Firm: A.T.

Kearney
Case Number:
Case setup (facts offered by interviewer):
Your client is a U.S. based oil refinery
The refinery has a single location and is a small to medium-sized refinery
Your client, although profitable, believes it is lagging behind the competition and could improve
You are brought in as part of a joint consultant-client team that will review overall operations and
make recommendations on ways to improve the bottom line
You have been assigned to work with the maintenance division
The maintenance departments primary objective is to prevent equipment failure and to repair
equipment when it does fail
Understanding of its organization is important. It consists of three primary areas: nine assets areas, one
central maintenance area and one group of contractors. The first two areas are employees of the client,
the third an external source of labor.

An asset is a physical area of the plant that contains various pieces of equipment (pumps, heat
exchangers, etc.). There are nine assets. Each asset has a Maintenance Supervisor who is
responsible for all maintenance to be performed in his/her asset. Working for the Maintenance
Supervisor in each asset is, on average, eleven craftsmen. The craftsmen are the actual workers
that perform the maintenance. The craftsmen are unionized and divide into twelve different craft
designations (e.g. electricians, pipefitters, welders, etc.). Each craft designation has a defined set
of skills they are qualified to perform. They are not allowed to perform skills outside of their
defined craft, or help in the performance of activities involving skills beyond their craft.
Collectively the twelve different crafts can perform any maintenance job that might arise at the
refinery. The maintenance supervisor and his/her assigned craftsmen are hardwired to their
asset. That is, they work only on equipment in their given asset.

Central maintenance is a centralized pool of Maintenance Supervisors and Craftsmen, who are
dispatched to support the different assets during times of high workload. They are employees of
your client and fit the description contained in the above Asset explanation. The only difference is
that they may work in any of the different assets as determined by workload. There are a total of
11 Maintenance Supervisors and 100 Craftsmen that comprise Central Maintenance

Contractors are a group of outside Supervisors and Craftsmen who support your client during
times of high workload. They also are capable of performing any maintenance job that may arise,
but differ from your clients Craftsmen in that they divide the collective skills required into five
designations rather than twelve. Thus, the craftsmen of the contractor are capable of performing a
broader set of skills. They, like your clients craftsmen, dont perform skills outside of their
defined craft but do allow different craft designations to help each other. There are an average of 7
contractor Maintenance Supervisors and 140 contractor Craftsmen at the refinery on any given
day.

Question:
What opportunities exist to increase profits?
What recommendations can you make to capture savings related to the identified opportunities?
What are the cost savings associated with your recommendations?

Suggested solutions:
The first question involves identifying opportunities to improve profits. The candidate must start with either
revenues or costs. Although one could make the argument that maintenance supports revenue by

maximizing the operating time of the refinery equipment, maintenance should be seen to be a support
function. Thus, it is more appropriate to focus on costs and cost reduction. The following questions will
help the candidate gain insight into cost reduction opportunities.

How does the maintenance department track its costs?

If the candidate phrases the question about material or overhead costs, the interviewer would inform
the candidate that detailed reviewed showed no major opportunities. The candidate would be steered
toward labor costs and given the following tables regarding maintenance labor costs for the past year.
To support understanding of the following tables, Turnaround work is long term preventive
maintenance (e.g. complete rebuilding of a boiler) that may be performed once every few years. All
other work (short term emergency repairs, small scale preventive maintenance, other routine work,
etc.) fits into the category of Daily work
Craftsmen
Client
Contractor
Total

Daily work
$ 8MM
$ 5MM
$ 13MM

Turnaround
$ 2MM
$ 9MM
$ 11MM

Total
$ 10MM
$ 14MM
$ 24MM

Supervisor
Client
Contractor
Total

Total
$ 1MM
$ 0.5MM
$ 1.5MM

Since the Craftsmen table represents a larger dollar amount than the Supervisor table, it is logical to pursue
cost savings opportunities in this area first.

What is the utilization of Craftsmen in the assets? In central maintenance? And for contractors?
Assume each area is utilized 100% of the time, 50 weeks per year, 40 hours per week.

How does the labor cost of craftsmen ($24MM) on a refinery-sized basis (i.e., $cost / per barrel of
crude oil processed) compare with industry averages?
Consulting your industry data base shows that costs appear to be about 20% above the average of
peer refineries.
This is an important question to determine if there is a problem with costs (dont assume there is,
the client may be performing better than industry average!)

