Reichard Maschinen, GmbH

This cae is set in Wester Europe in 1974, just afer the Arab oil shock of 1972 and 1973.
National borders were still ver important business barrerso But, the conce
p
t of o
p
en trade
borders (EC-1992) was begnninto grow.
In June of V4, . Kuz, maagig diector of the Gridig Machies Division (GMD) of Reichad
Machines, was considerig how he should handle a meeting that aferoon that would involve his sales
manager, his contoller, ad his product engieering manager. The meeting concered the introduction
by a Belgian competitor, Bruggeman Grinders, SA, of plastic rings to take the place of steel rings
which were a stndard component i many grinding machines, including many of the machines made
and sold by GMD.
The new plastic rigs, which had only been intoduced in April, not only appeared to have a
much longer lif than the steel rings, but also apparently were much less expensive to maufcture. M.
Kurz' problem i respondig to the new ring was complicated by the fct that he had 25,000 steel rigs
in inventory and 26 tons of special alloy steel puchased recently fr the sole purpose of mag more
rings. He kew that this raw steel could not even be sold as scrap because of the special alloys i it.
He had been required to buy a fll year's supply in order to convince a steel mill to make the special
product. Overall, he was holding about $93,000 worh of inventor related to steel rings (see Exibit
l ).
For almost 100 years, Reichard had manufctured industrial machies which it sold
throughout Europe and Norh America. It enjoyed a repu!a!ion fr high qualit, techology leadership,
and excellent customer service. There were dozens of companies of all sizes who competed, one way
or another, i idustrial machines i Europe. Reichard was one of the leaders i several segents.
Each division operated as a fily autonomous proft center. Corporate management, headquarered in
Franf, operated mainly as a holding compay.
The Griding Machie Division (GMD) had about a ten percent marketshare in Europe, its
principal market area. GMD's one plant was located in Cologne and employed 400 production
workers. Its diferent models were priced beteen $4500 and $7000, averaging about $6000. The
machines were used in metal working plants in many industries. Their usefl lif was about ten yeas
with noral maintenance.
Replacement pas in aggregate accounted fr more than half of GMD's tover. As is
common fr industrial machinery, margins on machine sales are ofen reduced in anticipation of higher
magins on replacement pars over the lif of the machine. This creates the opportunity fr price
discouting by pars suppliers on those replacement parts which are interchangeable across models and
across manufcturers. The steel rings were one of the standard component items which were
interchangeable.
In recent years Japanese maufcturers had entered Reichard's markets wit lower priced
spare pars. Other companies had entered with lower qualit and lower priced machines and parts.
Kurz flt sure that competition would continue to intensif in the fture. But, he was flly comitted
to Reichard's strategy of high quality, innovation and excellent service, at a price.
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The steel rings manufctured by GMD had a
usefl lif of about two months under nonal machine
use. A wor-out rig could be replaced in a minute or
to. Diferent machine models required fom two to six
rigs, but te average was fu rings per machine.
Usually, rings were replaced one at a time, as they were
wor-out.
Te sales manager, Mr. Goerer had leaed of
the new plastic ring almost immediately afer its
appearace and had asked when GMD would be able to
supply them, paricularly fr sale to customers in Belgium
where Bruggeman was the strongest competitor. In mid
May M. Hai, the development engineer, estimated that
the fctor could be ready to produce plastic rings by mid
September. The fctory already had a plastics injection
moldig deparment. The additional molds and tooling
necessa could be produced fr about $10,000, but
would have to be specially designed which would tae a
fw monts.
At this point Mr. Hainz had raised the question
about the ivestent i steel ring inventories which would
not be used up by the end of September. Mr. Goerer said
that if the new ring could be produced at a substantially
lower cost than steel, the inventory problem was
irelevant. The steel inventory should be sold fr
whatever could be obtained or even thrown away if it
could not be sold.
P. Goerer stated that Bruggeman was selling
the plastic ring fr about $340. per hundred. This was
$15. per hundred higer than the price of GMD's steel
rig even though the manufcturing cost of the plastic was
much less. Goerer wanted the company to prepare to
manufctre the new ring as soon as possible. Hainz
suggested that util the steel iventories were exausted,
they could be sold only in those markets where plastic
rigs were not ofered by competitors. No one expected
that the new plastic rigs would be produced by any
company other than Brggeman fr some time. This
meant that no more than 10% of GMD's markets would
be efected.
