APPENDIX A
Paramount Consulting’s Proposal Opportunity at the ABC Company: A Case Study

Dramatis Personae

Stan Gilmore, your boss and a partner at Paramount Consulting
Ray Armstrong, President of ABC Company
Anil Gupta, ABC’s Vice President of Operations
Marcia Collins, ABC’s Vice President of Marketing
Paul Morrison, ABC’s Chief Industrial Engineer
Frank Metzger, ABC’s Plant Manager

February 1: The First Contact

Stan Gilmore, a partner in Paramount Consulting responsible for the firm’s manufacturing practice, just received a letter from Anil Gupta, Vice President of Operations for the ABC Company, a division of Consolidated Industries. The letter states that ABC manufactures and markets a line of major household and commercial appliances, has annual sales of more than US$19B dollars, and has enjoyed a consistent record of growth. Future growth, however, might be curtailed by insufficient manufacturing capacity. ABC, the letter continues, wants to engage a consulting firm to help it answer its questions about manufacturing capacity. Paramount has been recommended to ABC, and if Paramount is interested in pursuing a possible relationship, it should contact Gupta.

Gilmore is eager to pursue this opportunity because he recognizes ABC’s brand name as having an outstanding reputation for product quality and delivery performance and knows that ABC holds a significant share of its market. Furthermore, Consolidated Industries is well known for acquiring and developing companies that hold dominant positions in their respective markets. Gilmore is confident that Paramount can help.

Gilmore calls Gupta to affirm that Paramount can indeed provide the needed consulting assistance and welcomes the opportunity to do so. According to Gupta, ABC plans to meet separately with representatives from each of four consulting companies that survived its initial screening. During those meetings, ABC will discuss the need for the study and provide the basic information necessary for the consultants to prepare their proposals. Gilmore asks who will represent ABC at the meeting, and Gupta says that he and the following will attend:

Marcia Collins, Vice President of Marketing

Frank Metzger, Plant Manager

Paul Morrison, Chief Industrial Engineer

They conclude their conversation by agreeing to meet the following week at ABC’s division office in a large midwestern city.

February 2: Research

Gilmore calls in one of his group’s research associates and tells her he needs background data that will give him a better understanding of ABC’s operations. She immediately embarks on a LexisNexis search, a review of Consolidated’s annual and 10K reports, a study of S&P’s industry reports, and a review of an industry report from the research department of a local brokerage firm.

As they analyze the results of the research, Gilmore can see that Consolidated is indeed a very successful company. Headquartered in New York City, it ranks in the upper quartile on most of the factors used by Forbes to measure the success of major industrial companies, and ABC contributes significantly to that success. ABC’s products are distributed through a strong national network of distributors and dealers and also to major department store chains that market them under their private labels. Its products enjoy high brand-name recognition and have a well-established reputation for product quality. Moreover, the division is recognized within the industry for providing superior customer service.

Industry forecasts indicate that the overall market will grow modestly over the next several years and that relatively little change in product configuration is expected. The forecasts also show that ABC is expected to retain its share of the market, which is highly competitive. Just four major producers accounted for 86 percent of total shipments the previous year. Because of the favorable characteristics of its product line and its high service levels, ABC has consistently increased its market share and participated fully in a modestly growing overall market driven by replacement demand, residential and commercial construction, and general economic conditions.

One of the concerns of the industry is the increasing cost of distributing its products. Apparently, the configuration of the product and its weight yields a bulk/weight ratio that makes distribution costs a major component of total operating costs. Furthermore, geographic demand for the product is following continuing demographic shifts to the U.S. South, Southeast, and Southwest. Industry reports also show that most of ABC’s production takes place in one midwestern city but that the manufacture of some special-purpose units in the product line occurs in two smaller satellite facilities in relatively small midwestern cities.

With this basic understanding, Gilmore looks forward to the meeting to learn more about ABC’s situation. He has already decided that he will take along one of his associates: you.

