商学院案例手册2017

WhartonConsultingClubCasebook2017

NotetotheReader

DearConsultingClubMember,

Thiscasebookismeanttoprovideyouwithabriefoverviewofconsultingrecruitingandinterviewpreparationaswellasanumberofpracticecases.Pleasenotethatthisismeanttosupplementtheexcellentworkdonebyourandotherschoolsinearliercasebooks,sowestronglyencourageyoutonotmakethisyoursolereference.

Goodluck!

-2017WhartonConsultingCasebookEditorialTeam

TypicalCareerPath

Consultant/Associate

SeniorConsultant/Associate

Manager/ProjectLeader

Partner

InterviewProcess

Caseinterview–involvessolvingabusinesscase;candidateexpectedtodrivetowardsasolutionandaskforrelevantdata;focusonstructure

Fitinterview–numerousbehavioralquestionsfocusingonpriorexperiences

Overviewofmanagementconsulting

Problem-solvecomplexandunstructured

Workcloselywithseniormanagementontheclientside

Intellectuallystimulatingworkandabilitytobuildastrongsetofskills

Constanttravel(dependingonofficelocationandconsultingfirm)canposesignificantchallenges

Industry(priortoeconomicdownturn)wasexpectedtogrowat8.8%in2009

Mostfirmshaveaglobalpresenceandofferinternationalprojectopportunities

IndustryOverview–ManagementConsulting

Management consulting involves solving complex business problems and offeringrecommendationstocompanies

ATypicalConsultingInterview

TheFit

Process

Waitinhospitalitysuitewithothercandidates/recruiters

Interviewerasksforyoubyname

Handshake/greeting

Walktointerviewsuite/smalltalk

Youshould

Appearwarm,confident,professional

Interviewermaygivepersonalbackground

Questionsaboutresume/experience

Convinceinterviewerthatyouarefitforthefirm

Passthe“airporttest”

Interviewerwillstartcase

Keeptrackoftimesothatyoubywhenyouareexpectedtoreachaconclusion

Maintainconfident,controlled,upbeatdemeanor

Yourchancetoaskquestions

Walkbacktohospitalitysuitewithinterviewer

Notaskstockquestions

Agoodchancetogettolearnabouttheinterviewer’spersonalexperiencesatthefirm

Casetypesandcaseinterviewmethods

Whatisacase?

Abusinessissue/problemcompanyisfacinginafewsentences

Takesabout25minutes;haslimiteddatawhichisusuallyprovidedifaskedforApproachtosolutionismoreimportantthanthefinalsolution

Therearetwocommoncaseinterviewmethods:

‘Gowiththeflow’cases(typicalofmostfirms)–Youwilldeterminewhichareastoexploreandleadthediscussion,i.e.drivethecase

Commandandcontrol(typicalofMcKinsey)–Interviewerguidesthediscussionandcasehasheavybrainstormingcomponentsandquantitativework

Commoncasetypes*(notacomprehensivelist):

Profitability

MarketEntry

Acquisition

Organization

IndustryAnalysis(incl.non-profit)

MarketSizing

CapacityExpansion(incl.outsourcing)

Investments

OverallflowofaCase

~3min. ~1-2min. ~12-15min. ~3min.

Listenactively

Askclarifyingquestions

Takejudiciousnotes

Organizenotesasslides

Formulateaninitialhypothesisaboutpossiblesolutions

Writedownkeyquestion

Mentionyouwilltakeaminutetoplanyourapproach

Drawoutaframeworkaschecklistoftopicstoexplore

Select3to5majortopicareas

Identifyrelevantsub-topics

Presentplanofattacktointerviewer–startwiththemostimportant

Followyourplan!

Askspecificquestionstotesthypothesis

Adjusthypothesisandplanasdataemerges

Organizenotesasslides

Highlightinsightsfromanynumericalcalculations

Noteconclusions

Drivethecasetoaconclusionbeforetimeexpires

Answerthequestion

Takeadefinitestand

Makebestconclusionwithdataonhand

Makerecommendationsandfollowthemwithsupportingevidence

Address“risks”and“nextsteps”

TableofContents

Case PageNo.

