Saturday, January 06, 2007

Case interview: Building products company

The following post is courtsey Tuhin and Tarun

" Tuhin interviewing Tarun29 Dec 2006

Topic: Investments / Acquisitions

The CEO of a large diversified building products company has asked to look at his division which manufactures china products, including tubs, toilets & urinals. He wants to evaluate the decision to invest $250m in a new manufacturing facility. What are the issues that need to be considered when making this decision?

Where does he have his ops?In the US. He's one of seven producers in the US. The largest has 20% mkt share. We are #3 with 15%.

Is the market equally distributed among the other four?Yeah, more or less

What are the kind of products that the client builds?The division builds tubs, toilets & urinals. Apart from that, we make anything that is used in construction.

Restate: Our client is a building products company, and wants to evaluate the decision of a $200m investment in a new manufacturing facility, which would manufacture china products.

Are the products only for commercial or residential buildings?Not specific, general

Is the construction market growing?Market, by itself, is linked to new housing. We can safely assume it is growing.

And do we have a dollar value of market?No, I don't have $$ value. Let's assume we grow at same rate as market, holding the same market share.

Maybe you want to think about other positives apart from increasing sales?Does the client also export stuff?No, primarily USA.

Apart from growing sales, he might want to shut down existing facilitiesNo, existing facilities will remain.

Do you think there'd be a cost impact?He could be considering economies of scaleYeah

How does the client fare with competitors in terms of prices?Competitor has been cutting prices. Ours have been flat. Two largest competitors are making a profit, we are only able to break even.

Are the supply sources the same for us & comp?Yes, the cheapest.

Are we catering to the same market as comp?How would you define market?E.g. Comp could be sourcing to commercial market. We're doing home segments. Maybe we're trying to subsidise home segment. Is that happening?No, we're targeting pretty much the same segments.

How much augmentation is this new facility going to make to his existing capacity?I don't know. All I know is he's asking for $200m.

What has been the reason that competitors have cut prices?Primary idea behind industry is volumes. No differentiation. Comp have managed to cut prices with scale.

I want to look at our cost structure and compare that with comp.OKSo, Yep

How's our distribution set up, as regards comp?Same. We use trucks.

How about current manufacturing facility?Anything specific you want to ask?
Do we have a stock out problem?No
With the added facility, will the client be able to sell excess stuff? Is there enough demand to justify that?True, that's a factor to be considered. Will be kept in mind when making the proposal for the $200m.

What are our operating costs? Labour, material, operating?Yes, yes. Any other costs?Overheads.Yep

How's our client's manufacturing facility?Mixed prod facility. Pretty much the industry norm - it's a moulding industry. The increased level of production would help me reduce VC.Will that be in form of material cost?No, it's currently the cheapest.Any automation in our facility?Yep, in line with industry stdAre we catering to entire US market?Yes, we try to.What are our ops cost? Do we use our own trucks?YesWill the new facility be located somewhere we don't have nay other place?It will be placed strategically.

Are our overhead costs in control?These are just allocated costs.

Is there anything apart from manufacturing you should be looking at?Is the distribution a problem?No, let's say I just hand it over to a distributor's warehouse.

How do we promote our products? How does our customer know of us?We have a good brand name, and get asked for from our distributor.

Is there any area I'm really missing here?You've covered most of the issues that are there. Question remains if I should invest 200m.

Umm.. there's nothing to be set right here. If he wants to invest 200m, what's the benefit he gets in terms of cost. If this facility gives us economy of scale... Look at location of facility, to ensure proximity to suppliers & distributors. Perhaps look at proximity to upcoming markets.If the benefits of all these amount to greater than cost, he should go ahead. That's about it.

Key Learnings

1) Completely skipped phase 2 and started to ask questions in phase 3
2) Interviewee did not realize that it was time to make recommendations inspite of covering all areas defined in the issue tree.
3) Did not apply MECE while covering cost areas (Missed out on operating costs but recovered eventually)"

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