Precision worldwide case solution

WILLIAM J. BRUNS, JR.

Precision Worldwide, Inc.

In late May 2004, Hans Thorborg, the general manager of the German plant of Precision

Worldwide, Inc. (PWI), scheduled an afternoon meeting with his sales manager, accountant, and

development engineer to discuss the introduction by the French firm Henri Poulenc (a competitor) of

a plastic ring substitute for the steel retaining rings presently used in certain machines sold by

Precision Worldwide. The plastic ring, new to the market, not only had a much longer life than the

PWI steel ring but also apparently had a much lower manufacturing cost. Thorborg’s problem

stemmed from PWI’s large quantity of steel rings on hand and the substantial inventory of special

steel that had 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 PWI had manufactured industrial machines and equipment for sale in

numerous countries. The particular machines involved in Thorborg’s dilemma were made only at

the company’s plant in Frankfurt, Germany, 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 company’s

business, were sold separately. As with the steel rings, these parts could often also be used on similar

machines manufactured by competitors. The company’s head office was in Toledo, Ohio, U.S.A. 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.

In the late 1990s, 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 PWI 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, Gerhard Henk, had learned of the new plastic ring shortly after its appearance

and had immediately asked when PWI would be able to supply them, particularly for sale to

customers in France, where Henri Poulenc was the strongest competition faced by PWI. Bodo

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Eisenbach, the development engineer, estimated that the plastic rings could be produced by midSeptember. The necessary tools and equipment could be obtained for about $7,500. Eisenbach had

initially raised the issue of the steel-ring inventories that would not be used up by September. Henk

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 Thorborg 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.

Henk reported that Henri Poulenc was said to be selling the plastic ring at about the same price as

the PWI steel ring; since the production cost of the plastic ring would be much less than the steel, he

emphasized that PWI 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 Henri Poulenc for

some time, and this meant that no more than 10% of Precision Woldwide’s markets would be

affected.

Shortly after this, Patrick Corrigan, from the parent company in Ohio, visited Frankfurt. 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 PWI’s 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 Corrigan’s visit, both Eisenbach and Henk came in to see Thorborg. Eisenbach

came because he 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. He

understood, however, that the price of the competitive ring was high, and he felt that the decision to

sell the plastic ring only in markets where it was sold by competitors was a good one. He 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.”