Unicloth 9

BrazilianHighwayConcessions 18

SnacksFoodAcquisitions 27

USManufacturing 34

ChicagoParkingMeters 42

HighEngineerAttritionatSLSOilGasServices 55

SaltLakeCityAirport 68

ClothingChainAcquisitions(HumanCapital) 77

PharmaOutsourcingandTechAdoption 94

MiningCompetitiveStrategy 111

PhightingPhillies 121

InsurancefortheunderservedinIndia 131

NationalParkService 139

Penn&Teller 147

WellingtonEquestrianFestival 161

MedicalDevicesCo 169

TVScreens 176

HomeInspectionCo 191

Unicloth

Case1:Unicloth

LevelofDifficulty:Medium

CaseSimilartoCasesatFirms:BCGsecondround

TopicsTested:i.e.marketsizing,mathematicalcalculation,

Prompt:Ourclient,Unicloth,isanAsianclothingretailerattemptingtoestablishaprofitablepresenceintheUnitedStates.However,sincetheyarrivedfiveyearsago,theyhavestruggledtoachievethatgoalandhaveengagedourfirmtofindoutwhyandtorecommendnextsteps.Howcanwehelp?

FrameworkandClarifyingQuestions

SampleofStrongFramework:

Product

Whatdotheysell?

Whereisitmade?

Competitiveproduct?

Market

Whoarethecompetitors?

Whataretheeconomicconditions?

Havetherebeennewentrants?

Revenue

Averagepriceperunit

NumberofunitssoldintheUSperday

Cost

COGS

Rent

Storemaintenance

Labor

Costoflostsales

FrameworkandClarifyingQuestions

ClarifyingQuestions

Product:

Thiscompanysellscasualclothing,thinkjeans,t-shirts,knitsweaters,dresses,etc.

Theyfollowthedesignsofthecompany’shomemarketinAsia

TheyaremanufacturedinChinaandBangladesh

Market:

Theretailmarkethasbeenstable,noeconomicdownturns,etc.

Revenue:

Price:averageproductpriceis~$40.Thisisinlinewithmid-tiercompetitorssuchasAmericanretailerBapandabitbelowEuropeanretailerMara

Revenue

Revenue

Price:averageproductpriceis~$40.Thisisinlinewithmid-tiercompetitorssuchasAmericanretailerBapandabitbelowEuropeanretailerMara

Sales:

Marketsizing:TheretailerhasaUSpresencecomprisedofthreemallstoresplusoneflagshipstoreon5thAvenue.Havecandidateattempttocalculateannualsalesbasedonintuition.

Threemallstores:

Sellonaverage1,375itemsperday

Havecandidatecalculate:1375items*$40=$55,000perday

$165,000perdayallmallstoresputtogether

$60,225,000annualrevenuefrommallstores

Flagshipstoreon5thAvenue

Sell4,500itemsperday

Havecandidatecalculate4,500items*$40=$180,000perday

$65,700,000peryear

Moveforwardwith$125Mrevenueperyear

Costs

Costs-havecandidatebrainstormwhatcostsmightbe.Iftheydon’tcomeupwithallofthem,givethemthebelow

COGS

Profitmarginonclothingsalesis30%

Costofitemsperyearis$125M*.7=$87.5M

Roundto$90M/year

Rent:

Flagshipstorerent:$1.5Mpermonth=$18Mperyear

Mallstore:$200Kpermonth*3stores=$600Kpermonth,$7.2Mperyear

Roundto$25Mperyear

Maintenanceofstores,utilities,etc.

$5Mperyear

COSTSCONTINUEDONNEXTSLIDE

CostsContinued

Costs-continued

Labor:

Flagshipstore:

500associates,average20hoursperweek,$8.5perhour=

$85,000/week,$4.42Mperyear

5managers,$100Ksalary=$.5Mperyear

Mallstores:

20associatesperstore*3,20hoursperweek,$8.5/hour

$10,200/week,$530,400peryear

1manager,$100Ksalary

$.12Mperyear

Totallaborcost:

Roundto$6Mperyear

Storage,sendingunsoldclothesbacktowarehouse,markdowns,etc.

$12Mperyear

Totalcosts

$138M-notbreakingeven!!(Underby$13Mvs.$125Mrevenue)

ImprovingProfitability

Nowthatwehavealloftherevenueandcosts,let’sworkonmakingthecompanymoreprofitable.Havethecandidatebrainstormandthenguidethemthroughthebelow:

Costs

Manufacturing-Wearealreadyproducingourclothinginthecheapestmannerpossible.

