Business Case September 1993 ®. BUSINESS CASE © Copyright Gemini Consulting, Inc. Reproduction...

Business Case

September 1993

®

BUSINESS CASE

© Copyright Gemini Consulting, Inc. Reproduction with express permission only. 2

Content

• Objective

• Approach and Assumptions

• Chemicals Group Current State

• A&D Findings

• Benefits– Quantified

– Unquantified

– Intangible

• Appendix

BUSINESS CASE


Objective

• To estimate timing and sequence of benefits during implementation

• To establish a logical business justification for change

• To create a rationale for making the tough decisions and staying on track after the emotion of discovery has worn off and the challenges of implementation set in

BUSINESS CASE


Content

• Objective



• A&D Findings


– Unquantified

– Intangible

• Appendix

BUSINESS CASE


Approach and Assumptions

The goal is to overachieveThe goal is to overachieve

• Financial information was gathered from– 1992 XXXX Corporation Annual Report– 1993 XXXXl Corporation Business Profile 10– Chemicals Group Performance Report December 1992– Chemicals Group Performance Report 1993– Industrial Chemicals Division Long Range Plan March 1992– Performance Product Division Long Range Plan March 1992– Electronic Materials Division Long Range Plan March 1992– Chemicals Segment Summary Long Range Plan March 1992– R&D Long Range Plan March 1992– Analysts’ Reports– Chemicals Group ERS reports for 1988 through YTD 1993– Magnolia, Orangeburg and Houston plant cost sheets 1991 through YTD 1993

• Benefits are quantified conservatively by design

• Higher incremental operating margins are not factored in for Capacity Increase opportunities

• Benefits are for North American Chemicals Group only

• Annual $/FTE @ Magnolia and Orangeburg = $45,000 and $75,000 for hourly and salaried employees respectively; @ Houston = $58,000 and $75,000 for hourly and salaried employees respectively; Annual $/FTE for R&D personnel = $ 78,000

BUSINESS CASE


Content

• Objective



• A&D Findings


– Unquantified

– Intangible

• Appendix

BUSINESS CASE


Over The Past Five Years Chemicals Group Revenue Has Been Relatively Flat...

Source: Revenue = Net Sales, Chemicals Group Year end ERS reports 1988-1992, FX impact inclusiveSource: Gemini Analysis; Industry composite consisting of Great Lakes, Lubrizol, Morton Intl., Ferro and Dexter grew at 10.63% between 1988 and 1992

1988 1989 1990 1991 19920

100

200

300

400

500

600

700

800

900

1000

1988 1989 1990 1991 1992

($000)

769846 827

790822

CAGR= 1.68%

During the same period, the industry has grown at over 10% CAGR.During the same period, the industry has grown at over 10% CAGR.

BUSINESS CASE


...And Its Profitability Has Declined Significantly

Source: Chemicals Group Total Reports 1988 – July FCST 1993

0

5

10

15

20

25

30

1988 1989 1990 1991 1992 1993

Gross Margin

Operating Margin

2830

23

29

27

23

1816 16

13

11 11

Percent

FCST

BUSINESS CASE


Chemicals Group’s Largest Revenue Contributor Is Its Least Profitable Business

19%

48%33%

22%12%

66%

Bromine and Derivatives

Olefins and Derivatives

Specialty Chemicals



Specialty Chemicals



Speciality Chemicals

3.4%

16.2%

27.2%

Operating Margin

Chemicals Group Net Sales = $880M (F1993)

Chemicals Group Net Sales = $880M (F1993)

Chemicals Group Op. Profit = $101M (F1993)

Chemicals Group Op. Profit = $101M (F1993)

Source: Chemical Group forecast for 1993, 7/93Note: Does not include ‘miscellaneous’ and ‘group unallocated’

BUSINESS CASE


R&D Investment In New Products Since 1988 Has Fallen In Absolute And Relative Terms

0

10

20

30

40

50

1988 1989 1990 1991 1992 1993

50%

40%

30%

R&

D In

vest

men

t In

New

Pro

duct

s

R&

D In

ve

stm

en

t In

Ne

w P

rod

uc

ts

% o

f to

tal R

&D

Inv

es

me

nt

$MM

27.0

28.9

32.9

33.8

27.2

23.0

48%49% 49%

47%

41%

33%

BUSINESS CASE


Chemicals Group’s Long Range Plan Appears Ambitious In Light Of Current Performance

0

200

400

600

800

1000

1200

1400

1600

1800

1991 1992 1993 1994 1995 1996 1997

Net Sales ($M)

CGR = 13%

CGR = 5.4%

861

979

1,141

1,298

1,478

1,646

822880

Source: Chemicals Group Performance Report, 12/92Chemicals Group Performance Report, 6/93Chemicals Segment Summary Long Range Plan 1992 through 1997, 3/92

*

*

791

* 6/93 forecast

Not making plan means that Chemicals Group has a $500 MM revenue short fall in 1997.Not making plan means that Chemicals Group has a $500 MM revenue short fall in 1997.

