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Case study #5: How much should we bid on this contract?

Team GradAustralia

Business consultants provide valuable advice to their clients. This case study about a contract bid will help you know how to approach case study interviews.

Case study examples

Case interviews allow you to demonstrate how you think - your ability to understand a problem, break it down into its requisite parts, analyse them and communicate a solution. In this series, we give you ten case studies to give you an idea of how to approach the case and how to walk through it with your interviewer.

You may want to consider the case question first and think about how you might structure a response before looking at the ‘answer’. Of course, bear in mind there are many ways to answer a case, so this is just one example!

For the purposes of these examples, we will only look at market sizing and business cases.

Case study #5: How much should we bid on this contract?

Question

Our client is a manufacturer and distributor of baby and infant formula. The product is sold nationally. They would like to boost their market share (currently middle of the pack) while maintaining profitability.

Currently, there is a government welfare program called For Women and Children (FWC) that allows individuals who are living below the poverty line to receive vouchers for formula for their children. This welfare program is actually subsidised by the producers of the infant formula. Within each state, infant formula producers must bid for the right to be the sole supplier of infant formula.

A sole supplier pays the government for the FWC contract, as well as providing rebates to retailers for FWC sales. This means that income received from FWC sales is substantially less than that received from normal formula sales. Indeed, sales to mothers who remain in the FWC program for more than 12 months result in a net loss. When determining how much to bid on an FWC contract for a given state, what factors should we consider?

Solution

This case is unlike the typical business cases we have looked at so far. It is an issue that is likely more unfamiliar and ambiguous. To start, you should look at the relative profitability of the FWC contract.

You:  To begin with, I’m going to look at who the typical FWC customer is, as well as how long they are a customer for and the kind of loyalty there. Can you tell me a little bit more about who the typical FWC customer, in regards to buying formula?

Interviewer: Sure. As you can imagine, given this a form of welfare, the typical FWC customer is poor. The average FWC recipient stays in the program for less than 12 months. Second, mothers appear to remain loyal to a brand through the infancy of their first child but for subsequent children seem to switch back and forth between brands. And finally, infants require formula for the first 22 months of their life.  

You: Ok, thanks. I’m going to now turn my attention to the issues that are facing this company. It seems that profitability would be the primary driver in trying to decide the terms for the contract – even though, it appears that there is some issue of social-enterprise here. I think the next step, given the FWC recipient gets rebates in addition to the subsidised cost of the product, is to quantify the rebate in order to understand what the profitability per recipient is. Do you have any information on this?  

Interviewer: For the purposes of this interview, let’s assume that the rebates average an additional 10 per cent (off the retail price).

You: Ok, so we might be able to calculate the profit per customer as FWC revenue – rebates – the cost of goods (COGS) sold. So, say the revenue is $100/customer per year, the rebates are $10 and COGS are $75, this means we make $15 per customer per year. So long as we’re paying less per customer for these rights to be the sole-supplier, then I assume we’re ok.

Interviewer:  For the most part, your logic is correct. But do you think there is anything else that might be a factor in determining profit?

You: Hmmm, there may be some hidden costs or revenues that I’m not considering. Maybe there are some kind of synergistic revenues that the company can achieve. For example, if the company got the contract then they would have additional shelf-space in the stores. And it’s not just FWC recipients who shop in these stores. So simply by having more shelf-space, they may be able to increase their market share overall. And on those sales, they would be getting full retail price. So perhaps, to the equation, I will add in an additional sales minus COGS. This might be tough to calculate. Do you have any idea of how long these contracts last?

Interviewer: Typically, several years.

You: If we know that a contract lasts several years, for simplicity, let’s just call that five, then we might be able to get a total dollar value for the contract. We can calculate the expected revenues because we know how many FWC recipients there are in this state that we’re bidding, plus if we get an idea of how much extra shelf space we would get, then we could calculate the synergistic sales.

Interviewer: You’re right. There are about 800,000 FWC recipients in the state and shelf-space is awarded based on volume sales. So getting this contract will help the company have more sales volumes, and therefore more shelf-space and hopefully more market share.

You: So, the equation might look something like (FWC revenue - rebates - COGS) + (synergistic non-FWC revenue - COGS) has to be greater than or equal to the Contract Bid.

Interviewer: We have run out of time but that sounds good to me.