Shipping-Wecouldcut5%ofourCOGSbyshippingtheclothingbyboatinsteadofair

Savings:$4.5Mannual(90M*5%)

Labor-Wehavewhatweneed,cannotreduce

Rent-Havecandidatebrainstormhowyoucouldpotentiallyreducetherentburden.Someoptions:

Movelocationofflagship-No,weneeditformarketing

Closemallstores-Wearenotreadytomakethatmoveaswearehopingtocontinueexpandinginthesuburbsinthefuture

Sharetherentwithanotherbusiness-YES!Openingacoffeeshopwithinthestorewouldcut25%ofourdebtburdenattheflagshipstore.

Savings:$1.75Mannual

Revenue

Havecandidatebrainstormhowwecanimproverevenue

Trainthesalesstaffbettertosell-No,they’reprettywelltrained

Lowerprices-No,itwouldn’tsolveourmarginissue

Onlinestore-Wearenotreadytomakethatinvestmentatthistime

TurnsoutthatAmericancustomersdon’tlovethestylesandhavesometroublewithAsiansizes(thestylestendtobetooconservative,thecolorsaretoomuted,ourclothingtendstorunsmallfortheUSmarket)

AdjustingdesignandsizesandcontinuingtomanufactureseparatelyfortheAmericanmarketwillcostus$12Mannually,butitwillprovide$23Madditionalrevenueperyear

Incrementalrevenue:$11Mannual

Totalincrementalincome

$1.75M+$4.5Msavings

$11Mincrementalrevenue

Total$17.25M→makesupfor$13Mdeficit

Recommendation

TheCEOisabouttowalkinandshewouldliketohearthecandidate’srecommendations-havehim/hermakesome.*Makesureyousaysheandgivethecandidatefeedbackifhe/shefallspreytobiasandcallstheCEOa“he”*

Currentlyweareseeingrevenuesof$125Mannually,butcostsof$138M,meaningweare$13Minthered.However,wehavestudiedthecostandrevenuestructureofyourretailoperationandfoundthatthereareafewactionsyoucantakeatthistime.Onthecostside,werecommendchangingyourmeansofshippingfromairtoboat,achangewehavefoundwillbring$4.5Minannualsavings.Additionally,werecommendseekingapartnertoshareyourrent/spaceattheflagshipstore.Webelieve,forexample,thatplacingacoffeeshopwithinthestorewouldsaveyou25%inrent,forasavingsof$1.75Mannuallyandperhapsencourageyourcustomerstoshopmore.Finally,werecommendrevampingyourinventoryfortheAmericanmarketbyadjustingdesignsandsizestobettermeetdemand.Weestimatethiswilldrive$11Minadditionalannualrevenue.Together,thesemeasureswillmorethanmakeyouprofitable,breakingevenandmaking

$4.25Minprofit.Potentialrisksofthisplanincludehavinganunreliableretailpartnerattheflagshipstore,makingproductsthattheAmericanmarketstilldoesn’tlike,anddelayinginventorystockingthroughthenewshippingmethod.Forthis,werecommendastudyintowhomtheretailpartnershouldbe,engaginginextensivemarketresearchtoproducethecorrectSKUsforthemarket,andadjustingUSwarehouseoperationsandleadtimestoensurethatstockingisnotdelayed.

BrazilianHighwayConcessions

Brazilian Highway Concessions

LevelofDifficulty:Mediumtohard

CaseSimilartoCasesatFirms:McKinseyfinalround

TopicsTested:internationalexpansion,graphicalinterpretation,marketentry,mathematicalcalculations(ROIC).

Prompt:AleadingBrazilianhighwayconcessionscompanyislookingtoexpandinternationally.EconomicgrowthinBrazilhasstalled,andinordertocontinuetogrowbothtop-linerevenuesandbottom-lineprofitability,theclientwantstodiversifyitsportfolioanddecreaseitsexposuretotheBrazilianeconomy.Whatfactorsshouldtheclientconsiderasitthinksthroughitsinternationalexpansionoptions?

OpeningFrameworkandClarifyingQuestions

SampleofStrongFramework

Cultureandmanagementcomplexity

Whatarethelanguageandculturalbarriers?

Whichcountrieswouldbeagoodfitforcurrentleadership’sworkingandmanagerialculture?

