Booz Allen Hamilton

Crack the Case

Beirut, Lebanon
March 2000

This document is confidential and is intended solely for the use and
information of the client to whom it is addressed.
 The Story

The Plot:

 A friend of yours runs a family owned business that produces engine parts and sells them to
major car manufacturers

The Problem:

 Ford, a major client, gave him one month notice to present a plan to cut down prices by 50% or
else...

 They will take their business to a newly established competitor located 100km away

The Situation:

 Frightened by the idea of loosing a life long business, your friend seeks your professional
advice

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 Approach
 Show a broad lateral view

 Identify major issues and assign priorities

 Probe into the most important issue

 Ask relevant questions

 NEW COMPETITOR

 PRESSURE: 50% PRICE CUT

 URGENCY: IN ONE MONTH

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 Ask relevant questions
Q. What is your product portfolio? And unit prices?

A. Three products:
– Door locks 10% 25$
– Mirrors 20% 15$
– Engine parts 70% 100$

Q. How important is Ford as a customer for engine parts?

A. Ford is the only client for engine parts

Q. What are the unit costs? Cost structure (Fixed vs. Variable costs)

A. Fixed Variable
– Admin & overhead 7$
– Labor 5$
– Labor 2$
– Material 60$
– Other 1$
– Packaging & Transport 5$

10$
70$

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 ASK RELEVANT QUESTIONS

Q. What do you know about your competitor’s product?

A. Reverse Engineering showed a different design

Q. Does your competitor use a different design?

A. Reverse Engineering showed a different design

Q. Does this design use less material? By how much?

A. Yes. By around 50%

Q. What impact on efficiency of material usage does the design have?

A. Eliminate 5% material scraps

Eliminate 5% defective parts

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 Explore solutions
 Negotiate with material supplier for reduction
– Can have 10% discount

 Consider other suppliers (not an option)

 Consider other materials (not an option)

 Consider product redesign to save on materials

– Eliminate 5% material scraps
– Eliminate 5% defective parts
– New design can save 50% of material per unit

 Lower overhead (3$)

 Lower margin (4$)

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 Result
 30.0$ materials saved due to redesign (50% of 60$)

 3.0$ negotiated price cut (10% discount on 30$)

 1.5$ materials saved by better process (5% defective)

 1.5$ materials saved by eliminating scrap (5% scrap)

 3.0$ reduced overhead

 4.0$ reduced margin

 43.0$ TOTAL PRICE CUT

43% PRICE CUT

STILL BELOW THE REQUIRED 50%

CAN THE 7$ PRICE DIFFERENCE BE JUSTIFIED

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