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1、Firm: A.T. KearneyCase Number:Case setup (facts offered by interviewer):q Your client is a manufacturer of bicyclesq They have been in business for 25 yearsq They manufacturer and sell three categories of bicycles: Racing bikes: High end, high performance bikes for sophisticated cyclists Mainstream
2、bikes: Durable, but not overly complicated bikes for everyday riders Childrens bikes: Smaller, simpler versions of their mainstream bikes for childrenq Profits at your client have decreased over the past five yearsQuestion:q What is driving the decline in overall profits?q What recommendations might
3、 correct the situation?Suggested solutions:The first question is to determine what has caused overall profits to decrease. To accomplish this the candidate must first understand what has transpired in each of the three product categories over the past five years during which profitability has slippe
4、d. The following are questions and answers that would be provided in an interview scenario.q What are the clients margins for a bicycle in each of the three segments?Racing: Cost = $600/unit, Profit=$300/unitMainstream: Cost = $250/unit, Profit = $75/unitChildrens: Cost = $ 200/unit, Profit = $50/un
5、itq What has happened to the market size of each of the three segments over the past five years?Racing: Has remained constant at its present size of $300MMMainstream: Has increased at 2% growth rate per year to its present size of $1.0BChildrens: Has increased at 3% growth rate per year to its prese
6、nt size of $400MMq What has happened to our clients market share in each of these segments?Racing: Market share has decreased from 60% to 30%Mainstream: Market share has increased from 0% to 5%Childrens: Market share has increased from 0% to 3% q Who are the clients major competitors in each market
7、segment? What has happened to their market share in each segment over the past five years?Racing: There is one main competitor and a host of small firms. Your main competitor has increased market share from 30% to 50%Mainstream: There exist many, large competitors, none of which holds more than 10%
8、of the marketChildrens: As in the mainstream segment, there are many competitors, none with more than 10% of the marketThe above information provides enough information to put together a picture of why profits have decreased over the past five years : Your client, with a commanding position in a fla
9、t market segment (racing), expanded into new segments (mainstream and childrens). As this occurred, market share decreased dramatically in the most lucrative segment (racing), creating an unfavorable mix. The extent to which profits have decreased can be deduced from some quick math : profits have s
10、lipped from $60MM five years ago (=60% x $300MM x 33% racing margin) to $44MM today ( = (30% x $300MM x 33% racing margin) + (5% x $1B x 23% mainstream margin) + (3% x $400MM x 20% childrens margin).The dramatic decrease in market share in the racing segment is at this point still unexplained. Quest
11、ions that would help formulate an explanation include:q Have there been any major changes in product quality in your clients racing product? Or in its main competitors racing product?Noq Have there been any major price changes in your clients racing product? Or in its main competitors racing product
12、?Noq Have there been any major changes in distribution outlets for your clients racing product? Or for its main competitors racing product?Yes. Previously your client and its main competitor in the racing segment sold exclusively through small, specialty dealers. This remains unchanged for the compe
13、tition. Your client, however, began to sell its racing bikes through mass distributors and discount stores (the distribution outlets for mainstream and childrens bikes) as it entered the mainstream and childrens segment.q How do the mass distributors and discount stores price the racing bikes relati
14、ve to the specialty stores?Prices at these stores tend to be 15 to 20% less.q What percent of your clients racing sales occur in mass distributors and discount stores?Effectively none. This attempt to sell through these distributors has failedq How has the decision to sell through mass distributors
15、and discount stores affected the image of the clients racing product?No studies have been done. q How has the decision to sell through mass distributors and discount stores affected your clients relationship with the specialty outlets?Again, no formal analysis has been performed.Although some analys
16、is and/or survey should be performed to answer more conclusively the last two questions, a possible story can be put together. There has been no appreciable change in either quality or price (or any other tangible factor) of your clients racing product relative to its competition. It is not the prod
17、uct that is the problem, but rather its image. As your client came out with lower end, mainstream and childrens products and began to push their racing segment through mass distributors and discount outlets, their reputation was compromised. Additionally, the presence of the racing products in the d
18、iscount outlets has put your historic racing distributor (the specialty shops) in a precarious position. The specialty shops must now lower price to compete, thereby cutting their own profits. Instead, they are likely to push the competitions product. Remember, your client has no direct salesforce a
19、t the retail outlets. The specialty shops essentially serve as your clients sales force.The above analysis offers an explanation of what has affected the top side of the profitability problem. Still to be examined is the cost, or bottom side, of the profitability issue. Questions to uncover cost iss
20、ues would include:q How does the client account for its costs?The client has a single manufacturing and assembly plant. They have separate lines in this facility to produce racing, mainstream and childrens products. They divide their costs into the following categories: labor, material and overhead.
