Johnson Controls to Boost Its Return on Net Asset by 5%

Case Type: operations strategy; reduce costs.
Consulting Firm: Mercer Management Consulting 2nd round job interview.
Industry Coverage: manufacturing; electronics.

Case Interview Question #00325: The client Johnson Controls Inc. (NYSE: JCI) is a manufacturing company based in Milwaukee, Wisconsin, United States. It is a Fortune 500 diversified, multi-industrial company with more than 142,000 employees in 1,300 locations across six continents. This case involves only Johnson Controls’ European operations.

The client’s European subsidiary is a $1B (revenues) company with 10 manufacturing sites throughout Europe. Its various products include thermostats, room climate controls, air conditioning units, switches for microcomputers, and other piece parts for assembly, such as automotive interiors, car seats and batteries, etc. The distribution channels that the company currently uses are the following:

• Wholesalers (i.e., local mom and pops for do-it-yourself home projects)
• Outlets (who sell to contractors)
• Construction companies (used mostly for hotels and restaurants)
• OEM (original equipment manufacturer, including switches)
• Other manufacturing companies (used for control processes, refineries).

One of the client company’s measures of operating performance is “return on net asset”, and right now the company would like to increase this measure from 17% to 22% in two years. The CEO and Chairman has retained you to help him accomplish this ambitious goal. What information would you gather? How should the client increase its “return on net asset” by 5%, from 17% to 22%, in two years?

Possible Solution:

I started with a market overview, then moved to the product line, and then the three C’s. Detailed discussions are presented below:

Candidate: First of all, I would like to have an Overview of the Market. What does the market look like?

Interviewer: Every family of products that the client offers is its own market, but nevertheless, each is experiencing average growth; they are relatively mature markets. The client has two primary competitors.

Candidate: (I then switched to the client company’s Product Line). Can you tell me more about the product line? How are they different from the competition? Is the range of products appropriate for the market? Are all of them profitable? Is the product range too broad, or too narrow?

Interviewer: The products do not differ very much from the competition. Some products are more advanced than others; but they are all high-quality products. The product mix seems to be appropriate: we make margins on all of our products, and the range seems to be what the market wants. However, what does differentiate the client from its competitors is the client’s service: it focuses on quick delivery. The client guarantees that orders arrive within 24-48 hours.

Candidate: I now wanted to find out more about the quick delivery. How is the quick delivery operation administered? Where are the facilities for delivery vs. production?

Interviewer: The client’s ten production facilities are located in four countries: Germany, Scotland, France and Switzerland. Anyone of these manufacturing plants delivers all over Europe. (The client just recently focused its plant operations to achieve economies of scale.) When products are manufactured, they are delivered to local affiliates, which store the inventory at sites closer to the customers. This allows the client to offer quick delivery despite highly variable demand. Unfortunately, even after the recent focusing of plant operations, the company has not seen an increase in market share. Assume for now that the client cannot achieve additional profits by further consolidating its production facilities.

Candidate: (At this point, I switched back to my original structure of the three C’s: Company/Costs). What are the costs associated with providing the quick delivery?

Interviewer: The operating costs are actually not a big impact on the client’s cost structure. What is important, though, is the cost of holding stock at the local affiliates: the working capital tied up at these sites is estimated at $300 million.

Candidate: (Next, I moved to Competition of 3C’s). Did competitors provide these services? How did their costs compare?

Interviewer: We don’t have exact information on the competition; the client believes that it is spending more than others due to this working capital issue.

Candidate: (I finally arrived at Customers). What are the customer needs and preferences? How highly do they value the quick delivery?

Interviewer: Through a targeted analysis, the client determined that customers were willing to give up time on delivery: the most important thing to them was consistency of delivery, rather than speed alone. Customers are willing to wait more like a week or so if they know it is going to arrive on time.

Candidate: Aaah! The client was providing an expensive service that was not highly valued by the customer. Problems with this strategy were:
1. Working capital/inventory that was tied up was very costly.
2. Competitors did not have this cost.

Interviewer: Excellent! So, what would be your recommendations for the client?

Recommendations for Client:

Based on the above analysis of the case, I recommended the client to cut its operating costs by taking the following measures:

1. Change its delivery policy to 7 to 10 days instead of 2-3.
2. Centralize delivery by reducing the number of local stock affiliates.
3. Reduce costs associated with working capital levels.

Interviewee’s Comments:

This is basically what the client ended up doing, as per the consultant’s recommendations. It turned out that the client saved about $200 million in working capital. The company saved 10% of total assets by reducing its stock sites from 10 to 5. Note that you should not get caught up with the original measure of an increase of 5% on “return on net assets”; I dug into the issue of the quick delivery/costs, as opposed to doing a detailed quantitative analysis.