Case

Medicine Distribution


Case prompt

Mercer, our client is a leading pharmaceutical manufacturer in the US. They are evaluating a change in their distribution strategy. 


They have hired us to help them with this restructuring and want us to advice them on whether they should invest in 1 distribution centre or in 6 distribution centres.


How would you help them?


Detailed solution

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

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.


Suggested case structure

Key question: Should the company invest in 1 or 6 distribution centres?

Brainstorm with the interviewee on a possible structure to solve the case.




Below would be the steps to solve the case:
  1. Context: The candidate should attempt to understand the current distribution structure, company’s plans, impact of distribution structure on sales/ customers etc.
  2. Economic comparison: The candidate should try to evaluate the economic impact of the two options by comparing the initial and recurring investment.
  3. Pros and cons: The candidate should try to evaluate the risks and benefits associated with the two options in addition to the economic analysis.
  4. Recommendation: The candidate must give a concrete recommendation on the basis of the above analysis.

1. Context

The interviewee should at the outset try to understand the existing distribution structure, company’s plans and the impact of the distribution structure on the company’s sales/ customers etc. 

Allow the interviewee to think aloud and lay out the list of information required in order to understand the existing distribution structure.

Share the following information with the interviewee if enquired:

    • The existing distribution system of the company is outsourced to a specialised logistics operator. This operator transports the medicines from the factory to the retailers directly
    • Mercer believes that distribution is a key element of the entire value chain and has therefore decided to in-source it
    • The company wants to build a system that would serve its requirements over the long term (10 years)
    • The company has been profitable over the last several years and has sufficient reserves to invest in its own distribution system
    • Mercer’s clients are distributed across the country. There are no pockets of high concentration of clients
    • Mercer believes that it’s revenues would not be affected by the choice of distribution configuration in the short term. Since it is difficult to predict the long term impact, it has asked you to not take the revenue impact into account whilst doing the analysis

Key insight:
  1. The company wants to develop a distribution system that will serve it well in the long run as well. The company’s investment decision horizon is 10 years.


2. Comparison

The interviewee should now try to evaluate the economic impact of the two options by comparing the initial investment required and the recurring costs (revenue impact is outside the scope of the analysis)

Promt the interviewee to think aloud and lay out the list of information required in order to compare the two options from an economic viewpoint (investment and recurring costs)

Share Exhibit 1 with the candidate if s(he) enquires about investments


Exhibit 1 


 

Share Exhibit 2 with the candidate if s(he) enquires about the recurring costs


Exhibit 2 


 
Hence,
  1. 6 distribution centers would require an incremental investment of 1,100 m$ compared to 1 center
  2. The 6 centers layout would ensure a 11 m$ monthly saving in recurring expenses as the transportation costs from center to retailers is much lower in case of 6 distribution centers
  3. Using the above information, we can calculate the point at which the monthly savings can recuperate the additional upfront investment required for 6 distribution centers




Key insight:
  1. After 8.33 years, the 6 center configuration would be cheaper economically compared to the 1 center configuration.
  2. Since the company wishes to build a structure which would serve it well in the long run (10 years), it makes economic sense to invest in 6 centers.


3. Pros and Cons

The interviewee should now try to evaluate the risks and opportunities associated with the two options in addition to the economic analysis.

Allow the interviewee to think aloud and lay out the potential pros and cons of the different options.

Share the following information with the interviewee if enquired:

    Advantages of 1 centre:

      • Scale economies in labour and other costs; simplified management structure
      • Centralised distribution centre with all employees in one location would create unity and a uniform standard of quality
      • Lower inventory levels would be required compared to a segregated structure of 6 centres. Deviations in demand across the country would cancel out each other. In case of 6 centres, each centre would need to maintain a buffer in order to accommodate local demand fluctuations.

    Advantages of 6 centres:

      • Reduced risk levels, as having one centre comes with the associated risk of downtime due to natural calamities, operational factors etc.
      • Proximity to market would reduce the delivery time and improve the company’s ability to respond to changes in the market. This would also potentially improve customer relationship
      • Diversified centres would encourage innovation; potential for centres to learn from the best practices of other centres

    Share Exhibit 4 with the candidate after s(he) has laid out the initial list himself/herself.

    Exhibit 3 


     


    4. Final recommendation

    The client should invest in a 6 centers layout
    1. This option makes economic sense in the long run. Although the initial cost of setting up 6 centers is higher, the lower recurring costs would make up for the higher initial investment in 8.33 years, less than the 10 year company’s investment horizon.
    2. Having 6 centers diffuses the risk of downtime & shock to the distribution chain 
    3. Having 6 centers increases the ability to respond to changes in the market thanks to the proximity to retailers
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