Valiant is a UK based weed killer company which has been producing the same formula weed killer successfully since the 1970s.
Valliant’s main product has always been its standard, 10 litre metal drums of weed killer. These are typically used by domestic consumers to treat garden paths and paving, to clear areas of garden and similar small tasks.
When Valliant first started trading, metal was required to contain the harsh chemicals used in their product. However, in recent years, the development of more resilient plastics has allowed Valliant to start producing a 25 litre plastic drum of the same weed killer.
This new product size has been very popular with consumers, who wanted it to be easier to use Valliant for larger tasks, and has allowed Valliant to be used by more by business customers.
The result for Valliant since this change has been strong growth in revenues year-by-year. However, we have been called in because – despite this ostensive success – Valliant has been suffering from falling profitability. In fact, it seems that every time revenues go up, profitability goes down.
The candidate does not need to provide a quantitative solution. However, they do need to demonstrate a clear understanding of what is causing Valliant’s problems and how they might be addressed.
Hints and information should only be shared with the candidate after they have brainstormed the relevant subject.
The candidate should ask for information on:
The pricing of both products before and after the change to producing plastic drums
- The sales breakdown between the two products
- The cost for both products
- How unit cost has been calculated by Valliant
10 litre drums were previously priced at £18
After the introduction of the new 25 litre product, the price of the standard 10 litre drums increased to £20
The new 25 litre product is priced at £38
Currently, the split of sales between the two drum sizes is 50/50.
Valliant’s plastic drums are significantly more expensive to manufacture than the company’s traditional metal ones, as the specialist plastic used is very expensive, both to purchase as a raw material and subsequently to mould. Developing the capability to produce plastic drums also required purchasing new equipment and re-training staff.
Valliant simply sums the remaining overheads and allocates them evenly across all the units of both product sizes.
Revenue per litre is lower for the 25 litre drum than the 10 litre one.
It costs more to produce the 25 litre plastic drum than the standard 10 litre metal drum.
Overheads have been spread equally across all products, rather than being allocated in more conventional, specific fashion.
Valliant is selling large volumes of 25 litre drums which command a higher unit price, but also cost significantly more to produce.
Overall, then, we can infer that, for each additional 25 litre drum Valliant sells, they are losing profit, as that product has a low or negative margin.
Problems have arisen for Valliant due to their failure to properly allocate costs.
Valliant should immediately instigate a full cost analysis. This should then be used as a basis to alter pricing – particularly of the 25 litre product – appropriately.