February 9: Meeting with Gupta, Collins, Metzger, and Morrison

At the meeting, Gupta introduces the attendees identified in the phone conversation. He explains that the four of them will serve as ABC’s consultant-selection committee along with the division president, who is away that day at Consolidated’s headquarters in New York.

Gupta introduces Marcia Collins, VP of Marketing, who sets the stage for the meeting. Collins joined ABC two years earlier after spending four years as director of marketing for a large national grocery products company. Prior to that, she received an undergraduate degree from Northwestern and an M.B.A. from its Kellogg School. Collins’s basic discussion document is a chart that shows two market forecasts for ABC, one labeled “optimistic” and the other “conservative.” (See Figure A.1.)

Obvious from the chart is that ABC’s forecasts assume its ability to continue to increase market share. Most revealing is a horizontal line on the forecast graph that represents the capacity of the existing production facility. It shows that in less than three years, existing capacity is exceeded even in the conservative forecast—beyond that point, the shortfall in production capacity becomes progressively larger.

Gupta next introduces Frank Metzger, Plant Manager, explaining that he has been with ABC his entire career. Metzger worked as an hourly employee in the press and maintenance departments before becoming press department foreman. Gupta stresses that Metzger was highly successful in the press department and succeeded him as plant manager three years ago when Gupta was promoted to VP of Operations. Gupta asks Metzger to describe the current situation related to utilizing production capacity.

FIGURE A.1 ABC’s forecasted sales could exceed manufacturing capacity in less than two years.

According to Metzger, the plant is meeting its current production schedules by working two full shifts of operation, with some overloaded work centers working a third shift. Most scheduled equipment maintenance is also performed on the third shift so that little overtime premium is incurred because of weekend work. While showing the group a site drawing of the current facility, Metzger describes how the site is well utilized with manufacturing and office space, truck docks, and parking areas. “Let me point out,” says Gupta, referring to the drawing, “that the site can’t be expanded because it’s bounded by railroad tracks in one direction, a major thoroughfare in another, and by residential areas in the other two directions.”

“But,” Metzger counters, “there’s still some space available within the current site into which the present manufacturing facility could expand. Most of ABC’s additional capacity requirements could be met by expanding the current facility into the space remaining.” He suggests, however, that to meet the projected forecasts they would probably have to operate a full third shift.

“Are there any downside risks to operating a three-shift schedule?” Gilmore asks.

“It would be a challenge,” Metzger admits, “because maintenance work would have to be done on the weekends, in which case, we’d incur additional overtime costs.”

Gilmore pursues the issue: “Could productivity and quality on the third shift be expected to attain the level of the other two shifts?”

They would undoubtedly experience additional absenteeism and turnover, according to Metzger, and might even have some difficulty in recruiting for that shift. But even if operating costs are higher, ABC’s capital investment would be considerably lower by expanding the existing facility:

“It’s also possible,” Metzger says, “that we could hold expansion space to a minimum by using outside storage for raw materials and finished goods, if necessary.”

Gupta introduces Paul Morrison, ABC’s Chief Industrial Engineer, to apprise the group of the manufacturing capacity situation. Morrison has an undergraduate degree in industrial engineering from Michigan and a master’s in that discipline from Georgia Tech, where, as a graduate assistant, he taught undergraduate courses in quantitative methods. He joined ABC three years ago, and one of his recent projects was to develop a computer model to enable the division to improve its distribution methods and to track and control those costs, which are an important part of their total operating costs.

According to Morrison, he and his department have not studied the capacity situation to any great extent because they have been occupied in helping the production departments maintain productivity levels so that they can meet increasing schedule demands. However, after examining current work center loads to judge the amount of new equipment that will be required and estimating the amount of additional storage space that will be needed for higher production levels, he questions whether the space available on the existing site is adequate:

“Even though investment costs might be lower, I would be hesitant to put all of ABC’s eggs in one basket, giving us no protection against natural catastrophes or labor difficulties. Furthermore, ABC’s markets are growing faster outside the Midwest.”

