Cost-savings analysis for food services company

 

In this case, we will provide you with information regarding a client situation and ask you questions regarding the case issues. After you submit your answer, we'll provide a detailed Bain answer that you can compare with your ideas.

Remember, in case interviews there is no "right answer": interviewers look for problem-solving skills, creativity and common sense. You will not be able to skip questions in this online case, so take your time and have fun!


Question 1

The client situation:

A large fast food chain has hired Bain to improve the company’s profitability. You’re about to have an initial brainstorming session with your team around your client’s options, and you want to collect your thoughts first.

How would you begin to tackle your client’s profitability problem?

Your answer:


Bain recommended answer:
Your interviewer wants to know that you have a structure in mind. An appropriate structure for this case would be the profit equation. Be sure to state that to your interviewer.

For example:

"Profit is: total revenue – total cost.

Where Revenue = Price * Quantity and Costs = Fixed Costs + Quantity * (Variable Costs).

In order for the company to improve its profitability, management needs to increase revenues and/or decrease costs.

So to begin tackling my client’s profit problem I am going to look at these two sides of the equation:
  • Could the client increase prices? How would customers react?
  • Could the client sell more meals, either at existing branches or through opening new ones?
  • Are there other creative ways to grow revenue (enter into large-scale catering contracts, for example)?
  • Could the client decrease our fixed costs by selling some of our branches or real estate?
  • Could the client reduce the quantity of products they buy, such as ingredients for their meals?
  • How else could they reduce their costs?"

Question 2

At your case team meeting, your manager informs the team the customer is price sensitive, the market is fairly saturated, and that the fixed costs are pretty stable. Thus Bain and the client agree that the team should focus on lowering variable costs. Specifically the client wants to reduce their spending on purchased items (items the client buys from others and then uses or offers to their customers, like the meat in the hamburgers or the ketchup packets).

Without knowing much more about the situation, what would you suggest are some ways to do so? Which ideas seem the most attractive and why?

Your answer:
analyse the supplier of purchased items to see if there exist the space to reduce the purchaseing cost. Then contacting several similar suppliers, and get the reasonable price of raw materials

Bain recommended answer:
Purchased goods in this business fall primarily into 2 categories: food and packaging. Variable costs are a function of: price and volume. Therefore, the client needs to reduce volumes purchased or negotiate lower prices.

Food:
  • We could negotiate lower food prices with our suppliers (consolidate our purchasing, etc.).
  • We could look for cheaper ingredients. This sounds risky because it could lower the quality of the food that we sell.
  • We could reduce the volume used. For the same reason, this sounds risky because it would change our recipes, one of our competitive advantages in producing winning recipes.
Packaging:
  • We could negotiate lower prices with our suppliers or look for cheaper alternatives.
  • We could reduce the volume used.
Recommendation:
  • Most attractive ideas are: negotiating lower food prices or packaging prices, looking for cheaper packaging materials, or reducing the volume used.

Question 3

At this point in the brainstorming session, the VP adds that two years ago, the company launched a program to centralize purchasing and successfully negotiated much lower prices. Therefore, it is critical to determine if you could reduce the volume of goods that the client purchases. How could you reduce the volume of purchased goods?

Your answer:
11

Bain recommended answer:
Some good creative answers here include (but are in no way limited to):
  • Can the client change the shape or size of food containers?
  • Can the client packaging for families be consolidated?
  • Can the client reduce the weight of the packaging while still protecting the food?
  • Can the client reduce other qualities of the packaging including degree of color or logo prevalence without sacrificing their brand?
  • Can the client lock bathrooms so that non-customers do not waste toilet paper and towels?
  • Can the client charge for extra condiments?
  • Can the client reduce the size or number of napkins they purchase?

Question 4

Bain focuses on components that make up large portions of a company’s costs: reductions in these areas will have the largest impact on a client’s overall costs. Bain’s philosophy is to always focus on where the value is. At first glance, napkins would not appear to fall within this category because they are so low cost. But there is a new napkin dispensing technology on the market that you have heard about and think could save the client some money. You decide to investigate.

One way to reduce volume is to reduce how many napkins a customer takes. Customers in fast food chains often take many more napkins than are needed for the meal, or actively hoard them to take home. One action some chains have taken to combat this is to switch their napkin dispensers from small metal dispensers (from which you pull napkins out in bunches) to larger plastic dispensers (from which you pull napkins one at a time, like a reverse Kleenex box). These dispensers are produced by major paper manufacturers.

Let’s assume your chain came to you with the following question:
  • How much money could we save per year in the US from using the new type of napkin dispenser in all restaurants?
What information would you like to know from the company? (Do not take into account the cost of the dispensers for now.)

Your answer:
number of customers per day, the average paper usage per meal

Bain recommended answer:
Key information that would be necessary includes:
  • Number of restaurants
  • Number of customer visits per store per year
  • Number of napkins used per customer now
  • Number of napkins used per customer after the switch
  • Price per napkin

Question 5

As you talk through the data points that you would need to gather with your colleagues, you learn from a fellow AC who worked for a local restaurant that a case of 6000 napkins cost his client $28. Thus, a reasonable price per napkin is about $0.005.

