Cookie and Privacy Settings

This website uses cookies to enable essential functions like the user login and sessions. We also use cookies and third-party tools to improve your surfing experience on preplounge.com. You can choose to activate only essential cookies or all cookies. You can always change your preference in the cookie and privacy settings. This link can also be found in the footer of the site. If you need more information, please visit our privacy policy.

Data processing in the USA: By clicking on "I accept", you also consent, in accordance with article 49 paragraph 1 sentence 1 lit. GDPR, to your data being processed in the USA (by Google LLC, Facebook Inc., LinkedIn Inc., Stripe, Paypal).

Manage settings individually I accept
expert
Expert with best answer

Vlad

97% Recommendation Rate

410 Meetings

11,439 Q&A Upvotes

USD 239 / Coaching

3

Structuring Costs

Hi, what are the good ways to structure the costs except for the cliche FIX & VARIABLE costs?

Thanks!

Hi, what are the good ways to structure the costs except for the cliche FIX & VARIABLE costs?

Thanks!

3 answers

  • Upvotes
  • Date ascending
  • Date descending
Best Answer
Book a coaching with Vlad

97% Recommendation Rate

410 Meetings

11,439 Q&A Upvotes

USD 239 / Coaching

Hi,

As a candidate, I've struggled a lot with cost reduction cases since most of the case books don't have them, while you can face these cases on the case interviews. This is especially relevant for McKinsey interviews.

Based on my experience most of the candidates end up by segmenting into fixed and variable costs. Obviously, this structure is quite poor.

My recommendation is to use the process approach which is similar to what consultants usually use on a real project:

  1. Cost segmentation and prioritization - here you basically try to understand what is the cost structure and what are the biggest cost buckets
  2. Internal and External Benchmarking and understanding the potential - you compare your costs with competitors, industry benchmarks or internally (Imagine one of your entities having 1 accountant per 100 employees and another 5 accountants per 100 employees)
  3. Process improvements - in order to cut the costs you need to identify the best processes and scale them across the organization. You should take into account that there are "major process steps" like production, contributing to the output and "supporting process steps" like cleaning. The former are usually optimized with technology or best practices, the latter are usually cut
  4. Costs & benefits - here you calculate the total impact and the rollout plan

One great advantage - it is really hard to argue with that approach since it's based on real consulting projects.

Best,

Hi,

As a candidate, I've struggled a lot with cost reduction cases since most of the case books don't have them, while you can face these cases on the case interviews. This is especially relevant for McKinsey interviews.

Based on my experience most of the candidates end up by segmenting into fixed and variable costs. Obviously, this structure is quite poor.

My recommendation is to use the process approach which is similar to what consultants usually use on a real project:

  1. Cost segmentation and prioritization - here you basically try to understand what is the cost structure and what are the biggest cost buckets
  2. Internal and External Benchmarking and understanding the potential - you compare your costs with competitors, industry benchmarks or internally (Imagine one of your entities having 1 accountant per 100 employees and another 5 accountants per 100 employees)
  3. Process improvements - in order to cut the costs you need to identify the best processes and scale them across the organization. You should take into account that there are "major process steps" like production, contributing to the output and "supporting process steps" like cleaning. The former are usually optimized with technology or best practices, the latter are usually cut
  4. Costs & benefits - here you calculate the total impact and the rollout plan

One great advantage - it is really hard to argue with that approach since it's based on real consulting projects.

Best,

Book a coaching with Giulia

100% Recommendation Rate

24 Meetings

237 Q&A Upvotes

USD 189 / Coaching

I would go for Direct (related to production/service the company is selling) and Indirect (everything else) costs, as an alternative.

But applying the right structure highly depends on what's the case study you are analyzing, thus what's the focus of the case and what you can obtain from the categorization you are applying.

I would go for Direct (related to production/service the company is selling) and Indirect (everything else) costs, as an alternative.

But applying the right structure highly depends on what's the case study you are analyzing, thus what's the focus of the case and what you can obtain from the categorization you are applying.

Cost could also be broken down by, for example:

  • Geographical locations (if client company runs at several different countries)
  • Product lines (if client company has >1 major product line)
  • Upfront vs. on-going (if client is thinking about investing in something)

As Giulia mentioned above, it very much depends on the case. The way you break down the cost should best help you find the underlying problem and solve the case. Also, the cliche "fix vs. variable" breakdown actually applies in a lot of situations, so don't be afraid of using it :)

Cost could also be broken down by, for example:

  • Geographical locations (if client company runs at several different countries)
  • Product lines (if client company has >1 major product line)
  • Upfront vs. on-going (if client is thinking about investing in something)

As Giulia mentioned above, it very much depends on the case. The way you break down the cost should best help you find the underlying problem and solve the case. Also, the cliche "fix vs. variable" breakdown actually applies in a lot of situations, so don't be afraid of using it :)

Related case(s)

Chinese Chess - Airline Business During COVID-19

Solved 4.0k times
Chinese Chess - Airline Business During COVID-19 Sky China, a government-backed Chinese airline, has recently seen profits plummet due to COVID-19. Profits are down 80% in the months of February and March, but are showing early signs of a rebound in April.  They've brought you in to first investigate what can be done immediatedly to prevent hemorrhaging cash and surive in the short-term. They are also looking to see how the current situation can be viewed as an opportunity, and what can be done to prepare for the future. 
4.3 5 115
| Rating: (4.3 / 5.0)

Sky China, a government-backed Chinese airline, has recently seen profits plummet due to COVID-19. Profits are down 80% in the months of February and March, but are showing early signs of a rebound in April. They've brought you in to first investigate what can be done immediatedly to prevent hemor ... Open whole case