In late May, . Metz of the headquarer group
i Frankf visited Cologne. During a review of GMD's
problems, te plastic ring case was discussed. Although
the rig was a very small par of the fnished machines,
Mr. Metz was interested in the problem because the
holdig company wanted all divisions to establish
comparable policies fr the production and pricing of all
such pas. Mr. Metz pointed out to Mr. Kurz that
replacement pars pricing and availability was a critical
component ofReichard's busiess strategy. Metz saw no
problem with GMD geting ready to produce plastic rings,
althoug he was skeptical of the market acceptance of
such a product. But, he added, "I would certainly expect
you to recover you ivestment i steel iventory." Mr.
Ku uderstood that he would need a very good story if
he decided to scrap any of the steel rings or raw material.
A fw days afer Mr. Metz' visit, both Mr. Hainz
and M. Goerer came in to see Mr. Kurtz. The fner
came because he felt that the plastic rig would
completely destoy demand fr the steel ring. New tests
had indicated that plastic had at least fur times the
wearing properties. However, because the price of the
competitive ring was very high, he flt that the decision to
sell the platic rig only in Brggema's market area was
good one. "In this way we would probably be able to
contiue supplying the steel ring until stocks, at least of
processed pas, were used up."
Goerer said he was still strongly against selling
any steel rigs afer te new plastic ones became
available. If the higer quality plastic rigs were only
beig sold in some areas, customers would soon fnd out.
Te result would afect the sale of machines, the sellig
price of which was many times that of the rings. He
produced fgures to show that even if te selling price of
bot rings were the same at $325 per hundred, the
additional proft fom plastic rings, which would cost
$66.60 per hundred as contrasted with $263.85 per
hudred fr steel rings, would more than cover the "so
called" investment in the steel inventory in lite more than
a year at present volume levels.
Mr. Kuz did not comit hiself to a decision,
but agreed to have aother discussion in a week. In
aticipation of the meeting, Kurz obtained the fllowing
cost ifnation fom his contoller comparing plastic and
steel rings:
Per 100 Rings
Plastic Steel
Material $4.20 $76.65
Direct Labor 15.60 46.80
Overhead*
Manufctng 1.2U Vo.
Selling & Admin. 15.60 46.80
Total $66.60 $263.85
* Overhead was allocated to all products on the basis of
direct labor dollars. Manufctring overhead WdS
allocated at 200% of direct labor, and selling and
administation overhead at 100%. he controller
estimated that the only variable overhead costs fr ring
production would be the payoll taxes and benefts related
to direct labor (approxiately 80% of labor cost).
h0ICh8lC Maschinen, LDDm
Mr. Ku leaed that te raw steel inventory on
hand was sufcient to produce approxiately 34,500
more rigs (See Exibit I). Assuming that sales
continued at the curent rate of 690 rigs per week, some
15,000 fished rigs would be lef on hand by mid
September witout ay fher production taking place. It
then occued to him that during the next two or tee
months the plant would not be operating at capacity. The
company had a policy of employing its excess labor
durig slack periods at about 70% of regula wages on
various make-work projects rather than layig workers
of. He wondered if it would be a good idea to commit
additional resources now to te steel rigs by converting
the raw steel inventory into rings during this period and
use some of this slack labor productively. If workers
produced rings, tey would be paid fll wage rates.
To: Mr. Kurtz, Managing Diector
FROM: M. PoliZer Controller
. Steel Inventory fr Rigs
DATE: 31.5.74
Finished Rigs in Inventor
Raw Steel in Inventor
(*) 254.5 x $263.85
EXHIBIT 1
MEMORANDUM
25,450
34.500
59,950
$67,149 (*)
26,400
$93,549
I) Ifwe convert the raw steel to rings, the total of 59
,
950 would last about 87 weeks at our curent sales rate of dDDuI
690 rings per week.
2) If we do not produce any more steel rings, we will have about 15,000 rings in inventory in September when W0
would be ready to begin producing and selling plastic rings.
3)
We have exausted all possible souces fr selling this stCel in bulk. Because of its special cheistr@ it has
no value to anyone else.
4) Duing our normal summer slowdown period (July and August), the fctory could conver all the raw steel to
fished rings, if you wish.