Firm AT Kearney
Case Number
Case setup (facts offered by interviewer)
q Your client is a US based oil refinery
q The refinery has a single location and is a small to mediumsized refinery
q Your client although profitable believes it is lagging behind the competition and could improve
q You are brought in as part of a joint consultantclient team that will review overall operations and make recommendations on ways to improve the bottom line
q You have been assigned to work with the maintenance division
q The maintenance department’s primary objective is to prevent equipment failure and to repair equipment when it does fail
q Understanding of its organization is important It consists of three primary areas nine assets areas one central maintenance area and one group of contractors The first two areas are employees of the client the third an external source of labor
Ø An asset is a physical area of the plant that contains various pieces of equipment (pumps heat exchangers etc) There are nine assets Each asset has a Maintenance Supervisor who is responsible for all maintenance to be performed in hisher asset Working for the Maintenance Supervisor in each asset is on average eleven craftsmen The craftsmen are the actual workers that perform the maintenance The craftsmen are unionized and divide into twelve different craft designations (eg electricians pipefitters welders etc) Each craft designation has a defined set of skills they are qualified to perform They are not allowed to perform skills outside of their defined craft or help in the performance of activities involving skills beyond their craft Collectively the twelve different crafts can perform any maintenance job that might arise at the refinery The maintenance supervisor and hisher assigned craftsmen are hardwired to their asset That is they work only on equipment in their given asset
Ø Central maintenance is a centralized pool of Maintenance Supervisors and Craftsmen who are dispatched to support the different assets during times of high workload They are employees of your client and fit the description contained in the above Asset explanation The only difference is that they may work in any of the different assets as determined by workload There are a total of 11 Maintenance Supervisors and 100 Craftsmen that comprise Central Maintenance
Ø Contractors are a group of outside Supervisors and Craftsmen who support your client during times of high workload They also are capable of performing any maintenance job that may arise but differ from your client’s Craftsmen in that they divide the collective skills required into five designations rather than twelve Thus the craftsmen of the contractor are capable of performing a broader set of skills They like your client’s craftsmen don’t perform skills outside of their defined craft but do allow different craft designations to help each other There are an average of 7 contractor Maintenance Supervisors and 140 contractor Craftsmen at the refinery on any given day
Question
q What opportunities exist to increase profits
q What recommendations can you make to capture savings related to the identified opportunities
q What are the cost savings associated with your recommendations
Suggested solutions
The first question involves identifying opportunities to improve profits The candidate must start with either revenues or costs Although one could make the argument that maintenance supports revenue by maximizing the operating time of the refinery equipment maintenance should be seen to be a support function Thus it is more appropriate to focus on costs and cost reduction The following questions will help the candidate gain insight into cost reduction opportunities
q How does the maintenance department track its costs
If the candidate phrases the question about material or overhead costs the interviewer would inform the candidate that detailed reviewed showed no major opportunities The candidate would be steered toward labor costs and given the following tables regarding maintenance labor costs for the past year
To support understanding of the following tables Turnaround work is long term preventive maintenance (eg complete rebuilding of a boiler) that may be performed once every few years All other work (short term emergency repairs small scale preventive maintenance other routine work etc) fits into the category of Daily work
Craftsmen
Daily work
Turnaround
Total
Client
8MM
2MM
10MM
Contractor
5MM
9MM
14MM
Total
13MM
11MM
24MM
Supervisor
Total
Client
1MM
Contractor
05MM
Total
15MM
Since the Craftsmen table represents a larger dollar amount than the Supervisor table it is logical to pursue cost savings opportunities in this area first
q What is the utilization of Craftsmen in the assets In central maintenance And for contractors
Assume each area is utilized 100 of the time 50 weeks per year 40 hours per week
q How does the labor cost of craftsmen (24MM) on a refinerysized basis (ie cost per barrel of crude oil processed) compare with industry averages
Consulting your industry data base shows that costs appear to be about 20 above the average of peer refineries
This is an important question to determine if there is a problem with costs (don’t assume there is the client may be performing better than industry average)