21、 Overall costs have been increasing at a fairly hefty rate of 10% per year.q What is the current breakdown of costs along these categories for each product segment?Racing: Labor = 30%, Material = 40%, Overhead = 30%Mainstream: Labor = 25%, Material = 40%, Overhead = 35%Childrens: Labor = 25%, Materi
22、al = 40%, Overhead = 35%q How has this mix of expenses changed over the past five years?In all segments, labor is an increasing percentage of the costs. q Does the basic approach to manufacturing (i.e. the mix of labor and technology) reflect that of its competition?Your client tells you that there
23、is a continuing movement to automate and utilize technology to improve efficiency throughout the industry, but it is his/her opinion that their approach, maintaining the “human touch”, is what differentiates them from the competition. (Unfortunately, hes right!)q Is the workforce unionized?Yesq What
24、 is the average age of the workforce?52 and climbing. There is very little turnover in the workforce.q What is the present throughput rating? How has it changed over the past five years?Presently the plant is producing at about 80% of capacity. This has been decreasing steadily over the last several
25、 years.q What is the typical reason for equipment shutdown?Emergency repairq Describe the preventive maintenance program in effect at the clients facility?Preventive maintenance is performed informally based on the knowledge of senior technicians.q How often has equipment been replaced? Is this cons
26、istent with the original equipment manufacturers recommendations?The client feels that most OEM recommendations are very conservative. They have followed a philosophy of maximizing the life of their equipment and have generally doubled OEM recommendations.The above information is sufficient to add s
27、ome understanding to the cost side of the equation. Your client has an aging workforce and plant that is behind the times in terms of technology and innovation. This has contributed to excessive breakdowns, decreased throughput, increased labor rates (wages increase with seniority) and greater labor
28、 hours (overtime to fix broken machines).In proposing recommendations to improve the clients situation, there is no single correct approach. There are a number of approaches that might be explored and recommended. The following are some possibilities:q Abandon the mainstream and childrens segment to
29、 recover leadership in the racing segmentIssues to consider in this approach: How much of the racing segment is “recoverable”? What are the expected growth rates of each segment? How badly damaged is the relationship with the specialty outlets? Are there alternative outlets to the specialty shops su
30、ch as internet sales? How will this move affect overall utilization of the operating facilities?q Maintain the mainstream and childrens segment, but sell under a different nameIssues to consider in this approach: Is there demand among the mass and discount distributors for bicycles under their name?
31、 What additional advertising and promotions costs might be incurred? What are the expected growth rates of each segment? What is driving the buying habits of the mainstream and childrens market?q Reduce costs through automation and innovationIssues to be considered: What technological improvements a
32、re to be made? What are the required investments? What are the expected returns on those investments? How will these investments affect throughput? To which lines are these investments appropriate? Are the mainstream and childrens segments potentially “over-engineered”? What impact will this have on
33、 the required workforce levels? If layoffs are required to achieve the benefits, what impact will this have on labor relations?q Reduce costs through establishing a formal preventive maintenance programIssues to be considered: What organizational changes will be required? What analysis will be perfo
34、rmed to determine the appropriate amount of PM? What training is required of the workforce? What technical or system changes are required? How will the unionized workforce respond?Key takeaways:This case can prove to be lengthy and very involved. It is not expected that a candidate would cover all o
35、f the above topics, but rather work through selected topics in a logical fashion. It is important that the candidate pursue a solution that considers both revenue and cost issues to impact profit. Additionally, a conadidates ability to work comfortably with the quantitative side of this case is important. The above recommendations for improving profitability are just a few among many. The candidate may come with their own ideas.
