The Case of Wellesley Paint

Agenda• Company Profile• Product Line : Traffic Paint• Geographical Presence• Product Line : Commercial Paint• Relative Comparison• Quality Issues• Financial Performance• Balance Scorecard

– Financial Perspective– Customer Perspective– Internal Business Perspective– Innovation and Learning Perspective

• Strategy and Solutions

Company Profile• Wellesley Paint Company is a small sized company

• Located in the state of Virginia

• A narrow product line consisting of:– Traffic Paint– Commercial Paint

• Major customers for traffic paint which is their primary source of revenue generation include the states of:– Pennsylvania– North Carolina– Delaware – Virginia

Product Line : Traffic Paint (1/3)

342000

38000

Production(in gallons)

Traffic Paint Commercial Paint

Virginia23%

Others77%

Contract Value

Average Price of Traffic Paint sold last year = $ 9 / gallon

Step

1 Road test under the supervision of NAHP. St

ep 2 Certain stretch

of highway is chosen to serve as the road test site.

Step

3 Any paint manufacturer can apply stripes of their paint at the test site.

Step

4 NAHP monitors the paint and sends report to the state. St

ep 5 State invites the

manufacturer of best performing paints to submit bids.

Step

6 Lowest bidder wins the contract.

Traffic Paint Bidding Process-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Traffic Paint has unique specifications for different geographies in terms of color, thickness, texture etc.

Wellesley recently lost the rights to bid for the Virginia Contract on poor performance in test.

Product Line : Traffic Paint (2/3)1. 5 Year fixed price contracts with only quality requirements being specified.

2. Delivery timing not certain.

3. Seasonal demands by states. Spring is the time they know their budget and typically painting starts in June-July which hence leaves very little time to produce the required quantity in time with proper quality checks.

4. Even if the paint is produced, a sample is tested by the laboratory (state). Time period involved is anywhere between 2 – 3 months.

5. Inventory has to be warehoused by Wellesley in the meantime.

6. If warehouse run out of capacity, aisles, production floor etc. are used as alternative storage arenas.

Product Line : Traffic Paint (3/3)Fixed Price Contract

Leaves no scope for renegotiation of contract for

next 5 years

Inflation may hurt cash flows in coming years

Uncertainty regarding Delivery

Money is blocked in the inventory thus reducing the free cash flow available with

the firm

Capex plans may take a backseat.

Working capital finance at higher rates

Seasonal DemandVariability in demand.

Plant may not operate at full capacity in off season.

Fixed Cost has to be serviced even if sales are seasonal.

Test SampleTest sample does not generate any revenue typically but its cost is

apportioned.

Sunk Cost

Inventory StorageRisk of damages that may be incurred on inventory kept at

warehouse.

Inventory Storage CostInsurance Cost

Opportunity Cost

Exceeding maximum

warehouse capacityRisk of pilferage, production

floor accidents etc.Additional Cost on account of

Inventory Storage Cost

Geographical Presence

v

High shipping costs enable a firm to be competitive in close proximity only.

Wellesley faces a threat from Heron Paint Company operating in Houston, Texas.

They are building an efficient new plant in North Carolina.

Hence Wellesley must start looking to revamp its operations or find new customers in the states of West Virginia and Maryland which are near to its base camp.

Product Line : Commercial Paint1. Commercial Paint form a significantly low revenue stream for Wellesley. A meager

10% is contributed by this segment.

2. Includes exterior and interior house authentic colonial color paints, thereby giving them a nice hold on local market in Virginia.

3. Though lack of customization (computerized color matching equipments) has pushed their products to second or third line of products.

4. A lot also depends on their strategy as they never consider this segment as the revenue generator for them. Traditionally they have focused on traffic paint as their core strength.

5. Average Price of Commercial Paint sold last year = $ 11 / gallon

Relative Comparison

If Virginia Contract is lost Wellesley saves cost to the tune of:

Overhead Cost of traffic paint = $25000

Inventory Handling Cost = $9000

Direct Cost

Overhead

Manufacturing Overhead

General and Administrative Cost

89.39%

2.91%

3.39%

4.31%

87.01%

4.44%

3.76%

4.79%

Cost Break Up

Traffic Paint Commercial Paint

Quality IssuesPaint contains three main ingredients:

1. Pigment2. Solvent3. Binders

The pigment provides the texture, colour and the hiding properties of the paint.