q Is there any particular reason why turnaround work is so heavily skewed toward contractors
Turnaround work tends to be more cyclical An external workforce is used to absorb some of this additional work Keep in mind that both client and contractor Craftsmen are capable of performing any maintenance job at the plant
After further analysis of the tables the key fact that should become appear odd is the large difference in the cost per unit of labor between your client’s Craftsmen and the outside contractor’s Craftsmen Often candidates will ask for the hourly wage rates of these two groups There is sufficient data to calculate these numbers The calculation is
Annual cost of client craftsmen 10MM ( 11 Craftsmenasset x 9 assets + 100 Craftsmen in
Central maintenance)
50000 year
Annual cost of contractor craftsmen 14 MM 140 contractor Craftsmen
100000 year
Again this difference should provoke a series of questions to understand the difference
q Is there any difference in the work performed by the client and contractor craftsmen
No other than the different levels of Turnaround work vs Daily work performed as noted in the previous table Both groups are capable of doing any job with roughly equal levels of quality
q Is there any difference in efficiency between the two groups of Craftsmen
The candidate would at this point be asked how they would measure this
After reaching an understanding of the difficulty involved in measuring the efficiency of a workforce (especially a unionized workforce) the candidate would be told that through a series of interviews with maintenance supervisors there is a consensus that contractor Craftsmen are roughly twice as productive as client craftsmen
This is a critical point in the case The candidate must recognize that in the present environment the client is largely indifferent about units of labor You can have a client worker who is half as efficient or a contractor worker who is twice as expensive The key now is to determine if there are ways to create an opportunity where the client would no longer be indifferent
q What is causing the inefficiencies associated with the client’s labor
Again the candidate would be encouraged to offer their own ideas
After some discussion the candidate would be told that many of the Maintenance Supervisors complain endlessly about restrictions placed on them by the existing union labor contract and the tightness of craft designations
The interviewer would probe to ensure the candidate understands why the present craft designation create the inefficiencies Essentially work is too finely divided It makes planning and supervision extremely cumbersome As an example if one of six crafts required to perform a job is absent or late the entire job must shut down as craft designations are not allowed to support other craft designations
q Is it possible to change the existing union contract
The present labor contract is a three year contract that is due to be renegotiatedrenewed in six months
q Will the union resist changes to the existing contract
Indeed
At this point the candidate should recognize a major (albeight difficult) opportunity to reduce labor costs The client would essentially like to have its own employees look and function like its contractors but continue to get paid at present rates In reality management will need to make wage concessions in order to change present work practices However through planned negotiations a scenario can be created which presents a favorable opportunity for your client to begin to replace outside contractors with its own Craftsmen
There are several ways to address the third question of the case the actual savings that might be achieved One quick method is to assume that these changes would bring maintenance costs back in line with industry average Utilizing the cost benchmark mentioned earlier one could assume costs could be reduced to 24MM120 20MM a 4MM savings
A second and more detailed method would be to take the extreme scenario where the client’s Craftsmen is paid its present rate but is made as efficient as the contractor’s Craftsmen In this case you begin with the present level of 200 client craftsmen who are functioning as 100 equivalent contractor Craftsmen (they’re onehalf as efficient) By improving their efficiency you are effectively creating 100 equivalent contractors Thus you are immediately able to replace 100 contractors and save 10MM This could be taken one step further by assuming you would want to replace all contractors This would save an additional 25MM (4MM existing contractor expense 2MM required to hire additional client craftsmen + 05MM in contractor supervisors) As noted earlier in reality this approach would require wage concessions to the union so actual savings may be something significantly less
Key takeaways
This case requires the candidate to quickly digest a large amount of organizational issues and then quickly check some ratios to uncover the basic problem (the client workforce is inefficient) Creativity must then be used to structure a recommendation that would create a more favorable situation for the client As in other cases acceptable solutions need not follow the exact method above nor cover all of the above points
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Case Number
