Global Industrial

In late May 2017, Chen Li, the general manager of the Indonesian plant of Global Industrial, Inc. (GII), scheduled an afternoon meeting with his sales manager, accountant, and development engineer to discuss the introduction by the Malaysian firm Sime Inc. (a competitor) of a plastic ring substitute for the steel retaining rings presently used in certain machines sold by Global Industrial. The plastic ring, new to the market, not only has a much longer life than the GII steel ring but also apparently has a much lower manufacturing cost. Lis problem stemmed from GIIs large quantity of steel rings on hand and the substantial inventory of special steel that has been purchased for their manufacture. After a thorough survey, he had found that the special steel could not be sold, even for scrap; the total book value of these inventories exceeded

$390,000.

For nearly 90 years GII had manufactured industrial machines and equipment for sale in numerous countries. The particular machines involved in Lis dilemma were made only at the companys plant in Jakarta, Indonesia, which employed more than one thousand people. The different models were priced between $18,900 and $28,900 and were sold by a separate sales organization. Repair and replacement parts, which accounted for a substantial part of the companys business, were sold separately. As with the steel rings, these parts could often be used on similar machines manufactured by competitors. The companys head office was in Columbus, Ohio, USA. In general, plants outside the United States were allowed considerable leeway in administering their own affairs; the corporate headquarters, however, was easily accessible by telephone, email, or during executive visits to the individual plants.

GII had a reputation for producing excellent quality machines and serving customers in a timely manner when they needed spare parts. However, in the early 2000s, competition had increased. Japanese manufacturers, with low-priced spare parts, had successfully entered the field. Other companies had appeared with lower-quality and lower-priced machines. There was little doubt that future competition would be more intense.

The steel ring manufactured by GII had a normal life of about two months, depending upon the extent to which the machine was used. A worn-out ring could be replaced in a few seconds, and although different models of the machines required from two to six rings, the rings were usually replaced individually as they wore out.

The sales manager, Mohamed Syed, had learned of the new plastic ring shortly after its appearance and had immediately asked when GII would be able to supply them, particularly for sale to customers in Malaysia, where Sime Inc. was the strongest competition faced by GII. Ameena Daeng, the development engineer, estimated that the plastic rings could be produced by mid-September. The necessary tools and equipment could be obtained for about $7,500. Daeng had initially raised the issue of the steel ring inventories that would not be used by September. Syed believed that if the new ring could be produced at a substantially lower cost than the steel ones, the inventory problem was irrelevant; he suggested that the inventory be sold, or if that was impossible, thrown away. The size of the inventory, however, caused Li to question this suggestion. He recalled that the size of the inventory resulted from having to order the highly specialized steel in large amounts so that a mill would be willing to handle the order.

Syed reported that Sime Inc. was said to be selling the plastic ring at about the same price as the GII steel ring; since the production cost of the plastic ring would be much less than the steel ring, he emphasized that GII was ignoring a good profit margin if it did not introduce a plastic ring. As the meeting concluded, it was decided that the company should prepare to manufacture the new ring as soon as possible but that until the inventories of the old model and the steel were exhausted, the plastic ring would only be sold in those markets where it was offered by competitors. It was expected that the new rings would not be produced by any company other than Sime Inc. for some time, and this meant that no more than 10% of Global Industrials markets would be affected.

Shortly after this, Patrick Corrigan, from the parent company in Ohio, visited Jakarta. During a review of company problems, the plastic ring question was discussed. Although the ring was only a small part of the finished machines, Corrigan was interested in the problem because the company wanted to establish policies for the production and pricing of all such parts that, in total, accounted for a substantial portion of GIIs revenues. Corrigan agreed that the company should proceed with plans for its production and try to find some other use for the steel; he then said, If this does not seem possible, I would, of course, expect you to use this material and produce the steel rings.

A few days after Corrigans visit, both Daeng and Syed came in to see Li. Daeng came because she felt that since tests had indicated that the plastic ring had at least four times the wearing properties of the steel ring, it would completely destroy demand for the steel ring. She understood, however, that the price of the competitive ring was high, and she felt that the decision to sell the plastic ring only in markets where it was sold by competitors was a good one. She observed, In this way we will probably be able to continue supplying the steel ring until stocks, at least of processed parts, are used up.

Syed still strongly opposed sales of any steel rings once the plastic ones became available. If steel rings were sold in some areas, he argued, while plastic rings were being sold elsewhere, customers who purchased steel rings would eventually find out. This would harm the sale of Global Industrial machinesthe selling price of which was many times that of the rings. He produced figures to show that if the selling price of both rings remained at $1,350.00 per hundred, the additional profit from the plastic rings (manufactured at a cost of $279.65 per hundred versus the $1,107.90 per hundred for steel rings) would more than recover the value of the steel inventory, and do so within less than a year at present volume levels. Li refused to change the decision of the previous meeting but agreed to have another discussion within a week.

Anticipating this third meeting and also having Corrigans concern in mind, Li obtained the data displayed in Table A from the cost accounting department on the cost of both plastic and steel rings.

Li also learned that the inventory of special steel had cost $110,900 and represented enough material to produce approximately 34,500 rings. Assuming that sales continued at the current

rate of 690 rings per week, without any further production, some 15,100 finished rings would be left on had by mid-September.

REQUIRED

1. Prepare a situational analysis for Global Industrial and identify the key success factors for the company.

2. Determine the incremental costs for the steel rings and the plastic rings (per 100 rings).

3. How many weeks of steel rings does GII have on hand in September? How many steel rings can GII produce out of the steel in inventory? (Provide your answer in weeks.)

4. Discuss the pros and cons of selling steel rings and using the steel in inventory to produce additional steel rings.

5. What is your advice to Chen Li?

TABLE A 100 Plastic Rings 100 Steel Rings Material $ 17.65 $ 321.90 Direct labour 65.50 196.50 Overhead Departmental 131.00 393.00 65.50 196.50 Administrative $279.65 $1,107.90 Total (cost) Overhead was allocated on the basis of direct labour cost. It was estimated that the variable overhead costs included here were largely fringe benefits related to direct labour and amounted to 80 per direct labour dollar or about 40% of the departmental amounts