1. Evaluate the three scenarios proposed by the project team along the lines of the criteria presented in the case
2. What would be your recommendation to the board in the current situation of world economy in December 2011
1. The project team has proposed three scenarios for Hilti’s management board which all have the potential to help the company compete in an ever more competitive and cost-driven environment. Hilti has still the competitive advantage over most other important industry players, because it has a very high-quality approach and is able to charge 30% premiums for their products. The first approach the project team has to offer is a “Low pain, low gain”-scenario in which semi-complex plastic and machined parts are not made in-house but bought from suppliers and all small tools are manufactured in Hilti’s plant in Shanghai. In the first assessment this alternative would have a small impact on cost reduction (8% of COGS) but it would be an alternative with a relatively small footprint. It could be easily achieved and wouldn’t have a big impact on some aspects that are very important to the company’s values. Hilti has established a couple of premises around which decisions about the company’s future have always been made. The “low pain, low gain”-alternative would be in line with the business model that the home factory in Liechtenstein has still a high enough value-add to support high prices and with most of the Champion3C strategy. The Champion3C strategy focuses on three important factors: The company should be economically and technologically independent, should focus on it’s own products and should maintain its sustainable leadership. With this scenario the only factor that is in question is, if the shift to even more “buy” instead of “make” (Hilti is already buying 80% of total product value from outside suppliers) makes the company even more economically dependent on its suppliers but since Hilti holds very strong patents and produces the most complex and exclusive parts itself, the company can always find new suppliers for the non-complex plastics and machined parts. “Low pain, low gain” doesn’t include huge investments in new plants or new supplier networks. The Shanghai plant has already an established network of suppliers and the additional costs of shifting all small tools manufacturing to China are logistical and the risk of currency fluctuations.
In addition to the first scenario there are two additional possible scenarios which both have a big influence on Hilti’s structure compared to the first scenario. “Low pain, low gain” would be a basic restructuring alternative and would probably have a big enough influence in a not-changing competitive environment but with competitor’s investing in more cost-effective supply chains and lots of consolidation in the industry the question remains if a conservative approach like that is enough to keep the company competitive over the coming years.
The second scenario suggests to hold on to the basic plant network but to consolidate around it. Instead of producing plastic parts and machined parts in different plants than they are manufactured in, this scenario calls for an minimization of logistical costs by producing parts where they are needed to avoid most of the shipping to assemble products. This consolidation would also lead to the closure of plants with the German plant in Strass not being able to survive.
“Consolidate around existing structures” is a scenario that has a bigger influence on lots of processes inside the company (30% of COGS are affected). In order to evaluate its influence we need to have a closer look on the monetary but also the qualitative criteria given for assessment. The production cost won’t be affected as much but the transportation costs in between facilities is probably a huge...