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.
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.
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The following framework/structure provides an overview of the case:
The candidate should start by asking clarifying questions on how the program & bidding works, especially if candidate never had any experience with tender contracts.
- 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.
Candidate should be looking into ways to determine profitability when dealing with these tenders.
- 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.
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.
- 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.
- 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.
- Are there other factors that the client should take into account when determining a bid?
- Do 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?