Management Consulting Case Study-Chemical Spill

Company Overview:

Your client is a U.S. chemical manufacturer in the commodity chemicals business with a single-digit market share. It recently emerged from bankruptcy and has limited capital available. The chemicals business is cyclical with pricing cycles of 7 years. The company is worried about how it will survive 2008 when it hits the bottom of the pricing cycle. The question is how this company can become sustainable, if at all possible.

Problem:
The chemical manufacturer has hired you to develop a new business model, either through.

(1) acquisition into a non-cyclical chemicals market,
(2) the manufacture of new products and services for customers, or
(3) your own recommendations.

Market Analysis:

• The market is extremely fragmented, with many rivals that are either independent businesses, tiny conglomerates, or minor divisions of bigger ones.
• Customers are extremely dispersed, with each buying little more than 10% of the chemical manufacturer's stock each year.
• The cost of "non-green" raw resources is rising as raw material providers progressively switch to "greener" processes and products without expanding their overall capacity.
• Your client currently has 5 plants, 3 of which are performing well, one has had recent issues with quality consistency, and one has historically been a poor performer in terms of capacity utilization. All plants are over 10 years old and production is spread evenly across all the plants.
• Government taxes and regulations on shipping have been recently enacted due to pressure from environmental groups.

Current Products:

The chemical manufacturer produces two chemicals: X and Y. Chemical Y is a by-product of Chemical X with a weight ratio of x = 1.5y (each 1.5 ton of X manufactured results in the by-production of 1 ton of Y)

Financial Analysis:

• In 2006, 100,000 tons of X were being manufactured at a profit of $5/ton, resulting in a profit of $500,000 for Chemical X. The manufacturing of X resulted in the by-production of around 70,000 tons of Chemical Y, at a cost of $0/ton and a profit of $100 x 70,000 = $7,000,000 for Chemical Y, and a total profit of around $7,500,000 for both chemicals.
• In 2005, the company generated a profit of $100 x 100,000 = $10,000,000 for Chemical X, plus an additional $175 x 70,000 = $12,250,000 for Chemical Y. This amounts to a total profit of $22,250,000 in 2005, and therefore a significant loss in profit.

Recommendations:

• Examine the underlying causes of the sales and profit cycles, such as the causes of rising prices, the decrease in the availability of raw materials, and the new restrictions implemented by the government.
• Examine the benefits and drawbacks of acquisition, partnership, licencing, selling one or more plants, and organic expansion via the development of new goods and services (preferably with a pricing cycle opposite that of X and Y).
• Consider opportunities to improve the current business model, such as increasing production of X and Y when the pricing cycle is up, and exploring the trend of raw materials suppliers turning to greener products.
• Investigate the possibility of passing on the price increase along the value chain, and differentiating its products as “green” and charging a premium.

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By Vandana Gaur