1. How did the laser cutter “save” Peerless Saw Company when it could not be justified on payback or ROI grounds?
2. Compare the decision Ted faces now—the 1200-watt laser purchase—with the decision he faced in 1991 when he was considering the three punch presses. Structure the investment decision for each of these cases, considering costs, benefits, and risks. How has the decision environment changed? Is Ted more or less comfortable with this decision? How is this decision easier? How is it harder?
3. What do you think the potential problems might be in purchasing the 1200-watt laser? What about the potential benefits? Will this laser have the same impact on the business as the first laser? What are the strategic variables involved in these decisions?
4. Calculate the variable cost per blade of laser cutting with this new system. Assume that the variable cost of the laser is $4/hour, that the laser cuts at the rate of 40 inches per minute that a typical blade of 14 inches diameter sells for $25, and the same computer and software will be used as currently. Material load time for a 10-blade sheet of steel is one minute. Use a 3-inch arbor hole size and assume that a cut tooth doubles the cut distance. Compare this cost to the cost of variable overhead per blade in Exhibit 1.
5. Using the data in question 4, estimate the costs and revenues for this new system to perform a payback analysis (in months). What do you have to assume in addition to do the payback analysis?
6. What are the organizational/behavioral considerations involved in this purchase? Are they the same as the first laser? How might this system be more or less justifiable on a noneconomic basis than the first laser system?
7. Of the three major types of control systems—cybernetic, go/no-go, and postcontrol—which would have been the most useful with the first laser and why? With this new laser and why?
8. Ted is thinking about offering 25 of his largest customers the opportunity to tie into his system directly from their offices. What benefits would this offer to the customers and Peerless? What problems might it pose?
Owner and President Ted Montague was sitting at his desk on the second floor of the small Groveport, Ohio plant that housed Peerless Saw Company and its new subsidiary, Peerless Laser Processors, Inc. As he scanned over the eight-page contract to purchase their third laser system, a 1200-watt computerized carbon dioxide (CO2) laser cutter, he couldn’t help but reflect back to a similar situation he faced three years ago in this same office. Conditions were significantly different then. It was amazing, Ted reflected, how fast things had changed in the saw blade market, especially for Peerless, which had jumped from an underdog to the technology leader. Market data and financial statements describing the firm and its market environment are given in Exhibits 1 and 2.
History of Peerless Saw Company
Peerless Saw Company was formed in 1931, during the Great Depression, in Columbus, Ohio, to provide bandsaw blades to Ford Motor Company. It survived the Depression and by 1971, with its nonunionized labor force, it was known for its quality bandsaw and circular saw blades. But conditions inside the firm warranted less optimism. The original machines and processes were now very old and breaking down frequently, extending order backlogs to 20 weeks. However, the owners were nearing retirement and didn’t want to invest in new machinery, much less add capacity for the growing order backlog which had been building for years. By 1984 the situation had reached the crisis point. At that point Ted Montague had appeared and, with the help of external funding, bought the firm from the original owners. Ted’s previous business experience was in food processing, and he had some concern about taking charge of a metal products company. But Ted found the 40 employees, 13 in the offices and 27 (divided among two shifts) on the shop floor, to be very helpful, particularly since they now had an owner who was interested in building the business back up.