Dominion Motors Case Analysis

Dominion Motors Case Analysis

What, precisely, is the problem here?

The problem is that DMC’s largest consumer of oil well pumping motors has ranked them the #3 supplier, and not only could this impact purchasing from this customer (Hamilton), other smaller companies follow this large company for their purchasing decisions, so that they get the benefit of copying their R&D decisions.

What are the causes of the problem?

Power companies implemented a graduated monthly base charge per HP at installation, to mitigate ineffieciencies caused by overmotoring in order to improve power factor. Upon the announcement of this change, the head of Hamilton’s EE department conducted testing on motors from different manufactures and used starting torque as the deciding parameter, in order to define the specifications of a motor which could be used most economically.

Is this just a “brush fire” or an important problem?

*This is an important problem because…

Look at sales potential for DMC in this particular market.

1,000 new wells will enter production over the next 5 years, so that’s 5,000 wells. Since DMC has 50% of this market, that would mean 2,500 potential sales. Per exhibit 2, the total cost to manufacture a 7.5 HP unit is $714.00, and it is sold to large users for $1,200, for a net profit of $486.00 per motor (the profit on mfg cost is 536.49 per motor.) Additionally, there DMC sells about 15% of the control and panel-board applications.

Other than lost dollars, what are the other implications if DMC looses Hamilton?

Other smaller companies that do not have their own engineering staffs follow the purchasing decisions of the larger companies, so that they can avoid the R&D investment. Therefore, DMC could stand to lose some of that market as well (This is somewhat analogous to Zoll Medical, where ambulance companies were highly influenced by hospital buying trends. However, there is no interdependence here as there was in the Zoll case, only cost avoidance by the smaller companies by leveraging research that they benefit from for free.)

Using mfg cost, what are the profit implications of each of the 4 alternatives?

What are the key advantages and disadvantages of each?

Alternative

Profit

Pro’s

Con’s

No Change

*Sell to lg. mfgs for $1,200

*CTM=$663

*Profit=$553/unit

*zero investment

*don’t know that customers will follow Bridges’ recommendations at all

*could lose a huge amount of anticipated sales

#1-Reduce price of 10 HP motor to 7.5HP price

*Sell to lg. mfgs for $1,200

*CTM=$816

*Profit=$384/unit

*Fast and easy to implement; no capital investments required

*Can implement only when needed-wait to see if Bridges’ analysis impacts customer decision making

*Buys time to research and reach a more reasoned strategy

*Decreased profit of $153/unit

*might not be necessary, so implementing may be premature

*Does not address Power factor issue, so customers face higher base charge, and possible PF penalties down the road

#2-Modify 7.5 HP motor to start with 105 ft-lbs torque

*Sell to lg. mfgs for $1,200

*CTM=$790 or 867

*Profit=$410 or $333/unit

*No capital investments required

*Would give motor highest starting torque of any motor available

*Only 3 months to begin shipping,