1,145

BUSINESS CASE


At Current Growth Rates, How Profitable Will Chemicals Group Be?

0

50

100

150

200

250

300

350

400

1991 1992 1993 1994 1995 1996 1997

103

Op.Profit($M)

CGR = 25%

CGR = 0%

142

176

220

273

334

387

91101

Source: Chemicals Group Performance Report, 12/92Chemicals Group Performance Report, 6/93Chemicals Segment SummaryLong Range Plan 1992 through 1997, 3/92

*

* 6/93 forecast

?

?

?

BUSINESS CASE


Content

• Objective



• A&D Findings


– Unquantified

– Intangible

• Appendix

BUSINESS CASE


Our Analysis Efforts Focused On Chemicals Group’s Manufacturing Effectiveness And R&D Effectiveness

• Through-put • Focus Interviews

• Capacity Utilization • Brown Papers

• Yield • Ratio-Delay Analysis

• Maintenance Excellence • Probes

• New Product Development Cycles • Focus Interviews

• Project Selection & Screening • Brown Papers

• Project development process with • CP / PD Probedecision points

• Project management skills • Product development survey• Cycle time probe

Opportunities Diagnostics

R&D Effectiveness

Manufacturing Effectiveness

Opportunities Diagnostics

BUSINESS CASE


Manufacturing Findings - Magnolia

• Consistently high quality tetrabrome production is limited (service factor = 81%) by

– equipment considerations

– inaccurate bromination control

– process contamination

• Decabrome production shows wide variations - service factor of 80%

• DECTP production is erratic ( downtime of 39 days in first 7 months of 1993) - 78% uptime year-to-date

• ADMA production is erratic as well, with a demonstrated service factor of around 80%

• Maintenance - effective “wrench time” is only 40%

BUSINESS CASE


• Variability in the DR-3 process leads to a 20% gap in service level for a ‘sold - out’ product

• Waste streams could be revenue generators rather than ending up as expenditures for treatment, handling and disposal

• AN 330 production is erratic - demonstrated service factor of 78% in 1993

• AN 701 production is hampered by frequent, costly product conversions

• Maintenance time is consumed by break time, travel time and wait time - effective “wrench time” of only 37%

• Life cycle cost implications and increasing supplies pressure to reduce inventory

Manufacturing Findings - Orangeburg

BUSINESS CASE


• Capacity utilization for most major product lines is low, e.g. capacity utilization for DETDA is 57%, ASA - 61%, Olefins - 72%, SAS - 86%

• Wide variation in capacity utilization has driven negative variances in olefins cost of production

• DETDA production is hampered by adequate supply of TDA

• Maintenance time is ineffectively utilized - “wrench time” is 50%

• Opportunity to streamline maintenance organization

Manufacturing Findings - Houston

BUSINESS CASE


R&D Findings

• The majority of R&D resources are dedicated to existing products rather than new product development

• Unclear vision and goals at the operating level drives conflicting R&D funding priorities

• Projects are not managed in the aggregate or within the context of XXXX’s business plans

• Project screening is inadequate; low probability projects are eliminated too late in the development cycle

• Interface with marketing and manufacturing is weak and too late in the development process

• Information to support effective decisions and project management is lacking

• Product development process and decision making are neither efficient nor effective

• Project management is not rigorous, lacks accountability and is inadequate

BUSINESS CASE


Content

• Objective



• A&D Findings


– Unquantified

– Intangible

• Appendix

BUSINESS CASE


Quantified Benefits Will Come Through Cost Reduction, Capacity Increase And Margin Enhancement Opportunities

