Improving the sales revenues and profit of an automobile supplier
Your client is an automobile supplier of motorcycles and chassis parts for major car manufacturers. Along with its headquarters in Baden-Württemberg, the company has two other plants in Germany and one in France, Romania and Mexico. The company employees approx. 5,000 employees worldwide, 3000 of which active in Germany. Having survived the global financial crisis, the company is working at full capacity once again in a five-shift operation. However, sales revenues and profit are below the pre-crisis level. The Board of Directors has asked us to investigate the cause of the problem and to come up with a solution.
In the first step, briefly summarize the situation described and evaluate the relevance of the existing information. Ask questions to further understand the client’s situation – the problem definition usually doesn’t contain all the relevant information. These questions could include, for example:
- Has the competition changed?
- How have the prices for raw materials developed?
- Do all plants produce different products?
- Do exchange rate effects play a role? etc.
- As the customer is working at full capacity, the falling sales revenues are due to a decline in prices.
- The declining profit is a result of the cost structure not being adjusted to the reduced prices.
The reasons for the reduced profit can be traced back to the cost side on the one hand and back to the sales revenue side on the other. To structure and analyze the problem in individual components, the following formula should be observed:
Profit= Sales revenues (Quantity x Price) - Costs (Costs fixed + Costs variable)
Adhere to this structure when drafting the solution. Ask the interviewee targeted questions to help you come up with the main lever for sales revenues and costs
Costs are made up of fixed and variable costs. The same fixed costs are incurred regardless of the production quantity or the activity level (e.g. taxes, insurance, maintenance, depreciation, interest, salaries). Variable costs depend on the production quantity and level of activity, e.g. raw materials, auxiliary materials, energy, wages. To better structure the basic fixed and variable costs, the value-added chain from Porter can be used:
- First analyze the value-added chain in the production area and determine the degree of vertical integration and the biggest cost drivers. Use these findings to prioritize your next steps.
- You should also ask whether the costs have merely remained constant or if they have actually increased. This can be the case, for example, if an elementary raw material becomes more expensive due to high global demand, but this price increase cannot be passed on to the buyer to the same extent, or if R&D costs and tool costs are no longer paid by the OEMs (original equipment manufacturers).
- You can suggest carrying out external and internal benchmarking. Firstly, all production sites of the company should be compared with one another in order to identify very cost-intensive sites. Secondly, a comparison with the main competitors should be carried out in order to set long-term goals for the operating efficiency of the factories. In this context, discuss the advantages and disadvantages of individual sites as well as the possibility of transferring certain production sites to more cost-efficient locations or outsourcing individual production units. However, don’t forget to draw attention to the costs and risks of such a decision.
Sales revenues = price x quantity. The information that the customer is working at full capacity means that you can focus on the analysis of the price. First ask how the client’s price structure has developed over the last 3 years.
- Then determine the price elasticity of the individual products. An increase in prices may then be suggested, e.g. for products with a high USP.
- Other factors that you could look at in more detail with respect to sales revenues include:
- Ongoing price reductions during production (generally about 3-4 % p.a.)
- No price adjustment for raw material increases
- Changed product portfolio (e.g. discontinuation of highly priced products)
Conclude the case with a short summary and an overview of the most effective recommendations on how to proceed.