## 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 (Expand)

## Detailed Solution

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.

**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?

**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**

**information**: We have

**found**a

**third party publisher**with the following characteristics.

**Table 2**with an

**overview**of the publisher’s

**characteristics**.

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

**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.