The company has been an innovator in components for LED products. The market for LED products, based on some research LumCO has conducted, is expected to grow by 24% p.a. until 2019 in Asia and by 17% in North America, with China and the United States being the key markets in both regions. Key experts on the lighting industry further assume that there will be a significant split in the lighting market with regard to technological features required in component products, which are believed to be either very high (e.g. light density, scope, area of light) or very basic.
Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.
Paragraphs highlighted in blue can be verbally communicated to the interviewee.
To get a better understanding of the overall situation the interviewee should ask for and be given answers to the following topics:
- Manufacturing site is located in Europe currently with the basis technology being injection-molding to a very precise standard. Typical batch sizes for Standard components can range from 5-100 million pieces. For Specialties, range is much lower (up to 5 million pieces but typically much lower) and design of the component is often created together with the customer as a technical service by LumCO. (If Interviewee asks: The total output of the company in 2014 was roughly 600 million pieces, all from its European facility).
- Technologically, the company is known throughout the end-consumer industries (large lighting OEMs, automotive companies, specialty lighting companies) for its precision molding and considered to be a reliable partner and innovator.
- Specialties sales account for 60% of the company's revenues, which, in 2014 accumulated to EUR 120 million. Revenues were split: Europe (65%), North America (15%), Asia (20%). In general, market volume for lighting components in Europe and North America is expected to be roughly equal, while Asia is approx. 1,5 as large.
- The company's product portfolio is evolving towards components for LED lighting, which, as of 2014, were accounting for 85% of the total product portfolio, which encompasses approx. 1,000 items, of which the majority are Standard components (If Interviewee asks: Split of 1,000 items is roughly 75% Standard, 25% Specialty, with molds for the latter typically not being reused).
In North America, the company's products are sold through one major distributor, whereas in Asia, the company currently uses three distributors. Quantities ordered by distributors tend to be higher in Asia than in North America since customers more frequently use products from the Standard Component catalogue. (If the interviewee asks it can be mentioned that LumCO has not been satisfied with the North American distributor and that they were required to pay a significant premium to be listed by him.)
LumCO's customers are either large integrated lighting companies or smaller specialists. In total, the company has had over 1,000 customers in 2014, with roughly 200 of those accounting for 90% of its total revenue. As with the overall lighting market, customers can be divided into those that seek standard components and focus on traditional lighting or standard LED applications or those that want specific components for LED and high-end lighting applications. Asian customers tend to require more Standard components, whereas North American customers more often request Specialty products.
Key cost driver for both Specialties and Standards are labor costs, which are typically 40% higher for Specialties as the requirements for design, mold creation and production process are usually performed by more skilled and technically trained employees. Provide following labor costs only if interviewee asks for them:
- Labor costs for Standards at LumCO's European facility amounted to 30 EUR/hour.
- Labor costs for Standards at the potential Chinese site are estimated to be 15 EUR/hour.
- Labor costs for Standards at the potential U.S. site are expected to be 25 EUR/hour.
The company currently employs 150 employees at its European production facility (If Interviewee asks: No overhead staff included and to be considered; 220 work days to be assumed with 8 hours worked per day).