Solvents give the paint the proper consistency. They are used to keep the ingredients in liquid form. They also act as a "carrier" for the binders and pigments.

Binders are the one ingredient that is absolutely required. The binder is the part which eventually solidifies to form the dried paint film.

Pigment

Solvent

Binder

• Titanium Dioxide and Iron Oxide

• Clay and Silica

• Latex paints use water• Thinner (Petrochemical

Distillate)

• Acrylics, polyesters, melamines, oils, or latex.

Silica cannot be grounded finely.

Add to that, it does not hold up well.

Hence quality issues are faced by Wellesley.

Financial Performance

Microsoft Office Excel Worksheet

Balanced Scorecard

Vision and Strategy

FinancialTo succeed financially, how should we appear

to our shareholders

CustomerTo achieve our vision,

how should we appear to our customers

Internal Business Processes

To satisfy our customers & shareholders, what

business processes must we excel at

Innovation and learning Perspective

To achieve our vision, how will we sustain our

ability to change and improve

Financial Perspective

• Survive

• Succeed

• Prosper

Goals Performance

• Consistency in growth of cash flows and investments in capex.

• Quarterly sales growth and increase in operating income across all divisions

• Increase in market share and high ROE/ROCE

Customer Perspective

• Delivery performance to customer

• Quality performance for customer

• Customer satisfaction & retention rate

Goals Performance

• Completion of projects in a timely manner & with high quality

• High value of product in terms of cost & quality

• Expand market share and retain current customers

Internal Business Perspective

• Manufacturing excellence

• Technology capability

• Avoiding bottlenecks

Goals Performance

• Reduction in cycle time and unit cost of paint

• Using technology to enhance efficiency of support services

• Increasing the paint storage capacity and reducing the inventory storage time

Innovation and Learning Perspective

• Continuous innovation

• Technological improvements

• Employee development

Goals Performance

• R&D to improve production processes and lower cost

• Improve product offerings and make internal support services more

• Job satisfaction and training / learning programmes

Strategy:Increased Focus on Commercial Paint

Per Gallon Gross Profits($) Gross Profit Margin(%)W/O Virginia contract and Promotion

24545 13.8

W/O Virginia contract but with Promotion of Commercial Paint

171320 35.3

1. Provide Distributors with Computerized Color Matching Equipment2. Better Pricing, Newer Offerings as per customer needs3. Customer Centric Initiatives such as Home Painting Services4. Increase Market Penetration by adding segments like: Customized Interior Wall

Paints, Wood and Metal Paints5. Larger Distribution Network 6. Strong Brand Building Campaigns: Pull Strategy7. Customer Helpline

Increased Focus on Commercial Paint

Benefits:

• Increased Revenues• Solution to Seasonality of Demand in Traffic paint• Timely Cash Flows• Predictable Demand, Inventory Levels as compared to Traffic

Paint Demand• Higher Margins

Solution to Traffic Paint Problem

• Modern Material Handling Facilities including storage of raw materials in silos instead of large tanks

• Automated Process Control System• Probe into lost Virginia contract to test the samples, production process ,

quality of raw materials, storage facilitiesQuality

Management

• Building Effective Supply Chain systems to ensure delivery to customers without holding much of inventory

• Use of Raw Material, Distribution Planning Software• Improving the product mix , technically advanced raw materials• Reducing the manufacturing , administrative overheads thereby improving

efficiencies

Cost Management

Increased Revenues and Cash Flows

Growth Strategy in Different cities of USA and in different Industrial segments such as:

• Automotive Coating• Decorative Coating• Power Coating• Floor Coating

Key Success Factors

Low Delivery Cost

Flexible Operations

Lower throughput time

Working Capital

Reduction

• Higher Creditors

• Lower Inventories

Margin Expansion

Lower Capex

• Asset “sweated’ more

• Higher Capital Productivity

Thank You!

Presented By:

Deepti Talreja (32144)Karn Thakuria (32299)

Nikita Giria (32276)Rohit Agarwal (32257)Sahil Makhija (32129)

Saurin Raichura (32132)Shilok Datta (32118)

Tarun Bothra (32213)