Capacity Change Case #1

Portugal Cement Maker CIMPOR to Add Capacity

Case Type: add capacity, business expansion.
Consulting Firm: Accenture first round job interview.
Industry Coverage: Building Materials; Manufacturing.
Case Interview Questions #00033: Your consulting firm has been retain by the CEO of CIMPOR (Cimentos de Portugal, Euronext: CPR), the number one producer of cement in Portugal. The company is mainly involved in manufacturing and marketing cement, hydraulic lime, concrete and aggregates, precast concrete and dry mortars.
The client currently has 45% of the Portuguese market, and feels it could have more, but is already running at 100% capacity of their major plant, located near Lisbon, in Southern Portugal. The CEO of CIMPOR has asked you to help him decide if they should build another plant or expand the capacity of current plant. How would proceed to gather information? And what recommendation would you give him?

Additional Information: (to be given to you if asked)
Costs: The cost structure for cement production is as follows:

Raw materials	28%
Labor and allocated fixed costs	16%
Distribution	26%
Sales and overhead	18%
Pre-tax profit	12%

Company: The company’s selling prices are set by prevailing market prices in Portugal. Land is available to expand the current factory; there is also a suitable site near Porto, the second largest city about 200 miles to the north. Approximately 80% of the customers are within 100 miles of the current plant located in Lisbon.
Production/Distribution: Raw materials are purchased from a government-owned company, and prices are set by a yearly contract with the government. The plant is unionized, and extra shifts are not possible. The trucks are owned by the company, and transport all product directly to the customers throughout the country. Customers pay for trucking by the mile. The fixed cost of plant additions is roughly the same as the cost of a new plant of the same capacity.

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case obtained from http://www.consultingcase101.com/portugal-cement-maker-cimpor-to-add-capacity/
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 Successful candidates always have a structured framework to go about each problem. He or she would often aproach the question with certain logical path to follow. Asking the right questions is sometimes more important than getting the right result. Because, if you get the results right but did not ask question, we assume you were just lucky. But if you asked all the right questions and were slightly off in your results, we believe you can get it right the next time you look at it. 

SUGGESTED ANSWER:


me: you are asking me to help the client decide whether to build a new plant or expand the current plant to boost production and occupy more market share? I would like to know if the company has other plans or objectives that i should know of?



I: you are to focus on that. 


me: ok. I would like to approach this problem looking at three major areas.
1. the company and its product
2. the customers and the market (the price, their location, the logistics)
3. its suppliers
4. the costs associated with the plan
does that sound reasonable to you?

I: fair enough. go on. 

me: first of all the company is the largest player and is strong in its market position. how many production facilities we currently have and where are they located?

I: like the problem said, the Lisbon site is the major plant. 

me: where are our customers located? and how do we reach them?

I:Approximately 80% of the customers are within 100 miles of the current plant located in Lisbon. The company own trucks and transport all product directly to the customers throughout the country. Customers pay for trucking by the mile.

me: do we have price-setting power?

I: we sell product at the prevailing price set by the market. 
 
me: do we have other sites, other than Lisbon plant, available to make this expansion possible? 



I: we do have another site at the second largest city Porto available. 

me: do you believe we have potential customers around the Porto region?

I: yes, that is highly likely. 

me: I would conduct some research and marketing to confirm that we could tap into the market there to help expand into that area.

I: ok, what else. 

me: i would like to look at the company's suppliers now. who are the suppliers and how stable are they? are they able to supply us with more raw material?

I: the supplier is a government-owned company, completely unionized and extra shifts are not possible. we have yearly contracts with them. 

me: so this supplier is stable, but is unable to supply us with more raw material is that right? i would suggest we go to find multiple suppliers, because government-owned unionized plants tend to be less efficient in their productions. But to procure from a single supplier is one way of achieving economies of scale. if we can't find another supplier that can supply us all the material we need, we should consider the trade-off there.

I: we may be able to struck a deal with the company the next year and let's not focus on this right now. 

me: ok. I would like to look at the costs now. do we have a break down of the costs associated with the current plant?

I: The cost structure for cement production is as follows:

Raw materials	28%
Labor and allocated fixed costs	16%
Distribution	26%
Sales and overhead	18%
Pre-tax profit	12%

me: since the raw materials are purchased from a government-owned company through yearly contracts, I dont see that part of the costs lowering now. The distribution accounts for 26% of the total costs here. It makes sense to consider lower the costs over there.
 here are a few things we can do to achieve that:

1. if we build the plant in Porto and secure customers in close proximity, we would be able to save a lot of money on that. 
2. trucking is ideal for short-mid distance transports, but not for long distance and can be expensive. I would suggest we use a combination of trucking and railroad to lower the distribution costs.
3. I would also suggest considering outsourcing the distribution to firms that specialize in supply chain management. 
4. If possible, we could look to acquire companies with existing distribution channel that fits into our structure. 

me: and also, I would like to know something about the costs associated with the two plans - to expand the existing plant/ to build new plant.


I: The fixed cost of plant additions is roughly the same as the cost of a new plant of the same capacity.


me: if that is so, i would recommend considering to build a new plant in Porto region to enter the largely un-tapped region. and this would also help lower the costs of distribution. also, i would suggest we consider outsourcing or use a combination of trucks and railroad to distribute our products.

Do we have competitions or any barriers to entry in the Porto region?

I: competition, yes, but I do not think we are going to focus on that here. summarize for me.

me: the company is a market leader and is expanding. the customers are located mostly in the Lisbon plant region. as the costs of building a new plant is almost the same as to expand the existing structure, not to mention plant addition would have to force the plant to temporarily shut down, i would suggest we build a new plant in Porto region. If we could tap the market there and win customers at the Porto region, we would open up a large market. the supplier is government-owned, so it should be stable enough, but we might want to consider other options as well, because unionized government-owned plants tend to be less efficient than other plants. finally, the distribution is highly costly. I would recommend we use a combination of trucks and railroads, or to outsource the distribution to other more specialized firms to lower costs.