B2B Marketing Project-CBS Assignment Question A: We know from Penetration pricing formulae: Unit Value added cost (C)= Unit Finished Product Cost – Unit Raw material Cost In most industries due to the effect of learning curve the value of C decreases with the increase in experience of the company. Same is the case of Carey Industries here. In this case we would use the following formulae as follows: Cq= Cn (q/n)-b Where, Cq= Unit Value added cost for the qth item Cn= Unit Value added cost for the nth item B is the learning parameter. This empirical analysis would help us to compute the experience curve equation for the Carey Builders Sequence of the project 4th Project 2nd Project
Total Cost of the project(1) $ 34.3 Million $ 30 Million
Raw Material Cost(2) $25.8 Million $ 20 Million
Thus computing the Experience Curve we have, Cq= Cn (q/n)-b Substituting values from the above table we calculate the value of b 10 = 8.5 (2/4)-b -b log (2/4) = log (10/8.5) -b = -0.235
Unit Value added Cost=1-2 $8.5 Million $ 10 Million
b = 0.235 Therefore the experience curve would be as follows, Cq= Cn (q/n)-0.235 Question – B: We know that for forecasting for the above nth value we would used the equation for the learning curve of experience curve. As indicated above the equation for the learning would be as follows: Cq= Cn (q/n)-0.235 From previous values we know that Carey Builder in the 4 th Project had the following costs involved Total Cost of the 4th Project = $ 34.3 Million Raw Material Cost involved for the project = $ 25.8 Million Unit Value added cost (Cq) = $ 34.3 Million - $ 25.8 Million = $ 8.5 Million Therefore substituting the values in the equation, As mentioned in the case study, the project would be 5 th in line for construction project for Carey Builders: Cq= Cn (q/n)-0.235 8.5 = Cn (4/5) -0.235 Where, Cn = Unit Value added cost for the 5th project i.e. n=5 Cn = $ 8.065755 Million The amount Carey should forecast as value added cost for the CBS project assuming the forecast is made using the experience curve is as follows: Ans: C5 = $ 8.065755 Million Question – C Raw material cost committed by Hutt and Speh (HS) Corporation = $ 43.9 Million
Incremental Fixed cost involved for bidding for the project = $ 75000= $ 0.075 Million The non refundable contract guarantee fees that needs to be paid to HS Corporation = 1% of the contracted raw material cost = 1% of $43.9 Million = 0.01 x $43.9 Million = $ 0.439 Million The value added cost as has been calculated in question b from the empirical experience curve = $ 8.066 Million The additional set up costs = 2 % of the forecasted value added cost = 0.02 x $ 8.066 Million = $ 0.16132 million Therefore the total cost involved for the project with out mark up and including all the costs involved = $ (43.9 + 0.075 + 0.439 + 8.066 + 0.16132) = $ 52 .64132 Million S No.
Bid Mark up %
1 2 3 4 5 6
0% 5% 10% 15% 20% 25%
Total Cost for each level of bid mark up( in Million US $) 52.64132 55.27339 57.90545 60.53752 63.16958 65.80165
The above table gives the level of total cost that Carey builders would bid for each level of gross profit margin. Question - D: The computation of profit at different markup levels along with the price and chances of winning the bid is as follows: Bid Price Profit (in (in Millions of Millions US $) of US $) 52.64132 55.27339 57.90545 60.53752 63.16958 65.80165
0 2.63207 5.26413 7.8962 10.52826 13.16033
Probability of bid being awarded to Carey Builders 1 0.8 0.7 0.4 0.3 0.0
Expected Profit (in Millions of US $) 0 2.105656 3.684891 3.15848 3.158478 0
The amount Carey Builders should bid as the Total Cost so that the expected profit is maximized = $ 57.90545 Million Question E: The computation of profit at different markup levels along with the price and revised probability/chances of winning the bid is as follows: Bid Price (in Profit (in Millions of US $) Millions of US $) 52.64132 55.27339 57.90545 60.53752 63.16958
0 2.63207 5.26413 7.8962 10.52826
Probability of bid being awarded to Carey Builders 1 0.7 0.4 0.3 0.2
Expected Profit (in Millions of US $) 0 1.842449 2.105652 2.36886 2.105652
The amount Carey Builders should bid as the Total Cost so that the expected profit is maximized considering the revised probabilities= $ 60.53752 Million Question F: The new probabilities would be calculated using the Binomial Theroem for Probability calculations: P1= Given probability x (1+x) (1-x) = Given Probability x 1.5.5 where x is the chance of Southern state university not bidding Thus the required table would turn up to be as follows: Bid Price (in Profit (in Millions of US $) Millions of US $) 52.64132 55.27339 57.90545 60.53752 63.16958
0 2.63207 5.26413 7.8962 10.52826
Probability of bid being Expected Profit (in awarded to Carey Millions of US $) Builders 1 0 0.86 2.2635802 0.49 2.5794237 0.37 2.921594 0.24 2.5267824
The value of the bid in this scenario would be US $ 60.53752 Million. Question – G
Maximizing expected profits should not be the only way to go about bidding for the project. This is because Chuck should understand this fact that the probability that are being considered while calculating the expected maximization of profit calculation is also being calculated taking some assumptions into account and this only provides for a one dimensional approach. One must also need to keep in mind the other smaller nuances while bidding like the interstate advantage that has been talked about. Apart from this as has been discusses in the above questions for your long term sustainability of the business and bidding &winning for larger projects it becomes imperative that companies some times bid to reduce the cost of the ‘ unit value added service which reduces once companies start gaining experience in handling projects the learning curve effect. Also certain companies usually bid very low for many prestigious projects just for the want of getting involved in a very prestigious project so that these projects act as a reference for the company while they keep bidding for more valuable projects and make a reputation for themselves. These projects basically act as reputation builders for the companies as a whole. Apart from this the assumptions involved in calculating the probabilities also influence the calculation for the maximizing of expected profits. Thus this approach would be called to be a one-dimensional approach towards pricing wherein it becomes imperative that the method for pricing is changed for better approach towards bidding for the required projects. Question-H: Yes, this would have an effect on the CBS bidding. This is because of the fact the company which gets the contract would would have insider information for the executive education facility that would be coming up pretty soon. This would not only would provide the winner with increasing business prospects but would also allow for keeping up with the business relations that would have developed by the winning bidder with the Hopskeen University official which would ultimately help the bidder to come out as a winner in the next instances. Hence Chuck as the head of the construction company as a whole should look at keeping the mark ups minimal so that it would allow him an entry into this University and allow him to build long term business relationships. Many companies would like to make a move into a B2B scenario even at losses if the future recurring business seems to be bright. As has been mentioned in the case the there would not only be Carey builders in the scenario give in the question but I am sure of the fact that the case would involve many more builders who would be in line to get involved in this bidding process as this would naturally allow them to make inroads into a business which would have long term profitability. In case of any B2B scenario, it is always seen that the business does not happen in one day but the associate sometimes develops the need within the client by acting as his consultant and engages with him on a long term basis which would ultimately would help him to churn out business in large amounts in the long term as well.Order Now