Precision Worldwide, Inc.

Precision Worldwide, Inc. (PWI) is a manufacturer of industrial machines and equipment for sale in numerous countries. Replacement parts account for a substantial part of PWI’s business. This case study focuses on a specific replacement part, steel rings, which are used in machines manufactured in company’s plant in Germany. These replacement rings are also compatible with machines manufactured and sold by PWI’s competitors. A French firm, Henri Poulenc, has entered the competition by introducing plastic rings which have lower manufacturing costs than steel rings. Table 1 below summarizes average life and total cost per unit for both types of rings.

Plastic Ring Steel Ring

Average Life 2 months 8 months*

Total Cost per Unit $2.80 $11.08

Table 1: Comparison of Average Life and Unit Cost

* Tests indicated plastic ring had at least four times the wearing properties of the steel ring

The biggest issue at hand is PWI’s large quantity of finished steel rings and excess inventory of special steel purchased. The total book value of these inventories exceeds $390,000. Based on the analysis of the data presented, Hans Thorborg, the general manager of the Germany plant, must decide whether to manufacture plastic rings or only continue with steel rings. Mr. Thorborg has many alternatives; few of which are outlined below.

1. Continue to sell steel rings and do not manufacture/sell plastic rings. This does not seem like a viable solution because in order for the organization to survive, PWI will have to plan strategically and keep with competition.

2. Discontinue manufacturing and selling steel rings when plastic rings are available. According to Eisenbach, the development engineer, plastic rings can be produced in approximately four months. Discontinuing steel rings will mean disposing of finished unsold steel rings as well as the special steel since these are sunk costs and are irrelevant to the decision.

3. Another possible alternative...