CAPACITY INCREASE

COST REDUCTION

Manufacturing R&D

•Magnolia•Orangeburg•Houston

•Baton Rouge•PDC’s•Manufacturing Sites

MARGIN ENHANCEMENT

Types Of Benefits

BUSINESS CASE


Cost Reduction Benefits Range From $12 MM to $19 MM

Manufacturing• Maintenance $ 5 MM - $ 6 MM

– Improving maintenance effectiveness

at Magnolia, Orangeburg and Houston

• Cycle Time Reduction $ 3 MM - $ 7 MM

• Cancellation Of R&D Projects $ 4 MM - $ 6 MM

Total Cost Reduction Benefits $ 12 MM- $ 19 MM

Range Of Benefit

R&D

BUSINESS CASE


Capacity Increase Benefits Range From $17 MM to $21MM

Manufacturing

• Magnolia $ 10 MM - $ 12 MM– Increasing throughput and capacity

for Tetrabrome, Decabrome, DECTP and ADMA

• Orangeburg $7 MM - $ 9 MM– Increasing throughput and capacity

for DR-3 Ibuprofen, AN 330

• Houston Not Applicable

Total Capacity Increase Benefits $ 17 MM - $ 21 MM

Range Of Benefit

Incremental revenue increase is expected to be approx. $50 MM. Incremental revenue increase is expected to be approx. $50 MM.

BUSINESS CASE


• Chemicals Group’s ‘Return on sales’ can be improved over time by– improved R&D project selection

– shortened cycle time for R&D projects

• Even assuming Net Sales at 1993 levels, Chemicals Group can expect to improve ‘Return on Sales’ from the current 11% in 1993 to 17.5% by 1998

• In terms of Operating Profit, this should translate into a $30 million to $50 million improvement by 1998

Margin Enhancement Benefits Range From $30 MM to $50 MM

1993 operating margin for top quartile performers is 18% 1993 operating margin for top quartile performers is 18%

Source: Gemini Analysis; Industry composite consists of Great Lakes, Lubrizol, Morton Intl., Ferro and Dexter

BUSINESS CASE


Summary Of Quantified Benefits

Cost Reduction Capacity Increase Margin Enhancement

Manufacturing

Total

Magnolia

Orangeburg

Houston

R&D

Total

$10MM - $12MM

$7MM - $9MM

N/A

N/A

$17MM - $21MM

$30MM - $50 MM

$30MM - $50MM

$11MM - $14MM

$8MM - $10MM

$3MM

$37MM - $63MM

$59MM-$90MM

$105MM - $24MM

$1MM - $2MM

$1MM

$3 MM

$7 MM - $13MM

$12MM - $19MM

BUSINESS CASE


Unquantified Benefits

• Enhanced customer satisfaction

• Improved productivity from effective team work and communications

• Enhanced strategic value of Product Development

• Better decision making from timely and effective information

• Focusing initiatives

BUSINESS CASE


Intangible Benefits

• A foundation and beginning of a new culture

• Ability to focus on customers and products

• Increased employee morale

• Clearer roles / responsibilities, accountabilities and authority levels throughout the organization

• Motivation and movement in one clear strategic direction

• Reduced frustration and complexity throughout the organization

BUSINESS CASE


Implementing A Performance Enhancing Culture Can Provide Significant Financial Benefit

Average for firms with performance enhancing cultures

Average for firms with low performance cultures

*Source: Kotter, Heskett (1992)

The Economic and Social Costs of Low Performance Cultures*(1977 - 1988)

RevenueGrowth

EmploymentGrowth

Stock PriceGrowth

Net IncomeGrowth

682%

282%

901%

756%

166%

36%74%

1%

BUSINESS CASE


Content

• Objective



• A&D Findings


– Unquantified

– Intangible

• Appendix

BUSINESS CASE


R&D Manpower Rationalization Approaches

• Cycle Time Reduction– Average Project Duration = 50 months, i.e. 4.2 years

– Average Resources/Project = 70 man months/year

– There are 65 active Type III and Type IV projects (Actually there are 140 Type III and IV projects, however, information is available only on 65)

– Total Effort on these ongoing projects = 70 man months/project/year * 65 projects = 4,550 man months

– 25% cycle time reduction will require 25% fewer resources

– One-time saving = .25*4550 = 1138 manmonths, or 95 FTE’s

– Annual weighted average fully loaded cost per R&D FTE = $78,000/year

– Expected one-time saving = $7.4 million

– At 20% cycletime reduction, FTE redeployment = 76 FTE’s, saving = $5.9 million



– Expected one-time saving = $3.0 million to $7.4 million (38 - 95 FTE’s)

*Source: Gemini Analysis

• Cancelling unattractive projects– Of 18 Type IV projects, 9 were attractive for Ethyl and only 6 had a high probability of commercial success

– Average Resources/project = 70 manmonths/year

– Total Annual Effort on the unattractive projects = 70 manmonths/project/year *9 projects = 630 manmonths = 50FTE’s

– Typically, a 10-15% net reduction in total headcount (Approx. 530) is possible in the first year

– Annual weighted average fully loaded cost per R&D FTE = $78,000/year

– Expected one-time saving = $4.1 million to $6.25 million (50 - 75FTE’s)

