Intelligent Machine Control Business Plan Donald Gex

Transcription

1 Donald Gex

2 Intelligent Machine Control Business Plan Donald Gex Company Anderson Equipment Company is a distributor of heavy equipment for the Construction, Mining and Forestry industries. The term heavy equipment refers to heavy-duty vehicles specially designed for executing tasks. Different types of heavy equipment are used in applications from civil engineering or infrastructure to other construction developments. As a distributor, Anderson Equipment Company has exclusive distribution rights to sell products in its territory, which spans from Western Virginia to New England. Its corporate headquarters are in Bridgeville, Pennsylvania (near Pittsburgh). Anderson s slogan is The Complete Equipment Solution, which means that it offers customers one-stop shopping for their entire job/project requirements. Anderson is committed to meeting its customers needs by providing equipment sales, rental, parts, and service at 18 branch locations. With more than 70 service trucks and 400 employees, Anderson s customers always have access to the company s quality people, products and service.

3 Brand Strength Anderson s primary brand of equipment is Komatsu, the world s second largest manufacturer and supplier of earth-moving machinery, consisting of construction, mining and compact construction equipment. Products manufactured under the brand of Komatsu are Excavators, Bulldozers, Haul Trucks, Dump Trucks, Wheel Loaders, Crushers, and Graders. Through its distributor network, Komatsu offers a state-of-the-art parts and service program to support its equipment. Anderson Equipment Company is the largest Komatsu dealer in the northeast, and one of the largest in the country. Anderson s territory size, market share and annual equipment orders from Komatsu enable it to earn discounts and rebates, improving its cost structure relative to competitors. In addition, Anderson is expected to support major initiatives and product launches by Komatsu in its territory. Competition Komatsu s primary competitor is Caterpillar (CAT), the largest manufacturer of heavy equipment in the world. Its brand recognition and reputation enables it to command market share approaching 50% and a premium price for its equipment. In Anderson s territory the CAT brand is represented by 3 different dealers and their heavy equipment offering is similar to Anderson s. Intelligent Machine Control (I-Machine) Historically, operation of heavy equipment has been performed by skilled operators who have the technical expertise to operate all of the controls and manipulate the machine to accomplish the job efficiently and safely. Two issues have resulted from this: First, construction companies in high growth construction markets face shortages of skilled operators. Second, operator judgment can result in inefficiency and damage to machines. Komatsu has introduced equipment with intelligent machine controls that not only allow the most inexperienced operators to understand and control the machines, but it also increases the productivity of the experienced operators by about 13 percent. It s so intelligent that when a machine is dozing along and it realizes that there s too much load on the blade that the tracks would slip and some damage might occur to the ground or undercarriage, it won t let that happen. The machine uses exact calibration and information rather than operator judgement to adjust the blade and minimize vehicle strain. In fact, the machine can operate hands-free until it has to change direction. How the I-Machine Technology Works I-machines take select dozer and excavator models and integrate a Topcon GPS unit with cylinder and body sensors into the machines. Each of these components plays a role in the I-machine s function. The GPS unit plays two roles. First, the GPS unit utilizes five satellites to give the precise location of the dozer within 0.2 ft. It not only gives the longitude, latitude, and elevation of the machine, but the height above the ellipsoid and state grid numbers as well. This allows the machine to detect both the vertical position and grade of the slope that is being worked on. Second, it uses uploaded job data to determine

