The industry is similar to the USMC Aviation motto—‘On Target. On Time’. The product had to be at the job site when the trench was dug and at the lowest price
Obviously, the larger producers (many parallel production lines at one location) had an advantage of the smaller producers. All of the BirdTech pipe companies operations had been sold before the acquisition of the bankrupt BirdTech, and the remaining plant in Louisiana was left to compete with the big boys—with only 3 production lines!
A significant competitor is The Evansville Pipe Company in Indiana. Evansville Pipe has several plants in the Midwest and in the Mississippi-Texas corridor. Evansville Pipe is a well-managed mid-sized competitor and along with the larger producers makes life difficult for the PVC Pipe Plant.
The Status of the Company in 1987
The structure of PVC Pipe Plant is as follows:
- The organization chart is as follows:
- General Manager. Compensation $65,000. Company car.
- Sec to GM. Compensation $16,000.
- Sales Manager. Compensation $50,000
- Two salesmen. Compensation $40,000 each + car
- Operations Manager. Compensation $45,000
- 5 Supervisors for 5 shifts. 24/7. Compensation $25,000
- Warehouse Manager. Compensation $26,000
- 3 shift supervisors for warehouse. Compensation $19,000
- Accounting Manager. Compensation $38,000
- Three accounting clerks. Compensation $18,000
- Purchasing clerk. Compensation $17,000
- Fringe benefits at 32% of salary
The other costs are detailed on the P&L statement for 1987-1989. The division, a wholly owned subsidiary of CDC, has losses that range in the $1.1 million annually.
That was the problem that I inherited as CEO of CDC. We had two years of losses at the $1.1 million figure, and we had taken the steps to re-organize the facility with a new sales manager, new general manager, trimming expenses and trying to get an understanding of the business. We were in the last steps of re-capturing the $3.4 million in the over-funded pension plan. The most memorable thing about the town of Slidell was the great food one could get in the local restaurants. There was nothing memorable about the PVC Pipe Plant.
We had contacted our competition in the industry to see if we could arrange a sale of the facilities. There were no takers and we could not sell the company due to the IRS regulations. We had developed a good relationship with the Evansville Pipe executive team, but they did not have the financial resources to purchase a PVC pipe plant.
During a dinner one night in Slidell, crayfish and beer, with the Evansville management, we developed a strategy that offered the only way to reverse the $1.1 million dollars of loss to a small operating profit in one year. What we had to do was to turn the strategy into an operating plan and make it happen. We did this, and the next year the PVC Pipe Plant had a $36,000 profit at the operating income level. Your assignment is to develop a strategy that puts the company in the black. I am sure that no one will be able to duplicate the successful strategy. In fact, I am so confident that there will be a 1 point bonus for the first person who develops the appropriate strategy. In addition to reversing the loss, we were able to reverse the negative cash flow.
You can do research on the PVC pipe industry, you will find nothing of value to assist in developing the correct strategy. If you want to do research I would do the following.
- Find out who the producers of PVC pipe are in the US and call up the plant and talk to the plant manager or the sales manager.
- Analyze the structure, giving special attention to the plant locations, size of plant (# of operating lines), range of product produced, market served (customers and geographic) and suppliers of the raw material.
- See if you can get an idea of the disadvantage a 3-line plant would have in the market. Find out about the suppliers of the resin and the stability of the price of raw material. Discuss the 24/7 operation and the problem of line changes (from one diameter of pipe to another).
- You will probably find that the raw material is 75-78% of the COGS and there is no chance of a price reduction. There are a limited number of suppliers and they are not willing to negotiate price.
- Discuss the importance of having the right inventory at the pipe distributor when the customer calls in with an order.
- GM% and operating income %.
- Price stability. Discounts offered to suppliers for quantity purchases.
- Unions. Not a significant factor, since most of the plants are in the southern US.
- Any financial information which can be reduced to ratios, such as gm%,
- Approximately 74% of the industry employees were laborers, operatives or service workers.
- Approximately 14% were officials, general managers and professionals.
- Approximately 12% were technicians, salespeople or office workers.
- The average hourly earnings of production workers were $15.78/hour in 2005.
- PVC pipe and other plastic piping is part of SIC 3079: Miscellaneous Plastics Products in 1972, and the workforce figures were calculated on the 1972 SIC basis.)
- 75-78% of sales price is material. See if you can gather data as to the stability of the raw material price as a % of sales. If the price is relatively stable as a % of sales, then another way to reduce costs and achieve profitability is eliminated.
- You cannot exist as a supplier of PVC by only producing a few sizes of pipe. You must produce all sizes and maintain some inventory to be competitive.
- Therefore, it is a waste of time in contacting producers of PVC pipe.
Modified Deal Structures covers the structure of the strategy to save PVC pipe. Your assignment is to build on the Modified Deal Structure strategy and develop specific actions that will insure an operating strategy. Do not worry about playing ‘what if’ and changing sales/costs etc. It cannot be done. The answer to think outside the box on how you would structure a deal to save this company. Think about optimum lowest cost/maximum productivity for a 24/7 operation/limitations that come with must three machines/pricing of the product/working closely with a partner and what results in a good deal for both sides. There is a hugh cash flow bonus once the operations are established.
You do not need a complete financial statement. You can play what if with the existing balance sheet and the numbers established for assets and liabilities. Once you develop the strategy, the financials will all into place.Create a pro-forma year showing how the deal is structured. Contact me if you have trouble with the financial statement and I shall assist—however you must have a strategy that we can discuss.