Case setup (facts offered by interviewer)
q Your client is a US based oil refinery
q The refinery has a single location and is a small to mediumsized refinery
q Your client although profitable believes it is lagging behind the competition and could improve
q You are brought in as part of a joint consultantclient team that will review overall operations and make recommendations on ways to improve the bottom line
q You have been assigned to work with the maintenance division
q The maintenance department’s primary objective is to prevent equipment failure and to repair equipment when it does fail
q Understanding of its organization is important It consists of three primary areas nine assets areas one central maintenance area and one group of contractors The first two areas are employees of the client the third an external source of labor
Ø An asset is a physical area of the plant that contains various pieces of equipment (pumps heat exchangers etc) There are nine assets Each asset has a Maintenance Supervisor who is responsible for all maintenance to be performed in hisher asset Working for the Maintenance Supervisor in each asset is on average eleven craftsmen The craftsmen are the actual workers that perform the maintenance The craftsmen are unionized and divide into twelve different craft designations (eg electricians pipefitters welders etc) Each craft designation has a defined set of skills they are qualified to perform They are not allowed to perform skills outside of their defined craft or help in the performance of activities involving skills beyond their craft Collectively the twelve different crafts can perform any maintenance job that might arise at the refinery The maintenance supervisor and hisher assigned craftsmen are hardwired to their asset That is they work only on equipment in their given asset
Ø Central maintenance is a centralized pool of Maintenance Supervisors and Craftsmen who are dispatched to support the different assets during times of high workload They are employees of your client and fit the description contained in the above Asset explanation The only difference is that they may work in any of the different assets as determined by workload There are a total of 11 Maintenance Supervisors and 100 Craftsmen that comprise Central Maintenance
Ø Contractors are a group of outside Supervisors and Craftsmen who support your client during times of high workload They also are capable of performing any maintenance job that may arise but differ from your client’s Craftsmen in that they divide the collective skills required into five designations rather than twelve Thus the craftsmen of the contractor are capable of performing a broader set of skills They like your client’s craftsmen don’t perform skills outside of their defined craft but do allow different craft designations to help each other There are an average of 7 contractor Maintenance Supervisors and 140 contractor Craftsmen at the refinery on any given day
Question
q What opportunities exist to increase profits
q What recommendations can you make to capture savings related to the identified opportunities
q What are the cost savings associated with your recommendations
Suggested solutions
The first question involves identifying opportunities to improve profits The candidate must start with either revenues or costs Although one could make the argument that maintenance supports revenue by maximizing the operating time of the refinery equipment maintenance should be seen to be a support function Thus it is more appropriate to focus on costs and cost reduction The following questions will help the candidate gain insight into cost reduction opportunities
q How does the maintenance department track its costs
If the candidate phrases the question about material or overhead costs the interviewer would inform the candidate that detailed reviewed showed no major opportunities The candidate would be steered toward labor costs and given the following tables regarding maintenance labor costs for the past year
To support understanding of the following tables Turnaround work is long term preventive maintenance (eg complete rebuilding of a boiler) that may be performed once every few years All other work (short term emergency repairs small scale preventive maintenance other routine work etc) fits into the category of Daily work
Craftsmen
Daily work
Turnaround
Total
Client
8MM
2MM
10MM
Contractor
5MM
9MM
14MM
Total
13MM
11MM
24MM
Supervisor
Total
Client
1MM
Contractor
05MM
Total
15MM
Since the Craftsmen table represents a larger dollar amount than the Supervisor table it is logical to pursue cost savings opportunities in this area first
q What is the utilization of Craftsmen in the assets In central maintenance And for contractors
Assume each area is utilized 100 of the time 50 weeks per year 40 hours per week
q How does the labor cost of craftsmen (24MM) on a refinerysized basis (ie cost per barrel of crude oil processed) compare with industry averages
Consulting your industry data base shows that costs appear to be about 20 above the average of peer refineries
This is an important question to determine if there is a problem with costs (don’t assume there is the client may be performing better than industry average)
