Actg 360 - Precise Worldwide, Inc. Case Study

Zheng Wei

ACTG 360 Case

2016/3/7

Michael Tomcal

Precise Worldwide, Inc.(PWI), manufacturing industrial equipment and parts for sale in numerous countries, is facing a serious problem which is Henri Poulenc (a competitor) of a plastic ring substitute for the steel retaining rings presently used in certain machines sold by Precision Worldwide. The steel ring has an average normal life of about 2 months, but the plastic ring has an average normal life of about 8 months. Therefore, in my opinion, Hans Thorborg who is the general manager of the company should take several actions in response to this problem.

The first action should do is being able to produce the plastic ring as well. Because the total cost of 100 steel rings is $1107.90. This cost is about 3 times of the cost of 100 plastic rings. Also, the plastic ring is also cheaper and durable than steel ring. Although the PWI would still have a lot of inventories for materials of plastic ring and completed plastic rings, PWI should demonstrate a positive attitude for resolving in terms of the qualitative factor of competition. In the other words, the cost of the existing inventory would replace by the opportunity cost for entering the current market. Furthermore, at the current rate of sale (690 rings per week), without any further production, 15,100 finished rings would be left on hand by mid-September. Therefore, PWI should continue producing and selling steel rings till mid-September. In the mid-September introduce plastic rings at least in those markets where Henri Poulenc is present and to consider the idea of selling the steel rings.

The second action Hans Thorborg should do is that adjust strategy based on the market trend. For instance, when the plastic ring is available to sell, Sales Manager, Gerhard Henk, should sell the plastic rings only at the reduce cost (table 1) in all other markets. In additional, Hans may offer a new option for customers which is free to replace the steel rings with plastic rings. Thus, the PWI should produce plastic rings when a lot of steel rings were sold. The total cost of two rings would be ($279.65 + $1107.90 = $1387.55) which means the company would confront a loss of ($1387.55 - $1350 = $37.55). $1350 is the total selling price of two rings. To recover this loss, PWI would take the time, because the cost of the new plastic rings is much lower than steel rings which means it will make more profits in the future. In addition, it is probable that the price of the steel rings will fall to one-fourth because the plastic ring is four times more durable than the steel rings. However, there are still variables to consider that may affect the pricing: that is, the issue of reengineering the production which may lead to lower costs.