Assignment:
The Infusion Pump Roll-Out
Jim Altschuler and Mary James were sitting in their conference room on a late Friday in January. They had just received the latest cost projections from the project manager on the new infusion pump system that had been in development for 2 years. Based on the latest design changes the results were going to require a major revision to the initial pricing forecasts. While early tests with potential buyers showed great receptivity at an initial price of $5.00, the project manager said the latest cost projections suggested that this retail process was no longer feasible; an initial price of at least $8.00 was needed. In fact, the design changes that had been required because of recent regulatory changes had resulted in a revised variable cost of closer to a $4.94 per unit.
In order to produce this new pump, the project manager said that the company would have to buy a mold that could stamp out a key component. The mold could produce 500,000 units with a 4 year life. Jim and Mary were a little taken aback at these new cost estimates and were concerned about whether this jeopardized the roll-out. Several years ago, the company introduced a new device that failed. The distributors who carried the item were not pleased and it took almost 18 months to restore their confidence in the company and get them to accept another new introduction.
"I'm not sure we should move forward with this roll-out," Jim said hesitantly. "The whole design is too novel. It requires clinicians to use it in a way that it totally different from the way they are used to. We've talked about bundling the purchase in unit quantities of 25, and now we are talking about having to raise the price to $8.00."
"Sorry, Jim," said Mary, "We've worked together a long time, so you know I respect your judgment, but not on this one. We have a good product here. I know the price has to rise, but I almost wonder whether, with our brand name, we could even get customers to pay a premium for this pump? In fact, I think we should be buying two molds and ramp production to a million units and spend at least $20,000-30,000 to advertise this pump alone. We know the market for the pump is huge based on the data we bought from that research firm. Let's go for it."
"I don't know Mary," Jim responded, "It seems like in the past year the market has been flooded with more and more low priced $3 and $4 pumps from Asia. How can you talk price premium?"
"There are bottom feeders in every market Jim, we have to make a decision here."
2010
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Pumps in use
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2.5 million units
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Infusion pumps
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550,000
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% pumps over $8.00
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33%
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Thoughts on what they should do? Can you use information in chapter to complete a break even analysis?