Case
Taco Shells
Case prompt
Our client is a large fast food chain specializing in Mexican food. They have embarked on a cost cutting exercise and have hired us to guide them through the process.
You are scheduled to meet the client tomorrow for the first brainstorming session and you plan to use the day today to collect your thoughts before the client meeting tomorrow.
Comments
This is an interviewer led case, so the interviewer should guide the candidate through the process.
This case is split into two segments. The first segment is qualitative in nature and is meant to test the thought process of the candidate in the given context.
The second segment is 'numbers-heavy' and is meant to test the quantitative aptitude of the candidate.
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: how can Taco Shells cut costs?
The case structure is a guide for the interviewer to build the case and need not be shared with the candidate.
Diagram 1 - Case Structure
1. Brainstorming
Ask the candidate to identify the major components of variable cost for the client.
Allow the candidate time to list out the components. After she lists out the major cost heads, prompt him/her to describe how she could potentially reduce each of the components.
A good candidate will identify the following two components:
- Raw material costs
- Packaging costs
Some candidates might also list out some other semi-variable components like labour, transportation cost. Prompt the candidate to focus on the above two components.
Variable costs are a function of the quantity purchased and the per-unit cost. In order to reduce the costs, the company would either need to reduce the quantity purchased or re-negotiate with their suppliers to reduce the per-unit cost.
Some of the ways in which the cost of the above two components can be reduced are listed below.
Raw material costs:
- Reduce the cost per unit by re-negotiating with the suppliers. A probable way would be to consolidate purchases (if it is practical) and negotiate price cuts.
- Look for cheaper alternative ingredients in the recipes instead of the ingredients used currently. This could be risky and would work only if the taste is not compromised and a decision is taken after a customer pilot.
- Reduce the amount of ingredients used in the recipes. Again this could be risky and could hamper the quality.
Packaging costs:
- Reduce the cost per unit by re-negotiating with the suppliers or look for some cheaper alternatives for packing.
- Reduce the volume used.
A great candidate would put himself/herself in the context of the fast food outlet and go over the list of cost heads to give contextual answers.
Some creative and contextual answers would include the following:
- Possibility to change the shape or size of the packaging to reduce costs
- Change the packaging style - color/text on the packaging which could potentially reduce costs
- Reduce the thickness/weight of the packaging in order to reduce costs
- Reduce the number of paper napkins handed out along with each order, so that customers come back if they need more instead of possible wastage
- Charge for extra condiments
- Have a condiment dispenser near the tills, so that customers take only as much as they need instead of the practice of putting several sachets in each order tray
- Consolidate packing material for families
- Have environment consciousness signs strategically placed at different points in the store to discourage the use of paper towels and other plastic items
- Reduce the size or thickness of paper napkins
2. Profitability and Break Even Analysis
The client had mentioned that they are evaluating a new napkin dispensing technology as they believe it would reduce the number of napkins used per customer and thereby save costs. You decide to do a quick calculation of the potential savings per annum with this technology.
Allow the candidate time to list out the information that s(he) would like to have in order to calculate the savings per annum.
Below would be the factors that the candidate must identify:
- No. of outlets
- No. of customers per outlet per day
- No. of napkins used per customer currently
- No. of napkins used after shifting to the new technology
- Cost per napkin
A great candidate is also likely to identify the difference in cost per napkin between the old and new technology and the capital cost of installing the new dispensers. Ask the candidate to ignore these factors for the time being.
If enquired, share the below information with the candidate:
- The client's current procurement cost for napkins is $35 for a pack of 7000 napkins.
- Currently, each customer uses 6 napkins on an average. However, after the switch, it is estimated that each customer would use 3 napkins on average.
- The client has 10,000 stores across the world.
- The stores are open from 7:30 am to 10:30 pm each day. The peak hours are from 7:30 - 8:30 am, 12 noon - 2 pm and 7 -9 pm.
- Each outlet has 5 tills. Each till operator takes the order, bills it and serves the customer.
- The average time taken to serve a customer at the till is 2.5 mins.
- During the peak hours, the tills operate at 90% capacity, while during the off-peak hours they operate at 50% capacity utilization.
The first step now would be to calculate the number of customers served per annum. Some key information that will be used for this calculation is:
- The store is open for 15 hours per day ( 7:30 am to 10:30 pm)
- The peak hours last for 5 hours during the day and the off-peak hours last for 10 hours during the day.
- Each till can serve 24 customers at max per hour ( 60 mins / 2.5 mins).
We can calculate the customers per day per outlet as follows:
Customers/ outlet/ day = No. of tills * (Peak hrs * Capacity utilization * Customers/ hr + Off-peak hrs * Capacity utilization * Customers/hr)
Therefore:
Customers /outlet/day = 5 * ( 5* 90%* 24 + 10*50%*24)
= 1140 customers
Customers served per annum = No. of outlets * Customers/outlet/day * 365 days
= 10000* 1140 *365
= 4161 m customers
Now savings can be calculated as follows:
Savings = (# Napkins used before - # napkins used after switch) * Price per napkin * No. of customers served p.a.
= ( 6- 3) * ($35/ 7000) * 4161 m
= 3 * 0.005$ * 4161 m
= 62.415 m$
What should be the highest price that the client should be willing to pay for these new dispensers?
This would require a break-even point analysis. Allow the candidate time to think through this calculation and list out the additional information required to complete it.
If enquired, share the below information with the candidate:
- If the new dispensing technology is used, then each store would require 8 dispensers
- Cost of the napkin that can be used in the new dispensers is 0.008$ per napkin
- There are no fixed costs ( for dispensing machine etc) under the current system
The maximum viable cost for the new dispenser would be at the point where the cost under the new technology equals the cost of the old napkin usage.
Therefore we can set up the below equation:
Cost of dispenser * 8 * No. of outlets + Napkin usage costs under new tech = Napkin usage costs under the earlier system
Cost of dispenser * 8 * 10,000 + (Cost/Napkin *# Napkins used * # Customers p.a.) = (Cost/Napkin *# Napkins used * # Customers p.a.)
Cost of dispenser * 8 * 10,000 + (0.008$ * 3 * 4161 m) = (0.005$ * 6 * 4161 m)
Cost of dispenser * 80,000 + 99.864 m$ = 124.830 m$
Cost of dispenser * 80,000 = 24.966 m$
Cost of dispenser =312.075 $
Rounding could be accepted along the calculation steps. There may be other ways of setting out the calculations to get to the same answer.
Key Insight
The maximum price that the client should be willing to pay for the new napkin dispenser is 312.075$ each.
Tell the candidate that the price of the new dispenser is 80$ and ask him/ her to conclude the case.
3. Recommendation
Ask the candidate to list out the key points that he/she would like to discuss at the meeting tomorrow with the client.
The candidate must have a succinct point of view which he/she can present at the client meeting.
- On the variable cost reduction, there are several ways to reduce costs. Raw material costs and packaging costs would be the two major cost heads that one should explore in order to reduce costs
- The new napkin dispensing technology has the potential to generate savings of approximately 62.415 m$
- The maximum price that the client should be willing to pay per dispenser is 312.5$; the current market price is 80$, which is roughly 25% of the maximum viable price
- Hence, the client should evaluate the switch to the new napkin dispensing technology
- On a standalone basis, the new technology requires the use of more expensive napkins and investment into dispensers; the savings calculated above are primarily a function of the reduction of 3 napkins per customer
- The client must therefore pilot the new technology in a few stores, to test the robustness of the proposed reduction in usage of napkins per customer
- The customer's reaction to the new dispensers also needs to be evaluated, as customer dissatisfaction could adversely impact sales
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