A large fast food chain has hired us to improve the company’s profitability by cutting costs. Before engaging in the initial brainstorming session about your client’s options with your team, you first want to collect your thoughts.
Since this is an interviewer-led case, the interviewer should guide the interviewee through the interview.
The case is split into two parts.
The first part is more qualitative. The open-ended questions should prompt the interviewee to think about the problem and its solution.
The second part is more quantitative in nature. In order to solve the questions, the interviewee should perform calculations. The questions in the big boxes should be read out to the candidate.
Short Solution (Expand) (Collapse)
Suggested case structure:
1. Can you identify major segments for variable costs?
A good interviewee will identify these 2 main segments:
- Raw material
Variable costs are a function of price and volume. Thus, the client should reduce the volume purchased and/or negotiate lower per-unit prices.
- Negotiate lower food prices with our suppliers (consolidate purchasing, etc.).
- Look for cheaper ingredients. This is risky because it could lower the quality of the food that we sell.
- Reduce the volume used. This is also risky because it would change our recipes. They are one of our competitive advantages.
- Negotiate lower per-unit prices with our suppliers or look for cheaper alternatives.
- Reduce the volume used.
Some good creative answers include (but are not limited to):
- Change the shape or size of food containers
- Consolidate packaging for families
- Reduce the weight of the packaging while still protecting the food
- Reduce other qualities of the packaging (e.g. degree of color or logo prevalence) without sacrificing their brand
- Lock bathrooms so that non-customers cannot use toilet paper and towels
- Charge for extra condiments
- Reduce the size or the number of napkins purchased
II. Profitability Analysis
There is a new napkin dispensing technology on the market. Since you think it could save the client money, you decide to investigate.
2. If our client uses the new napkin dispenser in all their outlets, how much money can they save every year?
The interviewee should identify the following information:
- # of restaurants
- # of customer visits per store per year
- # of napkins used per customer now
- # of napkins used per customer after the switch
- Price per napkin
Number of customers per store per year
Hence, the # of customers per store per yr is:
3. At what price per dispenser would the investment not be worth doing?
Here, the interviewee must calculate the highest price the company is willing to pay for the dispenser (the breakeven point).
At the breakeven point:
Costs of using new dispensers = Costs of using old dispensers
Max. price per new dispenser our client should pay =
The new dispensers will save the fast food chain $77.26 m per year. However, this investment will only be worth doing if the costs are lower than $215 per dispenser.
To cut costs, the fast-food chain should consider investing in a napkin dispenser with new technology. There are 2 reasons:
1) It can save the client $77.26 m per year in napkin cost.
2) It is currently priced at ~33% of what we are willing to pay.
However there are a few factors to consider before purchasing the dispensers. These factors include customers’ reactions to the new dispensers and future pricing of the napkins. We need to gauge customers’ reactions, we should run pilot programs and conduct customer research. We should also negotiate a good pricing contract with our suppliers.
What are the advantages and disadvantages of implementing these new dispensers?
- Fewer napkins used results in less stocking and may lower labor costs
- Can project a greener customer image.
- Can potentially negotiate better prices with paper manufacturers.
- Customers may not like the new dispensers (e.g. have difficulties using it). This can result in customer dissatisfaction and loss.
- The new dispensers might have limited napkin suppliers. This reduces our client's buying power. In the future, the suppliers might increase the price per napkin.
More questions to be added by you, the 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).