Bain Case 2•Office Vending Services Inc.SituationOffice Vending Services Inc. is a global leader in vending machines services for smalland large businesses.They provide a full service to their clients. This includes installing machines at client site, refills and repair.They collect revenues only from snack sales and choose the variety of products they sell in their vending machines themselves.ComplicationOver the past few years, their profits have dropped significantly and the CEO is unable to figure out why.The CEO asks Bain to identify the root causes of the problem and proposeactionable solutions.Question 1 of 11You would start to tackle this problem by looking at which factors:Industry trends 5-year market value evolution Fixed and variable costsRevenues and costs Competitors' actionsBain's answerUsing an External/Internal framework will help us determine whether our client's profitability problem is industry-wide or unique to them. If it is internal, we will look at our client's revenues and costs to isolate the problem.If it is external, we will need to investigate the cause of the industry decline (consumer trends, substitutes, etc.).It is more straight-forward to look into external factors first (Is the market and overall profit pool growing? Have there been new recent entrants to the market?). Therefore, looking at industry trends would be our likely first step.Question 2 of 11To identify if the declining profitability is an internal issue of our client or if it is an industry trend, John, the partner on your case, asks you to contact our information department, called Bain IS (Information Services).They propose several reports that might be of help. The client does not want to spend more than $3000 for this analysis.Please select the report you want to purchase.Industry Report #1 Industry Report #2 Customer Insights Analyst Report Bain's answerYour objective is to identify the driver that really matters. You need to know about the market:•Have total market sales and the overall profit pool gone up or down in recent years?•How have different competitors' profitability evolved over the past decade—is everyone facing pricing pressure and/or increased costs?The analyst report includes all this information.Question 3 of 11Based on info purchased by IS, let's look at the market profit trend for snack sales from vending machines.What would be your first conclusions based on this information?Bain's answerThe profit trend of the vending machines sales is positive (5%) for the overall market. Therefore, the problem of Office Vending Services' profitability is internal.Question 4 of 11What would the next step be to find the root cause of our client's internal profitability problem?Bain's answerA basic revenue and cost framework enables us to cover all factors impacting profitability and quickly identify the drivers that matter. We need to look both at revenues and costs and the component parts of each.Question 5 of 11At this stage, the Bain team would likely start to form its "answer-first" hypothesis to guide its analysis and help drive to a recommendation in the most efficient manner possible.You and your colleague Sarah, a consultant on the team, head to a team room to write your ideas on a white board based on your early insights that you will then share with the team manager.How would you suggest laying out a hypothesis at this point?Bain's answerA potential hypothesis at this point might be:Office Vending Services' decline in profitability has been caused by internal factors due to stagnated revenue growth that hasn't stayed in line with rising fixed and variable costs.Remember, an early hypothesis is simply a tool to help guide our analysis, not a final answer. It will be revised and fine-tuned as we learn more information.Question 6 of 11Given our profitability framework and initial hypothesis, what would be your next steps to investigate further and what questions would you like answered?A selection of possible questions is given below. Which of these are most relevant at this stage?Has the client launched new products recently? How have competitors' profits evolved?Have our client's individual snack prices changed recently? Has the volume of our snacksales declined? Has our client invested heavily in new equipment recently or had an increasein overhead? Did the cost of goods sold increase? Did our client reduce his marketing spend?Bain's answerAsking the right questions upfront will allow the team to quickly determine which of the four potential drivers is responsible for our client's decline in profitability.We have laid out what we consider to be the most critical questions at this stage under each of the four drivers of profitability. The interviewers responses are below.Your questioning has identified "quantity" to be the key driver of declining profitability. We can now update our hypothesis to show that a reduction in snack sales volume from vending machines is driving the decline in revenues.The team gets together to discuss this early insight. Suzanne, the team manager, states:"Since the industry's profit pool is growing and gross margins are constant, we can conclude that the overall vending machine market is growing. This means that our client must be losing share to their competitors. Our next step is to figure out why."Question 7 of 11With quantity identified as the key driver of profit decline, the client agrees to pay for temporary staff to perform market research. Based on their findings, Sarah, a consultant on your team, created the attached slide. Now we need to understand how our client compares to the competition on delivering on the customers' most valued needs.Given the market research presented in this slide, why do you