*Case Question: If you were Susan, what would you recommend to Delhi management?

The number of engineers employed worldwide dropped during the worst of the crisis from about 17,000 to 12,000. However, much of this drop resulted om offering early retirement packages and shifting away from mechanical to software engineering. Employment of engineers went quickly back up to 17,000 in 2011 and continued growing because engineering expertise was Delhi's most valuable asset. Delhi also made signicant investments in advanced manufacturing capabilities. For example, a completely new facility in Georgia spanned the length of two football elds and was churning out 2.1 billion electrical connectors annually for companies such as Tesla. Much of the work was done by unmanned robots called \"oggers\" scurrying among bins and rows of machines. In contrast, most of Delhi's older plants in the Midwest, which produced mainly powertrain and thermal system components, saw little investment in automation and remained labor intensive, even though their hourly wages for unionized employees were relatively high. The industry mega-trend was to build the \"Connected Car.\" Consumers were increasingly willing to pay for greater safety, infotainment, productivity, and convenience in their cars. Manufacturers wanted to simplify assembly, enhance lel economy, lower emissions, and improve performance by reducing car weight and mechanical complexity. All of this required augmenting traditional mechanical components with products and systems that combined integrated circuits, sensor technologies, and software algorithms, which in turn increased demand for a sophisticated electrical architecture as a foundation. As a part of this trend, it became necessary to enable on-going software support services to continuously upgrade cars with new features and performance enhancements. Although recent nancial performance was satisfactory, 2015 was going to be another milestone in remaking of the company. Mark Taylor was appointed as new CEO and immediately launched a strategic review of the product portfolio. Corporate staff branded it as the FutureNow project and planned to use it as a platform to publicly communicate with investors. The aim was to layout a ve-year action plan as well as a vision for the long term. Mark wanted a detailed blueprint of actions to be taken now to make that vision happeninvestments in new products (inhouse R&D as well as acquisitions) and sources of funding (long-term loans, seasoned equity offerings, and potential divestitures). He explained the need for such blueprint as follows: Our engineers have the future all gured out. Cars will be self-driving. Internal- combustion engines will be replaced by electric ones. They will be powered by batteries or fuel cells. The amount of data generated and processed by cars will exceed data generation of any other device known to mankind now... I get all that. But I also know that engineers are dreamers, as they should be... The point is not so much what the future holds, it is much more about how to get there. We cannot invent everything ourselves, we have to make choices and we have to hedge our bets. That's where it gets tough. What steps should we take next year and the year after and so on. Exhibit 6 Overhead Costs Description Indirect labor, tools, supplies: production supervisors and other salaried plant personnel directly involved in machine setup, production, and quality control; tools such as drills, screw drivers, wrenches, handheld power equipment; safety supplies such as goggles, gloves, masks, vests. Warehousing, receiving, shipping: including labor, tools, and supplies such as packing material; third party freight related costs; gas and maintenance of own trucks, forklifts, and other warehousing equipment. Manufacturing depreciation: depreciation of all manufacturing and warehousing related property, plant, and equipment. Manufacturing assets are depreciated relatively quickly so that the largest depreciation charges are incurred within the rst few years of asset activation. Maintenance and plant services: janitors, nonskilled hourly personnel, thirdparty maintenance and security contracts, onsite dedicated staff and administration. Warranty costs: annual provisions for the cost of recalls, repairs and related legal expenses; includes reimbursements of authorized service shops and consumer claims. Product design & development: all costs associated with operation of technical centers (except for depreciation which is included below); a large majority of these costs are salaries of scientists, engineers, and technicians. Depreciation & amortization: all other depreciation (except of manufacturing depreciation), amortization of intangible assets, changes in the valuation of acquisition-related goodwill. Pension, health care obligations: benefits of all hourly and salaried employees, contributions to union- operated pension funds specified in labor union agreements. Pension obligations increase considerably after ten years of employment. Contract and temporary