Case setup (facts offered by interviewer):
Your client is a U.S. based oil refinery
The refinery has a single location and is a small to medium-sized refinery
Your client, although profitable, believes it is lagging behind the competition and could improve
You are brought in as part of a joint consultant-client team that will review overall operations and make recommendations on ways to improve the bottom line
You have been assigned to work with the maintenance division
The maintenance department’s primary objective is to prevent equipment failure and to repair equipment when it does fail
Understanding of its organization is important. It consists of three primary areas: nine assets areas, one central maintenance area and one group of contractors. The first two areas are employees of the client, the third an external source of labor.
An asset is a physical area of the plant that contains various pieces of equipment (pumps, heat exchangers, etc.). There are nine assets. Each asset has a Maintenance Supervisor who is responsible for all maintenance to be performed in his/her asset. Working for the Maintenance Supervisor in each asset is, on average, eleven “craftsmen”. The craftsmen are the actual workers that perform the maintenance. The craftsmen are unionized and divide into twelve different craft designations (e.g. electricians, pipefitters, welders, etc.). Each craft designation has a defined set of skills they are qualified to perform. They are not allowed to perform skills outside of their defined craft, or help in the performance of activities involving skills beyond their craft. Collectively the twelve different crafts can perform any maintenance job that might arise at the refinery. The maintenance supervisor and his/her assigned craftsmen are “hardwired” to their asset. That is, they work only on equipment in their given asset.
Central maintenance is a centralized pool of Maintenance Supervisors and Craftsmen, who are dispatched to support the different assets during times of high workload. They are employees of your client and fit the description contained in the above Asset explanation. The only difference is that they may work in any of the different assets as determined by workload. There are a total of 11 Maintenance Supervisors and 100 Craftsmen that comprise Central Maintenance
Contractors are a group of outside Supervisors and Craftsmen who support your client during times of high workload. They also are capable of performing any maintenance job that may arise, but differ from your client’s Craftsmen in that they divide the collective skills required into five designations rather than twelve. Thus, the craftsmen of the contractor are capable of performing a broader set of skills. They, like your client’s craftsmen, don’t perform skills outside of their defined craft but do allow different craft designations to help each other. There are an average of 7 contractor Maintenance Supervisors and 140 contractor Craftsmen at the refinery on any given day.
Question:
What opportunities exist to increase profits?
What recommendations can you make to capture savings related to the identified opportunities?
What are the cost savings associated with your recommendations?
Suggested solutions:
The first question involves identifying opportunities to improve profits. The candidate must start with either revenues or costs. Although one could make the argument that maintenance supports revenue by maximizing the operating time of the refinery equipment, maintenance should be seen to be a support function. Thus, it is more appropriate to focus on costs and cost reduction. The following questions will help the candidate gain insight into cost reduction opportunities.
How does the maintenance department track its costs?
If the candidate phrases the question about material or overhead costs, the interviewer would inform the candidate that detailed reviewed showed no major opportunities. The candidate would be steered toward labor costs and given the following tables regarding maintenance labor costs for the past year.
To support understanding of the following tables, Turnaround work is long term preventive maintenance (e.g. complete rebuilding of a boiler) that may be performed once every few years. All other work (short term emergency repairs, small scale preventive maintenance, other routine work, etc.) fits into the category of Daily work
Craftsmen Daily work Turnaround Total
Client $ 8MM $ 2MM $ 10MM
Contractor $ 5MM $ 9MM $ 14MM
Total $ 13MM $ 11MM $ 24MM
Supervisor Total
Client $ 1MM
Contractor $ 0.5MM
Total $ 1.5MM
Since the Craftsmen table represents a larger dollar amount than the Supervisor table, it is logical to pursue cost savings opportunities in this area first.
What is the utilization of Craftsmen in the assets? In central maintenance? And for contractors?
Assume each area is utilized 100% of the time, 50 weeks per year, 40 hours per week.
How does the labor cost of craftsmen ($24MM) on a refinery-sized basis (i.e., $cost / per barrel of crude oil processed) compare with industry averages?
Consulting your industry data base shows that costs appear to be about 20% above the average of peer refineries.
