OfficeMax to Separate Shipping Charges from Retail Price
Case Type: reduce costs; business competition, competitive benchmark.
Consulting Firm: Aon Hewitt first round job interview.
Industry Coverage: office supplies; retail.
Case Interview Question #00360: Your client OfficeMax (NYSE: OMX) is an American office supplies retailer headquartered in Naperville, Illinois. The retail chain has a total of 991 stores as of April 2011, and revenue was US$7.1 Billion in fiscal year 2010. The company’s selection of brand name office supplies includes business machines, 
computers, computer software and office furniture, while its business services encompass copying, printing, document reproduction, shipping, and computer setup and repair.
The CEO of OfficeMax has asked you to help determine why his company is not as profitable as their primary competitor, Boca Raton, Florida-based office supply retail chain Office Depot (NYSE: ODP). How would you structure your analysis of this case? What would you tell the CEO of OfficeMax to do?
Suggested Approach:
Think of an Income Statement. Since both OfficeMax and Office Depot are public companies, their financial statements are all readily available. A competitive benchmarking will reveal where the problem lies.
Begin with Revenues and work your way down item by item (revenues, price, volume, costs, fixed costs, variable costs, etc.). Identify any area that is not consistent with industry standards (as a percentage of sales).
Once you have identified a problem area, you can begin to determine the specific cause and then make recommendations for corrective action.
Possible Solution:
In this particular case you would have discovered OfficeMax’s costs to be high. Further analysis would have identified variable costs and specifically the cost of the products they are purchasing from their suppliers. With even further analysis, you would identify that shipping from the supplier is included in the price of these products. Furthermore, these shipping costs are extremely high, because the suppliers are billing you for the shipping and thus have no incentive for them to manage the shipping costs. The following is a possible conversation between the job candidate and the interviewer.
Candidate: I would begin by analyzing the company’s Income Statement to identify an area to further investigate. Therefore, are the company’s revenues in line with the industry standards?
Interviewer: Yes.
Candidate: How about their costs?
Interviewer: They seem to be a bit high.
Candidate: Knowing that the company’s costs are high, I would then analyze in detail their cost structure by first determining if it is fixed or variable costs that need attention.
Interviewer: In this case, their fixed costs seem to be fairly consistent; however, their variable costs seem to be high.
Candidate: I would then analyze their individual variable costs beginning with the cost of their primary variable cost, their products.
Interviewer: It does seem that they are paying slightly more than their competitors for the products they purchase.
Candidate: I would then analyze the components of that price. What does it include in addition to the actual price of the product? Taxes? Freight? And are these costs competitive?
Interviewer: The price includes both taxes and freight. The taxes are obviously the same for all buyers, but the shipping costs do seem to be a bit high.
Candidate: I would then note this as a problem area to be addressed in my recommendations and then look for other problem areas.
Interviewer: It turns out that this is the only area in which we appear not to be competitive. What would you recommend we do about it?
Candidate: I would recommend that we separate the freight charges from the price of the products and pay the freight ourselves (i.e. Free On Board or FOB). This would allow us to utilize the most competitive means of shipping the products. Currently, the suppliers have no incentive to lower the shipping costs.
Interviewer: Excellent! Let’s just stop here. Do you have any questions for me?