workers are typically not eligible for benefits. Selling, general & administration: sales and marketing expenses (except for depreciation); executive stock-based compensation; IT support, human resource administration, accounting & finance, PR & investor relations.Exhibit 1 Employment and Properties 2014 2013 2012 2011 2010 2009 2008 Employees (total in thousands) 164 161 155 143 110 117 167 Contract & temporary 37 44 37 39 10 12 20 Hourly 101 91 93 80 78 80 114 Engineering 20 19 18 17 12 13 17 Other salaried 6 7 7 7 10 12 16 Manufacturing facilities 129 126 126 114 97 135 175 Sales offices & customer centers 96 94 90 82 74 91 136 Technical centers 15 15 15 15 14 15 16Sales Electronics & safety Powertrain systems Electrical architecture Thermal systems Automotive holdings group Direct costs Overhead costs Net operating income Exhibit 2 Delhi Components Statement of Operations (in billions) 2014 16.69 2.83 4.42 7.97 1.47 7.48 7.55 1.66 2013 15.75 2.73 4.66 6.82 1.54 7.24 7.19 1.32 2012 16.30 2.93 4.97 6.64 1.76 7.44 7.11 1.75 2011 14.03 2.72 4.09 5.62 1.60 6.78 6.41 0.84 2010 11.14 2.56 2.91 4.30 1.37 6.12 5.98 -0.96 2009 17.63 3.34 3.67 4.65 2.12 3.85 12.12 7.43 -1.92 2008 22.03 4.04 4.66 4.97 2.41 5.95 16.41 9.14 -3.52 Exhibit 3 Direct Cost by Product Line Area (in billions) 2014 2013 2012 2011 2010 2009 2008 Direct labor costs 3.95 3.81 3.92 3.53 3.20 6.41 8.35 Electronics & safety 0.71 0.70 0.73 0.73 0.78 1.38 1.77 Powertrain systems 1.14 1.19 1.22 1.08 0.90 1.25 1.61 Electrical architecture 1.66 1.48 1.51 1.27 1.10 1.34 1.54 Thermal systems 0.44 0.44 0.46 0.45 0.42 0.70 0.82 Automotive holdings group 1.74 2.61 Direct materials 3.53 3.43 3.52 3.25 2.92 5.71 8.06 Electronics & safety 0.54 0.53 0.55 0.56 0.68 0.99 1.27 Powertrain systems 1.3] 1.38 1.40 1.26 0.94 1.48 2.06 Electrical architecture 1.38 1.22 1.24 1.11 0.99 1.22 1.57 Thermal systems 0.30 0.30 0.33 0.32 0.31 0.47 0.64 Automotive holdings group 1.55 2.52 Exhibit 4 Net Operating Income by Product Line Area (in billions) 2014 2013 2012 2011 2010 2009 2008 Net operating income 1.66 1.32 1.75 0.84 -0.96 -1.92 -3.52 Electronics & safety 0.22 0.18 0.33 0.10 -0.36 -0.63 -0.94 Powertrain systems -0.21 -0.16 0.14 -0.21 -0.61 -0.51 -0.77 Electrical architecture 1.76 1.33 1.15 0.93 0.15 0.54 0.17 Thermal systems -0.11 -0.03 0.14 0.01 -0. 14 0.14 0.05 Automotive holdings group -1.46 -2.04 Net operating income = Sales Direct Costs Allocated Overhead Costs. Overhead is allocated proportional to direct labor costs. Total net operating income may not exactly equal the sum of net operating income by line area because of rounding. Exhibit 5 Overhead Costs Break-Down (in billions) 2014 2013 2012 2011 2010 2009 2008 Overhead costs 7.55 7.19 7.11 6.41 5.98 7.43 9.14 Indirect labor, tools, supplies 0.78 0.77 0.78 0.70 0.81 0.94 1.28 Warehousing, receiving, shipping 0.52 0.52 0.54 0.50 0.50 0.71 0.96 Utilities 0.33 0.32 0.35 0.31 0.28 0.48 0.60 Manufacturing depreciation 1.40 1.30 1.40 1.30 1.20 1.60 1.80 Maintenance and plant services 0.42 0.39 0.42 0.43 0.47 0.49 0.52 Warranty costs 0.42 0.35 0.28 0.21 0.10 0.32 0.41 Product design & development 1.65 1.60 1.40 1.20 1.10 1.00 1.40 Depreciation & amortization 0.80 0.72 0.75 0.61 0.54 0.45 0.60 Pension, health care obligations 0.58 0.57 0.57 0.56 0.56 0.99 1.05 Selling, general & administration 0.65 0.65 0.62 0.59 0.42 0.45 0.52 REMAKING OF DELHI COMPONENTS The oicial assignment is to evaluate the product portfolio and advise on strategic actions but I have done this often enough to know that they want cuts. Products will get eliminated, facilities will get shut, people will lose jobs... T hat 's painful but often necessary so they need an objective, independent, tough look at the data and a sound analysis to support their decision. And this is where we come in Susan Delaney, McWaters Consulting During her successful career as a consultant Susan Delaney advised companies on restructuring and strategic repositioning in a variety of industries. Her latest client, Delhi Components, engaged her team to evaluate their strategic options before nalizing the major pillars of the FutureNow initiative, which was planned to be publicly released at the next quarterly earnings release. Delhi was one of the major North American car parts supplier that evolved into a global industry leader with cutting-edge technologies and manufacturing presence in 33 countries. All 25 of the largest car makers in the world were customers and 18 of the 20 topselling models worldwide used Delhi parts. But it took a while to get there. Origins and Recent History Delhi was originally a division within one of the BigThree Detroit car manufacturer producing a wide range of parts such as batteries, breaks, lel tanks, mufers, catalytic converters, doors, steering wheels, suspensions, or ignition components. It was spun off during the 1990's into an independent company but for several years continued operating largely as a captive supplier conducting most of its business with the former parent company. Thus, unlike virtually all other Tier 1 suppliers, Delhi