Weber Grill to Outsource Production to China

Case Type: operations strategy; supply chain optimization.
Business Concepts Tested: Outsourcing; Cost analysis; Value chain.
Consulting Firm: Bain & Company 2nd round full time job interview.
Industry Coverage: manufacturing.
Quantitative Difficulty: Easy; Qualitative Difficulty: Hard; Overall Difficulty: Medium

Case Interview Question #01381: Our client Weber Grill Company is a family-owned grill manufacturer headquartered in Palatine, Illinois, United States. The Weber Grill company manufactures and sells outdoor electric grills, charcoal grills, gas grills, and charcoal smokers with related accessories.

The client Weber Grill is the current market leader, but is considering outsourcing their grill production to increase margins. A large scale outsourcing move would be a first for the industry, and the client wants to know if this is a worthwhile proposition.

There are two options being explored: (1) full outsourcing a grill manufacturing plant in China; (2) outsourcing final production in Mexico with parts provided from China. Should the client outsource their grill production?

Possible Answers:

1. Suggested Framework

a. Guidance for Interviewer

The interview candidate should focus on business argument for each of the two options as the financial situation is made fairly clear through the analysis (see below). It does not come down to pure costs since raw materials are the same (because parts are provided from China in both options).

Initially, the candidate should focus on costs but ask about changes in sales. Focus should shift to other business considerations after quick cost analysis on transport costs has been done.

b. Sample Framework

I. Cost criteria – used for each of two options

Production Cost
• Input costs (raw materials)
• Manufacturing costs (labor, resources, overhead)

Distribution Cost
• Transportation costs
• Sales force

Upfront cost
• New infrastructure
• Joint venture/partnership costs

II. Products

Consumer preferences
• Made in US?
• Quality
• Mix
• Price
• Brand name

III. Company (“Weber Grill Company”)

• Experience in outsourcing?
• Domestic PR (layoffs, re-organization) if outsourced
• Ability to work in new countries with new partners

2. Detailed Analysis

Additional Information if Asked:

• The client’s sales have been steady; they are seasonal in nature so timeliness of delivery is important.
• The client Weber Grill is the market leader in a fairly concentrated market. There are no specifics on other companies’ market shares.
• Product lines: three buckets of grills — basic, middle tier, and high-end.
• The high-end grill production has been outsourced to China already with no drop-off in quality or sales.
• Consumers care about brand, price, and quality.
• Client’s grill production is currently done in a single plant in Palatine, a small U.S. town in Illinois.

Areas for Analysis

a. Products

• Three lines of grills: basic, medium, high-end.
• Each product line is priced competitively for the respective segment.
• High-end is already outsourced to China with no drop-off in product quality or sales.
• Consumers focus on price, quality, and brand name.

b. Company

• Have outsourced high-end grill production from end to end for a couple years with no drop-off in sales.

c. Revenue

• Have been stable across lines for a few years now.

d. Costs

• Focusing on cutting costs here.

Cost Analysis

Key Question: Which option (full outsourcing to China or production outsourcing to Mexico) makes the most sense financially?

Solution:

The candidate should realize that cost of raw materials is the same since the parts are shipped to Mexico.

Transportation Costs:
• Containers that Weber Grill uses to ship can hold 2,000 cubic feet of grills or 5,000 pounds of raw materials for grill production.
• An average grill is 4 cubic feet and 40 lbs.

Amount to be shipped per container if used for production (China option): 2,000/4 = 500 grills
Amount to be shipped per container if used for final assembly (Mexico option): 5,000/40 = 125 grills

The candidate should then explore:
– wage/overhead costs (wages are roughly the same, overhead slightly higher in Mexico), and
– cost of doing business (Weber Grill would need to find a partner in Mexico, or they could just expand production with Chinese partner).

3. Conclusion & Recommendation

Recommendation

• The client Weber Grill should outsource all grill production to China.

Rationale

• Distribution costs are 50% as much as Mexico option.
• Existing partner.
• No expected drop off in revenue.

Potential Risks

• PR and company morale from job cuts.
• Scalability of Chinese production center.
• Operational difficulty.

Next Steps

• Evaluate plan to gradually shift production.
• Possible company-sponsored plant to replace jobs in local town.