Rolls of paper adhesive non stick liner adhesive and

• Rolls of paper
• Adhesive
• Non-stick liner
• Adhesive and
liner applied
to rolls
• Rolls of layered
paper cut into
sheets
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GROWING SPECIALTY PAPER SALES
Questions and Facts (II)
Price to printer
Materials
Coating
Sheeting
Packaging (direct costs)
Gross profit/($ per equivalent box)
Number of printers
Annual usage (number of equivalent
boxes)
Total potential profit pool ($)
Small (boxes)
20.00
5.50
1.00
0.50
3.00
10.00
20,000
100
20,000,000
Medium (carton)
18.00
5.50
1.00
0.50
2.00
9.00
3,000
500
13,500,000
Large (pallets)
15.00
5.50
1.00
0.50
1.00
7.00
1,000
3,000
21,000,000
All figures are per equivalent box
Framework and Analysis
The problem set-up indicates that the client wants to invest in this business. Investment can
take many forms including expansion of manufacturing operations and capacity, expansion of
customer-facing activities, and acquisition of competitors. It is interesting to note that this is
currently a profitable, no-growth business for the client. Investment decisions cannot be made
unless the management team (and the candidate) understands the market conditions as well as
the client’s internal capabilities
This case does not lend itself well to traditional “case solution structures”. A strong initial
response is to list a set of internal and external factors that must be understood and evaluated.
Ultimately, the candidate should decide whether investment is warranted, and if so, where.
Strong hypotheses might include:
•
Assuming the client is not capacity constrained, there are likely groups of customers
that represent opportunities for profitable growth
•
Depending upon the current go-to-market strategy, the client may need to re-evaluate
the way that it is configured to serve existing and potential customers
The client can expand its packaging operations to better serve medium or large customers, but
not both. Client economics and cost to serve each customer group are shown on Exhibit 1.
For simplicity, taxes and depreciation are ignored and SG&A is assumed to be fixed.
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The candidate should recognize that a comprehensive solution evaluates the required
investment to serve a particular market segment (packaging line, manufacturing operations,
additional SG&A) against the expected return.
The candidate should evaluate the profit pool from serving medium and large customers. This
should be based upon an assumption about the size of the market that the client can capture.
Assuming the client can match its small printer market share, the client could capture an
additional 20% of the medium or the large printer customer segment
The following is given to the candidate:
•
Investment and operation of carton packaging line would cost $675,000 per year
•
Investment and operation of the palletizing line would cost $2,300,000 per year
A logical conclusion would be that an investment in a carton packaging line would be a
superior investment compared to the palletizing line
Potential conclusions:
•
The carton packaging line is a less-risky investment (requires less up-front capital)
•
The solution assumes a static environment. If large printers are growing in number and