case analysis: The Top Plastics Company

THE TOP PLASTICS COMPANY CASE ANALYSIS - Situation Analysis Top Plastics Company is a wholly owned subsidiary of Alpen Paper Corporation. It was formed in 1960 and TPC continued to grow and expand at a healthy rate. During 1973 TPC had the plant capacity to produce 8,075,000 pounds of plastics without having to schedule overtime production. In 1973 the sales were expected to reach 8,000,000, thus almost utilizing the whole capacity. Its budget allocation for advertising and sales promotion was $ 450,000 - an amount 15% greater than 1972. But in summer and fall, they began face shortage of petroleum based liquid resins, which was the raw material required for the industry. By November, the shortage grew sharply due to oil boycott by the Arabs. TPC’s main suppliers, Eastman Kodak and Monsanto began allocating their reduced resin supplies first to their own plastics plant and to their contract customers. But TPC spread their purchases among several suppliers according to who offered the best price. Thus they found themselves last on the priority list of their suppliers. They were now paying 45-75 cents per pound of resin when compared to the earlier average price of 25 cents. Also there was shortage of supply, as by December they could obtain only enough resin to produce 5.2 to 6 million pounds far below the anticipated 8 million pounds. Problem Statement How can the TPC’s Vice President reformulate or adjust the marketing and manufacturing strategies in order to meet the constraints non availability of resin and its rising prices ? Objectives To get the maximum profit out of the raw materials present with them. To meet demands so as to not to lose their regular customers. To get a regular supply of resin. To reduce the amount spent on the resin. Alternatives Reduce the advertising costs to make it equal to the amount allocated in 1972. Enter into a contract with a supplier, so that at least the quantity if not the price is regularized. Increase the prices of product categories C and D as it includes products such as packaging material and disposable products which are mostly sold to solution- oriented customers who want low prices but will respond to arguments about more dependable supply or service. Stop the production of product category E, since the profit per pound is the lowest for that category and so is its market share. The raw material invested in this if invested in other categories will yield more profit. Action Plan There is an increase in the demand for the products of TPC. We also see that in certain product categories such as C and D they control more than half of the market share, indicating their strong market presence. Thus the TPC can afford to reduce the advertising cost and keep it the same as that allotted in 1972. The direct mail technique of advertising can be reduced to a great extent as this does not reach the decision maker in the purchasing organization (as the mail is sorted out at a lower level itself) or even if it does reach it is not seriously considered. It would be more effective to make contacts through sales forces. This money can be utilized to meet the increasing cost of raw material, as a regular supply is required to maintain the market presence and consumer loyalty. The next step to be taken is to get into a contract with a supplier of resin, so that the supply of resin is regular if not the price. Also another step to be taken is to increase the price of the products. Since the resin shortage phenomena will affect the whole industry, price hikes will eventually happen. For TPC, with the increase in price of the liquid resin from the average price of 25 cents to average of 60 cents, we can say that there is an effective increase of 35 cents in the cost of production per pound. Thus the profit margins for product class A and B will reduce to 15 cents and 35 cent from 50 cents and 70 cents. But the product class C will have a loss of 5 cents per pound and product class D will have a profit of only 5 cents per pound. Thus the prices have to be increased. They also produce products like packaging material, auto plastics which can be considered as bottleneck products. Bottleneck products are those which have low value and cost to the customer but they involve some risk. The customer will want a supplier who can guarantee a steady supply of reliable products. Also in product class C and D they are the major market share holders. For such class of product, TPC can negotiate with the customers for a price hike giving the reason of Arab oil boycott. Contingency Plan We see that the product category E generates the minimum profit per lb. Also the it consumes raw material equivalent to other product categories such as A, B, C and D which generate more profit when compared to product category E. Also the market share of the product category E is only around 20 %. With the increase in price of the liquid resin from the average price of 25 cents to average of 60 cents, we can say that there is an effective increase of 35 cents in the cost of production per pound. Thus the production cost of product class E will increase to $1.35 where as the market price is only $ 1.10 - a difference of 25 cents. Thus it will require a price hike of 35 cents even to retain the earlier level of profit.