How to structure

Framework
New answer on Oct 17, 2019
1 Answer
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Anonymous A asked on Oct 16, 2019

Hi, i would like to know what is the best way to structure the following case.

Our client is Freedom Bikes, the US-based producer of mountain bikes – luxury sport bikes that represent the American spirit of freedom. The bikes are fully designed and manufactured in the US and are sold mainly to US customers, who value independence, freedom and high quality of a US-based manufacturer.
The client brought us to help decrease costs, which increased in the resent years and eroded the client’s margins.

If you ask for the cost breakdown you realize that the problem is related with an increase in the manufacturing costs.

There is no fixed target

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Ben
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updated an answer on Oct 18, 2019
Ex-McKinsey EM | Experienced interview coach (1,000+ sessions) | Discount on 1st session | LBS MBA

Hi there,

Once you know where the problem is, there is no longer need in setting up a full profitability framework, which is particularly useful in identifying the cause of the profit decline. In this case, I would suggest that the best approach is a hypothesis driven manufacturing cost issue tree. You first need to breakdown the cost of manufacturing to its components, outline the levers to reduce the cost, and ask for data to support these levers. One example below:

  1. Cost of labour = labour hours / bike * cost of labour / hour
    1. Can we reduce amount of labour needed? How efficient / well-trained the production staff is? How does our client compare to industry averages?
    2. Can we reduce the cost of labour? How does our pay compare to industry? Is there an option to outsource some, labour intensive processes / components to a low cost location, while maintaining the US spirit of the brand?

You can do the same with the other components of manufacturing costs: raw materials, utilities, machinery, lease of the facility.

Hope it helps!

Kind regards,

Ben.

(edited)

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Ben

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