Case

Study-Fit School Supplies (SFSS)

Problem Definition

Our client, SFSS is a prominent producer of school supplies in 2017, with total sales of $275M in 2016. The company has solid brands, strongly invests in advertising and marketing, and has grown by using product line extensions and four main acquisitions.

SFSS is divided into 5 self-governing divisions, although manufacturing and promotion functions are collective. Joint costs (45% of total) are divided based on a % of sales method. Currently, SFSS has three operating plants, using 50% of the capacity.

Experts predict SFSS might be an acquisition target because of its potent balance sheet but decreasing earnings. The company is openly traded and has no significant long-term debt. As a possible investor, how would you increase SFSS’ profitability?


Comments

  • This case is a combination of public math and main qualitative insights. At the basis, this is a case on quickly decreasing profitability, and finding strategies (like plant consolidation) to improve a company's future performance.
  • The interviewee should be able to identify this as a performance improvement case, and has to look for ways to improve profitability. They should use the information handed to them beforehand to establish that capacity contraction is the main way to increase profitability
  • Since there are several possible avenues to investigate, it is possible that the interviewer needs to guide the participant.

Short Solution (Expand)


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.

Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.

Guide to case:
The case structure should have the following aspects:

  1. An investigation of SFSS’ recent performance to deep-dive decreasing profits.
  2. Examination of the possibilities of plant consolidation
  3. An analysis on the profitability of plant consolidation

Interviewer should hand out Exhibit 1 after the participant asks about profitability. Profitability: By using Exhibit 1, talk about why the slopes for sales and profits are different over time.

Interviewer should hand out Exhibit 2 after the participant concludes that plant consolidation is an area in need of a "deep-dive." This needs to become evident from the case introduction, but the interviewer should give hints where necessary.
Capacity utilization: By using Exhibit 2, qualitatively talk about the possible options for plant consolidation.

After the discussion on plant closures, the participant should ask about the cost structures of different plants. If they ask about revenues, kindly opt to calculate on a per SKU basis (for example, total sales / total SKUs = $ 22K / SKU

Notes to interviewer:

  1. The participant should see that the Mexico City plant is about to reach SFSS’ 12.5K SKUs capacity. So, SFSS can either close that specific plant and move all production to Canada, or it can close all Canadian plants, terminate 500 SKUs and move all manufacturing to Mexico City
  2. Sharp participants could note that Mexico City is the most doable strategy, but will also ask to view fixed and variable cost data. If so: show Diagram 3.

Plant closures: By using Exhibit 3, talk about the potential profitability of a plant closure.

Notes to interviewer:

  1. The participant needs to have identified that the Mexico City plant is most practicable, but that there are several important considerations:
  2. Key questions to ask:
    How would this influence revenues, presently at $275M a year?
    How would this influence production costs? What do they currently look like?
    How would this influence pre-tax profits, presently at $25M a year?

The school supply market declined in 2015 and 2016 at 5% annually.

The client covers a broader product line than business rivals. The company distributes 75% to wholesalers, 15% to superstores, 10% to final consumers.

The percentage of products distributed to superstores is increasingly critical.

Solution and Recommendations:

Generally, SFSS needs to close 500 SKUs and move all production to the Mexico City plant to increase yearly profits from $25M to $82M.

The company also needs to think about numerous qualitative aspects:

  • The period of the implementation: it cannot be done within a day
  • The relationships with the Union: two plants will be closed – if our production employees in these plants partake in organized labor, this state of affairs needs to be addressed.
  • Alterations in Distribution and Warehousing: SFSS needs to have an in-detail transition plan.
  • Purchasing: the company will need to adapt to a robust central purchasing department instead of smaller local purchasing departments.
  • Corporate Culture: the change really needs to be clearly communicated, and morale needs to be kept as high as possible.

An outstanding interviewee comprehends that issues pertaining macroeconomy are out of SFSS's hands. Following, the interviewee needs to cover the subject of plant consolidation as well as make an analyzation of the cost structures.

Fundamental knowledge of manufacturing processes should help the interviewee to arrive at parts or all of the qualitative problems given.
Related consulting question(s)
Vlad gave the best answer on Apr 03, 2017 - 2 answers
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

Hi, 1) You proactively ask in the beginning, even before drawing the structure (something like "What kind of products / revenue sources do we have) and then split the structure into price, qty,... (more)

Sidi gave the best answer on Aug 13, 2018 - 1 answer
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 60+ candidates secure MBB offers

Hi Kay, this is indeed one of the fundamental things that you need to learn in order to rigorously disaggregate the value drivers of a business. The driver tree allows you to identify the numerical d... (more)

Vlad gave the best answer on Feb 26, 2018 - 4 answers
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

Hi, I would start with either market sizing or with profitability cases since they are much easier: 1) In market sizing cases I would try to understand the basic approach: How to structure... (more)

Francesco gave the best answer on Sep 03, 2017 - 4 answers
#1 Expert for coaching sessions (2.100+) | Ex BCG | 1.000+ reviews with 100% recommendation rate

Hi Moji, it seems your issue is not the math computation, but rather how to structure the math part once you receive a question (that is, the logic behind that you should apply). This means you sho... (more)

Sidi gave the best answer on Jul 04, 2018 - 2 answers
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 60+ candidates secure MBB offers

Hi Anonymous, let me illustrate how I would approach the low-profits scenario that you are describing. You should start to clarify the profit expectations and how much the company is actually underpe... (more)

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Case exhibits

Calculations:
1. Revenues: Every SKU earns a yearly income of $22K ($275M divided by 12,500 SKUs). Accordingly, closing 500 SKUs will decrease yearly earnings by $11M/4%.