CanmanagementadapttothemanagerialstylesofcountriesthatarenotsimilartoBrazil?

Isgeographicaldistanceaproblemtomanageassets?

Pipelineandeconomicprospects

Whatisthepipelineofprojects?Willtherebesignificantprivatizationsornewprojectsinthefuture?

Whatisthesize,complexityandvalueoffutureprojects?

Isthecountrygrowing?Doesitrequireinfrastructureinvestment?

Howadvancedisthecurrentinfrastructureframework?

Politicalenvironment

Whatiscurrentregulationfortheprivatizationofpublicinfrastructure?Whichgovernmentsarepro-privatesectorparticipation?

Isthepoliticalclimatevolatileinthecountry?Istherehighprobabilityofchangesinregulation?

Isthecountryreceptivetobusinessoverall?

Competitiveenvironment

Whoarethecurrentplayersininfrastructureinthecountry?Arethereinternationalplayers?

Howlargearetheyandhowconcentratedistheindustry?

Isitlikelytobestrongcompetitiononbidsforpublicauctions?Howarethevaluationsofthelatestprojects?

SampleClarifyingQuestionsandAnswers

WhereelsedoestheclientcurrentlyoperatebesidesBrazil?

TheclientoperatesonlyinBrazil,hasscopedopportunitiesinSouthAmerica.TheirstaffspeaksprimarilyPortuguese.

Doestheclientoperateinanyindustriesbesidesroadconcessions?Aretheiradjacentindustriestheycouldpursue?

No,theclientcurrentlyonlyfocussesonroadconcessions(buildingandoperatingpublicroadways).

Whoaretheclientstypicalcustomersandhowdotheytypicallywinbusiness?

Theclients’customersarealwaysmunicipal,state,ornationalgovernments.Theybid,usuallythroughcompetitiveRFPs.

Doesthecompanywanttofocusonaspecificregion,orisitopentoallgeographies?

Theclientwantstoconsiderallgeographies,withabiastowardsopportunitiesinSouthAmerica.

GraphicalInterpretation:Introduction

Afterseveralconversationswiththeclientandaninitialanalysisbyourteam,we’vedecidedthatopportunitiesoutsideofSouthAmericaarenotworthpursuingbecauseof1)culturaldifferences;and2)managerialcomplexity.TheteamhasgatheredthebelowdatainordertoassesswhichcountriesinSouthAmericawouldbethemostattractive(providetheintervieweewiththegraph).

Basedonthegraph,whichmarketsshouldourclientfocustheireffortson?Whichshoulditdefinitelyeliminate?CorrectanswershereareMexico,Colombia,ChileandPeru(upperrightquadrant).YoumayalsobeabletoargueArgentinaaswell–forwhicheaseofdoingbusinessisnotenoughbutpipelineisstrong.

Assumingtheclientchoosestoenteroneormoreofthesemarkets,howshoulditapproachmarketentry?Correctanswersherecouldbegreenfieldorprimaryinvestment,jointventure(JV),oracquireacompetitor(M&A).

Whataretheprimaryprosandconsofeachmarketentryapproach?

Primaryinvestment:limitedknowledgeofmarket/greatercontrol

JV:lesscontrol/somemarketknowledge

M&A:moreexpensive/loweridiosyncraticrisk/localmarketknowledge

GraphicalInterpretation

Dataforinterviewee

Colombia

Argentina

Chile

Bolivia

Honduras

PrimaryInvestmentvs.M&A(Qualitative)

TheclienthasdeterminedthattherearenoviableJVopportunities,andsowantstodecidewhethertogotheprimaryinvestmentorM&Aroutes.Ifyouweregoingtoevaluatethetwoopportunitiessidebyside,whichinputswouldyouneedtocomparethevalueofeachinvestment?

Primaryinvestment

Annualprofit=(Km*$/km*vehicles)*(1-opex)

Payback=initialinvestment/annualprofit

InvestmentValue=annualprofit/discountrate[*assumeperpetualconcession]

ROIC=(investmentvalue/initialinvestment)-1

M&A

Annualprofit=revenue*(1-opex)+(revenue*synergies)

Payback=initialinvestment/annualprofit

Value=annualprofit/discountrate

ROIC=(value/initialinvestment)-1

Providetheintervieweewiththedatasheetafters/hehaswalkedthroughthemajorinputslistedabove.

