Your client is BS Systems, a defence contractor situated in the US.
They have contacted our company to advise them in the selection of the location for a new plant, producing Apache helicopters. Three sites are in consideration: Canada, UK and US.
The profits for each plant location over the next 5 years should be calculated.
This case is made to be interviewer-led. Therefore the interviewer should guide the interviewee through the interview.
The case is split into two parts.
The first part describes more qualitative problems and has more open questions that should make the interviewee think about the problem and its solution.
The second part is more about quantitative problems and calculations. Here the interviewee should try to make his own calculations and solve the questions.
The questions in the big boxes should be read out and shared with the candidate.
Short Solution (Expand) (Collapse)
Suggested case structure:
1. Which parameters would you consider for the decision?
- Export restrictions (between US, UK and Canada):
Are there are restrictions to export or import machines from/to the countries?
- Financial analysis of plant operation:
(VC, FC) / Revenues / Profits
Spare parts / Raw materials
How to get the product to the customer?
Availability of skilled labour
2. Where would you build the plant?
Information that can be shared if inquired by the interviewee:
- One of the plants in the US has space for an additional assembly line, for the costs of $500 m.
- The assembly line could produce up to 250 helicopters annually.
- The plants abroad can produce up to 350 helicopters per year.
- The helicopters are sold for $100 m a piece.
- If a new plant is built abroad, the local Departement of Defense (DoD) is willing to spend 50% of its annual budget on the helicopters.
- The UK and CA do NOT import from other countries
- If they are imported to the US they have to be certified for an additional cost of $10 m per helicopter.
Total revenues for 5 years:
Total revenue (US) = 5 * 25% * $100 B = $125 B
Revenue only UK = 5 * 50% * $20 B = $50 B
Total revenue (UK) = $125 B + $50 B = $175 B
Revenue only CA = 5 * 50% * $15 = $37.5 B
TR (CA) = $125 B + $37.5 B = $162.5 B
Total costs for 5 years:
Total number of helicopters sold in 5 years:
Costs are composed of:
- Initial setup costs
- Fixed costs
- Variable costs
- Certification costs for imports to US
Compared to the UK, in Canada costs are higher and revenues are lower. Consequently, the plant should either be situated in the US or UK.
To check the attractiveness of these two countries the profit for each has to be calculated.
Total profit for 5 years
Plant in US:
Profit = TR - TC = $125 B - $13.5 B = $111.5 B
Plant in UK:
Profit = TR - TC = $175 B - $40.75 B = $134.25 B
Building the plant in the UK will give us profits that are $22.75 B higher than in the case of having it in the US.
3. What is your recommendation to BS Systems regarding their choice of location?
- Based on the financial outcome, the UK seems to be the more attractive location due to:
- Profits over 5 years will be $22.75 B higher
- Our client will not completely depend on a single customer
- The plant in the UK would be fully utilized (350 of 350)
- There are other points that should be taken into consideration:
- Potential of selling helicopters to other countries worldwide
- Labour reaction in US plants if a new plant is built in the UK
- Stability of political relations between US and UK
What issues could arise by moving some production from the US to another country?
- Labour protest due to the loss of jobs in the US.
- Governmental intervention in order to keep industry in the US (e.g. losing subsidies).
- Loss of customers in the US as a result of taste (want only American quality), etc.
- Loss of brand reputation (depending on the country moved to).
More questions to be added by you, interviewer!
At the end of the case, you will have the opportunity to suggest challenging questions about this case (to be asked for instance if the next interviewees solve the case very fast).