Question:
Whatq opportunities exist to increase profits?
What recommendations can you make to capture savings related to the identified opportunities?
What is the cost savings associated with your recommendations?
Suggested solutions:
The first question involves identifying opportunities to improve profits. The candidate must start with either revenues or costs. Although one could make the argument that maintenance supports revenue by maximizing the operating time of the refinery equipment, maintenance should be seen to be a support function. Thus, it is more appropriate to focus on costs and cost reduction. The following questions will help the candidate gain insight into cost reduction opportunities.
How does the maintenance department track its costs?
If the candidate phrases the question about material or overhead costs, the interviewer would inform the candidate that detailed reviewed showed no major opportunities. The candidate would be steered toward labor costs and given the following tables regarding maintenance labor costs for the past year.
To support understanding of the following tables, Turnaround work is long term preventive maintenance (e.g. complete rebuilding of a boiler) that may be performed once every few years. All other work (short term emergency repairs, small scale preventive maintenance, other routine work, etc.) fits into the category of Daily work
Craftsmen Daily work Turnaround Total
Client $ 8MM $ 2MM $ 10MM
Contractor $ 5MM $ 9MM $ 14MM
Total $ 13MM $ 11MM $ 24MM
Supervisor Total
Client $ 1MM
Contractor $ 0.5MM
Total $ 1.5MM
Since the Craftsmen table represents a larger dollar amount than the Supervisor table, it is logical to pursue cost savings opportunities in this area first.
What is the utilization of Craftsmen in the assets?
In central maintenance?
And for contractors?
Assume each area is utilized 100% of the time, 50 weeks per year, 40 hours per week.
How does the labor cost of craftsmen ($24MM) on a refinery-sized basis (i.e., $cost / per barrel of crude oil processed) compare with industry averages?
Consulting your industry data base shows that costs appear to be about 20% above the average of peer refineries.
This is an important question to determine if there is a problem with costs (don’t assume there is, the client may be performing better than industry average!)
Is there any particular reason why turnaround work is so heavily skewed toward contractors?
Turnaround work tends to be more cyclical. An external workforce is used to absorb some of this additional work. Keep in mind that both client and contractor Craftsmen are capable of performing any maintenance job at the plant.
After further analysis of the tables the key fact that should become appear odd is the large difference in the cost per unit of labor between your client’s Craftsmen and the outside contractor’s Craftsmen. Often candidates will ask for the hourly wage rates of these two groups. There is sufficient data to calculate these numbers. The calculation is:
Annual cost of client craftsmen = $10MM/ (11 Craftsmen/asset x 9 assets + 100 Craftsmen in Central maintenance) = $50,000 / year
Annual cost of contractor craftsmen = $ 14 MM/ 140 contractor Craftsmen = $100,000 / year
Again, this difference should provoke a series of questions to understand the difference.
Is there any difference in the work performed by the client and contractor craftsmen?
No, other than the different levels of Turnaround work vs. Daily work performed as noted in the previous table. Both groups are capable of doing any job with roughly equal levels of quality.
Is there any difference in efficiency between the two groups of Craftsmen?
The candidate would at this point be asked how they would measure this.
After reaching an understanding of the difficulty involved in measuring the efficiency of a workforce (especially a unionized workforce), the candidate would be told that through a series of interviews with maintenance supervisors, there is a consensus that contractor Craftsmen are roughly twice as productive as client craftsmen.
This is a critical point in the case. The candidate must recognize that in the present environment the client is largely indifferent about units of labor. You can have a client worker who is half as efficient or a contractor worker who is twice as expensive. The key now is to determine if there are ways to create an opportunity where the client would no longer be indifferent.
What is causing the inefficiencies associated with the client’s labor?
Again, the candidate would be encouraged to offer their own ideas.
After some discussion the candidate would be told that many of the Maintenance Supervisors complain endlessly about restrictions placed on them by the existing union labor contract and the tightness of craft designations.
The interviewer would probe to ensure the candidate understands why the present craft designation creates the inefficiencies. Essentially work is too finely divided. It makes planning and supervision extremely cumbersome. As an example, if one of six crafts required to perform a job is absent or late, the entire job must shut down, as craft designations are not allowed to support other craft designations.
Is it possible to change the existing union contract?
The present labor contract is a three year contract that is due to be renegotiated/renewed in six months.
Will the union resist changes to the existing contract?
Indeed!!
At this point, the candidate should recognize a major (albeit difficult) opportunity to reduce labor costs. The client would essentially like to have its own employees look and function like its contractors, but continue to get paid at present rates. In reality, management will need to make wage concessions in order to change present work practices. However, through planned negotiations a scenario can be created which presents a favorable opportunity for your client to begin to replace outside contractors with its own Craftsmen.
There are several ways to address the third question of the case, the actual savings that might be achieved. One quick method is to assume that these changes would bring maintenance costs back in line with industry average. Utilizing the cost benchmark mentioned earlier, one could assume costs could be reduced to $24MM/1.20 = $20MM, a $4MM savings.
A second, and more detailed, method would be to take the extreme scenario where the client’s Craftsmen is paid its present rate, but is made as efficient as the contractor’s Craftsmen. In this case, you begin with the present level of 200 client craftsmen who are functioning as 100 equivalent contractor Craftsmen (they’re one-half as efficient). By improving their efficiency, you are effectively “creating” 100 equivalent contractors. Thus, you are immediately able to replace 100 contractors and save $10MM. This could be taken one step further by assuming you would want to replace all contractors. This would save an additional $2.5MM ($4MM existing contractor expense - $2MM required to hire additional client craftsmen + $0.5MM in contractor supervisors). As noted earlier, in reality, this approach would require wage concessions to the union, so actual savings may be something significantly less.
Key takeaways:
This case requires the candidate to quickly digest a large amount of organizational issues and then quickly check some ratios to uncover the basic problem (the client workforce is inefficient). Creativity must then be used to structure a recommendation that would create a more favorable situation for the client. As in other cases, acceptable solutions need not follow the exact method above nor cover all of the above points.
Mercer
1st Round
1) A New England telephone company is thinking of entering the home security market. What is the potential market size and what would you recommend they do?
2) If I gave you $10 million dollars to invest in any one business, which would it be?
3) Should Kraft Foods expand and incorporate ice cream into their product mix? If yes, how should they enter this market?
4) You are starting a new business, a gourmet coffee shop. The shop is located next to a train station. You're building the business with the hope of selling it within two years. What is your strategy?
5) How big is the market for window display marketing books?
2nd Round(Nov 2004):
We have been hired by a client to help her evaluate his product mix and determine the best one going forward. Refer to graphs.