He suggests that even if the projected forecasts could be satisfied at the present site, if they were able to increase market share further, or if the overall market grew more rapidly than expected, they would be facing the same dilemma again in the near future:

“In my view, the consultants must carefully define what ABC needs in terms of additional manufacturing capacity, develop logical alternatives to meet these needs, and then quantitatively and qualitatively evaluate those alternatives.”

Gupta thanks them all for their input and remarks that one of Morrison’s points is especially important—that virtually all of ABC’s production occurs at this facility, which makes ABC somewhat vulnerable. He also expresses some surprise that no one has mentioned another possible option:

“What about our two satellite manufacturing facilities? Neither one is on a site large enough to accommodate our full expansion requirements, but maybe one of the product lines could be relocated to one of these sites, thereby freeing up space at the existing facility.”

However, he agrees with Morrison that they will look to the consultants to develop possible alternatives and that those alternatives will have to be analyzed very thoroughly and convincingly, especially since ABC most likely will have to make a major capital investment.

Gupta asks Gilmore what else they can provide that will help him prepare the proposal. Gilmore requests copies of the site plan; the market forecast data; samples of various productivity, work center loading, and scheduling reports; equipment lists; and manning tables. He also asks Gupta to identify the other three consultants who will bid on the project. Gilmore recognizes one of Paramount’s competitors, which has strong, diversified consulting capabilities. Not recognizing the other two, he wonders if Gupta will tell him a little about them. According to Gupta, they are local companies that specialize in facilities planning, plant layout, materials handling, and productivity improvement. One of them helped ABC with a materials handling problem in the past.

“How satisfied were you with their work?” Gilmore asks.

Gupta responds briskly, but not curtly: “Satisfied enough to ask them to bid.”

Gilmore knows that the materials he requested will provide him a good understanding of ABC’s current situation related to manufacturing capacity. In addition, to make certain that Paramount’s proposal will be entirely responsive, Gilmore remarks, he would like to meet individually with each of the people present to understand their perspectives better and to probe the advantages and disadvantages of the alternatives they had discussed as well as some others that might be worth considering. During that visit, he would also like an extensive tour of the manufacturing operations.

Gupta is pleased with Gilmore’s willingness to take the additional time to do this and, after polling his group, suggests that the following week would be convenient. He also mentions that Ray Armstrong, ABC’s president, will be back in the office then and Gilmore probably could meet with him. Gilmore says he will call each person to schedule a specific time. He spends the balance of the meeting telling the group about Paramount’s overall capabilities, history, and reputation; its specific expertise in the areas relevant to the proposed study; and the capabilities of its staff. He then describes some consulting assignments in which Paramount had been successful in helping clients with similar problems.

The two of you leave the meeting feeling that you have a good preliminary understanding of ABC’s capacity situation and that you have established a reasonable rapport with the group. However, you recognize that you need to know much more about ABC’s operation to scope the proposal properly. This, you both feel, can be accomplished through Gilmore’s interviews. You also agree, however, that a major objective of the interview process should be to better understand the people on the selection team, including their interests and perceived study objectives, and how the results of the study could affect them. That will enable you to make the proposal responsive to the needs of each member of the team.

February 14: Individual Meetings with the Major Players

“I believe that your market forecasts will play a major role in the proposed study.” Gilmore is talking to Collins. “So I would like to understand better how they were developed.”

“Most of my data,” she says, “come from reports published regularly by the industry trade group, the Association of Home Appliance Manufacturers, in which ABC participates. These data were supplemented by others from Appliance Design surveys, Standard & Poor’s industry surveys, and ABC’s own historical data.” Because there is a good deal of consistency among the data from the different sources, Collins is confident that her conclusions on the overall industry forecasts are valid.

“However,” she points out, “my development of optimistic and conservative forecasts is based on my interpretation of ABC’s position in the market.”

