per month as possible; they rented it on a ‘’three-week’’ month but used it on a “4.33-week” month. This document is authorized for use by Wasim Azhar  , from 8/1/2015 to 12/18/2015, in the course:MBA 269: Pricing - Azhar (Fall 2015), University of California, Berkeley. Any unauthorized use or reproduction of this document is strictly prohibited.  709-434 Curled Metal Inc.—Engineered Products Division 4 Table A Equipment Rental, Labor, and Overhead Costs Per Standard Per Hour Average Cost per Real Hour   a  Month Week 1. Diesel hammer $13,500–21,600 $4,500–7,200 $187.50–300.00 $102 2. Crane 24,000–30,000 8,001–10,002 333.00–420.00 156 3. Leads @ $60 per foot per month (assume 70 feet) 4,200 1,401 58.32 24 4. Labor   b —3 laborers @ $18–24/hour each 1 crane operator 1 foreman 54.00–72.00 24.00–36.00 36.00–42.00 63 30 39 5. Overhead   c  (office, trucks, oil/gas, tools, etc.) 300.00 300 (Casewriter’s note: Please use average cost per real hour in all calculations, for uniformity in class discussion.) a   These costs were calculated from a rounded midpoint of the estimates. Hammer, crane, and lead costs were obtained by dividing standard monthly costs by 4.33 weeks per month and 40 hours per week.  b   Labor was paid on a 40-hour week and 4.33-week month. One-shift operation (40 hours/week) was standard in the industry. c   Most contractors calculated overhead on the basis of “working” hours, not standard hours. Hidden costs also played a role. For every hour actually spent driving piles, a contractor could spend 20 to 40 minutes moving the crane into position. Another 10% to 15% was added to cover scheduling delays, mistakes, and other unavoidable problems. Thus, the real cost per hour was usually substantially more than the initial figures showed. Reducing the driving time or pad changing time did not usually affect the time lost on delays and moving. All of these figures were based on a job that utilized 55-foot piles and 11½-inch pads. Although this was a common size, much larger jobs requiring bigger material were frequent. A stack of 11½ -inch micarta pads weighed between 30 and 40 pounds; the 30-inch size could weigh seven to eight times more. Each 11½-inch CMI pad weighed 15½   pounds. Bigger sizes, being more difficult to handle, could contribute significantly to unproductive time on a job. (See Exhibit 5 . ) Most contracts were awarded on a revenue-per-foot basis. Contractors bid by estimating the time it would take to drive the specified piles the distance required by the architectural engineers. After totaling costs and adding a percentage for profit, they submitted figures broken down into dollars per foot. The cost depended on the size of the piles and the type of soil to be penetrated. The $15 per foot that Kendrick charged was not atypical, but prices could be considerably greater. This document is authorized for use by Wasim Azhar  , from 8/1/2015 to 12/18/2015, in the course:MBA 269: Pricing - Azhar (Fall 2015), University of California, Berkeley. Any unauthorized use or reproduction of this document is strictly prohibited.  Curled Metal Inc.—Engineered Products Division 709-434 5   More Test Results CMI’s management was very pleased by how its cushion pads had performed for Kendrick. They lasted the entire job, eliminating downtime required for changeover, and other advantages became apparent. For example, after 500 feet of driving, the average temperature for the conventional pads was 600° to 700°F, which created great difficulty when they had to be replaced. The crew handling them was endangered and much time was wasted waiting for pads to cool, accounting for a major portion of time lost to changeovers. CMI pads, in contrast, never went above 250°F and were handled almost immediately with protective gloves. Thus, substantial energy lost in heat by the other pads was being used more efficiently to drive the piles with CMI pads. Also, the outstanding resiliency of CMI’s product seemed to account for a 33% faster driving time, which translated into significant savings. In talking with construction site personnel, CMI also found that most were becoming wary of conventional pads’ potential dangers, due to the heat generated and materials used. Many expressed a desire to use other material and were pleased that CMI pads contained no hazardous materials. And while CMI was happy with the results, Kendrick was ecstatic: it wanted to buy more pads and pressed Sanwal to quote prices. To confirm the Kendrick test results, therefore, CMI asked Corey Construction to try the pads on a  job in Pennsylvania that required 300 45-foot concrete piles to be driven 40 feet into the ground. Conventional pads of 11½ inches were again the comparison. Total job revenue was $324,000 or $27 per foot. Corey paid $120 for each set of 12 micarta pads used. Results were as follows: Conventional Pads CMI Pads 1. Feet driven per hour while pile driver was at work (does not consider downtime) 160 200 2. Piles driven per set of pads 6 300 3. Number of pads per set 12 5 4. Number of sets required 50 1 5. Number of set changes 50 1 6. Time required for change per set 20 minutes 4 minutes 7. Corey cost per set $120 Not charged The Market There were virtually no statistics from which a potential U.S. market size for cushion pads could  be determined, so Sanwal made several assumptions based on information he could gather. A report  by Construction Engineering  magazine estimated that about 13,000 pile hammers were owned by companies directly involved in pile driving. Industry sources estimated that another 6,500 to 13,000 hammers were leased. Sanwal assumed that this total of 19,500 to 26,000 hammers would operate about 25 weeks per year (because of seasonality) and be used 30 hours per week (because of moving time, repairs, scheduling problems, and other factors). Sanwal also assumed that an average actual driving figure (including time to change pads and so on) for most jobs was 20 feet per hour, which amounted to between 290 and 390 million feet of piles driven annually. To be conservative, he also assumed that a set of curled metal pads (four initially installed, plus two added after the srcinals lost some resiliency) would drive 10,000 feet. This document is authorized for use by Wasim Azhar  , from 8/1/2015 to 12/18/2015, in the course:MBA 269: Pricing - Azhar (Fall 2015), University of California, Berkeley. Any unauthorized use or reproduction of this document is strictly prohibited.
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