had a very narrow customer base and an extremely broad product portfolio. The main competitive advantage of Delhi was engineering expertise and ability to continuously innovate and bring new products to the market. It employed a vast network of scientists, engineers, and technicians who developed advanced products using the latest technologies, materials, and processes. The main challenge was competing on price in an industry where margins were constantly under pressure and competitors had an advantage of lower labor cost and economies of scale resulting from greater specialization. The reason for the relatively high labor costs went back to Delhi's origins as a division of a Detroit car manufacturer. Many of its manufacturing facilities were located in areas with strong labor union representation. Moreover, generous labor agreements negotiated with the unions by its former parent fully carried over when Delhi became independent. Although all parties anticipated a gradual renegotiation of those labor agreements to bring them in line with the terms prevailing in the automotive parts industry, management wanted to proceed cautiously and avoid antagonizing the unions and potentially costly and disruptive labor actions. A major impetus for change came when Delhi acquired Carco Electronics in 1995 which brought in expertise in the design and manufacturing of key electrical and electronic car components. It was a leap forward in the trend to move away 'om selling \"standalone parts\" that could easily be substituted with competitors' products to selling \"an architecture of parts\" or systems of seamlessly interconnected components. It also increased the focus on high-margin, technologically advanced components which allowed Delhi to greatly expand its customer base. Finally, many of the newly acquired product lines needed a different type of expertise. Design of microprocessor-based components such as engine management controllers, collision warning systems, custom integrated circuits, and data communication systems required mechanical engineers to closely work together with software engineers. In other words, the acquisition was the beginning of an era during which lines of code would become a new key competitive weapon. And then came the global financial crisis of 20082009. New car sales in the U.S. dropped from 17.2 million in 2007 to 9.2 million in 2009. Two of the Big-Three U.S. manufacturers led for bankruptcy protection and had to be bailed out by the government. Delhi sales dropped more than 50% during the crisis and radical restructuring became the only way to survive. The outcomes were drastic. More than 60,000 employees (about 40% of the workforce) lost their jobs, close to a half of all manufacturing facilities were closed, and dozens of products were divested or discontinued. In the words of Mark Taylor who was Vice President of Global Operations at that time: We underwent a complete model redo: wall-to-wall, oor-to-ceiling and top-to-bottom, there was nothing that wasn 't touched. We went from I l 9 product lines to 33 based on one ruleall divisions and all regions would carry their own weight and perform at the same high level, no excuses, no if? or buts. Everything we picked was picked for a reason and each of the product lines had to make money. All the sacred cows... well, we turned them into steaks. \" Labor union were largely cooperative during this restructuring and no major strikes were called. Delhi was able to renegotiate its labor agreements and most importantly shed some its pension obligations which were assumed by the labor unions in exchange for an equity stake. The specter of liquidation aligned the interests of shareholders, creditors, employees and their unions, which allowed for a esh new start. On Making of the Connected Car By the time Susan Delaney was brought in as a consultant in 2015, Delhi was a different company. It supplied all major car manufacturers in the world and its former parent accounted for only 14% of sales. It specialized in four product line areas: electronics and safety, powertrain systems, electrical architecture, and thermal systems. It became a global leader in so called \"fully-engineered solutions,\" which meant that it assumed many of the research and development, design, and assembly functions traditionally performed by car manufacturers. The transformation was the result of signicant investments and continued focus on high-margin, high-tech products. Despite closing many of its manufacturing plans during the recession, Delhi kept the number of technical centers designing new products largely unchanged (see Exhibit 1). His concerns were echoed by industry experts. It was not at all clear how quickly new automotive technologies would be adopted. According to Morningstar Inc. auto-parts analyst Richard Hilgert: \"If these technologies aren't embraced like they think it will, that could be a huge problem. .. While auto makers have talked about adding more, adoption rates could be slower than expected and some products not adopted at all leaving the suppliers to hold the bag on research and development costs.