She explains that the division’s steady increases in market share are due to its ability to control costs, maintain quality, and provide a high level of service to its customers:

“The optimistic forecast assumes that ABC will be successful in maintaining those positions; the conservative forecast assumes some slippage in market share.”

According to Collins, maintaining or increasing market share is important to ABC’s success:

“Not only does it affect our operating results, it is also a performance measure in our bonus plan. Furthermore, it affects the level of autonomy we enjoy as well as the ease with which we can obtain capital funds from Consolidated.”

Gilmore asks Collins to assess the various possibilities for expanding capacity that were discussed the previous week. Collins isn’t really knowledgeable about manufacturing operations, she says, and has little sense of just how many additional resources would be required. However, she is concerned about adding capacity entirely at the existing site:

“High service levels are important to increase market share, and ABC’s current service levels could be jeopardized if all manufacturing were in one location.”

Her reasoning appears sound. First, as she says, ABC’s major markets are shifting away from the Midwest, resulting in increased delivery times; second, if there should be a fire or another catastrophe, its reputation for good service would certainly deteriorate.

“I feel so strongly about maintaining or improving current service levels that I think service levels should be a major criterion for evaluating the various alternatives for expanding capacity.”

Metzger’s office is centrally located in the manufacturing area of the facility. As Gilmore enters, Metzger immediately apologizes: He has to delay their meeting for at least an hour to meet with his maintenance, press, and assembly department foremen. One of the major fabrication lines has broken down, and they have to find a way to complete a production run because the customer’s trailers are waiting at the shipping dock. In the meantime, he asks his assistant to give Gilmore a tour of the plant.

Gilmore is immediately impressed with the excellent housekeeping in the plant. Aisles are clear and well marked, storage areas are orderly with good use of clear height, individual work areas are clean and well organized, and there are many examples of point-of-use storage where materials are stored close to and are easily available to the production operators. The assistant explains that each operator is responsible for his own workplace—that housekeeping personnel are used only to maintain major travel aisles. Gilmore is also impressed with the production equipment, which appears reasonably state of the art. The assistant remarks that the industrial engineering group has an aggressive program to continually evaluate and upgrade equipment and that the plant engineering department is adept at designing and installing special-purpose equipment.

When Metzger returns, he again apologizes profusely and explains that they were able to make some equipment substitutions that will minimize the down-time on the assembly line as well as increase the rate of delivery of the finished product to the customer’s trailers. Gilmore compliments Metzger on the general appearance of the manufacturing facility and comments that it could be a model for many of his clients’ facilities. He asks Metzger to expand a bit on his background as portrayed the previous week at the initial meeting.

Metzger augmented his high school education with numerous in-house courses offered by ABC. He broadened himself beyond those offerings by taking courses in human relations, shop supervision, quality control, and advanced shop math at the local community college. Those efforts served him well because he was promoted to maintenance group leader and then succeeded the press department foreman when that individual became ill. As he explained last week, he was fortunate to be selected to replace Gupta as plant manager when Gupta was promoted.

Gilmore would like to hear more about Metzger’s concept of increasing capacity at the existing site. Metzger replies that although he doesn’t know just how much additional capacity would be needed, there is quite a bit of land available on the present site for expanding the manufacturing building. Although some of that space is now used for employee parking, he thinks this could be overcome by double-decking the remaining parking area. If the present facility were expanded, he would have the opportunity to promote some well-deserving first-line supervisors into positions of greater responsibility. The capital requirements for that option would probably be less, and he has heard that Consolidated is becoming less generous in releasing funds to the competing divisions.

In Morrison’s office, located in the same area, Gilmore remarks that the caliber of the equipment he saw on his plant tour was evidence of his group’s successful program to continually monitor and upgrade major production equipment. Morrison thanks him and shows him a stack of reports Gilmore had requested at last week’s meeting. They discuss the reports in some detail, and Morrison suggests that the documents could be very useful in determining ABC’s capacity requirements. Gilmore readily agrees.

