Why are only the transportation costs reasons for the decline in gross profit and not the increased shipping costs?

Roland Berger Case: Onlinestar
New answer on Jan 08, 2020
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Lukas asked on Jan 06, 2020

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Luca
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updated an answer on Jan 06, 2020
BCG |NASA |20+ interviews with 100% success rate| 120+ students coached |GMAT expert 780/800 score

Hello Lukas,

You are right, in the whole case there is a clear distinction between shippping costs (from Onlinestars to final customers) and transportation costs (from Chinese suppliers to Onlinestars).

Anyway, be careful about what the text says:

  • In order to be competitive, Onlinestar delivers free shipping. In the past, however, Onlinestar observed that shipping costs have increased disproportionately high to sales growth.
  • Based on a conducted investigation, it was found that products with a gross profit margin of less than 10% do not make a positive contribution to earnings due to high shipping costs.

The first bullet point suggests to exclude the possibility to charge for shipping. The second one tells us that the problem is circumscribed to small items. In fact it's not clear that we are paying more for the single shipment: the ratio "shipping costs/sales" could be higher just because we are selling more small items.
For example, if we do the assumption of a fixed costs per shipment. The cost to send 2 items of 5€ would be the double ofone item of 10€, and we still have the same total of sales. Therefore we would have a ratio that is 2x the previous one even if we have the same cost per shipment.
That's why, without having further information, the increased shipping costs could just be inluded in the mentioned bucket of "Increased sales of small intems".

Does it make sense?
Your point would be anyway a good challenge to do to your interviewer, but be careful on the meaning of the ratio and to fully understand the dynamic of their changes.

Hope it helps,
Luca

(edited)

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Antonello
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replied on Jan 06, 2020
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Hi Lukas,
I think the solution includes the shipping costs into the transportation costs.

Hope it helps,
Antonello

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Clara
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replied on Jan 08, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

Indeed it´s a bit weird, but as it´s laid out, I assume that the shipping costs are included into the transportation costs.

Does it make sense?

Hope it helps,

Clara

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Luca gave the best answer

Luca

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