Share figures 1 & 2 with interviewee
II. Structure and qualitative analysis
Interviewee should realize the following points after the discussion and sharing of information:
- The company is focused on LED lighting and generates the majority of revenues from Specialties
- 85% of product portfolio concerns LED lighting (information given)
- EUR 120 million in revenues of which 60% come from Specialties (=EUR 72 million)
- 600 million pieces are produced currently of which the interviewee can assume the split to be equal to the overall product split of 75% Standard and 25% Specialties
- 150 million pieces thus account for EUR 72 million = 1 piece is sold for 48 cent or approx. 0,5 EUR
- 450 million pieces are Standard components, accounting for EUR 48 million = 1 piece is sold for 11 cent or approx. 0,1 EUR
- The market in North America is more attractive for Specialties than for Standards
- The market in Asia is more attractive for Standards than for Specialties
- The European market is attractive for both types of products
The Interviewee should map each region in a matrix as suggested below, which should be hinted at by the interviewer:
The Interviewee could fill out a table similar to the one below for each region:
You can share both figures if the interviewee is stuck
- Even though it is evident that Europe is the least attractive region and Asia the most attractive one, the interviewee should realize that abandoning the core market is not an option given the context of the case
- Furthermore, it should be made clear by the interviewee that the difference in regional preferences for products is a factor and that this, along with the labor cost differential, will be the focus for the next step of the solution
III. Quantitative assessment of sites
It is clear from the context that the potential site in China should produce Standard products, whereas the site in the United States should focus on Specialties. The interviewer could lead the interviewee towards focusing on analyzing the different levels of personnel costs associated with each site (CAPEX and revenue growth not in scope quantitatively).
- The Interviewee knows the number of employees currently employed at the European site and should mention that he lacks information to precisely determine labor costs at each site since he is not aware of the number of people expected to be employed there. It should be shared, that one proxy, assuming that the workforce should not increase, could be to take the current revenue split by regions and apply them to the number of workers currently employed
- 150 employees * 0,20 = 30 employees in Asia
- 150 employees * 0,15 = 23 (rounded) employees in North America
- 150 employees – 30 – 23 = 97 employees in Europe
- However, as the interviewee knows that the growth potential for North America and Asia is rather high, he could suggest a different split in anticipation of a shift in revenues (this could be done but is not necessary)
- Having approximated the workers per facility, the interviewee should calculate the annual labor costs per facility:
- Asia: 30 employees * 8 hours a day * 220 days a year * (1 (factor for Standard products)* 15 EUR/hour) = EUR 792.000
- North America: 23 employees * 8 hours a day * 220 days a year * (1,4 * 25 EUR/hour) = EUR 1,416.800
- For Europe, the interviewee needs to consider both types of products based on the 75/25 split and prior divide the total employees by it:
- Europe for Specialties: (98 employees * 0,25) * 8 hours a day * 220 days a year* (1,4 * 30 EUR/ hour) = EUR 1,811.040
- Europe for Standards: : (98 employees * 0,75) * 8 hours a day * 220 days a year* (1 * 30 EUR/ hour) = EUR 3,880.800
- Europe Total: EUR 1,811.040 + EUR 3,880.800 = EUR 5,691.840
IV. Case result and recommendation to client
The interviewee should combine the qualitative facts from the structural analysis and the quantitative results for each facility and discuss the conclusions with interviewer highlighting that:
- There is a clear differentiation to be made in terms of which product type is produced at each site, given the different customer preferences and growth outlooks
- The most attractive region is Asia, followed by North America and Europe
- Given market growth and volume expectations in Asia and North America the purpose of building a facility in China and the United States seems reasonable
- Through the calculation it is clear that labor costs in Standard products are making the European site not competitive in contrast to the Asian one
- Shifting most of the Standard production to China and export the products from there would thus be an advisable strategy (If the interviewee mentions shipping costs to Europe and North America a figure per piece and 1 million pieces per shipping container could be given to add an additional calculation step, otherwise they could be given as identical and without sizable effect)
- Given that North America is currently served through one distributor that is expensive and does not add value and knowing that customers request Specialty products that require interaction and technical service with LumCO more often, it is advisable to avoid distribution sales in North America
- In Asia, three distributors handle large volume requests for Standard products, thus the sale of these products should not be handled by LumCO and a distribution network build upon these distributors should be set-up for Asia (closer collaboration possible)
- Lastly, the scaling down of the European facility could be discussed further:
- Design center
- Relocation (training of new employees in China and U.S.) and layoff of staff (pension schemes for older employees, training programs for younger ones)
- Transfer of equipment to other regions (Standard machinery to Chinese facility) and machinery or sale of it
Recommendation at end of case:
Building of both facilities, focusing on requirement in product type for each region and scale down European facility.