Gilmore compliments Morrison about some of Morrison’s comments last week: Several of the factors that would have to be considered in the proposed study were, in Gilmore’s experience, right on the mark. But Gilmore wonders about a factor not discussed:

“What about distribution costs?” he asks. “Distribution costs are a major component of total operating costs throughout the industry.”

“These are very important to the division,” Morrison says, “and you’re right—they weren’t sufficiently discussed last week. Because of the weight and configuration of our product, these costs are virtually the same as those for fabricating and assembling our product. They are such a concern,” he adds, “that my group worked with the information systems and distribution managers to develop a computer model. This model enabled us to analyze different logistics strategies, select the best, and then monitor the costs of distributing product to our nearly 150 demand points on an ongoing basis.”

Morrison explains that this model had been properly validated and could be used to determine distribution costs for different manufacturing capacity alternatives. The model had been developed because Armstrong was concerned about escalating distribution costs and their potential impact on profits. Learning that Armstrong planned to engage a consultant to develop the model, Morrison discussed with the systems and distribution managers the possibility of developing such a model in-house. They agreed that it could be done if Morrison, because of his academic background, would lead the project. They subsequently met with Armstrong and convinced him that the in-house project was feasible and cost-effective. Armstrong also saw that the project would provide a beneficial learning experience for his managers, and so he gave his approval to proceed. Morrison’s team overcame a number of problems (which he had anticipated) and successfully completed the project, although it took four months longer than expected.

“I should tell you,” Morrison confides, “that I recommended to Armstrong that ABC also conduct the capacity expansion study in-house. But Armstrong believed that I and my group were stretched too thin, that additional staff would have to be hired, and that the division needed to address its capacity issues without delay. Armstrong acknowledged that my group had proven capabilities for the study, but he held firm to his decision to use outside consultants. At this point, I am only interested in seeing the study done, done right, and completed expeditiously.”

He thinks the study will be complicated because there are many different alternatives, each with its own devotee. And yet these alternatives are being tossed around without the knowledge of just how much additional capacity is needed.

“So let me repeat what I said last week: One of the initial major tasks of the consultants will be to carefully define capacity requirements. Then, alternatives for satisfying those requirements can be developed and evaluated. The development of sound, agreed-upon evaluation criteria would be very important, too, to overcome any built-in prejudices that people might have in favor of their own ideas.” Gilmore tells Morrison that he completely agrees.

Gilmore mentions that he is meeting with Armstrong later that afternoon and asks if Morrison can tell him a little about Armstrong’s background. Armstrong, it turns out, was recruited from outside the company and has a marketing and financial background. Armstrong became vice president of marketing at a large manufacturing company and was recruited away from that position by a search firm to fill a CEO spot at another company. A few years after that, Consolidated recruited him to head ABC. Morrison doesn’t really have that much involvement with Armstrong but thinks him open-minded, analytical, and firm in his decisions once he has heard and thoroughly considered all sides of an issue.

Gupta’s office is near the conference room in which they had met last week. He receives Gilmore very cordially and asks him about his interviews and plant tour. They were very informative and helpful, Gilmore responds, and he is beginning to get a good “feel” for ABC’s operation, its organization, and its manufacturing capacity situation—background that will help Paramount prepare a responsive proposal.

Gilmore adds it would be helpful if he knew something more about the vice president’s background. After graduating with a degree in industrial engineering from Purdue, Gupta replies, he joined ABC’s I.E. Group. During his several years in that group, he worked in many different manufacturing areas, including plant layout, process engineering, equipment justification and selection, wage incentives, and job evaluation, among others. When the incumbent plant manager announced his retirement, he was offered the position, which he readily accepted. As plant manager, he set several goals for the plant, including meeting the continually increasing production schedules, controlling costs by improving manufacturing methods and processes, maintaining and improving product quality levels, and fostering harmonious employee relations. He believes he has been reasonably successful in meeting those goals; apparently, so did top management because after about five years, he was promoted into his current position and became part of the president’s management team.

