Option 1: Investment in New Manufacturing Equipment
As an established consultant who has helped several companies in difficulties over the years, you have recently been approached by Homage Engineering plc for assistance.
The company has been in existence for over ten years. It specialises in supplying vital parts and components to the engineering industry. When it first started out, all the items sold by the company were manufactured within its four factories dotted around the UK – Birmingham, Glasgow Manchester and Milton Keynes.
The company’s main administrative offices (Sales and Marketing, Accounting and Finance, etc) are based in Birmingham. Significantly however, the company has never had an HR Department. Their payroll administration is out-sourced to a firm that specialises in payroll administration. Whenever the company has wanted to appoint new senior staff, they have relied on a local recruitment/selection agency. For most ordinary positions, the company has tended to follow a rather unorthodox approach. They post details of the position on internal notice boards, and have encouraged staff to recommend/nominate their friends/family to apply. Such nominations/recommendations tended to play a big part in the final decision as to whether someone is hired or not. In this way, each of their four factories across the UK had ‘a local, family/friendly’ atmosphere.
At its height, the company had in excess of 1,000 employees, with turnover close to £25m pa. The 2007/08 recession however affected the company’s key customers badly and, in turn, this affected the company quite significantly too. Increasingly strong competition from China, Poland and Romania did not help either. Latest accounts show sales of only £15m, and profits of less than £2m.
Despite the huge negative impact of the recession and competition on the company’s finances, the directors made a conscious decision not lay off any employee. The expectation was that the recession would only last a short period, and they would need all the staff working at full tilt sooner rather later. It was also seen as a gesture of goodwill to staff, many of whom had been with the company for a long time. Thus, while a few employees did leave on their own accord - retirement, resignation, etc – a large majority of the workforce has remained in position.
Now, it is several years since the recession ended, but business and indeed profit levels are nowhere near what the company expected. Or put another way, the company cannot afford to maintain its current levels of staff. It will have to make some redundancies – and even the employees are expecting this to happen.
In fact, perhaps in this anticipation on the part of the employees, management has recently learnt that, for the first time, the employees are exploring the possibility of joining a union. None of the employees belonged to a union thus far.
The company is now at some cross-roads. It needs to decide on a number of options:
Option 1 : One of the directors thinks that the best option going forward is take on the competition from China and Europe by making the company’s own manufacturing capability more efficient and more modern. He argues that while Brexit has its negatives, it also has positives for a company such as Homage. He thinks that Brexit potentially gives the company a breathing space from competition from countries in the EU - like Poland and Romania, at least in the short term. That breathing space will allow it to consolidate its domestic market and allow it to become a stronger force on the international market in the longer term.
If the company decides to take up this option, they will have to review and replace some of their rather out-dated manufacturing plants, and acquire more modern, and more efficient ones. The relevant costs and savings are detailed in Appendix 1.
Option 2 : Another director has a different opinion. He thinks that a better option for dealing with competition is to merge with or take over one of the larger ones located within the EU. This will give the company a foothold in the large EU market after Brexit takes effect, and will therefore potentially give it a competitive edge. He has identified two such possible targets, and Appendix 2 has a summary of their last two years’ financial statements.
Irrespective of the option taken up, there is no doubt at all that a significant shake-up of the company’s workforce and the way it is managed will be required. One move they are considering for example is to set up an HR function and bring in-house many of the activities that can usefully be done internally from their current out-sourced arrangements. Among many things, they think that such a move may help them in dealing with the whole issue of managing the redundancy scheme that will surely have to be done. Deciding who to make redundant and who to retain will be a huge task, given the close interconnectedness between many of the employees. Preparing a streamlined workforce that is professionally selected, well-trained/qualified and motivated for the huge task of rebuilding the company going forward will be another challenge.
Several directors currently running the company are also approaching retirement age. Even though there is currently no compulsory retirement age limit, there is nevertheless some concern that not sufficient planning appears to be taking place.
The managing director has asked you to look at the company in detail and write a report to him covering a detailed review of :
i) Option 1 : Using discounted cash-flow techniques, assess whether in financial figures alone, the proposed investment in new manufacturing equipment and technology is worthwhile. The company’s shareholders estimated required rate of return is 10% p.a. Also, include key non-financial factors that the company may need to take into account in deciding whether or not to go ahead with this option.
ii) Option 2 : Using ratio analysis, work out a number of appropriate ratios from the two companies’ financial statements for the past few years, and assess and comment on the companies’ respective financial performance and financial health. With reasons, make a recommendation as which of the two companies should be taken over/merged with. Also, include any other key considerations to be taken into account in choosing between the two companies.
iii) Overall : Explain and recommend with justification/reasons your considered view as which of the two options the company should go for.
iv) HR Function :
a. Review Homage’s existing practice with regard to HR activities. and identify and discuss key areas of weakness/concern.
b. Outline and briefly discuss the possible ways in which the setting up of an effective HR Function/Department could help the company in its current predicament as well as in the future. Indicate in your report which areas, in your view, will require priority attention.
c. Finally, provide a well-balanced summary of arguments for and against a company having its own fully functional HR Department as opposed to having it outsourced, and given the circumstances of Homage Engineering, make a recommendation as to whether or not to establish one.