MDP to Re-design Supply Chain for Metal Processing Factory

Case Type: reduce costs; operations strategy; supply chain optimization.
Consulting Firm: AlixPartners second round job interview.
Industry Coverage: Freight Delivery, Shipping Services; Transportation.

Case Interview Question #00520: Our client Madison Dearborn Partners (MDP) is a private equity firm specializing in leveraged buyouts of privately held or publicly traded companies, or divisions of larger companies; recapitalizations of family owned or closely held companies; balance sheet restructurings; acquisition financings; and growth capital investments in mature companies. The firm was founded in 1992 and is based in Chicago, Illinois, United States.

Madison Dearborn Partners has recently bought a metal processing company in Chicago. You have been hired as a consultant by MDP and they want you to re-design the supply chain system for the finished goods produced by this Chicago metal processing company. How will you proceed?

Additional Information:

The client MDP has three specific objectives.

1. They are concerned only about the outbound finished goods
2. Minimize Cost
3. Reliable product delivery

Suggested Structure:

For a supply chain design and optimization case like this one, the candidate should be willing to explore the following issues:

• Number of Products
• Number of customers
• Product demand
• Transportation
• Inventory
• Any warehousing decisions
• Location of factory
• Location of customer
• Flow of information

The case is essentially a transportation case. After initial structuring, the interviewer should ask the candidate to focus only on the transportation part. The focus here is to minimize transportation cost and ensure reliable product delivery.

Provide the following additional information when asked. But if the candidate doesn’t get here in a few minutes, just provide this anyway.

1. The metal processing company has only one factory located in the suburb of Chicago.
2. The metal processing company has only one customer located in Denver, Colorado.
3. All shipments are direct from the Chicago factory to the Denver customer. The distance between the two is 1,000 miles.

Question #1: At this stage, ask the candidate about various modes of transportation possible for the product delivery.

Possible Answers:

• By air: air cargo, airfreight
• By train: railroad freight
• By truck: truck freight

The client finally settles in for trucks. Additional information:

4. The customer demand is 40 truck loads per week.
5. Currently the Chicago factory is using truck freight companies which charge about $3 per mile for a truck load.

Question #2: The client is now considering reducing this transportation cost. How can the client do it?

Possible Answers:

• Negotiate with contractors to reduce cost.
• Look at alternate freight companies.
• Buy trucks on its own.
• Lease trucks.
• Shift the plant location to Denver.

Question #3: The interviewer should insist on the leasing option. Ask the candidate what information he/she wants to decide if leasing is a cheaper option. The candidate should ask for the following things:

• Leasing cost per truck – $1750 per month
• Labor cost (Salary of truck drivers) – $0.5 per mile
• Fuel cost – $0.25 per mile
• Vehicle maintenance cost – $0.4 per mile
• Freight loading and unloading cost – negligible
• Assume 4 working weeks per month
• The lease provider pays the fleet insurance cost
• A truck can make only 2 round trips per week.

What is the total monthly cost of transportation and what is the expected saving in transportation costs?

Possible Answers:

1. Current system by using Truck Freight Company

Monthly demand = 4 weeks * 40 truck loads per week = 160 truck loads per month
Total miles traveled = 160 * 1,000 miles = 160,000 miles (Truck freight companies charge only one way)
Total cost = 160,000 miles * $3 per mile = $480,000

2. New system with leasing truck

Weekly demand = 40 truck loads. We need 20 trucks as a truck can make only 2 round trips a week.
Leasing charges per month = 20 trucks * $1,750 per month = $35,000
Labor cost per month = 20 trucks * 16,000 miles per truck per month * $0.5 per mile = $160,000 (Here an empty truck returns from Denver to Chicago after making a delivery to the customer and for each delivery a truck travels 2,000 miles. Thus in a month a truck travels 2,000 miles per round trip * 2 round trips per week * 4 weeks = 16,000 miles)
Fuel cost per month = 20 trucks * 16,000 miles per truck per month * $0.25 per mile = $80,000
Vehicle maintenance cost = 20 trucks * 16,000 miles per truck per month * $0.4 per mile = $128,000
Total cost per month = $35,000 + $160,000 + $80,000 + $128,000 = $403,000

3. Expected saving = $480,000 – $403,000 = $ 77,000 per month

Question #4: What other ways can you suggest to make more money with this new transportation system of leasing trucks?

Possible Answer:

A good candidate will identify the opportunity to make use of the empty-return trucks from Denver to Chicago. They may suggest transporting any raw materials or sell the space to some other truck freight company.

Question #5: What are the negatives of leasing trucks?

Possible Answers:

• Managing the truck drivers
• What if the vehicle meets with an accident?
• We have to maintain accounting systems for all the expenses.

Question #6: Will this new transportation system ensure reliable delivery?

Question #7: Ask the candidate to provide a 30 second summary of his/her final recommendation.