Polygon Engineering Plastics Ltd (PEP) is a supplier of engineering plastics to injection moulding and plastic forming manufacturers. The majority of their annual sales value comes from their supply of raw materials to the many producers of the â€œEuro Palletâ€ which is a standard size and specification pallet used universally across Europe and more increasingly throughout the world for the transportation of goods by land, sea and air. The Euro Pallet is made by the injection moulding process and PEP supply the raw material in granular form to the pallet manufacturers.
PEP has just developed a new material which can be moulded in exactly the same manner as a conventiona ...Read More l engineering plastic but has some useful properties. Using what PEP believe is a unique process, the density of the new material is 60% of the traditional plastic but when moulded into the final product using the same mould, and manufacturing techniques, it has improved mechanical properties. Hence the mass of the final product is 60% of the traditional pallet but the new pallet has increased strength. The exciting opportunity for PEP is that the cost this â€˜newâ€™ material is only marginally more than the traditional engineering plastic used by the pallet manufacturers.
The Managing Director of PEP has to ensure that they maximise the opportunities offered by this new product as the company is experiencing difficult times. He has asked you for comment and advice regarding the selling price of the new material.
Through their customers, the pallet manufacturers, PEP Ltd supply over 90% of the raw material used in the euro pallet market. The pallet manufacturers are under pressure from their customers, the transport industry, to reduce the weight of the pallets, whilst maintaining the overall dimensions and load carrying capacity. This is driven by legislation with the overall aim of contributing to increasing fuel efficiency and reducing carbon emissions. Naturally, any increase in costs will be fiercely opposed by both the pallet manufacturers and the transport companies.
Polygon has a good relationship with the pallet manufacturers and it would be easy to convert them to the new material particularly as it would allow them to reduce the weight of their product from 10kg to 6kg.
So a significant opportunity for PEP.The accounts department has calculated the standard cost of producing the new material and has applied the Companyâ€™s usual method to set the selling price. The Director of Finance had persuaded the accounts department to â€˜add a little extraâ€™ to this figure as the additional margin would be useful. This made the selling price Â£1100 / tonne.
1. This is obviously an exciting new product for PEP Ltd. and managed correctly should help their competitive advantage. What is first thing you should do to ensure that the company secures and maximises the commercial success of the new material?
2. What type of pricing method was being used at PEP Ltd. and what leads you to your answer?
3. Suggest a better pricing method based on the data given in the case and justify your argument.
4. The accounts department has set a price of Â£1100 per tonne, what is your opinion regarding this price and what price would you offer this new material to PEPâ€™s customers, the pallet manufacturers?
Discuss fully your considerations in deciding upon this particular price.