Bain Midwest Machinery Co.

. Round 1 for 1st year students Approximate time allotted: 45 minutes Instructions: The candidate is told everything in italics. The instructions for the interviewer are in normal text. Background Karl Gilmore, long time CEO and largest shareholder of Midwest Machinery (Midwest) is worried. Overall Midwests competitiveness has been slipping as it has been losing business more often to competitors due to price. Through benchmarking studies and some strategy consulting work, Karl knows that his cost structure is not competitive. As a result he has been pushing his team over the last couple of months to find ways to reduce costs. Midwest makes a wide variety of machines designed specifically for the medium to heavy industrial sector that are used in everything from factories, farms, tractors and industrial buildings. Revenue is 3B, with net profit margins around 12%. The CEO had demanded that management look for new ways to find cheaper ways to produce machines. This search has pushed management to comb the globe for alternate suppliers in far away places such as Colombia, Shanghai and India. Karl has also been very demanding with regard to the processes that support all of the operations. In particular he wants to ensure basic activities that do not involve intellectual capital are performed at the lowest cost possible. In particular, he does not want to overpay for labor when it is not necessary. He respects Midwests traditions and the strong sense of community it has with the local town, but he knows that profitability must come first for him and his shareholders. Pressing Issue Karls Six Sigma team has come up with a proposal to move the manufacturing process for the XL292 machine, a critical machine for many of Midwests end products, to India. Also, these results may affect Karls decision on whether to outsource over $300M worth of costs. But before Karl looks at the financial data he wants to have a clear understanding of the pros and cons of outsourcing. Case Questions 1. Develop a structure for thinking through the pros and cons of outsourcing this process to India. Your structure can only cover 5 topics that may or may not concern the business. You can only ask two questions before creating your structure. Explain this model and what you would advise Karl to consider as he reviews the data. 2. After explaining your model, ask for the financial data and calculate the profitability of staying local vs. going abroad to India. Case Interview Preparation Page 1 of 4

3. Using the data, return to your model and explain how it has affected your thinking. You may ask three more questions at this point before concluding with your advice to Karl. Additional Data if Asked Community Midwest is located in a small town in the midwestern USA and has been the largest employer in that town for over 30 years. Unions Midwest is unionized but the union and management have typically been on friendly terms. CEO Personal Incentive If Karl saves the company over $50M this year, he will receive a $1M bonus. Competitors They have been outsourcing for years and benefiting by getting their costs down 1. Framework: Let the candidate drive the case. The candidate should, at this time, draw out a framework. The framework should include most of the major discussion topics in the chart below. Guide for Advising Karl. Use a simple structure to stay logical.
Pre-Calculation Discussion
1. Financials None, reduced hassle in disposing of plant assets Revenue, Cost, TT 2. People Loyalty, best people stay, morale will be up
Elliminating low level jobs may force some people to look to try to advance and build their skills. Most likely save money due to low labor costs and parts

Pro

3. Plant operations Capacity should remain steady 4. Community Unions and community leaders will continue to support Relations Midwest management 5. Technology By producing locally, Midest can keep on top of technical
changes quickly

Unnecessary production may be streamlined resulting in more savings long term.

None.

By going abroad, Midwest will be exposed to better technology and may grow as a result Hidden costs in terms of handling product and dealing with a foreign country may be higher than expected.

1. Financials Midwest will continue to waste profit dollars. Revenue, Cost, TT

Con

US Location India 2. People Good employees still may leave as personal opps diminish. Fearing for their jobs, good people may leave Total Units 10,000 10,000 Labor & Benefits (per hour) 22 7 Idle 4 capacity may cause further expense in local plants 3. Plantto Produce Hours operations Operations are not going to be faced to change and as a 12 result may continue to be high price. $400 Material (per unit) $250 Holding Cost $30 $20 Backlash from the community may destroy value of 4. Community Shipping $12 $44 company. Relations No problem. Import Duty (per unit) 0 $150 Made in USA credit $85 $0
5. Technology No problem.

Cheaper prices may require cheaper technology and as a result, higher prices.

Cost = (Labor Solution: 2. Data and x Hours) + Material + Holding Cost + Shipping + Import Duty - Mfg Credit

Stay $621
10,000 $6,210,000 Savings on $6.2M of costs is Case Interview Preparation about $1.2M or 20%.

$492 10,000 $4,920,000

Outsource

20% savings on $300M is $60M, a very significant number. $60M of savings is about 17% of Midwest's total bottom line ($3B * 12% = $360M profit).

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Additional Questions (see table for answers) 1. 2. 3. 4. What would happen if Indian labor costs doubled? Us production goes to 8 hours? US credit goes to $125? Indian tax goes $200.
US 10,000 22 12 400 30 12 0 85 621 129 21% $ $ 360,000,000 $62,318,841 422,318,841 14.1% 16% $48.8M 14% still above 15% almost the same 00 7 4 250 20 44 150 0 492 India 10,0

Sum Savings Savings % Total profit Savings if outsource all New total profit 1 New profit margin Indian labor costs double Savings if outsource all new profit margin

$ 3,000,000,000 $300,000,000

12%

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We produce at 8 hours Savings if outsource all new profit margin US protection credit now $125 savings if outsource all new profit margin Indian tax goes to $200 if outsource all new profit margin

same as 1 8% $7.3M 12% 15% $45.90 13.5% 13% $38M 13.3%

very low little benefit almost no change threshold small change not great almost too small

3. Recommendations: The client has asked us for our recommendation. What would you tell the client? Here is a possible response: The savings for going abroad of about $1.3 MM is reachable. Based on the discussion of pros and cons of outsourcing to India, it may be a good idea to perform a pilot using the XL292 machine and make sure this part is successful before moving the $300 MM worth of costs to India. It will be important to invest time in communicating frequently and openly with employees in order to keep motivation high. As for next steps, Karl can begin to craft a proposal for the XL292 machine pilot and to begin forecasting costs. 4. Additional Considerations: What are your concerns? Here are some examples: Supplier charge large savings may disappear Government changes will the taxes and credits shift Hourly rate may see a big shift in hours for India

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