4 where the machine is on the job site. This allows the operator and machine to know the precise elevation needed at certain areas of the job site without a surveyor. The body sensor keeps track of the engine and hydraulics, while the three external cylinder sensors keep track of the blade s position based on how extended the controlling cylinder is. All three sensor s data are fed into a computer where they are analyzed. In here, the computer can use another sensor s data to manipulate the blade or bucket advantageously. The computer can raise the blade if the load is too heavy or lower it to collect more dirt to fill in a desired area on the dozer. On the excavator, the computer can stop bucket function if the machine is about to go over the desired grade and depth. I-Machines with intelligent machine controls integrated into the unit save a company time and money versus a standard machine. Standard dozers and excavators can dig and move dirt in the same way the I-machine can, however an extra man is needed to survey to ensure the desired depth and grade are obtained. With the I-Machine, the machine does this job and eliminates cab departure time by the operator. As a result, he can grade and move dirt for a longer period of time, increasing site efficiency. An option to an I-Machine with integrated controls is an aftermarket Plug and Play unit that bolts onto a standard machine. It enables the machine to perform similarly to the I-machine in terms of GPS by providing position and grade, and it uses 3-D format files to achieve the desired grade. Two advantages Plug and Play has over I-Machine are being able to mount the device on different machines as needed, and the lower investment cost. However, the Plug and Play units break easy, need re-installation daily, and do not receive feedback from the machine itself. As a result, if the cab shifts or the load gets too heavy, the blade does not adjust to compensate for the condition. This can lead to incorrect hill grades and damage to the machine. Anderson Equipment Company s Investment Decision Anderson Equipment Company is evaluating whether it should make the investments necessary to sell and support Komatsu s I-Machines. It is a new product line that requires additional inventory, staffing and training. To evaluate the decision Anderson analyzed the market potential, company capabilities, Komatsu s reputation and support, and financial impact of the investment. Anderson Equipment Company should invest in the I-Machine product line because, although initially it will not drive significant incremental profits, the construction industry is shifting toward more intelligent and integrated machines. While this technology constitutes a small portion of the machines on the market now, in a few years it will dominate the field. Many manufacturers, including Komatsu, have plans to boost production and sales in the coming years and some, albeit larger, construction companies are already making the switch toward integrated machines. It s a smart idea to invest in the technology now because profits on regular machines are stable and Anderson s market share is strong. Anderson needs to make an investment in this product to support Komatsu s direction and goals as well. To improve the financial proposition of this initiative Anderson should explore becoming a Topcon dealer and focusing its investment (staffing, training, inventory) in the larger markets in its territory. Becoming a Topcon dealer would allow Anderson to purchase the hardware at dealer prices rather than aftermarket and enable it to market its capabilities as offering The Complete Equipment Solution. It will also enable Anderson to participate in the factory-equipped and aftermarket segments. By focusing its investment in larger markets, Anderson can leverage its costs, integrate I-Machines into its existing inventory, and give customers opportunities to test the product alongside standard models. Market Potential and Strategy Market Size The market potential for I-Machine products in Anderson s territory is approximately the first year and it is estimated to grow by five units per year for the next five years. This assumes that Anderson maintains its current Komatsu market share of 20% and that the I-Machine achieves Komatsu s

5 national share of 20% and grows to 30% as the technology becomes more reliable and customers gain understanding of its capabilities. (See Exhibit 1 Market Analysis) Target Customers The target customer for this product would be large excavating and natural gas pipeline companies. First, large well-capitalized companies are not as price sensitive as they evaluate investments. Since the I-Machine price premium can be as high as 30-50% versus a standard machine, they would be more likely to evaluate the cost savings and efficiencies to justify the premium. Second, these specialty companies would appreciate the benefits of the technology given their need to clear land precisely. Their success is based on their ability to ensure land is at the correct elevation for laying pipe, making a pad, or beginning construction on a housing complex. The technology would eliminate the need of a surveyor and would allow them to finish jobs faster and improve fleet utilization. As a result, the I-Machine would allow these customers to work more jobs in a year as well. One can see how this description is true based on 8 of the customers who purchased at least one I-Machine in 2016 or 2017: Customer I-Machine Investment Equipment Purchases 1 yr from Anderson Equipment Purchases 2 yrs from Anderson Company Description Alex E Paris $1,057,959 $2,875,460 $4,812,962 Pipeline and Site Development Morgan Excavating $579,992 $608,734 $618,331 Excavating R & B Contracting $680,150 $1,988,484 $6,647,761 Site Development Mascaro Construction $288,166 $460,628 $1,324,246 General Contracting; Oil and Natural Gas John E Neville Excavating Tara Estates Community $225,490 $519,490 $1,053,940 Excavating and Site Development $258,850 $633,154 $633,154 Property Management As one can see, all of the customers spent at least $400,000 in the past 2 years, most of them much more than that. These customers definitely qualify as large customers as only 6% of customers at Anderson spend more than $350,000 per year. In addition, all of the customers deal in some way with site development or pipeline and excavating. Smaller companies will not be the primary target, initially, for this product because the price premium will be difficult to afford. At an average of $85,000, most companies would not be able to afford the premium and could use the money to purchase another machine for their fleet rather than upgrading to the I-Machine. Additionally, industries such as wood chipping, highway work, or scrap metal do not need the grading and digging precision that the dozer and excavator I-Machines provide. SWOT Analysis of Anderson Capabilities SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. This tool is used to evaluate the strategic position of a business and its environment, as well as its ability to execute an initiative, like the I-Machine. Its key purpose is to identify the strategies that will create a business model and it is the foundation for evaluating the internal potential and limitations and the probable/likely opportunities and threats from the external environment.

