Your client, Playdate Inc., is an apparel brand based out of U.K.
It specialises in costumes for kids and adults. The company has two lines of clothing:
Year round products: These are costumes for generic events like birthday parties, other common themes through the year.
Seasonal products: These are costumes for special occasions - Halloween, soccer matches etc. These are specifically sold only during certain events.
Playdate Inc. designs and manufactures the costumes. They then re-sell the costumes to retailers across 5 major cities in U.K.
The company has received feedback from the retailers that their prices are too high. After a detailed analysis, the company realised that the main reason is their high distribution cost.
They have appointed you to develop a plan to reduce the distribution costs. How would you go about it?
This case has a very well defined problem statement - reduction of distribution costs. The interviewee should not be focusing on market, revenues, other cost elements etc.
If the interviewee deviates from the problem statement, let them brainstorm the different elements. However, give them a hint and guide them back to the main issue that has been outlined.
Suggested case structure
- Context The candidate should attempt to understand the current distribution structure - process, different cost elements involved etc.
- Competitor analysis: The candidate should try to understand the distribution structure of companies in the same segment / similar line of business
- Develop options: The candidate should then try to develop options for reduction of the distribution costs
- Conclusion: The candidate must give a concrete recommendation on the basis of the above analysis.
The interviewee should at the outset try to understand the company's current distribution structure.
Allow the interviewee to think aloud and lay out the list of information required in order to understand the the client's current distribution structure. Some relevant issues that must be discussed are:
- Detailed account of the distribution process from the time the apparel leaves the factory to the time it reaches the retailers
- Different components of the distribution costs
- Differences if any in the distribution process, costs or volumes between the two product lines
Share the following information with the interviewee if enquired:
- Playdate Inc. ships the goods to a central distribution warehouse located in each of the 5 cities. The retailers are then responsible for shipping the goods from the warehouse to their locations
- Our client uses a reputed logistics company Redex to ship the apparel from its factory to the 5 different warehouses
- The rates differ for each of the 5 warehouses as they are at varying distance from the factory
- Packaging costs are not included in distribution costs
- In a year there are 4 months where the seasonal products are sold; the year round products are sold during the remainder 8 months
- The volumes during the normal months are stable at 200 boxes per month per warehouse; the volumes across the cities triple during the seasonal months
With the information given, the interviewee would be able to calculate the total distribution costs:
- The distribution costs during a normal month are £ 5,000 and £ 15,000 during a seasonal month
- Therefore, the total distribution costs for the year would be £100,000
2. Competitor analysis
The interviewee should now attempt to compare the client's distribution process and costs with that of other competitors in order to identify areas of improvement.
Share the below information about the competitors after he/ she has brainstormed and discussed other options:
- Playdate Inc. had interviewed some of its employees who used to work with its biggest competitors earlier. The discussions revealed that the distribution process of the competitors is very similar to that of Playdate Inc. The only point of difference is that several competitors use leased trucks sometimes to transport the apparel from the factory to their warehouses in the different cities.
- Using leased trucks could potentially be an option for the client and should be explored further.
3. Develop options
The interviewee should now focus on building out options for the client to help reduce their distribution costs.
Share the below information with the candidate if he/ she enquires about the economics of leasing a truck:
- A leased truck can carry upto 650 boxes. The logistics company charges £ 1,000 in addition to the fuel cost for the trip which varies by distance.
- The company also leases out a part of the truck. However, they only have the option of hiring 50% of the capacity. Under this option, the company allows upto 325 boxes and charges £600 plus 50% of the fuel costs borne during the trip.
- The company has given a fixed rate for the fuel costs for the different warehouses.
With the information given, the interviewee would be able to calculate the distribution costs in case the company chooses to lease trucks:
- It is evident from the analysis that there are no savings from leasing trucks during the normal months.
- However, it makes sense to lease trucks during the seasonal months especially for warehouses B, C, D and E.
- The total savings per month by shifting to leased trucks would be £ 3,600. Therefore, the annual savings by moving to leased trucks during the seasonal months (given there are 4 seasonal months) would be £ 14,400 or 14.4% reduction of the annual distribution costs.
- The company should shift to leasing of trucks instead of using a logistics company for shipping the apparel during the seasonal months. Leasing trucks makes sense especially for warehouses B, C, D and E.
- The company could also consider negotiating better rates for part usage of the truck during the seasonal months. It should try to evaluate if the trucking company would allow renting out one-third of the space (100 out of 325)
- A great candidate might also bring out the possibility of shipping only once in 45 days to the warehouses B, C, D and E. This option would allow the company to make an optimal utilisation of the 325 box capacity limit under the 50% usage clause. However, there are potential risks/ bottlenecks that need to be highlighted. The retailers might not accept the longer shipping cycle. Also, storage capacity might be a challenge to hold 45 days of stock at the central warehouses in the different cities.