\" Moreover, Delhi was facing a new breed of competitors: \"It is Detroit against Silicone Valley. Who do you think is going to be better at integration of software, articial intelligence, and automotive engineering? I am not going to bet on Detroit.\" (Thomas Salanczik, managing director Star Venture Capital). Delhi Components Page 3 Mark was condent that Delhi would do well in the future with an increased focus on the right portfolio of products. He hired Susan Delaney's team because he valued \"her ability to balance the healthy tension between a vision and nancial reality.\" Product Portfolio The obvious start was to look at the protability of the four product line areas and get a sense of the trends (see Exhibits 25). Susan quickly gleaned the following big picture: The rst area, electrical architecture components, included product lines such as connectors, cables, wiring assemblies and harnesses, electrical centers, circuit protection and switching devices, and hybrid high voltage distribution systems. This area was the largest in terms of sales and accounted for virtually all prots in recent years. The second area, powertrain systems, included gasoline and diesel engine architectures with components for ignition, fuel handling, fuel injection, combustion, transmission, and emission control. It also included electronic control modules with software, algorithms, and automatic calibration. This area used to be the main strength of Delhi but went through a severe downturn during the recession. Although sales recovered quickly, the powertrain business was loss making in all but one of the recent years. The third area, electronics & safety, included body computers, sensors, security systems, infotainment and driver interface products such as audio/digital/satellite receivers, navigation systems, displays as well as occupant detection systems, collision warning systems, advanced cruise control technologies, collision sensing and auto braking. Sales in this area have not reached pre-recession levels yet but severe losses during the recession turned into solid prots in recent years. The fourth area, thermal systems, included components for powertrain thermal management such as condensers, radiators, fans and heat exchangers as well as cabin thermal comfort such as HVAC modules and air conditioning compressors. This was not only the smallest area in terms of sales, it also experienced no growth and losses in several years. Susan thought that two of the four product line areas were ripe for a signicant overhaul to improve the bottom line. The math seemed relatively simple. Direct material costs could not be reduced without signicantly increasing production volumes. Given little or no organic grth in these areas, volume increases would require investments in acquisitions or development of new product lines. The more likely path forward was to reduce labor costs or raise prices. Reducing labor costs in many of the unionized plants in the Midwest seemed both necessary and difcult to implement. Labor unions yielded a lot of ground during the recession because survival was at stake. This time around, Delhi was making decent prots and it would be much harder to explain why shareholders were given priority over long-time employees. Closing plants and moving production to Mexico or oversees could trigger strikes, let alone the political backlash and reputation damage. However, labor union leaders were more amenable to discussion if labor cost savings came together with signicant new investments into upgrading and automating their outdated plants. In essence, some lost jobs could be exchanged for a guarantee of j ob stability and wage grth for the remaining employees. Raising prices in a supercompetitive and pricesensitive industry also seemed like wishful thinking. Both powertrain and thermal system manufacturing facilities were still plagued by overcapacity issues following the painful adjustments during the recession. Higher prices and the resulting lower sales and production volumes could aggravate these issues. The only way to increase prices was to make the product lines more unique. Although this resonated well with Delhi's strategy of investing in engineering expertise and innovation, the R&D budget was inevitably constrained and technical centers needed guidance as to which design and development projects should be prioritized. Susan knew that she was hired to translate this big picture into an actionable plan. The tasks for her team were clear now: We need to prepare a detailed analysis of discontinuing or selling one of the two under- performing product line areas. We should be very clear about the impact on the following year 's operating profit. Bad surprises could ruin our reputation. Let 's start with a thorough at the overhead costs. We really need to gure out how much we can save by discontinuing a product line area. Let's run the numbers and then we can prepare a report on the broader strategic implications of our recommendations