Static and dynamic cost evaluations methodologies

The developed model gives the possibility to the Sales department to compare the dynamic cost price of the production process found with the new proposed pricing strategy, with the static cost price obtained with the current used pricing strategy. We will now review the differences between the two methodologies.

• Static pricing – Current used strategy

The costs of the production process for a product is constant and does not depend on the tons already booked by the customers.

• Dynamic pricing – Proposed strategy

The price of the production process for a product depends on the current planned capacity and the quantity that a customer is willing to order.

8.3.1 Differences and similitudes of the two methodologies

We will now resume what are the differences and the similitudes between the strategy applied in the new model and the current strategy applied by Tata Steel Tubes for the production process costs evaluation (in the following phases: selling, slitting machine, production machine and warehousing).

• Selling phase

The selling evaluation in the new model is the same as in the current one. The costs related to the selling phase are calculated with a fixed price per ton. The price estimated

by Tata Steel Tubes is 11 euro per ton. This estimation is considered to be correct and

therefore no further investigation in this cost evaluation has been made.

• Slitting Machine phase

The Slitting Machine phase, as the Production Machine phase, is evaluated by the speed performance during the production phase. The speed of the machine during the production is the factor indicating the performance of the slitting phase. The current calculation of the speed values is made with pre-estimated norms values. During the research we have analysed the historical real data of the performance of the slitting machine; these data have been considered not statistically significant. For this reason we were not able to improve the current cost calculation.

• Production Machine phase

As introduced above the cost of the production machine with the current cost estimation are evaluated considering the speed of the tubes during the Production Machine phase.

82

We propose some changing in the cost evaluation. It is still in part based on the speed during the process but in this case we not use only the norms speed values to make the estimation. The proposed methodology considers:

1. Use of a weighted average between the historical speed values and the norms speed

values (currently only the norms speed values are considered). At the historical

data we will apply penalties for items that have nominal thickness of 8 mm and 10

mm.

2. Penalties per length.

We decide to use a weighted average between the historical speed values and the norms speed values for the next two reasons:

a) To guarantee that the outcomes of the model will not be too distant from the

current pricing methodology used by Tata Steel Tubes.

b) The use of only the historical speed values data could not perfectly represent the

expected speed of the production of certain products, especially in the case when the historical data of a product are limited (when only limited times a product has been produced in the past). In these cases the historical speed could be highly influenced by occasional malfunction of the production machines.

The production Machine cost calculation follows the equation (1) discussed in chapter 7,

which we propose again:

𝑈𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛𝑝𝑚= 𝑃𝑟𝑒𝑝𝑎𝑟𝑎𝑡𝑖𝑜𝑛 𝑀𝑎𝑐ℎ𝑖𝑛𝑒𝑗[ℎ] + 1 𝑆𝑝𝑒𝑒𝑑 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑗[ ℎ 𝑡𝑜𝑛] ∗ 𝐸[ 𝑇𝑜𝑛 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑]𝑗[𝑡𝑜𝑛] ∗ 1 ղ𝑗 𝐸[𝑇𝑜𝑛 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑]𝑗[𝑡𝑜𝑛] ∗ 𝑅𝑒𝑞𝑢𝑒𝑠𝑡𝑒𝑑 𝑇𝑜𝑛𝑗[𝑡𝑜𝑛]

This equation guarantees that the costs involved during this phase are changing in a dynamic way considering the Expected produced ton of a specific analysed product. The cost decreases when the expected produced ton is higher. With this new methodology we believe that the sellers will have a better overview of the costs involved in this phase and will be able to check at the moment the production costs. That is different from the current methodology where the price is static and does not change considering the time when it is checked or the current available production capacity.

• Warehousing phase

The warehousing costs evaluated by the current methodology used by Tata Steel Tubes

83

evaluation methodology we will consider the next factors to evaluate the costs involved during this phase:

1. Effective space utilization

2. Use of internal or External warehouse

The first point, as already introduced, guarantees that the price is dependent on the utilization of the warehouse (bottleneck of the production process of the tubes). The tubes are estimated in a different way, if they are using the internal or external warehouse. That because the warehouse bottleneck regards only the internal warehouse. The external

warehouse is currently never full and the utilization results maximum around 60% of the

available space. Therefore it is evident that the products that can be stored in the open air have to have a different price evaluation considering their external location.

We will now schematize in a table the differences between the current used methodology and the new one proposed for the model:

Phases Static Pricing (current

used)

Dynamic Pricing

(proposed for the model)

Sales Price per Ton sold Price per Ton sold

Slitting Price per Norms speed Price per Norms speed

Production Price per Norms speed Price estimated considering

a weighted average between the historical speed values and the norms speed values. Penalization for items that

have nominal thickness of 8

mm and 10 mm.

Penalization for length. Dynamic changing

considering the planning.

Warehouse Price per Ton Price per m^3. Different

prices for external or internal warehouse

84