This is an important question to determine if there is a problem with costs (don’t assume there is, the client may be performing better than industry average!)
Is there any particular reason why turnaround work is so heavily skewed toward contractors?
Turnaround work tends to be more cyclical. An external workforce is used to absorb some of this additional work. Keep in mind that both client and contractor Craftsmen are capable of performing any maintenance job at the plant.
After further analysis of the tables the key fact that should become appear odd is the large difference in the cost per unit of labor between your client’s Craftsmen and the outside contractor’s Craftsmen. Often candidates will ask for the hourly wage rates of these two groups. There is sufficient data to calculate these numbers. The calculation is:
Annual cost of client craftsmen = $10MM/ ( 11 Craftsmen/asset x 9 assets + 100 Craftsmen in
Central maintenance)
= $50,000 / year
Annual cost of contractor craftsmen = $ 14 MM/ 140 contractor Craftsmen
= $100,000 / year
Again, this difference should provoke a series of questions to understand the difference.
Is there any difference in the work performed by the client and contractor craftsmen?
No, other than the different levels of Turnaround work vs. Daily work performed as noted in the previous table. Both groups are capable of doing any job with roughly equal levels of quality.
Is there any difference in efficiency between the two groups of Craftsmen?
The candidate would at this point be asked how they would measure this.
After reaching an understanding of the difficulty involved in measuring the efficiency of a workforce (especially a unionized workforce), the candidate would be told that through a series of interviews with maintenance supervisors, there is a consensus that contractor Craftsmen are roughly twice as productive as client craftsmen.
This is a critical point in the case. The candidate must recognize that in the present environment the client is largely indifferent about units of labor. You can have a client worker who is half as efficient or a contractor worker who is twice as expensive. The key now is to determine if there are ways to create an opportunity where the client would no longer be indifferent.
What is causing the inefficiencies associated with the client’s labor?
Again, the candidate would be encouraged to offer their own ideas.
After some discussion the candidate would be told that many of the Maintenance Supervisors complain endlessly about restrictions placed on them by the existing union labor contract and the tightness of craft designations.
The interviewer would probe to ensure the candidate understands why the present craft designation creates the inefficiencies. Essentially work is too finely divided. It makes planning and supervision extremely cumbersome. As an example, if one of six crafts required to perform a job is absent or late, the entire job must shut down, as craft designations are not allowed to support other craft designations.
Is it possible to change the existing union contract?
The present labor contract is a three year contract that is due to be renegotiated/renewed in six months.
Will the union resist changes to the existing contract?
Indeed!!
At this point, the candidate should recognize a major (albeit difficult) opportunity to reduce labor costs. The client would essentially like to have its own employees look and function like its contractors, but continue to get paid at present rates. In reality, management will need to make wage concessions in order to change present work practices. However, through planned negotiations a scenario can be created which presents a favorable opportunity for your client to begin to replace outside contractors with its own Craftsmen.
There are several ways to address the third question of the case, the actual savings that might be achieved. One quick method is to assume that these changes would bring maintenance costs back in line with industry average. Utilizing the cost benchmark mentioned earlier, one could assume costs could be reduced to $24MM/1.20 = $20MM, a $4MM savings.
A second, and more detailed, method would be to take the extreme scenario where the client’s Craftsmen is paid its present rate, but is made as efficient as the contractor’s Craftsmen. In this case, you begin with the present level of 200 client craftsmen who are functioning as 100 equivalent contractor Craftsmen (they’re one-half as efficient). By improving their efficiency, you are effectively “creating” 100 equivalent contractors. Thus, you are immediately able to replace 100 contractors and save $10MM. This could be taken one step further by assuming you would want to replace all contractors. This would save an additional $2.5MM ($4MM existing contractor expense - $2MM required to hire additional client craftsmen + $0.5MM in contractor supervisors). As noted earlier, in reality, this approach would require wage concessions to the union, so actual savings may be something significantly less.
Key takeaways:
This case requires the candidate to quickly digest a large amount of organizational issues and then quickly check some ratios to uncover the basic problem (the client workforce is inefficient). Creativity must then be used to structure a recommendation that would create a more favorable situation for the client. As in other cases, acceptable solutions need not follow the exact method above nor cover all of the above points.
