Sample Framework – Q1: Market sizing (data from Exhibit 1)
Cotton yarn produced globally in 2019 [million tons] * 75% = 30M tons
Since winding speed is in [m/min], it is necessary to convert weights into lengths using Ne.
Ne = 40 means that to get 0.5 kg of yarn (1 pound) we need 40 * 840 meters (1m = 1 yard). Therefore, 1 kg of yarn = 40 * 840 * 2 = 67,200 m ~ 67,000 m = 67 km
► Shortcut: tell the candidate 1kg of yarn is 67km long
With 1 kg of yarn long 67 km, 30M tons of yarn = 30M * 1,000 * 67 km ~ 2,000bn km
To estimate total number of machines installed, it is necessary to use the average winding speed of 1,200 m/min. In 1 year, a machine processes about
1.2 km/min * 60 min/h * 24 h/day * 360 days/year * 80% efficiency = 483,840 km ~ 500k km
► Shortcut: tell the candidate 1 machine can process 500k km of yarn per year
Total capacity installed = Total length processed / Length processed per machine
Total capacity installed = 2,000bn km / 500k km = 4M
From the capacity installed and the expected life (20 years) it is possible to calculate the expected sales per year, assuming a 1/20 = 5% renewal rate.
New sales = Total capacity installed * Renewal rate = 4M * 5% = 200,000 units (MARKET SIZE)
Sample Framework – Q2: Market share and profit
Data to provide upon request from the candidate (eventually show Exhibit 2)
GoodWind winding machines 2019 sales [units] 80,000
Price per winding machine [€] 2,500
Cost per winding machine [€] 2,000
Fixed costs [€] 30,000,000
Market share = GoodWind sales / Market sales (from previous calculations)
Market share = 80,000 / 200,000 = 40%
Profit = (Price per machine – Variable cost per machine) * Machines sold – Fixed costs
Profit = (2,500 – 2,000) * 80,000 – 30,000,000
Profit = 40,000,000 – 30,000,000 = 10,000,000
Sample Framework – Q3: Market disruption
Rough calculations from Exhibit 3
- Winding machine: to get 1,200 m/min it is necessary to pay 2,500 € / 80% = 3,125 €
- Open-end spinning: to get 2,500 m/min it is necessary to pay 5,000 € / 50% = 10,000 €, so to get ~ 1,200 m/min the price is about 5,000 €
- Air-jet spinning: to get 5,000 m/min it is necessary to pay 15,000 € / 75% = 20,000 €, so to get ~ 1,200 m/min the price is about 5,000 €
From these calculations, it seems that winding seems to be the cheapest way to produce yarn, and therefore it seems potentially not disrupted by the new technologies.
Additional considerations to be taken into account (that the candidate could mention for additional credit):
- Exhibit 3 is ignoring the price and efficiency of ring-spindles, which ideally should enter the calculation, and could potentially revert the conclusion
- Exhibit 3 is also ignoring the operating costs of such machines (e.g. Air-jet has 4x the output of a winding machine, therefore could potentially save on energy consumption, maintenance, room required)
- IF Open-end spinning or Air-jet spinning can improve speed or efficiency or can become cheaper in the future, there is a potential threat for GoodWind’s market
- Yarn quality is also not considered: Open-end spinning and Air-jet spinning DO NOT produce high quality yarn, therefore there are certain applications which still require Ring spinning and Winding machines