Case: SteelCo

Case Question
A large steel manufacturing company based in Lübeck, Germany called SteelCo found itself in trouble. They are facing pressure
from competition who offers lower prices. SteelCo is currently exploring the option to shut down one of its three production units to
consolidate operations and reduce total operating costs. You have been asked to identify which production unit the client
should close down in order to reduce their total operating costs.
What factors will you take into account?

Interviewer to announce: “This is the Q&A stage, you can ask any clarifying questions now”
Data to be shared only if requested and necessary
● SteelCo is a global steel manufacturing company that has operations across Germany.

● Its competitors include other major steel manufacturers who offer similar products at lower prices

● SteelCo supplies products to several industries including shipyards, automotive, construction and transportation

● SteelCo is operating in a growing steel market with a 5 Yr CAGR of 2.5%

● Share Exhibit 1 for better visualization of sites

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Case: SteelCo

Production Production Direct Shipping Route via River Shipping

site A site B Location

River Travel Bay of Lübeck

Shipping Production Shipping

Location site C Location
Direct Shipping Direct Shipping
Route via Trucks Route via River

● A,B and C are the 3 production units of SteelCo

● Shipping is managed via road trucks and canal

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Case: SteelCo
Framework
Interviewer to announce to the following: “This is the framework stage, create a framework for this case”
Factors Site 1 Site 2 Site 3

Fixed costs
● Maintenance
● Utilities
● Rent
● Depreciation
● Labour

Variable costs
● Raw materials
● Transportation
For each site, collect the following
information to evaluate
Capacity & Utilization rate

Product mix
● Revenue / product
● Margin

Consequences of closing a site

● Monetary, i.e. layoff compensation
● Non-monetary, i.e. union negotiation, government regulations, impact on the
culture

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Case: SteelCo
Question 1
What should SteelCo consider when choosing which production unit to close?

Interviewer to announce to the following:

“This is the case solving stage”

Answer

● Production Costs

● Shipping Costs

● Process Capability and access to technology

● Potential investment required to accommodate increase in production

● How will the integration be planned and executed?

● Will testing be required for products being moved from one facility to the other?

● If we reduce workforce, how will this affect the morale of the company?

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Case: SteelCo
Question 2
Please come up with a new production plan for SteelCo and the impact on their total costs. Share Exhibit 2.
Additional information if asked to be shared:
● Carbon Steel, Alloy Steel and Stainless Steel are 3 types of advanced steels
● Production units A and C can produce a maximum of 0.6 M tons of Stainless Steel (1 ton = 2,000 lbs)
● Production unit A can produce a maximum of 2.4 M tons of Carbon Steel
● Stainless Steel is growing due to high demand from automotive and construction companies

Exhibit 2
A B C
Year Built 1975 1950 1965
Production Capacity 4 M tons 8 M tons 2 M tons
Utilization 80% 90% 80%
Number of Employees 1000 800 600
Workforce Unionized Non-unionized Unionized
Type of Products Manufactured
Carbon Steel 1.8 M tons 5.2 M tons 1 M tons
Alloy Steel 1 M tons 1.4 M tons 0 M tons
Stainless Steel 0.4 M tons 0.6 M tons 0.6 M tons
Production Cost $300 / ton $100 / ton $250 / ton
Major Customers Automotive, Construction Construction, Transportation Automotive, Construction

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Case: SteelCo

Exhibit 2
A B C
Year Built 1975 1950 1965
Production Capacity 4 M tons 8 M tons 2 M tons
Utilization 80% 90% 80%
Number of Employees 1000 800 600
Workforce Unionized Non-unionized Unionized
Type of Products Manufactured
Carbon Steel 1.8 M tons 5.2 M tons 1 M tons
Alloy Steel 1 M tons 1.4 M tons 0 M tons
Stainless Steel 0.4 M tons 0.6 M tons 0.6 M tons
Production Cost $300 / ton $100 / ton $250 / ton
Major Customers Automotive, Construction Construction, Transportation Automotive, Construction

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Case: SteelCo
Answer: Exhibit 2
The interviewee should be able to correctly identify the new production plan.

The first step is calculating current production levels at each of the 3 production units.

After the interviewee has identified the correct spare capacity, guide the interviewee to develop the new production plan
for each production unit with the goal of closing 1 production unit.