6 Execution Plan As the SWOT analysis shows, Anderson has a very strong business to handle a new product investment and roll out. It has a quality reputation for its company s capabilities and the Komatsu product line. Financially, it is stable and well-capitalized. Finally, it has the existing infrastructure in terms of facilities, sales reps, and technicians to support customers. Anderson can use the current sales reps and rental agents at its branch locations to sell and rent the new product line. These employees are used to learning annual product modifications and features that Komatsu rolls out each year. For the I-Machine the training will need to be more formal and focused with a cost of approximately $4,000 the first year. Anderson can also use its current Service Technician staff to repair and maintain the machines. Currently, the technicians must be trained on every aspect of a machine to leverage their time when fixing an issue. They must be knowledgeable in hydraulics, electrical, and mechanical diagnostics and repair. With the new technology they will have to add I-Machine-specific courses to their annual training. This will cost approximately $13,500 per mechanic. Due to the specialized features of the I-Machine Anderson will need to add Technical Solutions Experts to assist the sales reps with presentations and demonstrations, as well as provide consulting

7 assistance to technicians as they install, calibrate and repair machines. The cost of these experts will be approximately $110,000 per employee, and Anderson will need 1-2 per region (2 PA, 1 NY, 1 NE; See Exhibit 3: Staffing Requirements). As the SWOT Analysis shows, the incremental gross margin from introduction of this product line will not be significant, initially, due to the price premium for the product and the reluctance of customers to invest in new technology early in its life cycle. In addition, customers who want one-stop shopping and service from Anderson would not get that with the I-Machine today. The I-Machine relies on GPS Technology support, which Komatsu and its dealers do not currently provide. This support is provided by a company called Topcon with its own independent dealer network. This will be a significant barrier to success for Anderson; therefore management should prioritize becoming a Topcon dealer in order to offer a seamless solution to customers, who purchase and need service for their I-Machines. Once Anderson has obtained distribution rights for Topcon, it can support the Komatsu I- Machines and offer the Plug and Play option to customers who are not ready to purchase an I-Machine. Anderson will have to make an investment in machine inventory of I-Machine Dozers and Excavators as well as Topcon accessories. Financial Analysis Customers are often reluctant to take a risk purchasing products with new technology because they can t bridge the gap between value of the technology and the ability to realize the promises of efficiency, especially if that new technology comes at a premium price. Anderson must expect this resistance as it introduces the I-Machine. For this reason the investment in staffing and training is significant. Anderson needs to have the capabilities to address any issues that occur as the machines are sold and put into service. In addition, Anderson must carefully target customers who will be willing to adopt new technology and who already have confidence in Komatsu s reliability and support of its products. Incremental gross margin will be driven by I-Machine sales, which will likely cannibalize standard machines. For that reason the market assumptions are conservative, maintaining Anderson s current Komatsu share and assuming it can achieve Komatsu s national I-Machine ratio for this year. (See Exhibit 1: Market Analysis) Other sources of incremental margin will include sales of the bolt-on Topcon hardware and supplies (which offers technology similar to what is integrated in the I-Machine), Consulting and Technician services by specially trained experts in installation, calibration and I-Machine maintenance. The investment will primarily consist of staffing and training experts in the technology. (See Exhibit 3: Staffing) For the most part Anderson s current employees can add this knowledge to their repertoire and leverage it to upsell the customer (sales reps, rental agents) or they can service the technology hardware and software components of the machine while fixing other issues. One position that will be additional headcount is Technical Solutions Expert (TSE) because this employee will be dedicated solely to the I-Machine technology. Anderson will need 2-4 employees depending on the number of markets and machines. Finally, Anderson will have to make an investment in inventory to provide machines for customers to rent. Although this is a significant investment, $300,000 to $400,000 per year, this will give customers an opportunity to use the equipment s new technology and hopefully, overcome their reluctance to purchase I-Machines. Based on this assessment of incremental gross margin and the costs, it appears that Anderson will not gain significant profits from this initiative, at least in the next 5 years. (See Exhibit 4: Financial Analysis Profit) Anderson needs to make the investment in this product line and the technology to support it, because it is the direction that the industry is moving. CAT dealers have already made the investments and are gaining market share. In addition, many Komatsu dealers have not only made the investments, but are also actively marketing it on their websites and with brochures. (See Exhibit 5: Komatsu Dealer Website and Brochure). Finally, this technology can improve efficiency and profitability for our customers; therefore, they will rely on Anderson Equipment Company to offer this as part of the Complete Equipment Solution.