think our client's volumes are dropping?Client's volumes are dropping because of (you can select more than one):Overall market decline Products offered are not meeting customers' needs Client isnot offering sufficient snack variety Customers finding substitutes in other markets (café,convenience store, newsagent, etc.) Vending Services Inc. prices are too high Customers are tempted by competitors' modern machinesBain's answerThrough our structured investigation, we have quickly established drivers of the client's falling profitability (see image).Conclusions from the market research show:•Products offered are not meeting customer needs (i.e., too few low-fat options)•Although their individual and average prices have not changed over time internally, our client's snack prices are perceived as much higher than competitorsQuestion 8 of 11In order to solve the problem and make an actionable recommendation, we need to understand the drivers of each identified problem.How would you answer the following?•Why do you think the client is underperforming on price?•What are the immediate next steps or analysis needed to identify the source of the pricing problem?Bain's answerTwo factors are most likely to be forcing Office Vending Services to maintain their higher prices:•Greater product variety (adds complexity to their operations and doesn't allow them to reach full purchasing scale from suppliers)•Modern machines are likely to have higher leasing costsThese two factors put our client at a cost disadvantage to the competition.The next step is to understand how our cost structures compare to those of our competitors in order to fully assess our competitive performance.Question 9 of 11A comparison of our cost structure to that of our competition confirms that our client is unable to compete on price due to structurally higher costs.Although the client's costs have not increased recently, those of their competitors are lower. Suzanne asks you to investigate how to reduce costs to allow Office Vending Services Inc. to price their snacks more competitively.Ben, an associate consultant on the team, puts together a data request to the client to get more internal information. The client returns the following exhibits.Read them carefully to extract all of the necessary information.One of the ways to reduce Office Vending Services' costs is to reduce its product complexity. Based on the exhibits, would you stop distributing any products? If so, which ones?1 2 3 4 5 6 7 8 I would recommend not dropping any existing productsBain's answerBased on the information in Exhibit 1, one way to maximize sales force efficiency would be to:Keep products that currently make up ~80% of our client's total profit marginWe also want to be sure the remaining products will have enough low-fat options, as this is valued by customers.Following these guidelines, products 2,7, and 8 could be excludedQuestion 10 of 11Suppose you stop selling products 2, 7 and 8.You decide to reallocate the volume (12,000 units) to either vendor 1, or vendor 4, or a new vendor 9 who have proposed the following:Vendor/Product 120% discount on historical volumes and 25% discount on incremental volumes of their productVendor/Product 420% discount on all volumes of product 4 and will subsidize part of the client's admin staff (equivalent to 1 FTE) in charge of the product orders processingVendor/Product 9A new vendor has a fat-free product with COGS of $2. While there is no product discount, their modern procurement system will allow our client to reduce its admin staff by 2 FTE. Remember from Exhibit 2, each product eliminated creates a 7% reduction in salary and benefit costs.X CLOSEFor simplicity, you can calculate this additional administrative savings for Vendors 4 & 9 off the original SG&A baseline costs, not the post-complexity reduction SG&A costsWhat option do you choose?What is that option's monthly impact on COGS and SG&A?Your answer:I would reallocate the volume to:Vendor 1 Vendor 4 New vendor 9This option would result in:Bain's answerLet's analyze each vendor's proposition:Exhibit 1 told us that our monthly cost of goods sold (COGS) is $126,500. In eliminating products 2, 7 and 8, we must reallocate their 12,000 units to Vendors 1, 4 or new Vendor 9Like all case interviews—there is no one "right answer" in how you draw conclusions from the analytics and make recommendations to the client. We want to hear your thought process and logic. Here are some of our thoughts about each option:Question 11 of 11Through our investigations we have discovered the root cause of Office Vending Services Inc.'s falling profitability. However, we now need to make actionable recommendations to help them reverse their performance trend.What actions do you advise your client to undertake to increase their profits?Bain's answerKey RecommendationsTo reverse the trend in falling profitability, there are several key steps we would recommend the client to do (note:all of these options were not fully analyzed in this practice case):Reduce the number of product varieties sold, Consider keeping only those which account for 80% of gross margin dollars.This will reduce complexity, decrease COGS and SG&A costs and will allow you to negotiate discounts with remaining vendors.Stock more low-fat options within the reduced inventory, This will increase number of snacks sold and improve profitability.Deprioritize leasing newer, more expensive machines, Customers don't care and older machines are cheaperAllocate cost savings to reduce prices, This will attract more customers, increase snack sales and drive profitsInvestigate a competitor acquisition, Client could benefit from cost synergies (e.g., SG&A) and economies of scale (e.g., COGS).。