Your client is a U.S. based oil refinery
The refinery has a single location and is a small to medium-sized refinery
Your client, although profitable, believes it is lagging behind the competition and could improve
You are brought in as part of a joint consultant-client team that will review overall operations and make recommendations on ways to improve the bottom line
You have been assigned to work with the maintenance division
The maintenance department’s primary objective is to prevent equipment failure and to repair equipment when it does fail
Understanding of its organization is important. It consists of three primary areas: nine assets areas, one central maintenance area and one group of contractors. The first two areas are employees of the client, the third an external source of labor.
An asset is a physical area of the plant that contains various pieces of equipment (pumps, heat exchangers, etc.). There are nine assets. Each asset has a Maintenance Supervisor who is responsible for all maintenance to be performed in his/her asset. Working for the Maintenance Supervisor in each asset is, on average, eleven “craftsmen”. The craftsmen are the actual workers that perform the maintenance. The craftsmen are unionized and divide into twelve different craft designations (e.g. electricians, pipefitters, welders, etc.). Each craft designation has a defined set of skills they are qualified to perform. They are not allowed to perform skills outside of their defined craft, or help in the performance of activities involving skills beyond their craft. Collectively the twelve different crafts can perform any maintenance job that might arise at the refinery. The maintenance supervisor and his/her assigned craftsmen are “hardwired” to their asset. That is, they work only on equipment in their given asset.
Central maintenance is a centralized pool of Maintenance Supervisors and Craftsmen, who are dispatched to support the different assets during times of high workload. They are employees of your client and fit the description contained in the above Asset explanation. The only difference is that they may work in any of the different assets as determined by workload. There are a total of 11 Maintenance Supervisors and 100 Craftsmen that comprise Central Maintenance
Contractors are a group of outside Supervisors and Craftsmen who support your client during times of high workload. They also are capable of performing any maintenance job that may arise, but differ from your client’s Craftsmen in that they divide the collective skills required into five designations rather than twelve. Thus, the craftsmen of the contractor are capable of performing a broader set of skills. They, like your client’s craftsmen, don’t perform skills outside of their defined craft but do allow different craft designations to help each other. There are an average of 7 contractor Maintenance Supervisors and 140 contractor Craftsmen at the refinery on any given day.
Question:
What opportunities exist to increase profits?
What recommendations can you make to capture savings related to the identified opportunities?
What are the cost savings associated with your recommendations?
Suggested solutions:
The first question involves identifying opportunities to improve profits. The candidate must start with either revenues or costs. Although one could make the argument that maintenance supports revenue by maximizing the operating time of the refinery equipment, maintenance should be seen to be a support function. Thus, it is more appropriate to focus on costs and cost reduction. The following questions will help the candidate gain insight into cost reduction opportunities.
How does the maintenance department track its costs?
If the candidate phrases the question about material or overhead costs, the interviewer would inform the candidate that detailed reviewed showed no major opportunities. The candidate would be steered toward labor costs and given the following tables regarding maintenance labor costs for the past year.
To support understanding of the following tables, Turnaround work is long term preventive maintenance (e.g. complete rebuilding of a boiler) that may be performed once every few years. All other work (short term emergency repairs, small scale preventive maintenance, other routine work, etc.) fits into the category of Daily work
Craftsmen Daily work Turnaround Total
Client $ 8MM $ 2MM $ 10MM
Contractor $ 5MM $ 9MM $ 14MM
Total $ 13MM $ 11MM $ 24MM
Supervisor Total
Client $ 1MM
Contractor $ 0.5MM
Total $ 1.5MM
Since the Craftsmen table represents a larger dollar amount than the Supervisor table, it is logical to pursue cost savings opportunities in this area first.
What is the utilization of Craftsmen in the assets? In central maintenance? And for contractors?
Assume each area is utilized 100% of the time, 50 weeks per year, 40 hours per week.
How does the labor cost of craftsmen ($24MM) on a refinery-sized basis (i.e., $cost / per barrel of crude oil processed) compare with industry averages?
Consulting your industry data base shows that costs appear to be about 20% above the average of peer refineries.
This is an important question to determine if there is a problem with costs (don’t assume there is, the client may be performing better than industry average!)
