Cyclical industries produce some of the hardest cases, because the client's problem is partly the calendar. This management consulting case study puts you in front of a commodity chemical maker with little cash, old plants, and a price trough on the way.
Company Overview
Your client is a U.S. chemical manufacturer in the commodity chemicals business with a single-digit market share. It recently emerged from bankruptcy and has limited capital available. The chemicals business is cyclical, with pricing cycles of seven years. The company is worried about how it will survive 2008, when it hits the bottom of the pricing cycle. The question is how this company can become sustainable, if that is possible at all.
Problem
The chemical manufacturer has hired you to develop a new business model, either through:
- acquisition into a non-cyclical chemicals market,
- the manufacture of new products and services for customers, or
- your own recommendations.
Market Analysis
- The market is extremely fragmented, with many rivals that are either independent businesses, small conglomerates, or minor divisions of bigger ones.
- Customers are extremely dispersed, with each buying little more than 10% of the chemical manufacturer's output each year.
- The cost of "non-green" raw materials is rising as raw material suppliers progressively switch to "greener" processes and products without expanding their overall capacity.
- Your client currently has five plants: three are performing well, one has had recent issues with quality consistency, and one has historically been a poor performer in terms of capacity utilisation. All plants are over 10 years old and production is spread evenly across them.
- Government taxes and regulations on shipping have recently been enacted due to pressure from environmental groups.
Current Products
The chemical manufacturer produces two chemicals: X and Y. Chemical Y is a by-product of Chemical X with a weight ratio of x = 1.5y (each 1.5 tons of X manufactured results in the by-production of 1 ton of Y).
Financial Analysis
- In 2006, 100,000 tons of X were manufactured at a profit of $5/ton, resulting in a profit of $500,000 for Chemical X. The manufacturing of X resulted in the by-production of around 70,000 tons of Chemical Y, at a cost of $0/ton and a profit of $100 × 70,000 = $7,000,000 for Chemical Y, giving a total profit of around $7,500,000 for both chemicals.
- In 2005, the company generated a profit of $100 × 100,000 = $10,000,000 for Chemical X, plus an additional $175 × 70,000 = $12,250,000 for Chemical Y. This amounts to a total profit of $22,250,000 in 2005, and therefore a significant loss in profit year on year.
Recommendations
- Examine the underlying causes of the sales and profit cycles, such as the drivers of rising prices, the decrease in the availability of raw materials, and the new restrictions implemented by the government.
- Examine the benefits and drawbacks of acquisition, partnership, licensing, selling one or more plants, and organic expansion via the development of new goods and services (preferably with a pricing cycle opposite to that of X and Y).
- Consider opportunities to improve the current business model, such as increasing production of X and Y when the pricing cycle is up, and exploring the trend of raw material suppliers turning to greener products.
- Investigate the possibility of passing the price increase along the value chain, and of differentiating the products as "green" and charging a premium.
Want to upskill yourself? If yes, then join our free workshops: jobaajlearnings.com/workshop
Practise More Consulting Case Studies
- Specialty chemicals growth strategy
- Military aircraft industry – surviving a shrinking market
- CD stockouts – an operations case
- Timed prep cases for full interview practice