q Is there any particular reason why turnaround work is so heavily skewed toward contractors
Turnaround work tends to be more cyclical An external workforce is used to absorb some of this additional work Keep in mind that both client and contractor Craftsmen are capable of performing any maintenance job at the plant
After further analysis of the tables the key fact that should become appear odd is the large difference in the cost per unit of labor between your client’s Craftsmen and the outside contractor’s Craftsmen Often candidates will ask for the hourly wage rates of these two groups There is sufficient data to calculate these numbers The calculation is
Annual cost of client craftsmen 10MM ( 11 Craftsmenasset x 9 assets + 100 Craftsmen in
Central maintenance)
50000 year
Annual cost of contractor craftsmen 14 MM 140 contractor Craftsmen
100000 year
Again this difference should provoke a series of questions to understand the difference
q Is there any difference in the work performed by the client and contractor craftsmen
No other than the different levels of Turnaround work vs Daily work performed as noted in the previous table Both groups are capable of doing any job with roughly equal levels of quality
q Is there any difference in efficiency between the two groups of Craftsmen
The candidate would at this point be asked how they would measure this
After reaching an understanding of the difficulty involved in measuring the efficiency of a workforce (especially a unionized workforce) the candidate would be told that through a series of interviews with maintenance supervisors there is a consensus that contractor Craftsmen are roughly twice as productive as client craftsmen
This is a critical point in the case The candidate must recognize that in the present environment the client is largely indifferent about units of labor You can have a client worker who is half as efficient or a contractor worker who is twice as expensive The key now is to determine if there are ways to create an opportunity where the client would no longer be indifferent
q What is causing the inefficiencies associated with the client’s labor
Again the candidate would be encouraged to offer their own ideas
After some discussion the candidate would be told that many of the Maintenance Supervisors complain endlessly about restrictions placed on them by the existing union labor contract and the tightness of craft designations
The interviewer would probe to ensure the candidate understands why the present craft designation create the inefficiencies Essentially work is too finely divided It makes planning and supervision extremely cumbersome As an example if one of six crafts required to perform a job is absent or late the entire job must shut down as craft designations are not allowed to support other craft designations
q Is it possible to change the existing union contract
The present labor contract is a three year contract that is due to be renegotiatedrenewed in six months
q Will the union resist changes to the existing contract
Indeed
At this point the candidate should recognize a major (albeight difficult) opportunity to reduce labor costs The client would essentially like to have its own employees look and function like its contractors but continue to get paid at present rates In reality management will need to make wage concessions in order to change present work practices However through planned negotiations a scenario can be created which presents a favorable opportunity for your client to begin to replace outside contractors with its own Craftsmen
There are several ways to address the third question of the case the actual savings that might be achieved One quick method is to assume that these changes would bring maintenance costs back in line with industry average Utilizing the cost benchmark mentioned earlier one could assume costs could be reduced to 24MM120 20MM a 4MM savings
A second and more detailed method would be to take the extreme scenario where the client’s Craftsmen is paid its present rate but is made as efficient as the contractor’s Craftsmen In this case you begin with the present level of 200 client craftsmen who are functioning as 100 equivalent contractor Craftsmen (they’re onehalf as efficient) By improving their efficiency you are effectively creating 100 equivalent contractors Thus you are immediately able to replace 100 contractors and save 10MM This could be taken one step further by assuming you would want to replace all contractors This would save an additional 25MM (4MM existing contractor expense 2MM required to hire additional client craftsmen + 05MM in contractor supervisors) As noted earlier in reality this approach would require wage concessions to the union so actual savings may be something significantly less
Key takeaways
This case requires the candidate to quickly digest a large amount of organizational issues and then quickly check some ratios to uncover the basic problem (the client workforce is inefficient) Creativity must then be used to structure a recommendation that would create a more favorable situation for the client As in other cases acceptable solutions need not follow the exact method above nor cover all of the above points
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