PrimaryInvestmentvs.M&A(Quantitative)

Dataforinterviewee

Input

Primaryinvestment

M&A

Km

300

NA

$/Km

$5

NA

Expectedtraffic(vehicles/month)

20,000

NA

Annualrevenue

Km*$/Km*expectedtraffic

$120,000,000

Opex

30%

40%

Investment

$150,000,000

$750,000,000

Contractterm

Perpetual

NA

Discountrate

10%

10%

Synergies

NA

15%(ofrevenue)

Answersforinterviewee

Input

Primaryinvestment

M&A

Annualrevenue

$30,000,000

(300*5*20,000)

$120,000,000

Annualopex

$9,000,000

(30,000,000*.3)

$48,000,000

(120,000,000*.4)

Annualprofit

$21,000,000

(30,000,000-9,000,000)

$90,000,000

(138,000,000-48,000,000)

Paybackperiod

7years

(150,000,000/21,000,000)

8.33years

(750,000,000/90,000,000)

Value

$210,000,000

(21,000,000/.1)

$900,000,000

(90,000,000/.1)

ROIC

40%

((210,000,000/150,000,000)-1)

20%

((900,000,000/750,000,000)-1)

OnceintervieweehascomeupwithanROIC,askthemfortheirconclusion.

Wrap-up

Whatshouldtheclientdo?

TheclientshouldenteraSouthAmericanmarket(preferableMexico,Chile,orColombia)throughaprimaryinvestment:

There are high levels of cultural similarity and low levels of managerialcomplexitywithintheSouthAmericanmarkets.

Mexico, Chile, Peru and Colombia all have large pipelines and attractivebusinessenvironmentrelativetootherSouthAmericanmarkets.

AprimaryinvestmentinoneofthesemarketsislikelytoyieldahigherROICandshorterpaybackperiodrelativetocurrentlyexistingM&Aopportunities.

Asfollowonsteps,theclientmaywishtounderstandwhetherfurthernegotiationsmayyieldalowerpriceforanM&Aopportunity,howsensitiveourinvestmentanalysesaretomacroeconomicfactors,andthelikelihoodofwinningdealsasaprimaryinvestorinthenewcountry.

SnackFoodsAcquisition

SnackFoodsAcquisition

LevelofDifficulty:Medium

CaseSimilartoCasesatFirms:BainRound1case

TopicsTested:marketsizing,break-evenanalysisandpaybackperiod,mathematicalcalculation,

Prompt:AUSsnackfoodscompanyspecializinginsnackingpeanuts,PeanutCo.,isplanningtoacquireanothercompanyspecializinginsnackingalmonds,AlmondCo.PeanutCo.iscurrentlythemarketleaderinsnackingpeanuts,buttheoverallsegmentisgrowingslowlycomparedtothemarketandtheywanttodiversify.Theyhavehiredyoutotellthemwhetherthisisagoodidea.

FrameworkandClarifyingQuestions

SampleofStrongFramework:

Acquireornot?

Marketsize

Profitability

Synergies/dis-

synergies

Competition

DealPrice

Howlargeisthemarketforsnackingalmonds?

Howmuchisthisindustryexpectedtogrow?Isittrendingup,

down,orstagnant?

Howprofitablewillthisproductbe(e.g.,pricing,costs)?

Issnackingalmondsamorepremiummarketthensnackingpeanuts,intermsofprice?

CanweleveragePeanutCo.’sexistingcapabilities(distribution,mktg,sales)?

Willenteringcannibalizeexistingsales?

Istheoverlapbetweenalmondandpeanutcustomershigh?

IsAlmondCo.thepreferredbrandinthemarket?

Whoarethecurrentcompetitors?

Whatarethebarrierstoentry?

Howlargeisthethreatofnewentrants?

Whatisthedeal

price?

Howwillwefinancethedeal?

SampleClarifyingQuestionsandAnswers

Areweonlylookingatthesnackingalmondmarket?

Yes–allotheralmonds(e.g.,forcooking)areexcluded

Sincethesnackingpeanutmarketgrowthisslowing,isthistrendaffectingtheentiresnackingnutindustry?

No–thealmondindustryisnotimpactedbecausealmondsareconsideredtobehigherinnutrients

SizingtheUSmarketforsnackingalmonds

Candidatecoulddomarketsizingbasedonfrequencyofpurchase.