2. Production costs: Every plant currently has the following yearly costs, with a total of $136M:
Mexico City: $20M + ($4K * 4.5K SKUs) = $20M + $18M = $38.0M
Calgary: $15M + ($7.9K * 5K SKUs) = $15M + $39.5M = $54.5M
Vancouver: $18M + ($8.5K * 3K SKUs) = $18M + $25.5M = $43.5M
Limiting revenues to Mexico City would decrease yearly costs by 50%:
Mexico City: $20M + ($4K * 12K SKUs) = $20M + $48M = $68.0M

3. Profits: If costs are decreased by $68M and revenues reduced by $11M, thereby increasing profits by $57M, totaling at $82M. This leaves them more than tripled.


Calculations:
1. Revenues: Every SKU earns a yearly income of $22K ($275M divided by 12,500 SKUs). Accordingly, closing 500 SKUs will decrease yearly earnings by $11M/4%.

2. Production costs: Every plant currently has the following yearly costs, with a total of $136M:
Mexico City: $20M + ($4K * 4.5K SKUs) = $20M + $18M = $38.0M
Calgary: $15M + ($7.9K * 5K SKUs) = $15M + $39.5M = $54.5M
Vancouver: $18M + ($8.5K * 3K SKUs) = $18M + $25.5M = $43.5M
Limiting revenues to Mexico City would decrease yearly costs by 50%:
Mexico City: $20M + ($4K * 12K SKUs) = $20M + $48M = $68.0M

3. Profits: If costs are decreased by $68M and revenues reduced by $11M, thereby increasing profits by $57M, totaling at $82M. This leaves them more than tripled.


Calculations:
1. Revenues: Every SKU earns a yearly income of $22K ($275M divided by 12,500 SKUs). Accordingly, closing 500 SKUs will decrease yearly earnings by $11M/4%.

2. Production costs: Every plant currently has the following yearly costs, with a total of $136M:
Mexico City: $20M + ($4K * 4.5K SKUs) = $20M + $18M = $38.0M
Calgary: $15M + ($7.9K * 5K SKUs) = $15M + $39.5M = $54.5M
Vancouver: $18M + ($8.5K * 3K SKUs) = $18M + $25.5M = $43.5M
Limiting revenues to Mexico City would decrease yearly costs by 50%:
Mexico City: $20M + ($4K * 12K SKUs) = $20M + $48M = $68.0M

3. Profits: If costs are decreased by $68M and revenues reduced by $11M, thereby increasing profits by $57M, totaling at $82M. This leaves them more than tripled.


Calculations:
1. Revenues: Every SKU earns a yearly income of $22K ($275M divided by 12,500 SKUs). Accordingly, closing 500 SKUs will decrease yearly earnings by $11M/4%.

2. Production costs: Every plant currently has the following yearly costs, with a total of $136M:
Mexico City: $20M + ($4K * 4.5K SKUs) = $20M + $18M = $38.0M
Calgary: $15M + ($7.9K * 5K SKUs) = $15M + $39.5M = $54.5M
Vancouver: $18M + ($8.5K * 3K SKUs) = $18M + $25.5M = $43.5M
Limiting revenues to Mexico City would decrease yearly costs by 50%:
Mexico City: $20M + ($4K * 12K SKUs) = $20M + $48M = $68.0M

3. Profits: If costs are decreased by $68M and revenues reduced by $11M, thereby increasing profits by $57M, totaling at $82M. This leaves them more than tripled.


Calculations:
1. Revenues: Every SKU earns a yearly income of $22K ($275M divided by 12,500 SKUs). Accordingly, closing 500 SKUs will decrease yearly earnings by $11M/4%.

2. Production costs: Every plant currently has the following yearly costs, with a total of $136M:
Mexico City: $20M + ($4K * 4.5K SKUs) = $20M + $18M = $38.0M
Calgary: $15M + ($7.9K * 5K SKUs) = $15M + $39.5M = $54.5M
Vancouver: $18M + ($8.5K * 3K SKUs) = $18M + $25.5M = $43.5M
Limiting revenues to Mexico City would decrease yearly costs by 50%:
Mexico City: $20M + ($4K * 12K SKUs) = $20M + $48M = $68.0M

3. Profits: If costs are decreased by $68M and revenues reduced by $11M, thereby increasing profits by $57M, totaling at $82M. This leaves them more than tripled.


Calculations:
1. Revenues: Every SKU earns a yearly income of $22K ($275M divided by 12,500 SKUs). Accordingly, closing 500 SKUs will decrease yearly earnings by $11M/4%.

2. Production costs: Every plant currently has the following yearly costs, with a total of $136M:
Mexico City: $20M + ($4K * 4.5K SKUs) = $20M + $18M = $38.0M
Calgary: $15M + ($7.9K * 5K SKUs) = $15M + $39.5M = $54.5M
Vancouver: $18M + ($8.5K * 3K SKUs) = $18M + $25.5M = $43.5M
Limiting revenues to Mexico City would decrease yearly costs by 50%:
Mexico City: $20M + ($4K * 12K SKUs) = $20M + $48M = $68.0M

3. Profits: If costs are decreased by $68M and revenues reduced by $11M, thereby increasing profits by $57M, totaling at $82M. This leaves them more than tripled.