Harnischfeger

Harnischfeger Industries was a major manufacturer of paper making and material handling equipment that filed chapter 11 in the mid 90’s. One of the many challenges that faced Harnischfeger resides in the “Portal Cranes” industry. Competition from other manufacturers such as Kranco based out of Houston, Texas proved to be an issue for Harnischfeger. Kranco broke into the industry with a sale of 3 portal crane units in 1987 to 8 by Harnischfeger. By 1989, Kranco overtook Harnischfeger with a 5 to 4 units sold advantage. Mobile log stackers were also a substitute method to portal cranes in this industry. The log stackers cost about $250,000 per unit whereas the straight-tracks portal cranes cost $2 million. Even though a portal crane’s production is equivalent to four stackers, the flexibility of a cheaper option is enticing to the buyer. How to price the portal crane with an equivalent number of mobile log stackers as a benchmark was an important decision Harnischfeger had to face. By determining the willingness of a customer to pay for a portal crane with the log stackers as another option, Harnischfeger could then price the portal crane appropriately.

In order to compare the mobile log stackers to the portal cranes, their costs must be annualized to give an equal-footing analysis. As stated on page 5 on the Harnischfeger Industries case from Harvard Business School (HBS), a mobile log stacker costs about $250,000 and had a four-year life cycle. The labor, energy, equipment maintenance, parts, and log breakage costs for a single log stacker per year are listed in Table 2 of the HBS case. After summing up those costs, the tally for operating a single log stacker is $180,000. It was estimated that one crane could replace four log stackers if the timber arrived as longwood. Four stackers multiplied by the $180,000 operating costs per stacker yields $720,000. Since a stacker typically has a four year life cycle, it can be expected to replace one stacker per year if...