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Case Prompt:
A cardboard manufacturer with two plants, Plant A and Plant B, has provided data on their sales, costs, and profits. The interviewer asks what the data tells and how to improve the performance of Plant A to similar levels as Plant B.
Exhibit:
Plant A
Sales: $45,000 (ë000)
Cost of Paper: 65%
Other Goods: 6%
Labour: 18%
Other Manufacturing: 6%
Depreciation: 3%
Profit: 2%
Plant B
Sales: $75,000 (ë000)
Cost of Paper: 63%
Other Goods: 5%
Labour: 13%
Other Manufacturing: 5%
Depreciation: 3%
Profit: 11%
Background:
The cardboard manufacturer produces cardboard boxes for packaging, and both plants are in Benelux, owned and operated by a central HQ division. Each plant manages its own sales and customers and has completely delegated authority, making each plant its own profit centre. The two plants have similar processes and equipment, and the average salary in each plant is $45,000. Plant A has 15% of the workforce in sales, 35% in full-time employees, and 50% in operators, with low morale. Plant B has 35 salespeople and different customer mixes. Plant A's customers have poor demand forecasting, resulting in lower production runs and a need for more labour-intensive steps.
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Analysis:
The data shows that Plant B has better sales, lower costs, and higher profits than Plant A. To improve the performance of Plant A, we need to reduce labour from 18% to 13%, which is a 6% reduction of around $2.3M.
To achieve this reduction, we can lay off 10 sales staff in Plant A, given that each salesperson in Plant B sells approximately $2M of product, and if Plant A's salespeople did the same, we would only need 20 people. This would save around $450,000. Additionally, we could reduce the number of product changes in Plant A in line with Plant B, which would reduce labour costs by around $1M, as we could cut 10 shift operators and 14 full-time staff.
Moreover, improving morale could also save 10% of shift costs, which would save another $450,000. In total, these measures could save around $2M, which is the majority of the cost reduction needed to improve Plant A's performance to that of Plant B.
Frequently asked questions
Why is Plant A less profitable than Plant B?
Plant A suffers from higher labor costs, inefficient production runs, and a less effective sales team. Its customer base lacks accurate demand forecasting, leading to more manual interventions and lower output per labor hour.
How can Plant A reduce labor costs effectively?
By aligning its workforce structure with Plant B, Plant A can reduce labor from 18% to 13% of sales. This includes removing excess sales staff, cutting shift operators, and streamlining full-time roles while maintaining output.
What role does employee morale play in Plant A’s performance?
Low morale contributes to inefficiency and higher labor costs. Improving morale could save 10% in shift-related costs, boosting productivity and reducing absenteeism, leading to better overall performance.
Can customer behavior affect plant profitability?
Yes, poor demand forecasting from customers leads to frequent production changes and short runs, increasing labor requirements and reducing cost efficiency. Educating or refining the customer mix can improve profitability.
How much cost savings are needed for Plant A to match Plant B?
To match Plant B’s profitability, Plant A needs to reduce costs by approximately $2.3 million. This can be achieved through a combination of labor optimization, sales team downsizing, and morale-driven efficiency gains.
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