Cisco Closes Minnesota Plant to Remove Excess Capacity

Case Type: operations strategy.
Consulting Firm: Siemens Management Consulting second round summer internship job interview.
Industry Coverage: telecommunications & network.

Case Interview Question #00636: Our client Cisco Systems, Inc. (NASDAQ: CSCO) is a global multinational telecommunications company headquartered in San Jose, California, United States. Cisco designs, manufactures, and sells telecommunications infrastructure and networking equipment. The company’s current portfolio of products and services is focused upon three market segments — Enterprise and Service Provider, Small Business and the Home.

The management of Cisco have hired us to help determine if they have any excess manufacturing capacity. If there is any excess capacity, our client would like Siemens Management Consulting to suggest a course of action to ensure they are profitable and efficient. How would you go about this case?

Additional Information: (to be given to candidate if requested)

The interviewer does not offer the necessary data and so the interviewee should ask directed questions to extract the following data.

The client Cisco Systems currently has plants in both Minnesota and Mexico, close to the Texas border. The plants manufacture similar products and the facilities are about the same size. The company expanded capacity by replicating their first plant (using it as a template for others).

• Each plant operates an 8am — 5pm shift
• Industry wide demand is flat or declining
• The client Cisco has a relatively high market share of 80%
• Customers are mostly phone companies and there are very high switching costs
• Our client recently acquired a competitor and there are very few players in the market right now.
• The client is not highly concerned about new entrants because the industry growth is flat or declining, this is not an attractive market.

Possible Solution:

The candidate should formulate a logical structure (internal vs. external factors, supply/demand, etc.) and then determine if the client has excess capacity or not.

Candidate: I would start by looking into the company’s manufacturing process to determine if they are experiencing low utilization rates compared to the overall capacity of production.

Interviewer: The company operates an 8am – 5pm shift and is running at fairly close to 100% utilization rate. However, they have considered shifting to multiple shifts in each plant and running a 22-hour workday. What do you think the overall demand capacity looks like in this particular industry?

Candidate: I would assume that it is either flat or declining because the US telecommunication market is relatively saturated, with little new customer growth.

Interviewer: Yes, that’s correct.

Candidate: Ok, well, I would now like to investigate the overall market and determine where our client sits in the industry. Do we have any information about their market share?

Interviewer: They have a relatively high market share of 80%.

Candidate: Who are they supplying the products to? Consumers, business customers, or phone companies?

Interviewer: They are a telecommunication infrastructure manufacturer, so their direct clients are the phone companies.

Candidate: Does our client have any reason to believe that the market share could change dramatically? What are the switching costs in this industry?

Interviewer: There are very high switching costs in the industry. Also, our client recently acquired a competitor so they are not anticipating any big declines in market share. There are also only a few competitors in the industry with little threat of new entrants due to the flat or declining growth.

Candidate: Given the overall macro trends in this industry as well as their specific manufacturing set-up, I believe that our client does have excess capacity?

Interviewer: Why?

Candidate: Well, the industry is declining and there is less demand for these products over time. Also, opportunities exist to streamline their manufacturing operations with more shifts per plant across less overall plants.

Interviewer: OK. What should they do?

Candidate: They could close some existing plants, or they could generate revenues from manufacturing products for competitors (or for companies with similar products).

Interviewer: Good. Looking at the first option, how would you determine which plants to close?

Candidate: I would look at the overall cost per unit at each plant and determine which would result in the most efficient overall location. Costs could be classified into major subsets such as labor, distribution (from Mexico vs. Minnesota). I would also want to know if quality of product differs across any of the plants. Finally, it would be valuable to analyze whether our client could change their plant size and configuration to generate further efficiencies.

Interviewer: Good. Quality is fairly consistent across all of the plants and they are not looking into plant reconfiguration at this point. Labor costs are the most significant contribution to cost per unit. Given that, what do you recommend?

Candidate: I recommend our client closes the Minnesota plants and increases overall utilization of the plants in Mexico by adding shifts.

Interviewer: What are the major risks/concerns of this recommendation?

Candidate:

• Negative PR resulting from closing US plants
• Scalability issues, e.g. can the Mexican plants quickly increase capacity?
• Quality issues stemming from increased production
• Reliance on one location/region for all manufacturing