Is there any particular reason why turnaround work is so heavily skewed toward contractors?
Turnaround work tends to be more cyclical. An external workforce is used to absorb some of this additional work. Keep in mind that both client and contractor Craftsmen are capable of performing any maintenance job at the plant.
After further analysis of the tables the key fact that should become appear odd is the large difference in the cost per unit of labor between your client’s Craftsmen and the outside contractor’s Craftsmen. Often candidates will ask for the hourly wage rates of these two groups. There is sufficient data to calculate these numbers. The calculation is:
Annual cost of client craftsmen = $10MM/ ( 11 Craftsmen/asset x 9 assets + 100 Craftsmen in
Central maintenance)
= $50,000 / year
Annual cost of contractor craftsmen = $ 14 MM/ 140 contractor Craftsmen
= $100,000 / year
Again, this difference should provoke a series of questions to understand the difference.
Is there any difference in the work performed by the client and contractor craftsmen?
No, other than the different levels of Turnaround work vs. Daily work performed as noted in the previous table. Both groups are capable of doing any job with roughly equal levels of quality.
Is there any difference in efficiency between the two groups of Craftsmen?
The candidate would at this point be asked how they would measure this.
After reaching an understanding of the difficulty involved in measuring the efficiency of a workforce (especially a unionized workforce), the candidate would be told that through a series of interviews with maintenance supervisors, there is a consensus that contractor Craftsmen are roughly twice as productive as client craftsmen.
This is a critical point in the case. The candidate must recognize that in the present environment the client is largely indifferent about units of labor. You can have a client worker who is half as efficient or a contractor worker who is twice as expensive. The key now is to determine if there are ways to create an opportunity where the client would no longer be indifferent.
What is causing the inefficiencies associated with the client’s labor?
Again, the candidate would be encouraged to offer their own ideas.
After some discussion the candidate would be told that many of the Maintenance Supervisors complain endlessly about restrictions placed on them by the existing union labor contract and the tightness of craft designations.
The interviewer would probe to ensure the candidate understands why the present craft designation creates the inefficiencies. Essentially work is too finely divided. It makes planning and supervision extremely cumbersome. As an example, if one of six crafts required to perform a job is absent or late, the entire job must shut down, as craft designations are not allowed to support other craft designations.
Is it possible to change the existing union contract?
The present labor contract is a three year contract that is due to be renegotiated/renewed in six months.
Will the union resist changes to the existing contract?
Indeed!!
At this point, the candidate should recognize a major (albeit difficult) opportunity to reduce labor costs. The client would essentially like to have its own employees look and function like its contractors, but continue to get paid at present rates. In reality, management will need to make wage concessions in order to change present work practices. However, through planned negotiations a scenario can be created which presents a favorable opportunity for your client to begin to replace outside contractors with its own Craftsmen.
There are several ways to address the third question of the case, the actual savings that might be achieved. One quick method is to assume that these changes would bring maintenance costs back in line with industry average. Utilizing the cost benchmark mentioned earlier, one could assume costs could be reduced to $24MM/1.20 = $20MM, a $4MM savings.
A second, and more detailed, method would be to take the extreme scenario where the client’s Craftsmen is paid its present rate, but is made as efficient as the contractor’s Craftsmen. In this case, you begin with the present level of 200 client craftsmen who are functioning as 100 equivalent contractor Craftsmen (they’re one-half as efficient). By improving their efficiency, you are effectively “creating” 100 equivalent contractors. Thus, you are immediately able to replace 100 contractors and save $10MM. This could be taken one step further by assuming you would want to replace all contractors. This would save an additional $2.5MM ($4MM existing contractor expense - $2MM required to hire additional client craftsmen + $0.5MM in contractor supervisors). As noted earlier, in reality, this approach would require wage concessions to the union, so actual savings may be something significantly less.
Key takeaways:
This case requires the candidate to quickly digest a large amount of organizational issues and then quickly check some ratios to uncover the basic problem (the client workforce is inefficient). Creativity must then be used to structure a recommendation that would create a more favorable situation for the client. As in other cases, acceptable solutions need not follow the exact method above nor cover all of the above points.
