3M to Engage More Distributors to Grow Sales

Case Type: improve profitability; operations strategy, optimization.
Consulting Firm: Boston Consulting Group (BCG) first round full time job interview.
Industry Coverage: conglomerate; manufacturing.

Case Interview Question #00965: Our client The 3M Company, formerly known as the Minnesota Mining and Manufacturing Company (1902 – 2002), is an American multinational conglomerate corporation based in Maplewood, Minnesota, a suburb of St. Paul. 3M employs 88,000 people worldwide and produces more than 55,000 products, including: adhesives, abrasives, laminates, passive fire protection, dental and orthodontic products, electronic materials, medical products, and optical films.

As a large conglomerate, the client 3M has various business divisions and the division we are working with makes pressure sensitive self adhesive canvases for sign boards. This division has seen revenues stagnate over the past few years and profitability has declined. 3M has engaged Boston Consulting Group (BCG) to help them with this issue. The two questions facing them are:

1. How to restore profitability for the pressure sensitive self adhesive canvas division?
2. Should we improve our delivery channel?

Additional Information:

If the candidate asks for more information on the product, provide the following info.

To understand what the product is, think of any signboard that you see. One part of the signboard is the metallic posts that holds the board up, and upon that board you can stick our client’s product. 3M’s customers buy blank canvases from 3M, print their signs onto the canvas and then simply paste the canvas over sign boards, just like you would paste a normal sticker.

The figure below is only for the interviewer’s understanding. This should NOT be shared with the candidate.

Let the candidate drive the case. The candidate should, at this time, draw out a framework. Here is some of the information that a candidate may ask for. Provide this only if the candidate asks.

More about the client 3M:

* 3M is among the largest market share holders in the pressure sensitive self adhesive canvas market.
* 3M supplies the entire U.S.
* 3M has been in this industry for a long time and hence, has an established brand.
* 3M has grown through acquisitions and has a few manufacturing plants that it has acquired.
* Assume that there is only one kind of product in the client’s product mix. There are no opportunities to change this.
* As far as distribution goes, the client has already asked us whether we should look at improving our distribution channels.

More about the Market:

* There are 2 other big players. 3M and each of the two big players have about 25% of the market each. The rest is fragmented.
* The market is growing at 3% (A good candidate should be able to figure out that this must be an industry that is growing as fast at the GDP)
* Our competitors’ products are very similar to ours and are priced similarly too. Our competitors do not have any differentiation when it comes to the product, promotions, or price.

Possible Answer:

1. Suggested Framework

Profits = revenues — costs = (price * volume) — (fixed costs + variable costs)

Here is the information that can be provided to the candidate for the above framework:
* The division’s revenue has stagnated at about $100M.
* The price has not changed. There are no opportunities to increase or decrease price.

2. Analysis

When the candidate discusses costs, provide Exhibit 1.

Exhibit 1: 3M “pressure sensitive self adhesive canvas division” Income Statement (in $ million)

If, after seeing Exhibit 1, the candidate asks about the manufacturing costs, provide Exhibit 2. If the candidate does not ask about manufacturing costs, drive the candidate towards manufacturing costs and then provide Exhibit 2.

Exhibit 2: 3M “pressure sensitive self adhesive canvas division” Manufacturing Cost Details

Along with Exhibit 2, provide the following information:

The product is sold by the yard. The way the process works is that the raw materials are fed into the machine for a pre-set run length (run-length = length of canvas produced in the run). The machine runs for that period, generates the pre-set amount of canvas, and then stops and needs to be set up again for the next run.

A good candidate will notice that 3M has produced the same length of canvas per year. However, their average run length has been decreasing, number of employees increasing and the employee overtime hours increasing. The inventory turns has been increasing too. You may provide the following information if the candidate asks related information:

* 3M has heard about inventory management and they have learned that a high inventory turn is generally good for the company.
* Inventory turn = total volume / average inventory (at this point, good candidates will infer that the average inventory has been decreasing).
* 3M has sought to increase inventory turns because they feel that the demand in the market for these canvases is uncertain. So, they are unwilling to keep inventory indefinitely.

If the candidate asks about why the client feels that the market demand is uncertain, say that that’s what a different consulting firm has told them. Good candidates will want to go deeper into understanding this. Tell them that the product can be kept in inventory for long periods and 3M already has the capability to store them. Candidates should infer that the decrease in run lengths was done to reduce inventory, but it has in turn caused inefficiencies in the manufacturing process.

Interviewer: How inefficient is 3M today in comparison to 2012?

The candidate should calculate this:

In 2012, an average run took 1,000/25 = 40 mins. The set up time was 20 mins. Thus, total time = 60 mins to produce 1,000 yards. –> 1,000/60 = 16.67 yards per minute

In 2014, an average run took 500/25 = 20 mins. The set up time was 20 mins. Thus, total time = 40 mins to produce 500 yards. –> 500/40 = 12.5 yards per minute

To produce 1,000 yards in 2014, 3M will need 1,000/12.5 = 80 minutes, i.e. 33% more than that in 2012. So, 3M’s efficiency has gone down 33% as a result of the ‘supposed’ improvements in inventory turns.

If a candidate asks if it is possible to produce at more than 1,000 yards run lengths, tell them that it is possible to go up to 1,500 yards per run.

At 1,500 yards per run, an average run will take 1,500/25 = 60 mins. The set up time is 20 mins. Thus, total time = 80 mins to produce 15,00 yards. –> 1,500/80 = 18.75 yards per minute, which is a 50% improvement over our 2014 results (12.5) and a 12.5% improvement over our 2012 results (16.67).

At this point, the candidate should move into the question on distribution channels. If the candidate is still working on profitability, guide the candidate towards the distribution issue.

Provide this additional information if asked:

* Currently, 3M works with two distributors who sell the canvases to end customers. One distributor is based on the west coast and another on the east coast. Customers generally prefer distributors close to them in terms of time zone.
* Our competition uses several distributors.
* The distributors (be it for 3M or for competition) work on standard percentage of sales.
* Most distributors are open to stocking multiple brands.

The candidate should deduce that 3M should engage more distributors in other regions in the US to ensure that sales grow at the rate of growth of the industry.

3. Recommendations

Interviewer: The client has asked us for our recommendation. What would you tell the client?

Here is a possible response:

Our profitability has gone down because we have reduced our average run length from 1,000 yards to 500 yards. This has reduced our efficiency by 33%. To restore profitability, 3M should aim to increase run lengths to the maximum of 1,500 yards per run. This will increase their efficiency by 50% over 2014 results and by 12.5% over 2012 results. Further, we should also engage more distributors in geographically diverse regions of the U.S. so our customers may be able to source the canvases more easily. This will allow us to regain our growth and start growing at the market growth rate again.

4. Additional Considerations

Interviewer: What are some of the potential risks?

Here are some potential answers:

* We will need to fire some employees. This may result in a loss of goodwill and may create some bad press.
* Running machines at capacity may result in more wear and tear, resulting in added maintenance expenditure.
* Engaging new distributors may make our existing distributors unhappy.
* 3M will need to spend resources to find new distributors and to find ways to get the canvases to them.
* 3M can also explore reductions in their inventory holding costs (less manpower, less inventory storage space) to realize the benefits of increased inventory turns. The reduction of these costs may be enough to compensate for increases in manufacturing costs, but we need further analysis to confirm this.