8 I MACHINE TECHNOLOGY EXHIBIT 1 I Machine Excavator and Dozer Products Market Analysis PA New England New York All Other Bridgeville Manchester Cumberland West NY Albany Subtotal Branches Total AEC Total Market by AEC trerritory Komatsu Machines Sold Anderson/Komatsu Share 17% 18% 31% 25% 16% 20% 6% 16% Komatsu National I Machine Share = 20% Total Market Growth AEC territory 5% AEC Market Yr AEC KAC Share branches to 20% 20% 20% 25% 20% 31% 22% AEC assume current Komatsu share *2:1 Ratio Assume National I machine share 20% Excavator 9 AEC machine sales Year 1 Dozer 4 Total Market Growth AEC territory 10% AEC Market Yr AEC KAC Share 20% 20% 25% 20% 31% 22% AEC assume current Komatsu share *2:1 Ratio Assume I Machine share increase 25% Excavator 12 AEC machine sales Year 2 Dozer 6 Total Market Growth AEC territory 10% AEC Market Yr AEC KAC Share 20% 20% 25% 20% 31% 22% AEC assume current Komatsu share *2:1 Ratio Assume I Machine share increase 30% Excavator 16 AEC machine sales Year 3 Dozer 8 Dozer Market 2016 Dozers AEC Market KAC Units D D D Total Excavator Market 2016 Model Market Size KAC Excavator to Dozer Ratio 2:1* PC PC Total

9 EXHIBIT 2 I Machine Excavator and Dozer Products Gross Margin Incremental Gross Margin Avg per unit D51 Dozer Revenue $131,474 Avg GM % 17.1% Gross Margin $22,482 D51 I Machine Revenue $210,414 Avg GM % 15.7% Gross Margin $33,035 Price Premium $78,940 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Units Incremental GM $10,553 Incremental Gross Margin $42,212 $63,318 $84,424 $105,530 $126,636 Avg per unit PC 210 Excavator Revenue $188,858 Avg GM % 11.3% Gross Margin $21,341 PC 210 I Machine Revenue $221,439 Avg GM % 13.9% Gross Margin $30,780 Price Premium $32,580 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Units Incremental GM $9,439 Incremental Gross Margin $94,977 $126,636 $158,295 $189,954 $221,613 Additional GM from complementary products GM$ Units Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Bolt On hardware $5,000 Half of above $32,500 $45,000 $57,500 $70,000 $82,500 Assume $50K 10% GM Cables $150 Half of above $975 $1,350 $1,725 $2,100 $2,475 Assume $1,500 10% GM Parts Dozer $2,000 See Above $8,000 $12,000 $16,000 $20,000 $24,000 Part Excavator $1,800 See Above $16,200 $21,600 $27,000 $32,400 $37,800 $57,675 $79,950 $102,225 $124,500 $146,775 Additional GM from Consulting and Service GM per Hour Hours TSE Consulting $ $39,104 $58,656 $78,208 $78,208 $78,208 20% of 2080 hours Service $ $54,080 $81,120 $108,160 $108,160 $108,160 20% of 2080 hours Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Total Units Incremental GM $288,048 $409,680 $531,312 $606,352 $681,392

