AEROSOL

 CAN  
MANUFACTURER  
CASE TYPE: PROFITABILITY - DECLINE
FIRM/STYLE: BAIN
REGION: EUROPE
DIAGRAMS: NO
DIFFICULTY: 3/4
TIME: 20 MINS.

M A N A G E M E N T   C O N S U L T E D ,   I N C .      
 CASE  INTRO  

Your client is an aerosol can manufacturer.

They buy sheet steel, cut it into shape, paint it, weld it into a cylinder, apply a
top and bottom and then sell them to their customers. They do not fill the can.

Over the last 5 years their sales have increased from 80M to 120M, but their
profits have decreased from+10M to -40M.

They want to know what they should do.

M A N A G E M E N T   C O N S U L T E D ,   I N C .      
 CASE  CREATIVE  QUESTION  

How would you help your client figure out the source of declining
profitability?

M A N A G E M E N T   C O N S U L T E D ,   I N C .      
 CASE  CREATIVE  QUESTION  

I would propose a 3-part structure to answer this question:

•  First, I’d focus on fixed costs.

•  Have we increased fixed costs to increase capacity?
•  Have our fixed costs, such as labor and equipment, outpaced revenue
growth?
•  Second, I’d look at variable costs.
•  What are the costs of materials? Are we getting scale advantages for
purchases as we grow?
•  What is our labor staffing model? How is our turnover?
•  Finally, I’d look at revenues.
•  Are we pricing appropriately to account for market changes?
•  Are we driving volume growth by price decreases, that are leading to
lower per-unit profitability?

M A N A G E M E N T   C O N S U L T E D ,   I N C .      
 CASE  CREATIVE  QUESTION  

To address your first bucket - depreciation costs are the same and there has
been no additional fixed asset expenditure.

Our client’s pricing basis is steel price + value added, so they automatically
pass on all cost increases/savings to their customers. 5 years ago the average
price we got for a can is 1p and now it is 3p.

However, we have seen a steep increase in labor cost. The increases account
for about a third of the total cost increase.

What does this mean for the client?

M A N A G E M E N T   C O N S U L T E D ,   I N C .      
 CASE  CREATIVE  ANSWER  

Based on what you said, we are scaling up. We haven’t increased fixed cost,
and our price increases account for changes in material prices.

However, the increase in labor costs is accounting for the decrease in

profitability.

We need to address the labor costs, and to do so I’d like to look at the process
it takes to assemble the cans.

M A N A G E M E N T   C O N S U L T E D ,   I N C .      
 CASE  CREATIVE  QUESTION  

Historically we sold 40% to industrial clients, 30% into household

applications and 30% into consumer packaged goods. This has now changed
to 20/30/50.

For industrial clients we used stickers rather than paint.

The costs of paint have increased by 40M over the last 5 years.

Painting is a capacity limiting step.

M A N A G E M E N T   C O N S U L T E D ,   I N C .      
 CASE  CREATIVE  ANSWER  

Our customer requirements have changed: they are demanding higher quality.

Our client is losing money because of this shift to the higher priced consumer
segment. The additional quality requirements in this segment, in particularly
on the painting side, have limited our capacity and increased our cost basis.

We need to look at ways to decrease the cost basis for the client to ensure
continued profitability.

M A N A G E M E N T   C O N S U L T E D ,   I N C .      
 FINAL  RECOMMENDATION  

We looked at fixed and variable costs, and determined that rising variable
costs are the key issue for our client. Specifically, the client is losing money
because customer volumes are rising in a higher-quality segment, and labor
costs – a key component of the painting process – are down.

The cost basis increased by 90M over the last 5 years and we need to confirm
why these costs have increased and what we can do about it.

In addition, we would suspect the company is foregoing additional sales

because of limited capacity. There is an opportunity cost associated with this,
but that hits the top line, not the bottom line.

Over the next few weeks, our team is going to look at: costs and benefits of
capacity addition, outsourcing the painting to a 3rd party and ways to grow
the industrial part of the business again

M A N A G E M E N T   C O N S U L T E D ,   I N C .