Providethefollowingassumptions:

AssumethepopulationoftheUSis300M

1snackalmondspacket:16ounces

Priceof1packet:$2

Askcandidatereasonsfornumbersbrainstormed

“Don’tsnacknuts”

“Casualconsumers”

“Healthconsciousconsumers”

“Frequentconsumers”

%ofUSpopulation

75%

10%

10%

5%

Populationsize

210M

30M

30M

15M

Numberofsnackalmondspacketsconsumed/year

0

25

(2/month)

60

(5/month)

120

(10/month)

Totalconsumption

0

750M

1800M

1800M

Totalnumberofpackets:0.75B+1.8B+1.8B=4.5B(roundto5B)

Costof1packet:$2

Totalmarketsize:5B*$2=$10B

Totalmarketsizeis$8-10B

Pressuretestifthisistoolarge

BreakevenforPeanutCo.onthisinvestment

Providethefollowingassumptions:

AlmondCo.’scurrentmarketshare:10%

AlmondCo.’sprofitmargin:50%

PurchasepriceforPeanutCo:$1.5B

AlmondCo.’srevenues:$1B

AlmondCo.’sprofits:$500M

Assumerevenueandcoststructurestaysthesameoverthenextfewyears

Purchasepriceis$1.5B

Paybackperiod=$1.5B/$500M=3years

Morecomplexquestions:

IfthepurchasepricewasdoubledandAlmondCo.’smarketsharewashalved,whatwouldthenewpaybackperiodbe?(3*(2/(1/2))=12years

Whatassumptionsareyoumostuncomfortablewith?Whichoneswouldyoutestfurther?

GivenPeanutCo.’sexistingsnacknutsbusiness,whatelsewouldyouconsider?

PotentialBenefits

Crosssellalmondproductstoexistingpeanutcustomers

LeveragecurrentdistributionnetworktoexpandreachofAlmondCo.anddrivesales

Canextendinnovationfrompeanutstoalmonds(e.g.,flavor,packaging,etc)

PotentialRisks

Potentialforcannibalizationofexistingsales

Potentialofbranddilution

RecommendationstotheCEOofthePeanutCo.

Goodsummarywillincludethefollowing:

Answer–acquireornot?Eithercanbejustified.Seebelow

Strongjustificationonwhy?(Include2-3keynumbersfromthecase)

Outlinekeyriskswithrecommendation

Outline2-3keynextsteps

IfrecommendationtoacquireAlmondCo.:

Largeandgrowingmarket

Quickpaybackperiodof3years

Highoverlapwithcustomers

Risks:couldcannibalizecurrentpeanutsales,coulddilute/confusebrand

Nextsteps:canwegetamorefavorabledealprice;determinewhatexactinnovationcanbecarriedoverfrompeanutbusiness

IfrecommendationistonotacquireAlmondCo:

Cannibalizecurrentsales

Couldimpactourcurrentmarginstructure

Coulddilutebrand

Risks:ifcompetitoracquiresAlmondCoandsucceeds,PeanutCo’scompetitivepositionwouldbeweaker

Nextsteps:determineifthereareotherplayersthatwecouldacquire

U.S.ShoeManufacturing

U.S.ShoeManufacturing

LevelofDifficulty:Hardifyouaren’tfamiliarwithoperationsstrategy

CaseSimilartoCasesatFirms:McKinseyfinalround

TopicsTested:onshore/offshore,operations,mathematicalcalculations(unitprofitability,totallandedcost).

Prompt:AmajorU.S.shoemanufactureriscurrentlymanufacturingitsentireproductlinedomestically.Becauseofincreasedlaborcostsandcompetitivepressure,themanufacturerisnowinterestedinunderstandingwhetheritshouldoffshoresomeorallofitsproductionand,ifso,whereitshouldoffshoretoandwhatpercentofitstotalproductlineshouldbemanufacturedonshorevs.offshore.Whatfactorsshouldtheclientconsiderasitcomparesonshoretooffshoremanufacturing?

