## Problem Definition

Your client, **Bookl**, is a **publishing company** with stable sales in terms of both volume and price.

Its **distribution** **warehouse** is reaching **maximum capacity**. This has **lowered **its** service quality**.

The head of Bookl’s distribution department wants to **extend** the warehouse. The extension will **cost** **$15 m **and will NOT increase the company’s **revenues**.

The CEO wants your company to determine whether the **investment** is **necessary**.

## Comments

Since this is an **interviewer-led **case, the interviewer should guide the candidate through the interview. The **questions** should be **read out** to the interviewee.

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**.

## Short Solution

- The client should
**not build** the **extension**.
- It is
**less risky** to remove **one publisher** in order to **reclaim warehouse space**.

## 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 structure provides an overview of the case:

### I. Background

#### 1. Why could the warehouse be reaching its maximum capacity?

The interviewee should ask what **drives** warehouse **capacity**. Each book has a **specific storage location** (**SSL**) in the warehouse. Capacity utilization can be expressed as:

There are **three** possible **reasons** for an increase in capacity:

- Number of
**SSL** is **increasing **(more different titles)
- Number of
**volumes** per **title** is increasing
**Decrease** in total **capacity** (warehouse is being used for other purposes)

The interviewee should find **potential** **ways** to increase the capacity.

If necessary share **Table 1**.

**Information **that can be shared on the interviewee’s inquiry:

- There has been
**NO increase** in the **number** of **new titles** stored.
- The company provides
**storage** and **order fulfillment services** for **third parties** (other publishers).

This business accounts for up to **50%** of the **warehouse’s flows**.
- The warehouse
**charges** for this service. It might be possible to **terminate** all or part of these services.

#### Main conclusion

Bookl can **decrease** the **number** of **SSLs** and **free up** extra warehouse **space** for its own use by **terminating** its **services** to **other publishers.**

#### 2. How would you determine which publishers Bookl should stop serving?

The interviewee can come up with **multiple criteria**. The objective is **maximising** the **positive** **impact** on the **warehouse**. This mostly depends on the following drivers:

**Amount **of **space freed up**
- Suppressed
**costs**
**Revenue loss**
**Economic** **impact**

### II. Cost

#### 3. If Bookl stops serving a particular publisher, how would you determine the impact of this action on the warehouse’s P&L statement?

The impact would be the **change in revenue** **minus** the **change in** **costs**. The interviewee should identify possible cost changes.

Total costs can be divided in fixed and variable costs:

**Fixed costs (independent from the number of publishers):**

- Warehouse
- Sets of shelves
- Admin staff
- IT staff
- Other infrastructure

**Variable costs (decreasing if number of publishers decreases):**

- Staff who handle books
- Packaging

#### 4. What are the main drivers of the company’s variable costs?

Share **Diagram 1 (cost structure overview) **if inquired.

**Variable** **costs** include **staff** who handle books and **packaging**. This involves **filling SSL spots**, **fetching** books and **packing** the **books** for distribution.

**Drivers** of these variable costs are:

**# of movements** **performed**:

**How often** operators have to **fetch** one or more **books** of a **same** type. **Personnel expenses** **vary** depending on the **number** of **order** lines
**# of boxes/packages:**

**Costs increase** with the **number** of **boxes/packages**, which corresponds to the **number of books. **(Assumption: the size and type of book does not change)

### III. Options

#### 5. Third-party publishers pay your company 10% of a book’s price. How would you determine which publishers to remove?

We want to **remove** a **publisher** from the warehouse in order to **maximize** **profit**. Thus, since revenue depends on price, there are **two** **possibilities**:

- Terminating publishers with a
**low average price** and replacement
- Terminating publishers that sell
**many titles** in **small amounts**

After the interviewee has determined these possibilities, you should share the following **information**: We have **found** a **third party publisher** with the following characteristics.

Share **Table 2** with an **overview** of the publisher’s **characteristics**.

#### 6. If we terminate this publisher, how will it affect our profit?

Provide information about

**current profits and sales** if asked for:

**Current** warehouse **margin**: **$4m**, which is **20%** of the **sales**
**Number **of **volumes **indicates level of necessary **packaging**
**Number** of **order lines** indicates level of necessary **personnel**

#### Current revenue

#### Current costs

Current total costs = revenue - margin = $20 m - $4 m = $16m

Fixed cost = $16 m * 50% = $8m

Personnel cost = $16 m * 35% = $5.6m

Packaging cost = $16 m * 15% = $2.4m

#### Expected Revenue (w/o publisher)

Lost revenue = Current revenue * volume reduction = $20 m * 15% = $3m

Expected revenue = $20 m - $3 m = $17m

#### Expected Costs (w/o publisher)

Fixed = $8 m (no change)

New personnel cost = old person.cost * (1- % order line reduction) = $5.6 m * 75% = $4.2m

New packaging cost = old pack.costs * (1 - % volume reduction) = $2.4 m * 85% = $2.04m

Expected total costs w/o publisher = $8 m + $4.2 m + $2.04 m = $14.24m

#### Expected margin

New margin = expected revenue - total cost w/o publisher = $17 m - $14.24m = $2.76m

Change in margin = new margin - old margin = $2.76m - $4m = -$1.24m

#### Main conclusion

If this publisher is removed **profit **will **decrease** **by $1.24m**.

### IV. Conclusion

#### 7. Since removing this publisher reduces our profit by $1.24m every year, is it better to remove this publisher or to build the extension?

Assuming other factors remain the same and ignoring the time value of money, in **12 years**, the **planned** **extension** will **cost** as **much** as **removing** this **publisher**.

After about **12** **years**, the **extension** is the **better** **option**, because the **lost profit** for the **removed** publisher keeps **adding** up.

However, it is **risky** and **unrealistic** to plan for **periods** of **over 10 years** because the industry is **unstable** and changes quickly.

The **client** should **NOT** **build** the **extension**.

## Difficult Questions

### How else could we solve the capacity problem?

**Possible solutions **(some mentioned at the beginning of the case):

**Destroy** old unsold **stocks**
**Avoid** **overstocking**
**Minimize** the **initial stocksize**
**New** **copies** of **old** **titles** can **only** be **obtained** on **request**
**Minimize** replenishment **times**

**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.