Our client, Ooze, is one of the market leaders in the US spirits market (strong alcohol products).
They are thinking of restructuring their distribution strategy and want to know whether they should invest in 1 or 5 distribution centers.
What would you recommend?
Since this is a candidate-led case, the candidate should drive the case from start to finish.
This case focuses on Ooze’s distribution strategy.
Sooner or later, most consumer goods companies will face similar problems.
Financial aspects mostly influence the decision.
Nevertheless, the interviewee should not forget the risks and/or opportunities (which are often very hard to financially quantify) that are associated with each plan.
Our client should invest in 5 distribution centers.
Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Information to share” section.
Paragraphs highlighted in blue can be verbally communicated to the interviewee.
Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.
Suggested case overview:
The interviewee should ask about the following areas:
- How the current distribution system functions
- Company’s long-term plans
Information that can be shared on the interviewee’s inquiry:
- The current distribution system is totally outsourced. A specialized company transports goods from Ooze’s factory to its retailer clients. Lately, the company has been very profitable. Thus, it decided to acquire this part of the supply chain to further increase its profits.
- The company wants to manage its own distribution logistics. It also wants to develop and maintain this system for at least 10 years. (Long-term)
KEY element to CRACK the case!
- Ooze’s clients are equally distributed throughout USA.
- In the short run, Ooze does not expect its revenue to change regardless of which distribution plan it chooses. However, since it is hard to predict long-term developments, revenue should NOT be considered when deciding which distribution plan to invest in.
The interviewee should ask about initial and recurring costs for both plans. Before sharing information, ask the interviewee to brainstorm potential cost segments.
Share Table 1 about the investment costs if inquired.
Share Table 2 about the recurring costs if inquired.
- Having 5 centers costs an extra $550m in upfront investment.
- However, having 1 center costs an extra $5m every month.
- Overall, both plans cost the same amount for 110 months (approximately 9 years). After that, the 5-center plan is cheaper.
- In order to decide which plan to choose, the interviewee must ask about the company’s investment timeframe.
- As stated in the company section, the company wants to invest in this new distribution structure for at least 10 years (long-term). Thus, it makes more economic sense to invest in 5 distribution centers.
III. Pros & Cons
Now that we have completed the economic analysis, we should now consider the opportunities and/or risks of both plans. We should also consider the plans’ possible impact on revenue.
Information that can be shared if inquired by the interview:
Advantages of 1 center
- Economies of scale: less complicated management system
- Having all the employees work together helps to build company culture.
- Lower inventory levels are needed. With one big center, deviations in demand across the country can cancel each other out. With 5 centers, each center must carry higher levels of inventory to account for deviations in demand within their own region.
Advantages of 5 centers
- Reduced inventory risk. If there is only one center, the company’s inventory can be completely destroyed by events such as fires or floods.
- Inventory is closer to the client. This results in shorter processing times and increased flexibility. (Clients can make smaller orders or order special product combinations.) This leads to better relationships with clients and increases client loyalty.
- Centers can learn from each other and copy the best practices developed at other centers.
Share Table 3 about the pros and contras if inquired.
Finally, the interviewee should give the client a solid recommendation.
The client should build 5 distribution centers:
- The client wishes to invest in the distribution center for at least 10 years (long-term).
- Economically, after approximately 9 years, maintaining 5 centers costs less than maintaining 1 center.
- This is mostly because it is more expensive to deliver goods from 1 center to retailers across the country. (Greater distances result in greater recurring costs.)
- Although we will need higher levels of inventory and will miss out on some economies of scale, building 5 centers allows us to be closer to our clients, thus allowing us to quickly process their orders. We can even customize our delivery to our local clients’ needs. This will probably generate more customer loyalty. Our revenue could increase.
What is the payback time for the investment option compared to the outsourcing option?
Is this within the company’s investment timeframe?
By looking at Table 1 and 2, we can calculate the difference between outsourcing and investing in 5 distribution centers. Investing costs $1,000m overall but saves $9m every month.
The payback time is within the company’s investment timeframe of at least 10 years.
More questions to be added by you, interviewer!
If the interviewee solves the case very quickly, you can come up with more challenging questions to ask them.