A B C
Production Capacity 4 M tons 8 M tons 2 M tons
Utilization 80% 90% 80%
Actual Production 3.2 M tons 7.2 M tons 1.6 M tons
Spare Capacity 0.8 M tons 0.8 M tons 0.4 M tons

New Production Plan

Carbon Steel 2.4 M tons 5.6 M tons 0 M tons
Alloy Steel 1 M tons 1.4 M tons 0 M tons
Stainless Steel 0.6 M tons 1 M tons 0 M tons
Candidate answer marked in blue dotted line

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Case: SteelCo
Answer: Exhibit 2
The interviewee should correctly allocate production by production unit

This requires taking into account the capacity constraint for Production Units A, B and C for production of Stainless Steel and
Carbon Steel and the cost of production per production unit.

Therefore the correct recommendation is to close Production Unit C.

The interviewee should also correctly identify the new production costs

● Old production costs = $ 2080 M

– Production Unit A – Total tons: 3.2 M, Total cost: 3.2 M tons * $300 / ton = 960 M
– Production Unit B – Total tons: 7.2 M, Total cost: 7.2 M * $100 / ton = 720 M
– Production Unit C – Total tons: 1.6 M, Total cost: 1.6 M * $ 250 / ton = 400 M

● New production costs = $ 2000 M

– Production Unit A – Total tons: 4 M, Total cost: 4 M tons * $300 / ton = $1200 M
– Production Unit B – Total tons: 8 M, Total cost: 8 M * $100 / ton = $800 M
– Production Unit C – Total tons: 0 M, Total cost: $0 M

So although SteelCo is saving $80M by closing one production unit, it requires running the other two production units at
full capacity. It also requires shutting down an unionized facility and SteelCo may face obstacles to successfully close it
down.

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Case: SteelCo

Exhibit 3

A B C
Via River 0 $105 / ton $ 100 / ton

Via Truck 0 0 $ 50 / ton

To Production Unit $ 200 / ton * includes all costs 0 0

● Production Unit A ships products to production units B or C to ship to final customers

● For production unit C, equal amount of steel is shipped via canal and truck
● Above costs represents total shipping costs for each production unit.

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Case: SteelCo
Answer
Based on the information presented in the Exhibit, the interviewee should be able to observe the following:

● Shipping cost for Production Unit A is the highest

● Although it is highest, it should not change the decision of SteelCo to close Production Unit C based on production
constraints

● An advanced interviewee will quickly recalculate the total costs saved after taking into account the shipping
costs for each production unit

● Old Operating Cost with 3 Production Units (Including Shipping Costs) - $3.716 B
– Production Unit A - $1600 M (960 M (calculated before) + 3.2 M x 200$)
– Production Unit B - $1476 M (720 M (calculated before) + 7.2 M x 105$)
– Production Unit C - $640 M (400 M (calculated before) + 1.6 M x 150$ (see slide 8))
● New Operating Cost with 2 Production Units (Including Shipping Costs) – $3.640 B
– Production Unit A - $2000 M
– Production Unit B - $1640 M
– Production Unit C - $0 M

Savings of $76M

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Case: SteelCo
Question 4
What factors should SteelCo consider when they are integrating different production units?

Possible ways to address this challenge

● Does the new labor force have the right skills to operate on new machinery or technology that might exist in a different
production unit?
● Are we going to layoff any of the workforce? If yes, how many and how will the compensation be structured?
● Will any of the workforce be relocated to another production unit?
● Is there any investment that would be required to ensure production units can run at 100% utilization?
● How is employee morale affected by closing of 1 production unit. How can SteelWorks mitigate loss in employee
morale?
● Will customers care if products are being shipped from a different production unit?
● Is there a need for a testing phase to accommodate production of new products?
● Are production units setup to accommodate increase in production and manpower?
● How will SteelCo deal with Union issues?
● What should SteelCo do with the truck fleet used to ship steel from Production Unit C?

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Case: SteelCo
Question
What is your final recommendation for the client?

Interviewer to announce to the following:

“This is the recommendation stage, create a recommendation for this case”

Recommendation
Recommendation: Close production Unit C in order to reduce total operating cost for SteelCo.
Reason: It will result in $76M savings.
Risks
● Loss of employee morale
● Production Units may not be able to operate at 100% utilization
● Closing 1 Production Unit may affect SteelCo’s ability to meet demand for Stainless Steel, if demand continues to rise
Next Steps
● Communicatecustomers about closing down of 1 Production Unit
● Setup planning team to carry out closure with and consolidation of operations
An advanced recommendation can consist of the following:
● Savings of $76 M after shipping costs may not be substantial for SteelCo to reduce its overall operating costs.
● SteelCo should consider making investments in its equipment to produce more volumes of Stainless Steel
● Consider building a shipping facility at Production Unit A and avoid shipment of products between Production units.

Interviewer to inform the candidate: Recommendation to be provided in the following steps

1. Recommendation 2. Reason 3. Next steps 4. Risks
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