Our client, SFSS is a prominent producer of school supplies in 2017, with total sales of $275M in 2016. The company has solid brands, strongly invests in advertising and marketing, and has grown by using product line extensions and four main acquisitions.
SFSS is divided into 5 self-governing divisions, although manufacturing and promotion functions are collective. Joint costs (45% of total) are divided based on a % of sales method. Currently, SFSS has three operating plants, using 50% of the capacity.
Experts predict SFSS might be an acquisition target because of its potent balance sheet but decreasing earnings. The company is openly traded and has no significant long-term debt. As a possible investor, how would you increase SFSS’ profitability?
- This case is a combination of public math and main qualitative insights. At the basis, this is a case on quickly decreasing profitability, and finding strategies (like plant consolidation) to improve a company's future performance.
- The interviewee should be able to identify this as a performance improvement case, and has to look for ways to improve profitability. They should use the information handed to them beforehand to establish that capacity contraction is the main way to increase profitability
- Since there are several possible avenues to investigate, it is possible that the interviewer needs to guide the participant.
Short Solution (Expand) (Collapse)
Guide to case:
The case structure should have the following aspects:
- An investigation of SFSS’ recent performance to deep-dive decreasing profits.
- Examination of the possibilities of plant consolidation
- An analysis on the profitability of plant consolidation
Capacity utilization: By using Exhibit 2, qualitatively talk about the possible options for plant consolidation.
Notes to interviewer:
- The participant should see that the Mexico City plant is about to reach SFSS’ 12.5K SKUs capacity. So, SFSS can either close that specific plant and move all production to Canada, or it can close all Canadian plants, terminate 500 SKUs and move all manufacturing to Mexico City
- Sharp participants could note that Mexico City is the most doable strategy, but will also ask to view fixed and variable cost data. If so: show Diagram 3.
Notes to interviewer:
- The participant needs to have identified that the Mexico City plant is most practicable, but that there are several important considerations:
- Key questions to ask:
How would this influence revenues, presently at $275M a year?
How would this influence production costs? What do they currently look like?
How would this influence pre-tax profits, presently at $25M a year?
Solution and Recommendations:
Generally, SFSS needs to close 500 SKUs and move all production to the Mexico City plant to increase yearly profits from $25M to $82M.
The company also needs to think about numerous qualitative aspects:
- The period of the implementation: it cannot be done within a day
- The relationships with the Union: two plants will be closed – if our production employees in these plants partake in organized labor, this state of affairs needs to be addressed.
- Alterations in Distribution and Warehousing: SFSS needs to have an in-detail transition plan.
- Purchasing: the company will need to adapt to a robust central purchasing department instead of smaller local purchasing departments.
- Corporate Culture: the change really needs to be clearly communicated, and morale needs to be kept as high as possible.