Bookl

The following structure provides an overview of the case:

Information that can be shared on the interviewee’s inquiry:

• There has been NO increase in the number of new titles stored.
• The company provides storage and order fulfillment services for third parties (other publishers).
  This business accounts for up to 50% of the warehouse’s flows.
• The warehouse charges for this service. It might be possible to terminate all or part of these services.

The interviewee should ask what drives warehouse capacity. Each book has a specific storage location (SSL) in the warehouse. Capacity utilization can be expressed as:

There are three possible reasons for an increase in capacity:

• Number of SSL is increasing (more different titles)
• Number of volumes per title is increasing
• Decrease in total capacity (warehouse is being used for other purposes)

The interviewee should find potential ways to increase the capacity.

Main conclusion

Bookl can decrease the number of SSLs and free up extra warehouse space for its own use by terminating its services to other publishers.

The interviewee can come up with multiple criteria. The objective is maximising the positive impact on the warehouse. This mostly depends on the following drivers:

• Amount of space freed up
• Suppressed costs
• Revenue loss
• Economic impact

The impact would be the change in revenue minus the change in costs. The interviewee should identify possible cost changes.

Total costs can be divided in fixed and variable costs:

Fixed costs (independent from the number of publishers):

• Warehouse
• Sets of shelves
• Admin staff
• IT staff
• Other infrastructure

Variable costs (decreasing if number of publishers decreases):

• Staff who handle books
• Packaging

Variable costs include staff who handle books and packaging. This involves filling SSL spots, fetching books and packing the books for distribution.

Drivers of these variable costs are:

1. # of movements performed:
   How often operators have to fetch one or more books of a same type. Personnel expenses vary depending on the number of order lines
2. # of boxes/packages:
   Costs increase with the number of boxes/packages, which corresponds to the number of books. (Assumption: the size and type of book does not change)

After the interviewee has determined the possibilities, you should share the following information: We have found a third party publisher with the following characteristics.

• Current warehouse margin:
  $4 m, which is 20% of the sales

We want to remove a publisher from the warehouse in order to maximize profit. Thus, since revenue depends on price, there are two possibilities:

• Terminating publishers with a low average price and replacement
• Terminating publishers that sell many titles in small amounts

Provide information about current profits and sales if asked for:

• Current warehouse margin: $4m, which is 20% of the sales
• Number of volumes indicates level of necessary packaging
• Number of order lines indicates level of necessary personnel

Main conclusion

If this publisher is removed profit will decrease by $1.24m.

After about 12 years, the extension is the better option, because the lost profit for the removed publisher keeps adding up.

However, it is risky and unrealistic to plan for periods of over 10 years because the industry is unstable and changes quickly.

The client should NOT build the extension.