Reference no: EM132472188

Point 1: John Stone grimaced as the door of the lift opened and he emerged into the 40-degree mid-summer heat at the Silverrock mine in Western Australia. But, as uncomfortable as it was, it was still marginally better than what he had just been experiencing for the previous 6 hours - the 45 degree heat in the uncomfortable environment of the copper and silver mine 500 metres below the surface. If it were not for all the efforts made to keep the air fresh in the mine, at a depth of 500 m depth it would be impossible to work. Geologists calculate that temperature increases by 1 degree for every 33 metres the mine increases in depth.

Point 2: Underground mining was a dangerous and physically demanding job: apart from the miners doing the blasting, there were LHD machines (Load-Haul-Dump), also known as Scooptrams, which were used to pick up the ore from the blasting site and then drive it over to transfer stations where the ore was dumped for subsequent transportation to the surface. Both trucks and Scooptrams were big and expensive machines. Trucks were capable of transporting up to 100 tons of mineral at a time. The work at the blasting site was hot, dirt, dusty, and incessant. But it was well paid - the average driver earned around AUD$100,000 a year for their four-weeks-on four-weeks-off lifestyle. This entailed rotating 12-hour shifts for the duration of their stay on site, ensuring that the 24 hour-a-day schedule in the mine was maintained. There were very few people living permanently at the Silverrock site - the itinerant staff tended to fly in from all around Australia. While on site, all of the drivers stayed at the mine, living in dormitory-style accommodation. All their living costs were met, which John thought amounted to around AUD$2k per worker per four week shift. Now in the comfort of his air-conditioned dormitory, John was reflecting about his company's options to introduce technological changes that would enable better management of both the people and the machines, a task which he felt was currently not only expensive but also difficult.

Point 3: Over the last few years manufacturing companies have been working on developing technology to remotely control the operation of Scooptrams and underground mining trucks. However, every manufacturer had come up with their own solution, which was not compatible with the equipment of the competitors. So, for example, if a mine operates both Atlas Copco and Sandvik Scooptrams as well as Caterpillar Trucks, it would need three different control systems. This would be expensive and also lower efficiencies significantly. John was inspired by these issues to start new software system capable of integrating the systems of different manufacturers, and he was therefore pleased with the outcomes of his time spent underground reviewing the performance of the new software that his small Sydney-based IT company, Telemine, had developed. The software essentially allowed an operator working on the surface to operate, monitor and manage the movements of the Scooptrams and trucks via a combination of video cameras and "hands-on" electronic manipulation of the vehicle, thereby removing the need for there to be any drivers underground at all.

Point 4: The trials had been conducted in coordination with Dumpster, an external provider of ore loading and transportation equipment at the Silverrock mine. Dumpster didn't own the equipment, but leased, operated and maintained a fleet of some 100 Scooptrams and Trucks at Silverrock, charging the mine an agreed amount of money per ton of ore delivered at the dressing plant where mine ore was upgraded before the concentrate was exported to a smelter in China. Dumpster considered Telemine's trial a great success, and were eager to agree a potential price for the new software product.

Point 5: Telemine was also very committed to collaborate with Dumpster, given that they operated these Scooptrams and trucks at the Silverrock mine. It would therefore mean a substantial contract for Telemine. The software had cost around AUD$500,000 to develop, and there were no other potential customers on the short-term horizon, so John was keen to try and recoup his costs and make some profit on this deal alone. His company usually aimed to make about 20% markup on its costs. He was considering offering Dumpster a one-year contract, during which the software would run on each truck for the full 12 months. John considered that Telemine would charge a price of around AUD$6,000 per Scooptram or truck per year. However, he worried that Dumpster would perhaps not be willing pay this amount and also invest around AUD$10,000 which was necessary to convert each truck to run on the driverless software. But they would be saving the AUD$1m a year that they had to pay to insure all the drivers.

Point 6: John felt that he was between a rock and a hard place. If he did indeed win the contract, he would be incurring substantial costs for his small company. He would have to employ the remote 'drivers' to drive trucks, but they could at least work from a comfortable office in their home base over 2000 miles away in Sydney. Given that the trucks had to work 24 hours a day, he would only be able to recruit people to work 8-hour shifts - but at least each of them could manage four Scooptrams or trucks simultaneously. This would probably entail also hiring one manager and two administrative assistants per shift. Given Telemine's restricted office space, he thought that they would have to rent one additional office, which in the expensive part of North Sydney where their offices were located would cost about AUD$1m a month. He recognised that the office workers in Sydney would need to be trained. But, given that he expected there to be lower turnover than with the drivers on the mines, did not expect this to be a great on-going cost.

Question 1: Calculate the price that John should charge based on "cost+" logic, considering only their development costs.

Question 2: What do you think their minimum price should be? You will need to make some assumptions here. Suggestions: a 'driver' in Sydney would cost say AUD$50k a year, the manager AUD$100k and the administrators AUD$30k? You probably need to add 25% to the overall wage bill to cover sickness, leave, pension costs etc. Assume that they still want to achieve their 20% mark-up.

Question 3: From a value perspective, what is the product worth? In other words, if Telemine gave it to Dumpster for free, how much money would they save?