Metalúrgica Andina: exit the fastener line?
Metalúrgica Andina makes metal components for industrial buyers. Revenue is €48M. Line A (standard fasteners) contributes €30M at an 8% contribution margin and consumes 62% of press hours. Line B (custom subassemblies for two OEMs) contributes €18M at 19%. Fixed costs are €6.4M. The controller proposes exiting Line A to free capacity for Line B, arguing that the company 'loses money on fasteners.' Two facts complicate this. First, 70% of Line A customers also buy Line B. Second, both OEM contracts require 48-hour replacement-part service, which is currently met using Line A's flexible short-run capacity. The union agreement requires 90 days' notice and €1.2M in severance, and only €900k of the fixed cost base is genuinely avoidable within two years.
1. Quantify the financial case for exiting Line A and identify the error in the controller's framing.
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Current contribution picture
| Line | Revenue | CM % | Contribution |
|---|---|---|---|
| A | €30.0M | 8% | €2.40M |
| B | €18.0M | 19% | €3.42M |
| Total | €48.0M | - | €5.82M |
Contribution €5.82M against €6.4M fixed = −€0.58M operating result.
Year-1 effect of the exit as proposed
- Lost contribution: −€2.40M
- Avoidable fixed cost: +€0.90M
- One-off severance: −€1.20M
- Net: −€2.70M in year 1, and −€1.50M per year thereafter until the remaining €5.5M of fixed cost actually comes out (which the proposal does not explain).
The framing error. 'Line A loses money' is an average-cost artefact: fully loaded, A is being charged a share of shared fixed cost it does not cause. On a contribution basis Line A pays €2.40M toward common overhead. Exiting it does not create €2.40M of value; it destroys €2.40M of contribution and hopes to save €0.90M.
A second error: capacity is only valuable if there is demand for it. The proposal implicitly assumes Line B can absorb 62% of press hours at 19% margin. That is an assumption, not a fact in the file.
2. What evidence would you require before the board votes?
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Four gaps, in order of decision weight:
- Confirmed incremental B demand. A signed or pipeline-weighted volume that fills the freed hours, at what price, with what tooling capex and ramp curve. If B demand fills only 30% of the hours, the exit converts a €0.58M loss into a larger loss.
- Shared-customer revenue at risk. 70% of A customers also buy B. Build the overlap: what share of B's €18M comes from accounts that also buy A, and what is the observed churn rate when an account stops buying one line? That number, not the 8% margin, is the real cost of the exit.
- Contractual exposure. Do the OEM agreements contain continuity-of-supply, single-source or change-of-scope clauses? A 48-hour replacement-part service level that depends on Line A's short-run flexibility is an operational dependency the board cannot waive by vote.
- Avoidability of fixed costs, line by line. Which supervisors, leases, presses and quality certifications actually disappear, and in which year. A €0.90M saving that lands in year 3 has a different NPV.
Add competitor capacity and price behaviour for fasteners: the €2.40M of contribution may be recoverable by re-pricing rather than exiting.
3. Give your recommendation, including the condition under which you would reverse it.
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Recommendation: reject the exit as framed; restructure Line A instead.
- Rationalise, don't exit. Segment Line A by SKU and customer and re-price or drop the bottom tail - typically the long tail of small orders carries most of the complexity cost. A 3-point price increase on the tail, with modest volume attrition, can lift Line A's contribution by more than the €0.90M the exit would save, without triggering €1.2M of severance or touching the shared-customer base.
- Fund B on incremental capacity. Add shifts or capex against confirmed B orders rather than cannibalising A's hours.
- Ring-fence the service obligation. Formalise the replacement-part capability cost and, if possible, charge for it - it is currently an unpriced service embedded in a low-margin line.
Reverse the decision - i.e. exit - if two conditions hold simultaneously: (a) the B pipeline covers at least ~80% of the freed hours at 19% or better within 12 months, and (b) the shared-customer overlap turns out to be low-value - the double-buying accounts represent a small share of B revenue, or churn at single-line accounts is measured and small. If both hold, the exit destroys little contribution and the €1.2M severance is a one-off worth paying. Until both are measured, the exit is a bet on an unverified demand forecast financed with certain cash.