10 I MACHINE TECHNOLOGY EXHIBIT 3 I Machine Excavator and Dozer Products Staffing Requirements Year 1 Year 2 Year 3 Year 4 Year 5 Technical Engineers Assume 4 total: 2 PA, 1 NY, 1 NE Position Description: Technical Engineers are the product and service specialists They are the experts for customers, sales reps and mechanics They assist with selling, demonstrations, installation, troubleshooting Training: Manufacturer Online Training course Factory Tour and Training Ongoing product Update and Education sesisons Cost : Compensation $220,000 $330,000 $440,000 $440,000 $440,000 Assum $90K+ 30% per emp full time dedicated Training first year $29,000 $14,500 $14,500 $0 $0 Assume $14,500 first year Mechanics Position Description: Mechanics provide maintenance for the machines and troubleshoot issues They assist with delivery and calibraiton of the machine at the job site They diagnose and fix machine mechanical problems (engine, tracks, hydraulics, electrical, buckets, blades, etc) They must be able to diagnose/address software and hardware issues associated with the I Machine technology I Machine Training: Manufacturer Level 1 online courses for Dozer and Excavator Factory Level 1 and 2 Courses for Dozer and Excavator Ongoing product Update and Education sesisons Cost : Compensation $0 $0 $0 $0 $0 No incremental compensation cost Training first year $108,000 $40,500 $0 $0 $0 Assume $13,500 first year Sales Reps Position Description: I Machine Training: Sales Reps meet with customer to assess equipment needs and identify opportunites to sell Anderson's products They need to have understanding of machine features and benefits as well as competitive offerings They must be able to explain and demonstrate the technology and features They must also inderstand the financial impact vs standard unit Manufacturer LMS online courses focussed on I Machine and GPS Technology Periodic Sales Meetings for product and technology updates Cost : Compensation $0 $0 $0 $0 $0 No incremental compensation cost Training first year $40,000 $8,000 $0 $0 $0 Assume $4,000 first year Rental Agents Position Description: I Machine Training: Rental Agents answer calls from customers who need equipment for specific applications They need to have understanding of machine features and benefits as well as competitive offerings They must be able to explain advantages of I machine and financial impact vs standard unit Manufacturer LMS online courses focussed on I Machine and GPS Technology Periodic Sales Meetings for product and technology updates Cost : Compensation $0 $0 $0 $0 $0 No incremental compensation cost Training first year $16,000 $4,000 $0 $0 $0 Assume $2,000 first year TOTAL STAFFING COST $413,000 $397,000 $454,500 $440,000 $440,000

11 EXHIBIT 4 I Machine Excavator and Dozer Products Financial Projections Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Total Units Incremental GM Sold Units $137,189 $189,954 $242,719 $295,484 $348,249 Complementary Products $57,675 $79,950 $102,225 $124,500 $146,775 TSE Consulting $39,104 $58,656 $78,208 $78,208 $78,208 Service $54,080 $81,120 $108,160 $108,160 $108,160 Total $288,061 $409,698 $531,335 $606,380 $681,425 Operating Costs Staffing and Training $413,000 $397,000 $454,500 $440,000 $440,000 Machine Inventory $400,000 $320,000 $340,000 $340,000 $260,000 Total $813,000 $717,000 $794,500 $780,000 $700,000 Profit ($524,939) ($307,302) ($263,165) ($173,620) ($18,575)

12 Komatsu Dealer Websites EXHIBIT 5