Classic Pen Company: Developing an Abc Model
ANALYSIS Background Information: The Classic Pen Company was a low-cost producer of traditional BLUE and BLACK pens with profit margins over 20% of sales. They then introduced RED pens at a 3% premium, and a year later they introduced PURPLE pens due to the 10% premium that they could command. However, they were disappointed with the most recent year; RED and PURPLE pens were not bringing in expected sales (still considering their higher profit margin), and BLUE and BLACK pens profitability was down.
Issue(s) Identification There are two main issues within this case: -Profitability -Pricing ?Which involves Production time and effort per unit. -Should they introduce even more variety? Can they keep up with demand and competition? Recommendations: 1. Get rid of RED pens – They are the trickiest to make; their revenue is only $. 03 more than standard pens. 2. Lower the Price for BLACK pens, since they are the most simple to make and require less overhead and direct labour. . Lower price of BLUE pens- they are the most popular, but with the changing market prices must be adjustable. 4. Invest in new equipment (Therefore eliminating time to clean vats in order to make new coloured pens). 5. Focus in only making BLUE and BLACK pens as specialty pens Conclusion: My recommendation to Dempsey would be to invest in new technology to lower the overhead costs (Set-ups, runs) in the future. With a competitive market it is important to adapt.
The addition of new colours is crucial to their survival, but with the current machinery it may not be possible. New equipment would mean limited backlog (if any), more options in colour, and meeting customers’ demands. If investment of new machinery is not doable for the company, it would be best to try and cut cost, and focus on standard pens for future investments. BLACK and BLUE pens bring in the most sales volumes and they could potentially cut back to 200% overhead once again.