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Medium Profitability Operations Capacity

Orrington Office Supplies

#Engineering & Construction #Manufacturing #Office Products
ProHub Comment

This is a classic capacity and operations case testing the candidate's ability to diagnose profitability issues in a manufacturing business. The case guides candidates through structured problem-solving: identifying declining profit trends despite sales growth (indicating fixed-cost leverage issues), analyzing plant-level operations to spot consolidation opportunities, and quantifying the financial impact of operational restructuring. The key insight is recognizing that excess capacity across three plants with varying cost structures creates waste, and consolidating to the lowest-cost facility can dramatically improve profitability.

Estimated Time 15 minutes
Difficulty Medium
Source Kellogg
50 / 100
Our client, Orrington Office Supplies (OOS) is a leading manufacturer of office products in 1992, with sales of $275m in 1991. They have strong brands, invest heavily in marketing and advertising, and have grown through product line extensions and 4 key acquisitions. OOS is organized into 5 autonomous divisions, but shares manufacturing and marketing functions. Shared costs (45% of total) are allocated on a percentage share of sales method. There are three plants running at a current capacity utilization of 50%. Analysts predict OOS is a potential acquisition target given its strong balance sheet but weakening earnings. They are publicly traded and have little long-term debt. As a potential investor, how would you improve its profitability?

Clarifying Information

  1. U.S. Office supplies market grew at 5% CAGR historically. In 1990 and 1991, the market declined at 5% per year.
  2. Superstore channel is becoming increasingly critical - Gained 10 share pts in past 2 years - Typically discount products 30% to small retailers/dealers
  3. Superstores are aggressively substituting private label products for traditional brand names
  4. Broader product line than competitors (12.5k SKUs vs. 4-5k for competitors)
  5. Distribution: 75% wholesalers, 15% superstores, 10% end customers
  6. Highest selling product is a high-end branded stapler
  7. Staples, Inc. is OOS’s largest customer