Leeds Works, Imperial Optronics PLC At the beginning of 2014: managers at the Leeds Works: [mperial Optronics PLC: met to decide how to respond to a French competitor's launch of a cutting tool that could replace the carbide-steel blades used worldwide in [mperial's eyeglass-processing equipment The composite-based blades: which were currently only available in France, appeared to last much longer and cost less than carbide blades. By itself: this one decision would have only a modest Impact on the group's financials: but the Parts Division at Imperial was far more profitable than its original-equipment divisions: so the blade issue could eventually have a significant impact on the full range of replacement parts produced by Leeds. Imperial was the global leader in dry-cut lens-processing equipment. When glass was the only material for making eyeglasses: the most effective way to edge or glaze a lens was With a diamond wheel and flood coolant. As glass was replaced by plastic, polycarbonates: and Imperial's dry-lens equipment became the preferred approach because plastic materials would gum up diamond-wheeled edgers Optometrists and eyeglass labs throughout the world used Imperial tracers, and finishers. Blades were an important consumable in this equipment. They could be quickly replaced: and lasted about tvo months in average use. Blades produced at Leeds were also sold as replacement pans for Leeds' competitor's lens-processing equipment Barry Sullivan was the division executive at Leeds. His instmcts: after 10 years as head of Sales, were to rush a composite blade to market as soon as possible: especially m France, where the composites had first been introduced; however: Sullivan had only recently become the head of the Leeds Works: and he now had other points of view to consider. The head of Operations warned that stocks of finished blades and carbide steel were at E and that the large inventories of steel had been necessary because Leeds was the only customer for that particular alloy _ Carbide-lens saws were the only use that Leeds had for the special steel. The head of operations cautioned that a composite product, even on a rush basis, would not reach the marketplace for six months. He estimated that starting production would require roughly f300,000 in new equipment and another E80:000 in development and training costs. The new head of Sales warned that a composite blade might be needed only in the French market for some time as their competitor lacked the manufacturing and marketing capability to expand quickly, but in France: it was needed immediately. He was concerned that: as the composite blades appeared to last four times longer than the carbide steel blades: they would quickly dominate the market for blades in France Othenvise: they would have some flexibility on when to introduce outside of France as he didn't think any of other competitors would quickly adopt the new technology. He also thought that any first-mover advantages to Leeds would be dimmish over time as customers tended to be loyal to the firm they bought the equipment from. division. The blade issue was likely to become a benchmark for other parts decisions facing Leeds and Imperial. Substitute spares were constantly being introduced by European, American: and Asian firms: panicularly those in China. Sullivan had accumulated other data pertaining to the blade Issue: Special-carbide-steel mventory was E3452000 Carbide-blade sales averaged 10,000 a week: includmg blades sold for replacement, new Leeds' equipment, and competitors' machines. Leeds would have 140,000 finished carbide blades available when a composite- based replacement would first be shippable staning in July _ During April, Leeds would operate well below its normal capacity. Following labor agreements, the company agreed to employ excess labor during this period at 70 percent of the regular wage while employees worked on various "make- work" projects. This excess labor was available to produce carbide blades, should that become necessary. In which case, they would have to pay workers at 100% of their regular wages. The head of operations estimated that there would be enough excess labor during this period to convert all of the existmg stock of carbide steel into blades. A key issue would be pricing. The new composite blade had been priced at roughly a 20% premium to the Leeds blades: even though the manufacturing cost of the composite product was expected to be significantly lower. If die composite blades continued to be sold at the same premium to the carbide-blade price of Barry concluded that the extra profit on the composite blade would easily cover the cost of the carbide steel inventory, were it to be no longer required. To prove his point: Sullivan produced the manufacturing-cost data shown below that was provided by the head of Operations: Material Direct labor Divisional Group allocation Total cost Expected Cost of Composite 0.98 0.33 0.69 0.30 2.30 Current Carbide Costs 1.15 0.70 1.48 0.63 3.96 * Overhead '.vas allocated on the basis of direct-labor costs. Management estimated that the variable overhead costs included m the overhead estimates above were about 40% of the divisional overhead