OpeningFrameworkandClarifyingQuestions

SampleofStrongFramework

Demandfactors

Demandvolatility

Demandgrowth

Demanddiversity(foreignvs.domestic)

Competition(foreignvs.domestic)

Requiredservicelevel

Supplyfactors

Supplyvolatility

Supplyleadtime/responsiveness

Availabilityofsuppliers

Directlaborvs.totalcosts

Capitalinvestmentsandeconomiesofscale

Technologicalfactors

Accesstohumancapital(knowledgeandskills)

Manufacturinginfrastructure(downstreamsuppliers,manufacturingfacilities)

Generalinfrastructure(roads,electricity,ports)

Processinnovation(efficientfrontierofproduction)

Macroeconomicandregulatoryfactors

Tariffs,quotas,andotherprotectionism

Tradeandglobalinstitutionalagreements

Exchangerates

Politicalstability

Culturalaffinityandmanagerialalignment

SampleClarifyingQuestionsandAnswers

Whatotherproductsdoestheclientcurrentlysellbesidesshoes?

Theclientcurrentlyspecializesinshoemanufacturing,butalsomanufacturessomeapparelaswell.

WhereelsedoestheclientcurrentlysellitsproductsbesidestheU.S.?

Theclientcurrentlysellsitsproductsindevelopedmarkets(NorthAmerica,Europe,andAustralia)

Whatarecompetitors,bothdomesticandforeign,currentlydoingwithrespecttoonshoring/offshoring?

Mostoftheclients’competitorscurrentlydonotoffshoretheirproductionduetomanufacturingandmanagerialcomplexity.

OutsideoftheU.S.,inwhichmarketsareshoestypicallymanufactured?

Wherearehigh-Fqouralcitayssehoinetsemrvaineuwfamctautreerdi?alsandtraining,pleasefollo

LowerqualityshoestendtobemanufacturedinChina,SoutheastAsia,

waWndeCCenhtartalOAfmfiecriiacla,Ahcigchouqunat:litgydobnwesnixnEasterwnwEuwr.oCpea.reerE

UnitProfitability

TheclienthasbegunassessingamanufacturerbasedinVietnam.Theywantustodoanin-depthanalysisoftheper-unitprofitabilityofshoesproducedinourexistingfacilityvs.theVietnamfacility.Assumenocapexineithercase(U.S.capitalissunk,Vietnamarrangementwouldbecostplus).Whatdoestheequationforper-unitprofitabilityforshoeslooklike?

profit=retailrevenue–(COGS+labor+SG&A+transportation+quality+tariffs+retailmargin)

Givetheintervieweethebelowdataandhavethemsolveforprofitability.

U.S. Vietnam

Retailrevenue

$200

$200

COGS

30%

20%

Directlabor

25%

5%

SG&A

20%

25%

Transportation

4%

10%

Quality

1%defectrate

5%defectrate

Tariffs

NA

10%

Retailmargin

10%

10%

Profit

$10

$15

UnitProfitabilityConclusion

Givenestimatedprofitabilityatbothfacilities,whatshouldtheclientdo?Whatarethekeyconsiderationsandsensitivitiesthatthisbasicmodelcontains?

Basedontheunit-profitabilityanalysis,theclientshouldoffshoremanufacturingtoVietnambecauseitis50%moreprofitableonaunitbasistomanufacturethere.Thereareseveralconsiderationsandsensitivitiestokeepinmind:

MaterialcostsandlaborcostsaremuchlowerinVietnamthanintheU.S.,drivingmostoftheVietnammanufacturingcostsavings.

ProductionqualityissignificantlyworseinVietnam(5%vs.1%),andfurtherqualitydeteriorationwouldimpactprofitabilityandswingthedecisiontotheU.S.

ProducinginVietnamalsoentailsaddedtransportationandtariffcosts,whicharevulnerabletomacroeconomicshifts(increasedfuelcosts,increasedtariffs).

Arewemissinganythingelseinthisanalysisthatmightdrivecostshigherintheoffshoringcase?Orisitpossiblethattheclientshouldsplitmanufacturingacrossthetwooptionsand,ifso,whatproportionofshoesshouldbemadeinVietnamvs.theU.S.?Oncetheintervieweehastouchedonmosttheabove,introducethisquestion.Directtheintervieweetotheopeningframeworkandaskaboutleadtimeandthevolatilityofdemand.

TotalLandedCost

Theclientjustgaveusonepieceofinformationinadditiontothecostingdata.ShoesmanufacturedinVietnamhavealeadtimeofthreemonths(timefromordertodelivery).ShoesmanufacturedintheU.S.,incomparison,havealeadtimeofonemonth.Whatadditionalfactorsshouldtheclientaddtotheunit