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McKinsey: How to best sub-structure fixed costs?

Anonymous A asked on Feb 26, 2019 - 3 answers

Dear all,

Wondering what the best way is to structure fixed costs?

Variable costs can be ideally splitted along the value chain:

- Procurement (material costs, inbound logistics costs, inventory)

- Production (wages, maintenance of machines, electricity etc.)

- Distribution (packaging, transport costs, customs)

But what is the best way to substructure fixed costs?

Thanks a lot.


3 answers

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replied on Feb 26, 2019
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There is no one best way. Industries will usually have a very significant fixed cost component, Services often a larger variable cost component - but inside FC & VC, a number of parameters will come into play depending on the business model.

If it helps though, you can think of the following: Rent/Utilities (fixed but you can always move if needed) / Machinery & amortization / G&A / "Others".

I never expect a candidate to think of all the costs; what I do expect however, is that you take a crack at it and suggest a couple of potential costs; asking me then "is there any other cost I should be concerned with" is perfectly acceptable and moves the case efficiently along.

replied on Feb 27, 2019
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Simple answer: the same! If you can distribute variable costs across the value chain, you should also be able to do the same for fixed cost! Or in other words: for each part of the value chain, you split the costs into fixed and variable. Hint: don't forget support functions such as marketing, finance & admin etc. in your value chain!

Cheers, Sidi

replied on Feb 26, 2019
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It depends on the industry. Utilities and rent may be a fixed cost as well. Labor is very often partially or fully fixed. Also, most of the candidates forget about marketing as a fixed cost. Pls always take the industry and business model contexts into account


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