Case Statement:
You are the newly appointed CEO of a large manufacturing firm. Just 7 days into joining, the COO of the firm asks for a Rs. 300cr approval. You have to decide whether you'll approve, reject or stall it.
C: I’d like to start by understanding what the COO plans to use the 300 crores for.
I: The company currently has 3 manufacturing plants set up in Gujarat, West Bengal and Orissa. The 300 crores is to increase our production by setting up another manufacturing plant in Mysore.
C: Alright, to evaluate whether the CEO should approve, reject or stall the bid – I would look at conducting a cost benefit analysis to understand if there is enough demand to justify the production increase by investing 300cr. Post that I would look at the operational feasibility of the project – i.e if such a project is possible and finally calculate the break-even period to understand how long would it take to recover this amount. Does it sound like a reasonable approach?
I: Yes, you can go ahead.
C: Alright, so let’s start with the financial feasibility. I’d start by conducting the cost benefit analysis, can you share some data for the same?
I: You don’t need to use the data; just tell me what factors you would be considering.
C: Sure, I’ll start by understanding the project scope. Moving on to determining the costs – Direct costs, Indirect costs as well as opportunity costs. Then, I’ll move to evaluate the Benefits from the project, which in this case would be higher revenue and sales from increased production as well as higher market share.
I: Ok, fair enough. Let’s say the outcome of this analysis turns positive. What would be the factors that you would take into account for operational feasibility?
C: I would start by considering external factors like approvals, regulations, government policies, availability of labour etc. Then move to technical factors, like if we would be able to smoothly replicate our manufacturing processes to the new plant. I would also take into account factors like location of the plant and the time required to set it up. At the same time identify the major challenges that we might face.
I: Alright, now how would you evaluate the profitability.
C: I would do that by calculating the ROI and then comparing it with my opportunity cost.
I: Alright, let’s say you make a new profit of Rs 50 cr. What would be the ROI percentage?
C: In this case the ROI % would be (Rs 50 crore / 300 Crore) * 100 = 16.67%. If this is higher than the percentage we can get through any other investment alternative, I would accept the project.
I: Great, thanks for the discussion.
Background Information:
Client: Large Manufacturing Firm
Location: India
Case recommendations:
Evaluate all the factors individually. The 2 major factors for approving/rejecting a project would be financial viability and operational viability.
Case tips:
The key points to mention here were the factors to take into consideration while conducting financial and operational viability.
Another important point was to consider the opportunity cost – the revenue that the firm can generate if the Rs. 300 crores were invested elsewhere