BUSINESS CASE


R&D Value Contribution – Margin Growth

• We compared XXXX’s operating margin with that of 12 peer companies, we also reviewed 5 years of R&D spending per employee in this group

• There is strong correlation between R&D spending and operating margin

• Chemicals Group is in the middle of the pack

• Improving performance should significantly impact operating margin

• Targeting a top quartile performer in this peer group would require a 50% improvement over 5 years

• Assuming static sales, straight-line improvement in operating profit and 5 years to fully actualize benefits, the stream of incremental profits would appear as follows:

Year Operating Margin Op. ProfitAnnual

increment

‘94‘95‘96‘97‘98

11.5012.5014.0015.5017.50

$101$110$123$136$154

-0-$9

$13$13$18$53

Assumptions:Revenue from 1994 through 1998 stay static at 7/93 F1993 level, i.e. $ 880 MMShort-term projects and other projects that are currently under way will positively impact operating margin in 1994 through 1996; improved cycle time reduction and project selection will drive sale of new products andoperating margin growth in 1997 and 1998.

Total benefit from operating margin enhancement will range from $30 MM to $50 MM.Total benefit from operating margin enhancement will range from $30 MM to $50 MM.

BUSINESS CASE


Payback Curve

-15

-10

-5

0

5

10

15

20

25

30

35

40

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

($ MM)

18

Cum. Benefits

Investment

Net Cum. Benefit

Month

BUSINESS CASE


The Project Design That We Select Will Determine Level Of Total Benefits And Project Payback Period*

R&D Excellence

Plant-Based Systems

•Maintenance Excellence

•Manufacturing Excellence

Integrated project as currently designed yields $ 25 MM in net benefits and a payback of 9 months.Integrated project as currently designed yields $ 25 MM in net benefits and a payback of 9 months.

•People Excellence•Portfolio Management Process•Project Management•Development Process•Customer/Market Focus•Core Competences

Net Benefits = $ 25 MM

Payback = 9 Months

-15

-10

-5

0

5

10

15

20

25

30

35

40

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

($ MM)

18

Cum. Benefits

Investment

Net Cum. Benefit

Month

* Does not include margin enhancement benefits

Total Investment = $ 13.75 MM

BUSINESS CASE


Plant-Based Systems



We will also lose the benefit of integration between maintenance and manufacturing in the plants.We will also lose the benefit of integration between maintenance and manufacturing in the plants.


Payback = 12 Months

Excluding Manufacturing Excellence Substantially Decreases Net Benefits And Increases Payback Period

-15

-10

-5

0

5

10

15

20

25

30

35

40

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

($ MM)

18

Cum. Benefits

Investment

Net Cum. Benefit

Month

Note: Payback computation does not include margin enhancement benefits

R&D Excellence



BUSINESS CASE


Plant-Based Systems



Payback = 9 Months

Net Benefits Decrease With The Exclusion Of Maintenance Excellence


R&D Excellence


We will also lose the benefit of integration between maintenance and manufacturing in the plants.We will also lose the benefit of integration between maintenance and manufacturing in the plants.


-15

-10

-5

0

5

10

15

20

25

30

35

40

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

($ MM)

18

Cum. Benefits

Investment

Net Cum. Benefit

Month


BUSINESS CASE


Delaying R&D Cost Reduction Efforts Prolongs Project Payback

Plant-Based Systems



Payback = 11 Months

-15

-10

-5

0

5

10

15

20

25

30

35

40

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

($ MM)

18

Cum. Benefits

Investment

Net Cum. Benefit

Month


R&D Excellence




BUSINESS CASE


R&D Excellence And Maintenance Excellence Alone (without Manufacturing Excellence)

-15

-10

-5

0

5

10

15

20

25

30

35

40

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

($ MM)

18

Cum. Benefits

Investment

Net Cum. Benefit

Month

BUSINESS CASE


-15

-10

-5

0

5

10

15

20

25

30

35

40

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

($ MM)

18

Cum. Benefits

Investment

Net Cum. Benefit

Month

R&D Excellence And Manufacturing Excellence Alone (without Maintenance Excellence)

BUSINESS CASE


-15

-10

-5

0

5

10

15

20

25

30

35

40

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

($ MM)

18

Cum. Benefits

Investment

Net Cum. Benefit

Month

R&D Excellence Delayed By 3 Months And Both Maintenance Excellence And Manufacturing Excellence

Business Case September 1993 ®. BUSINESS CASE © Copyright Gemini Consulting, Inc. Reproduction...

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