Is there any particular reason why turnaround work is so heavily skewed toward contractors?
Turnaround work tends to be more cyclical. An external workforce is used to absorb some of this
additional work. Keep in mind that both client and contractor Craftsmen are capable of performing
any maintenance job at the plant.

After further analysis of the tables the key fact that should become appear odd is the large difference in the
cost per unit of labor between your clients Craftsmen and the outside contractors Craftsmen. Often
candidates will ask for the hourly wage rates of these two groups. There is sufficient data to calculate these
numbers. The calculation is:
Annual cost of client craftsmen = $10MM/ ( 11 Craftsmen/asset x 9 assets + 100 Craftsmen in
Central maintenance)
= $50,000 / year
Annual cost of contractor craftsmen = $ 14 MM/ 140 contractor Craftsmen
= $100,000 / year

Again, this difference should provoke a series of questions to understand the difference.

Is there any difference in the work performed by the client and contractor craftsmen?
No, other than the different levels of Turnaround work vs. Daily work performed as noted in the
previous table. Both groups are capable of doing any job with roughly equal levels of quality.

Is there any difference in efficiency between the two groups of Craftsmen?

The candidate would at this point be asked how they would measure this.
After reaching an understanding of the difficulty involved in measuring the efficiency of a workforce
(especially a unionized workforce), the candidate would be told that through a series of interviews with
maintenance supervisors, there is a consensus that contractor Craftsmen are roughly twice as
productive as client craftsmen.

This is a critical point in the case. The candidate must recognize that in the present environment the client is
largely indifferent about units of labor. You can have a client worker who is half as efficient or a contractor
worker who is twice as expensive. The key now is to determine if there are ways to create an opportunity
where the client would no longer be indifferent.

What is causing the inefficiencies associated with the clients labor?

Again, the candidate would be encouraged to offer their own ideas.
After some discussion the candidate would be told that many of the Maintenance Supervisors complain
endlessly about restrictions placed on them by the existing union labor contract and the tightness of
craft designations.
The interviewer would probe to ensure the candidate understands why the present craft designation
create the inefficiencies. Essentially work is too finely divided. It makes planning and supervision
extremely cumbersome. As an example, if one of six crafts required to perform a job is absent or late,
the entire job must shut down, as craft designations are not allowed to support other craft designations.

Is it possible to change the existing union contract?

The present labor contract is a three year contract that is due to be renegotiated/renewed in six
months.

Will the union resist changes to the existing contract?

Indeed!!

At this point, the candidate should recognize a major (albeight difficult) opportunity to reduce labor costs.
The client would essentially like to have its own employees look and function like its contractors, but
continue to get paid at present rates. In reality, management will need to make wage concessions in order to
change present work practices. However, through planned negotiations a scenario can be created which
presents a favorable opportunity for your client to begin to replace outside contractors with its own
Craftsmen.
There are several ways to address the third question of the case, the actual savings that might be achieved.
One quick method is to assume that these changes would bring maintenance costs back in line with industry
average. Utilizing the cost benchmark mentioned earlier, one could assume costs could be reduced to
$24MM/1.20 = $20MM, a $4MM savings.
A second, and more detailed, method would be to take the extreme scenario where the clients Craftsmen is
paid its present rate, but is made as efficient as the contractors Craftsmen. In this case, you begin with the
present level of 200 client craftsmen who are functioning as 100 equivalent contractor Craftsmen (theyre
one-half as efficient). By improving their efficiency, you are effectively creating 100 equivalent
contractors. Thus, you are immediately able to replace 100 contractors and save $10MM. This could be
taken one step further by assuming you would want to replace all contractors. This would save an
additional $2.5MM ($4MM existing contractor expense - $2MM required to hire additional client

craftsmen + $0.5MM in contractor supervisors). As noted earlier, in reality, this approach would require
wage concessions to the union, so actual savings may be something significantly less.
Key takeaways:
This case requires the candidate to quickly digest a large amount of organizational issues and then quickly
check some ratios to uncover the basic problem (the client workforce is inefficient). Creativity must then be
used to structure a recommendation that would create a more favorable situation for the client. As in other
cases, acceptable solutions need not follow