Problem Definition
Your client is a German manufacturer of disguises for events and parties called KostümCo. They segment their products in two lines: round-the-year and seasonal products.
Round-the-year products serve customers that celebrate birthdays and common parties during the whole year.
Seasonal products aim at special occasions like the carnival or the beer festival in Munich and are only sold for some time before these events.
KostümCo makes the design, manufacturing and resells the disguises to retailers in 5 different German cities.
Recently, though, the largest retail customer complained that KostümCo’s prices are too high. After some internal analyses, the client found this to be due mainly to distribution costs. You have been asked to figure out how we can reduce distribution costs.
Comments
This is a case of cost reduction. The interviewee should not inquire about revenues or profit at all. Moreover, the cost block that is under scrutiny here is well defined: distribution.
If the interviewee asks for a complete breakdown of costs you can let him/her brainstorm different costs along the value chain like purchase of raw material, labor, production costs, SG&A, Marketing etc. However this does not bring him closer to cracking the case.
He should quickly realize this and focus on tackling the core problem.
Detailed Solution
The core problem of this case is very well delimited from the start. Cost reduction on the distribution cost block. The interviewee should not waste time investigating revenue related issues, competitive landscape or trends in the disguise industry.
A conventional framework is therefore not recommended here. However, like for every single case ever to be solved, a structure that will be referred to throughout the case is still crucial for the interviewee to convince the interviewer of his/her consulting abilities.
The following structure/framework could be used by the interviewee:
- Suggestion: You should share the structure with the interviewee after the introduction of the case (after the discussion of the problem definition and a quick brainstorming of the candidate).
After discussing these three main areas we will make a final recommendation for the client.
I. Distribution
The interviewee should, first of all, try to understand how the distribution of the goods occur if he wants to understand why it has been considered too expensive. Relevant questions here are for instance:
- What happens with the products from the time they are ready in the factory until they are bought by the end customers in the retail stores?
- Who pays for each part of the transportation of the products? How much does it cost?
- What is the volume difference between seasonal and normal periods?
Information that should be told to the interviewee, if he/she asks for it:
- The retailers that sell KostümCo’s products are responsible for picking up the goods in the distribution center of their city. Each of the 5 centers is located in a big city, so that the retailers do not need to drive too far to fetch the goods.
- KostümCo hires the logistics firm DHL to transport the products in boxes from its factory to each distribution center. However, because of their varying distances from the factory, different fees apply (see exhibit 1, to be shared with interviewee if information asked).
- There are 8 normal months and 4 seasonal months every year.
The candidate should come besides the already mentioned information to the following conclusions:
- The current costs for delivery can be calculated with the information on Table 1.
- Since there are 8 normal months and 4 seasonal the total costs are: €180,000.
II. Competitors
Here should the candidate analyse the competitors in order to check, if they have less distribution costs compared to the client.
- Is our cost structure regarding distribution costs worse than that of our competitors? What are they doing better than us?
Information that you can/should tell the interviewee after his/her inquiry (when asked about alternatives, tell the interviewee to brainstorm options before sharing this information):
- A benchmarking study with KostümCo’s two main competitors revealed that they utilize similar distribution strategies to the client. However, they also lease trucks to transport some of their goods from the factory to the retail distribution centers.
The candidate should come besides the already mentioned information to the following conclusions by interpretation of the given data:
- Distribution with a leased truck could be a possibility to reduce the distribution costs. Therefore you should analyze the costs structure of both possibilities.
III. Alternatives
You gave, as the interviewer, a very good hint when you told the interviewee about the leasing option used by competitors. A good way for the interviewee to proceed with the case is analyzing what could be saved with this possibility before brainstorming about other means of transportation.
Information that you can/should tell the interviewee after his/her inquiry:
- One truck that can carry up to 650 boxes costs €4,000 per delivery plus the fuel it consumes. If the truck is used for carrying only up to 300 boxes, the leasing company charges only 50% of the price (€2,000) plus 50% of the fuel consumed (this is because they use the extra capacity for shipping products from other clients).
You should share Table 3 with an overview of the fuel costs for the leased trucks to make it possible for interviewee to compare the different distribution costs.
After the interviewee calculated the current costs or has great difficulties with it, you should share Table 4, containing the results, with him/her.
The interviewee should analyze, for every center, whether it would pay-off to lease a truck in a normal month or in a seasonal month:
- We can see that it would be cheaper for the client to lease their own truck for seasonal months to transport goods to centers C, D and E. The savings per month would total € 3,000, that is, € 12,000 annually (as there are 4 seasonal months).
- Another interesting option would be to deliver the goods to the centers only once every two months during normal months. This way we would still have up to 300 boxes (actually exactly 300 boxes) and would divide the transportation cost of the trucks by half (transporting the same amount of products in two times less deliveries). Then it would be worth to lease trucks for every 2 months for normal months to deliver to centers C, D and E. The savings every two months would total € 1,500, that is, € 6,000 annually (as there are 8 normal months).
- If delivering every two months is not viable because of warehouse-space constraints at the center (the stock would be two times bigger) or even because products would be out of date after 2 months, then we could also negotiate with the truck leasing company to make a better discount for trucks loaded with up to 150 boxes.
IV. Conclusion
- Our client should definitely lease trucks for the seasonal months to deliver to centers C, D and E. By doing this it would save € 12,000 (around 6.6% of the total transportation costs) per year.
- Another option is to deliver centers C, D and E only every two months (if no other constraints like warehouse space prevents the client from doing it). Then the use of leased trucks would save the client € 6,000 annually.
- Another option that we did not consider could be partnering with other companies with factories close to the client’s factory and share leased trucks during normal months. Of course, the companies would have to deliver to places close to the client’s retail centers.
Difficult Questions
In real life, what other possibilities of transportation would you look for in order to replace DHL?
Possible answer:
I would look for DHL competitors like UPS, FedEx, etc. Other types of transportation could also be considered like railway for instance.
Before the client can implement the cost saving measures discussed, they realize their market share is rapidly dropping because of cheaper competitors. What would you recommend the client to do in the short term?
Possible answer:
Offering temporary discounts or signing a long-term contract with the price that will be possible to offer after cutting the transportation costs.
More questions to be added by you, interviewer!
At the end of the case, you will have the opportunity to suggest challenging questions about this case (to be asked for instance if the next interviewees solve the case very fast).
