14 Aug Case Study for Applied SteelApplied Steel is one of two major producers of wide-

Case Study for Applied SteelApplied Steel is one of two major producers of wide-flange beams in the United States.The other producer is USX. A number of small firms also compete but they tend to competemainly on price in nearby markets where they can keep transport costs low. Typically, allinterested competitors charge the same delivered price, which varies some depending on how farthe customer is from either of the two major producers. In other words, local prices are higher inmore remote geographic markets.Wide-flanged beams are one of the principal steel products used in construction. They arethe modern version of what are commonly known as I-beams. USX rolls a full range of wideflanges from 6 to 36 inches. Applied Steel entered the field about 30 years ago, when itconverted an existing mill to produce this product. Applied Steels mill is limited to flanges up to24 inches, however. At the time of the conversion Applied Steel felt that customer usage of sizesover 2 inches was likely to be small. In recent years, however, there has been a definite trendtoward the larger and heavier sections.The beams produced by the various competitors are almost identical-since customers buyaccording to standard dimensional and physical-property specifications. In the smaller sizerange, there are a number of competitors. But above 14 inches, only USX and Applied Steelcompete. Above 24 inches, USX has no competition.All the steel companies sell these beams through their own sales forces. The customer forthese beams is called a structural fabricator. This fabricator typically buys unshaped beams andother steel products from the mills and shapes the according to the specifications of eachcustomer. The fabricator sells to the contractor or owner of the structure being built.The structural fabricator usually must sell on a competitive basis. The bidding is done onthe plans and specifications prepared by an architectural or structural engineering firm andforwarded to the fabricator by the contractor who wants the bid. Although thousands of structuralfabricators compete in the United States, relatively few account 6for the majority of wide-flangetonnage in the various geographical regions. Wince the price is the same from all producers, theytypically buy beams on the basis of availability (i.e., availability to meet production schedules)and performance (i.e., reliability in meeting the promised delivery schedule).Several years ago, Applied Steels production schedules saw that they were going to havean excess of hot-rolled plate capacity in the near future. At the same time, development of a newproduction technology allowed Applied Steel to weld three plates together into a section with thesame dimensional and physical properties and almost the same cross section as a rolled wideflange beam. This development appeared to offer two key advantages to Applied Steel: (1) Itwould enable Applied Steel to use some of the excess plate capacity, and (2) larger sizes of wideflange beams could be offered. Cost analysis showed that by using a fully depreciated plate milland the new welding process it would be possible to produce and sell larger wind-flange beamsat competitive process-that is, at the same price charged by USXApplied Steels managers were excited about the possibilities, because customers usuallyappreciate having a second source of supply. Also, the new approach would allow the productionof up to a 60-inch flange. With a little imagination, these larger sizes might offer a significantbreakthrough for the construction industry.Applied Steel decided to go ahead with the new project. As the production capacity wasconverted, the salespeople were kept well informed of the progress. They, in turn, promoted thisnew capability to their customers, emphasizing that soon they would be able to offer a full rangeof beam products. Applied Steel sent several general information letters to a broad mailing listbut did not advertise. The market development section of the sales department was very busyexplaining the new possibilities of the process to fabricators at engineering trade associations andshows.When the new production line was finally ready to go the market reaction wasdisappointing. No orders came in and none were expected. In general, customers were wary ofthe new product. The structural fabricators felt they couldnt use it without the approval of theircustomers, because it would involve deviating from the specified rolled sections. And as long asthey could still get the rolled section, why make the extra effort for something unfamiliar,especially with no price advantage. The salespeople were also bothered with a very commonquestion: How can you take plate that you sell for about $460 per ton and make a product thatyou can sell for $470 per ton? This question came up frequently and tended to divert the wholediscussion to the cost of production rather than to the way the new product might be used or itsvalue in the construction process.Evaluate Applied Steel’s situation. What should Applied Steel do?Case Study for Applied SteelApplied Steel is one of two major producers of wide-flange beams in the United States.The other producer is USX. A number of small firms also compete but they tend to competemainly on price in nearby markets where they can keep transport costs low. Typically, allinterested competitors charge the same delivered price, which varies some depending on how farthe customer is from either of the two major producers. In other words, local prices are higher inmore remote geographic markets.Wide-flanged beams are one of the principal steel products used in construction. They arethe modern version of what are commonly known as I-beams. USX rolls a full range of wideflanges from 6 to 36 inches. Applied Steel entered the field about 30 years ago, when itconverted an existing mill to produce this product. Applied Steels mill is limited to flanges up to24 inches, however. At the time of the conversion Applied Steel felt that customer usage of sizesover 2 inches was likely to be small. In recent years, however, there has been a definite trendtoward the larger and heavier sections.The beams produced by the various competitors are almost identical-since customers buyaccording to standard dimensional and physical-property specifications. In the smaller sizerange, there are a number of competitors. But above 14 inches, only USX and Applied Steelcompete. Above 24 inches, USX has no competition.All the steel companies sell these beams through their own sales forces. The customer forthese beams is called a structural fabricator. This fabricator typically buys unshaped beams andother steel products from the mills and shapes the according to the specifications of eachcustomer. The fabricator sells to the contractor or owner of the structure being built.The structural fabricator usually must sell on a competitive basis. The bidding is done onthe plans and specifications prepared by an architectural or structural engineering firm andforwarded to the fabricator by the contractor who wants the bid. Although thousands of structuralfabricators compete in the United States, relatively few account 6for the majority of wide-flangetonnage in the various geographical regions. Wince the price is the same from all producers, theytypically buy beams on the basis of availability (i.e., availability to meet production schedules)and performance (i.e., reliability in meeting the promised delivery schedule).Several years ago, Applied Steels production schedules saw that they were going to havean excess of hot-rolled plate capacity in the near future. At the same time, development of a newproduction technology allowed Applied Steel to weld three plates together into a section with thesame dimensional and physical properties and almost the same cross section as a rolled wideflange beam. This development appeared to offer two key advantages to Applied Steel: (1) Itwould enable Applied Steel to use some of the excess plate capacity, and (2) larger sizes of wideflange beams could be offered. Cost analysis showed that by using a fully depreciated plate milland the new welding process it would be possible to produce and sell larger wind-flange beamsat competitive process-that is, at the same price charged by USXApplied Steels managers were excited about the possibilities, because customers usuallyappreciate having a second source of supply. Also, the new approach would allow the productionof up to a 60-inch flange. With a little imagination, these larger sizes might offer a significantbreakthrough for the construction industry.Applied Steel decided to go ahead with the new project. As the production capacity wasconverted, the salespeople were kept well informed of the progress. They, in turn, promoted thisnew capability to their customers, emphasizing that soon they would be able to offer a full rangeof beam products. Applied Steel sent several general information letters to a broad mailing listbut did not advertise. The market development section of the sales department was very busyexplaining the new possibilities of the process to fabricators at engineering trade associations andshows.When the new production line was finally ready to go the market reaction wasdisappointing. No orders came in and none were expected. In general, customers were wary ofthe new product. The structural fabricators felt they couldnt use it without the approval of theircustomers, because it would involve deviating from the specified rolled sections. And as long asthey could still get the rolled section, why make the extra effort for something unfamiliar,especially with no price advantage. The salespeople were also bothered with a very commonquestion: How can you take plate that you sell for about $460 per ton and make a product thatyou can sell for $470 per ton? This question came up frequently and tended to divert the wholediscussion to the cost of production rather than to the way the new product might be used or itsvalue in the construction process.Evaluate Applied Steel’s situation. What should Applied Steel do?

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