1. What are the options for dealing with this kind of profitability problem?
The candidate should be instructed to discuss whatever springs to mind as regards options to respond to a profitability issue. However, what they do say should be presented in a systematic, structured fashion.
Ideally, some form of tree structure should be presented, likely beginning from a decision as to whether to continue operating the company or not.
Part way through this process, show the candidate EXHIBIT 1.
This structure should be developed and elaborated before moving on to the main case question.
2. Dealing With Heckman’s Profitability Issue
Start from the standard profitability equation:
Profit = Revenues – Costs
The solution of the case lies within the cost side. Therefore, direct the candidate to the revenue side first.
Revenues
Show the candidate EXHIBITS 2 and 3
Inspecting the exhibits, we can see that:
- In terms of revenues, Heckmann is around average.
- In terms of margins, Heckmann has much worse margins than any other firm.
Thus, we can see that there is a problem with Heckmann’s costs and should move on to analyse these.
Costs
The candidate should ask for further data on costs at this point. Before giving them this data, though ask them to explain what they imagine to be the major costs facing a construction company like Heckmann.
Show the candidate EXHIBIT 4.
Materials and components are by far the largest portion of costs. As such, this is where our primary focus should be directed. Strategies to reduce other costs can be discussed after dealing with this main element.
Before sharing any further information with the candidate, ask them which data they should base an analysis of Heckmann’s costs.
Show the candidate EXHIBIT 5
Of Heckmann’s suppliers, companies C and D have anomalously high margins for firms operating in the relatively commoditised market of construction supplies.
This is what lowers Heckmann’s margins and which will, in turn, be responsible for their profitability issues.
The candidate should now be asked for ideas as to how this situation has come to be. They should come up with creative answers and possibilities.
The candidate can now be told that, in this case, companies C and D have been able to achieve such high margins because the executive tasked with negotiating supply of the relevant materials was corrupt and had been paying excessive prices in exchange for backhanders. The solution to Heckmann’s profitability issue is, therefore, to fire the executive concerned, report any criminality to the authorities and negotiate more industry-standard prices with other suppliers.
Note that it is unlikely the candidate will strike upon this exact cause as the reason for Heckmann’s problems. However, with appropriate guidance, they should be able to iteratively converge on the correct solution. Whichever reasons the candidate does suggest should be rational and conform to the data they possess.