Conduct your estimates as if your client is similar to McDonald's in terms of the number of outlets.

Your manager calls you for a quick estimation of the market size before getting the actual data from your client. Use creative approaches to hypothesize values for each of the above pieces of information and then calculate the estimated savings.

Your answer:
10000*365*100*(3-1)*0.005=3650000

Bain recommended answer:
The interviewer is not looking for you to know the values of each of these buckets, however it is important for you to make reasonable estimates and be able to defend your answer. Were your estimates near these, or did you at least take similar approaches?

Number of restaurants

Actual answer: ~12,000 McDonald's in the US.

One estimation approach:
Think of your hometown: How many McDonald's are there for the number of people? Assume there is a McDonald's for every 20-25,000 Americans, with a population of ~275 million people in the US, that would be 11-13,750 McDonald's.

Other approaches:
  • Estimate the entire fast food market and then estimate McDonald's share
  • Estimate the area covered per McDonald's across the United States.
    Note: With this approach, be careful to account for population differences between 10 square miles of NYC and 10 square miles of Utah.
Number of customers per restaurant per day

Actual answer: Fast food restaurants expect around 1,500 customers a day.

One estimation approach:
Assume the 20,000 people per McDonald's visit an average of twice a month, that's 24 times a year per customer or 480,000 visits / 365 days = 1,315 customers per day.

Other approaches:
  • One might take this a step further during a case interview and attempt to segment these customers. For example, one might assume 50% of the restaurants customers are drive-through and 25% of the remaining take their food "to go." Drive-through customers do not take, but are given napkins. "To go" customers may be more likely to "hoard napkins" as they can not go back to the counter for more.
    Note: This would influence potential answers to the next question - but for now, assume you did not take this step and all customers are the same.
Number of napkins used per customer per visit

Actual answer: Five napkins with old dispensers and two napkins with prohibitive dispensers for a savings of three napkins per customer.

One estimation approach:
During a case interview you would most likely just use personal experience here - how many napkins do you take or see others take when you're at a fast food restaurant?

Other approaches:
  • Bain would send people to the chain to watch napkin taking behavior or call fast food restaurants with both kinds of dispensers to find out how many napkins they go through a day.
Calculations
$0.005 per napkin * 3 napkins * 1500 customers * 365 days per year * 12,000 restaurants = $98.6M dollars saved in napkin purchases.


Question 6

Does this estimate sound reasonable?
  • How would you go about feeling comfortable with this figure and pressure checking your assumptions?
  • What would you want to flag for your manager as factors that might significantly alter the answer?
Your answer:
11

Bain recommended answer:
To check the magnitude of the overall number some options include:
  • Looking at a comparable company’s operating income to see what percentage of the expense napkins account for.
  • Find out what your client currently spends per restaurant per year on napkins.
Keep in mind that with a company of this size any small changes in assumptions will significantly alter your answer. Some things to flag for your manager:
  • The chain you work for probably gets a significantly better deal on napkin pricing due to the magnitude of their orders (in contrast to the single-location restaurant napkin price estimate you received)
  • Up to 50% of customers are drive-through and their napkin behavior should not change. This would reduce the savings by up to 50%
  • The three napkin reduction estimate needs refining. Perhaps a pilot program would need to be done to see if the dispensers really have the desired effect

Question 7

Assume you would need 10 dispensers per store for a total of 120,000 dispensers. Also note that napkins in these dispensers cost more at a price of $.01 per napkin (remember it is the paper companies that make the new dispensers).

At what price per dispenser would the investment not be worth doing?

Your answer:
11

Bain recommended answer:
120,000 * cost of dispenser + 2 napkins * .$01 per napkin * 1,500 customers * 365 days * 12,000 stores = 5 napkins * .005 per napkin * 1,500 customers * 365 days * 12,000 stores

120,000 * cost of dispenser = $32.85M

The most you would be willing to pay per dispenser would be $273.

Note: In an actual case interview you can use round number estimates so that mental math is easier.


Question 8

The actual cost of these dispensers is around $50.
  • Can you see any other factors your client should consider before making a decision?
  • What other advantages and disadvantages might there be to this switch? (Impact on costs and customers.)
  • How might you evaluate the impact of the extraneous factors?
Your answer:
11

Bain recommended answer:
Some potential ideas include:

Advantages:
  • Fewer napkins used per day leads to less restocking which may mean better customer service or lower labor cost.
  • Better relationship with paper manufacturer (potential for better pricing).
Disadvantages:
  • With the new dispenser locking you into a paper provider you may lose buyer power. There is the potential for additional napkin price increases in the future.
  • Customer reaction: Will a customer find this to be poor service? What if he or she needs to grab a handful of napkins after a spill?
Implementation:
  • Management will need to negotiate a contract that includes limits on future pricing.
  • Bain will need to do customer research and pilot programs to evaluate customer reaction.

And many, many more! As you can see, the keys to a good case interview are logical assumptions, creative thinking, and basic quantitative ability. Take time to think through problems and share your thought process with your interviewer and you will do great.