Case

Baby formula

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Problem Definition

Our client is a producer & distributor of baby formula. They sell worldwide and have around 30% market share. Currently, they're looking at ways to boost their market share whilst maintaining profitability. Recently, a welfare program for poor children was started to give poor people vouchers to purchase baby formula. Each state is opening up for bidding. The producer is thinking about bidding in the program to be sole supplier, but they're not sure how much to bid for these contracts.

They hired you to help them come up with an approach on how to determine the amount they should bid for those supply contracts.


Comments

This is a market-sizing case, but also a brain-teaser since the case is left very open.

However, remember that the company wants to know how they should determine the amount to bid. Candidate is not required to calculate the actual number, but they will be evaluated more on their ability to lay out a structure and to explore aspects more in-depth.


Short Solution

Client should calculate the profit room he has to wiggle after taken into account lower revenues, voucher discounts and associated costs.


Detailed Solution

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

The following framework/structure provides an overview of the case:

I. Background

The candidate should start by asking clarifying questions on how the program & bidding works, especially if candidate never had any experience with tender contracts.

Information that can be shared if inquired by the candidate:

  • The tender contract allows our client to bid to become the sole supplier of baby formula for a single state.
  • Each program participant receives a voucher that gives them a certain discount at the check-out which is around 15% of the retail price.
  • The tender contract lasts for 12 months, so suppliers need to participate for a full year, but the supply contracts can be extended up to several years.
  • Whilst the revenue from these tenders is lower, the volume associated with it makes it interesting to participate.
  • Most bids are determined based on profitability.

Candidate should now come up with early ideas on how to approach this and basically every logical structure is deemed right as long as it is centered around profitability. The client needs to issue a bid that gets him the contract while still remaining profitable.

II. Analysis

Candidate should be looking into ways to determine profitability when dealing with these tenders.

Information that can be shared if inquired by the candidate:

  • Typically, the client calculates profitability by deducting COGS & Overhead from the retail price.
  • In such a scenario of bidding, the supplier needs to find out how much profit he can forfeit in order for the deal to remain attractive.

III. Solution

Candidate should come up with a simple formula of determining the bid to send out which is the following:

(Revenue from welfare program-15% rebate-COGS-Overhead)=potential contract bid.

Ask the candidate if the producer could expect another profit-stream from this tender besides the actual contract value.

Share this information if asked by candidate:

  • If a supplier wins the contract, it also means they get to increase the amount of shelf-space in stores since they need to supply more products.
  • All WIC participants buy these products in regular stores along with other consumer products.

Possible answers:

  • By increasing shelf-space in stores with products of supplier it could mean that more regular consumers could buy the products and pay full price and thus help the supplier increase its overall revenues and market share.
  • Since the WIC contracts could last for several years, we could look into benefiting from this customer loyalty and develop a cheap by-product that WIC customers could purchase at full price along with the rebate-product and engage in cross-selling.

Difficult Questions

  • Are there other factors that the client should take into account when determining a bid?
  • You think that there is a way to keep those welfare customers after the program ended despite the higher price? What kind of information would you need to determine this?
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Case exhibits