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Background
A Fortune 500 industrial business recently acquired a specialty chemical manufacturer with a multinational supply chain.
The acquired business operated a China-based manufacturing site that made a critical component used in the production of lithium batteries in the United States.
The Chinese site had some serious safety and code compliance issues and would be forced to close its most critical production lines within three years.
The issues at the plant could not be resolved – It utilized hazardous substances in an area deemed too close to residential dwellings.
The business needed to know the impact of shuttering the affected production lines. Further, they needed to determine (quickly) the cheapest option for maintaining this capability.
Our Process
Review Relevant Data
We partnered with the client’s marketing team for the affected business division.
Together, we reviewed the following detail:
- A list of products made at the Chinese site
- All customer SKUs that used products from the Chinese site
- Forecasted sales and gross profit for all affected SKUs
We Ask the Right Questions
We liaised with the client’s R&D and site engineers to to answer the following:
- Which product lines at the China site would be forced to close?
- Are there any existing locations that could produce these same products?
- What is the cost to add this capability at an existing site?
- What is the cost to build a new site in China?
We Modeled Each Option
We calculated the business impact if the production lines at the China site closed in three years, with no alternate production site. We compared this with the cost of adding capability at an existing site or building a new facility in China. In each case, we deployed a cash flow model to calculate the present value of cash flows.
What We Learned
The Cost of Shuttered Production Would be Huge
The Chinese site produced specialty chemicals that were exported to the United States for production of lithium batteries. The technology had enormous growth prospects for the business. If the China plant were shuttered with no alternate production sites, the business impact would be enormous.
Alternate Sites
The original site was built in China because of cheap access to rare minerals and a favorable cost to build and operate industrial sites. While our client maintained numerous sites in the United States, it would be cost-prohibitive to move the production to one of these sites.
Our Analysis: We Compare the Options
Simple Comparison
We provided the client with a simple, side-by-side comparison view of the P&L impact for each option. In this case, the options were to either lose the profit from the high-growth battery segment, invest in a new Chinese manufacturing site, or add capability at an existing US site.
In this case, the least-cost option was to build a new manufacturing site at a nearby industrial park in China. While the price tag for a new site exceeded $100 million, the alternatives were much worse. In this case, there simply wasn’t a low-cost option.
Robust Decision Support
We built highly-digestible executive views that clearly laid out the financial impact of each option. While we include substantial detail in appendices, we start with highly simplified views that enable quick understanding and decision. Our client presented this to their board for investment approval.
Client Outcome
The client’s board understood our financial analysis and approved the investment in a new china-based manufacturing facility to support the lithium battery business. The old plant is slated to be partially shuttered as soon as production begins at the new site.