Gilmore asks Gupta to tell him about ABC’s satellite manufacturing operations since he mentioned them last week during their discussion of capacity expansion alternatives.

“They are relatively small operations in two rural cities,” he says, “producing certain low-volume, special-purpose units in the product line. Both of the facilities are on plant sites large enough to accommodate some building expansion.”

But the manufacturing workforce in both cities is rather small and might not support a major expansion. His supervisory groups there are relatively thin and would have to be “beefed up.” But an expansion to accept a limited part of the product line in addition to expansion at the existing facility probably would enable ABC to meet its forecasted demand for several years.

Gilmore finds Armstrong to be very congenial, with a demeanor that reflects his guidance of a key and successful division at Consolidated. They spend some time discussing business conditions generally and Consolidated and ABC in particular. Armstrong asks Gilmore to tell him about Paramount, which he is pleased to do since Armstrong hadn’t attended the previous week’s meeting.

Gilmore then leads the discussion to the proposed study. Armstrong believes a sound, comprehensive study is critical to the future of the division. Only by providing manufacturing with the resources it needs to operate cost effectively and to maintain and improve product quality and service levels can the division hope to maintain its reputation, compete effectively in the marketplace, and assure success for the company and its employees. He wants to initiate the study quickly because he knows that if, for example, a new facility is required, it probably will be close to two years before it reaches full production. And, he points out, some critical work centers are already operating on a third shift. Gilmore replies that Armstrong’s time estimates are realistic and that Paramount can initiate the study quickly.

Armstrong again emphasizes that the study would have to be thorough and convincing. He tells Gilmore that although he operates ABC with a great deal of autonomy and that although ABC is very successful, it—like other Consolidated divisions—has to compete for funds “at the company trough.”

“Therefore, as you’ve probably been told, the study will have to be well documented and the returns from the investment clearly defined, because an expansion project of this probable magnitude will require capital funding by Consolidated, and our request will receive close scrutiny at corporate headquarters.”

Others had remarked about the study needing to be thorough and convincing; this was an additional reason why.

Gilmore asks Armstrong what deliverables he expects from the study. Armstrong and his management team have given considerable thought to that topic; indeed, the depth and diversity of their discussions convinced him they would need outside assistance. He goes on to say that the team agreed that the study would definitely have to answer at least the following questions:

What will it take in terms of space, equipment, and manpower to meet both the conservative and optimistic forecasts?

How many of those resources can be provided by expanding the current facility?

Even if those resources can be added at the present location, does it make economic sense to do that or to make the investment elsewhere?

Can service levels be increased and transportation costs reduced at a new geographic location to provide greater leverage in selling to mass-marketed customers?

What ROI will result from the substantial new investment?

Which alternative generates the greatest profit during the forecast period?

Gilmore responds that these are important and realistic questions and that in judging different alternatives, certain qualitative analyses also would have to be made regarding labor supply, union climate, available technical training assistance, and the like. Armstrong acknowledges this and says he wants to leave Gilmore with one additional point before they end their discussion. He explains that even though they are seeing a shift in market demand away from the Midwest, they have no intention of relocating the existing facility because of its central geographic location and experienced workforce, the significant cost involved in relocating many pieces of equipment and numerous personnel, and the large “sunk cost” in land, building, and fixed equipment.

Gilmore says he appreciates that comment because in the back of his mind he had considered these factors. He thanks Armstrong for his time and tells him that he can probably have a proposal to him by the end of the following week. Armstrong instructs him to send the proposal to Gupta, who is heading the selection committee.

February 15: Next Steps

When he returns to the office the following day, Gilmore meets with you to brief you on his second visit to ABC. Gilmore wants you to spearhead the preparation of the proposal, which he will help you with as time is available.