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BCG Medium Profitability Capital Investment Operations

New Rubber Plant Investment

#Industrial #Manufacturing
ProHub Comment

This case tests operational constraint identification and financial modeling under capacity limitations. The key insight is recognizing that the plant's 10M lb capacity is constrained by transportation logistics (outbound trains can only handle 5M lbs/month), not production capability. Strong candidates identify the thin 1% margins and commodity price volatility risks that threaten investment viability despite positive short-term ROI.

Estimated Time 15 minutes
Difficulty Medium
Source Darden
50 / 100
The federal government of a foreign country is investigating whether to reopen a rubber factory in a western part of the country. The factory was operational in the past, but has not been used for 7 years. The plant was closed due to terrorism in the area. If rejuvenated, it may become a target for the rebels. All the equipment is usable, but the government would need to spend $12M on upgrades, which would allow the plant to produce 10M lbs of rubber per month. The demand for rubber is strong, but rubber must be transported by train to a port. Two trains a day can be used for this.

Clarifying Information

  1. How is rubber made? Gum resin is refined. Need 3lbs of gum resin to produce 1 lb of rubber
  2. How do we get resin? By train from the capital. Up to 4 trains can be used for this purpose.
  3. How much can we sell rubber for? $20 per pound. Gum resin costs $5 per pound.
  4. How many suppliers are there? We have identified one gum supplier
  5. Who are our customers? Rubber is highly commoditized. We would sell on the global markets.
  6. What is the government’s goal? Profitability, job creation, and economic development.