Expert Case by Ian

Hot Wheels

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Hot Wheels Problem definition: Our client is Korean Car Parts (KCP), a multi-national original equipment manufacturer (OEM) of car parts based in Korea. They've recently seen a decline in profits and have brought us in to understand how to address this falling profitability.
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Problem Definition

Problem definition: Our client is Korean Car Parts (KCP), a multi-national original equipment manufacturer (OEM) of car parts based in Korea. They've recently seen a decline in profits and have brought us in to understand how to address this falling profitability.


Comments

This is a candidate-led case, the style of which could be seen across a range of consultancies, but particularly BCG and Bain. The case is split into 3 main parts:

  1. Market Analysis
  2. Competitor / Product analysis
  3. Supply chain solutioning

In addition to the above, this case tests a candidate's understanding of profitability, the automotive industry, globalisation, and, of course, chart reading.

The following can be verbally provided to interviewee if asked:

  • Our client serves the Japanese, Korean, and US markets
  • They specialize in the production of 5 products: carburetors, A/C units, wheels, airbags, and seatbelts
  • Profits have been steady in Asian markets, but they've noticed a big drop in profitability in the US
  • They care a lot about profitability, as they have limited capital – as such, efforts need to be focused in areas with the highest profitability

Short Solution (Expand)


Detailed Solution

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

Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case

I. Geographic/Market Analysis

In the first phase, the candidate needs to figure out if there is a geographic specificity to the client's falling profits. The interviewee needs to ask if we’re seeing differences in the different markets the client serves.

The following information can be shared if asked:

  • KCP serves the Korean, Japanese, and US markets
  • They are seeing good, growing profits in Japan and Korea, but US profits are falling
  • The US Market is not declining overall, it’s increasing/growing (KCP's competitors in the US market are seeing growth)

The candidate needs to realize that our client's presence in the US market needs further investigation.


II: Parts Analysis

Part 1:

It’s very important that the interviewee asks about what types of original equipment our client manufactures.

If asked, you can provide the following information:

  • Our clients sells the same products across all markets
  • They specialize in 5 different products – carburetors, A/C units, wheels, airbags, and seatbelts

If the candidates asks for a breakdown of sales by product, exhibit 1 can be shared.

The interviewee needs to identify that total profits have been decreasing, and that falling sales in Wheels, Airbags, and Seatbelts is the culprit.

If you want to test the interviewee's math, prompt them to calculate how much profitability will decrease next year in total, and across all parts. They are allowed to round to the nearest million.

To calculate profitability, the candidate will need to know the following profit margin:

  • Carburetors = 18%
  • Wheels = 69%
  • Airbags = 72%
  • A/C units = 35%
  • Seatbelts = 50%

If our client stays the course, profitability will decrease by $43M

The breakdown is as follows ($ in Millions):

Product line Change in sales Change in profitability
(change in sales times profit margin)
Carburetors $25 $13
Wheels -$60 -$15
Airbags -$70 -$14
A/C Units $45 $18
Seatbelts -$90 -$45
Total -$150 -$43


Part 2:

At this point, the interviewee needs to figure out what parts matter and what is causing sales to drop. If they ask, you can clarify the following:

  • Our client has not seen rising costs
  • We have seen falling revenues
  • Our client has not changed prices at all
  • No unusual government regulations/tariffs

Other answers can be given on the spot for other suggested possibilities, but they should all lead to the realization that profits are falling because of lack of demand for those products translating into fewer items sold.

If the interviewee asks for any information as to why they are falling, turn it around on them. A good brainstorm question to examine the candidate’s thought process would be something like “what do you think could be causing falling quantities?”

Possible answers to this question include:

  • Brand issues (answer - the client is a reputable brand)
  • Failure to meet orders (answer - we are supply constrained and need to prioritize production, but we have not been failing to meet orders)
  • Change in consumer preferences (answer - this could be something to look at)
  • Less demand for certain products (answer - the products are in high demand)
  • Competitors taking market share (answer - this is currently happening. We are losing sales to competitors)

If the interviewee suggests a change in consumer preferences or market share, you can share exhibits 2 and 3 with them, saying “well we have some competitor analysis/product research/analysis and here’s what we’ve found so far”.

The candidate should come up with the following insights:

  • For our client’s struggling products (Wheels, Airbags, and Seatbelts), consumers really care about time to delivery, which our client isn't providing but local competiton is
  • For carburetors and A/C units, those really align with our client’s strengths

The interviewee may inquire about the current delivery time. Our client currently manufactures in Asia, where costs are low, then ships the products eastward, over the Pacific Ocean to the US.

  • It takes our client 2 days to manufacture a product once ordered. It then takes 20 days to ship across the pacificand ~2 days to transport by road and rail in the US
  • Local competitors do not have to ship to the US, so they only take a total of 4 days to manufacture and ship to buyers

The candidate should realize the 20-day difference in delivery times, and recognize that this is where our disadvantage in time to delivery comes from.


III. Solution

Now that the interviewee realizes that the failing product lines are failing due to the transit of goods across the Pacific ocean, they must brainstorm some methods to fix this.

Some possible answers are:

  • Moving operations to the US
  • Building a warehouse in the US to store goods in anticipation of orders
  • Flying products over

Ultimately, the interviewee needs to realize that all of those options are both more expensive and take time + capital to implement, dramatically affecting margins. They should also realize that it is not an option to price compete, as this will also reduce margins.

The ideal solution for our client is to stop selling the product lines that are currently selling poorly in the US: Wheels, Airbags, and Seatbelts.

Additionally:

  • They could look to increase the prices we charge on carburetors and A/C Units, or promote them more aggressively in the US
  • They could also look to continue to leverage their presumed strengths regarding time to delivery in Japan and Korea for Wheels, Airbags, and Seatbelts
  • They could look to identify parts with characteristics similar to carburetors and A/C units that we can be sold in the US market to replace lost profits and create new revenue streams

Difficult Questions

Question: Why do you think our client decided to get involved in the US market in the first place, given today's just-in-time supply chains?

Possible Answers:

  • An imperative/mandate for growth
  • The US market is growing and attractive (as stated) - they probably thought they could compete on quality (which they can for some parts)

Question: Are there any other markets you would recommend our client expand into? Why?

Possible Answers:

  • Really anywhere where we can easily (quickly) supply parts AND has car manufacturing. Since we are in Korea, this may include (Eastern) Russia, China, Vietnam, Thailand, Malaysia
  • We may have exhausted our geographic options, in which case we should expand into other product markets. We should identify other parts that we can sell to our existing Japanese and Korean buyers

Question: Do you have any suggestions as to how our client can increase their delivery speed in their local markets?

Possible Answers:

  • Build our manufacturing plants next to our buyers
  • Use predictive analytics to anticipate orders
  • Store already produced items in a warehouse (either on site, in a convenient holding spot in between our buyers, or right next to our buyers)
    • Note: Bottle production companies do this for beverage companies
Questions on this case
2 Do we have data on profit margin?
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Hello! Agree with you, that is a piece of information that you indeed need and it´s missing. If this happens in a real intrview, it´s a good catch, and you should ask for it. Interviewer will f... (read entire answer)

1 Calculation of Change in Profitability
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Hi Benedikt, You are correct! My apologies, the case will be updated shortly :) In summary: 1) Seatbelt change in profitability is indeed -$45M 2) Total projected change in profitability i... (read entire answer)

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