Paper Supplier to Expand Customer Base in Janitorial Supplies

Case Type: improve profitability.
Consulting Firm: Simon-Kucher & Partners (SKP) first round full time job interview.
Industry Coverage: pulp, paper products.

Case Interview Question #01092: Your client SupplyCo. is a large supplier of various paper products (copy and printer paper, fax paper, tissue paper, toilet paper, packaging paper, paper carton, cardboard, etc) in the United States. The company is organized into three major business units: (1) office paper, (2) janitorial supplies, and (3) packaging supplies.

The client SupplyCo.’s total profit has declined in the last few years. Their current overall profitability is low compared to industry average. The CEO of SupplyCo. has hired our consulting firm to figure out why and to develop a solution for the problem. How would you go about it? What would you recommend?

Additional Information: (to be provided upon request)

* Provide Exhibits #1 and #2 as instructed.

Possible Answers:

1. Case Overview

Basic analysis to determine that SupplyCo.’s profit has declined because the company’s costs are too high as compared to competitors. The candidate will be asked to brainstorm at several points and should be pushed for more ideas. Finally, the candidate will be required to calculate profits for several alternative strategies.

2. Suggested Framework

a. Profitability
* Revenue by business line
– Quantity: Product mix
– Price
* Costs by business line
– Fixed cost
– Variable cost

b. Customers
* Preferences
– Shift from paper
– Green supplies
* Who are they
– B2B
– B2C

c. Competitors
* Marketing
– Quantity
– Type
* New entrants
– Pricing
– Differentiators
* Substitutes

d. Distribution
* Volume
– Internet
– Direct Sales
– Distributors
* Time to sale

3. Potential Areas for Analysis

a. Profitability
* Prices have remained the same.
* Paper sales and packaging sales have declined; janitorial sales have remained steady.

b. Customers
* Paper — large businesses, office supply stores.
* Janitorial supplies — large janitorial companies.
* Packaging — shipping companies, retailers with shipping service.
* Preferences remain the same.
* Demand for paper dropping with Internet.

c. Competitors
* Marketing has remained similar across the business line.
* No new entrants
* No specific differentiation across business lines; SupplyCo.’s products are generally well regarded.
* Substitute — Internet. Email has replaced printing and mailing, reducing demand for both paper and packaging.

d. Distribution
* Has distribution by Internet and retail.
* Time to sale has remained constant.
* Uses direct sales to large customers, Internet sales for smaller customers, and distributors.
* This mix has not changed.

4. Detailed Analysis

Question #1: Client’s profitability is declining — what are some reasons that could be?

Possible Solution:

Costs
* Increase in SG&A
* Increased marketing with no increase in sales
* Increased material costs
* Higher labor

Revenue
* Decreasing real prices — more discounts
* Reduced quantity — change in preferences, competitor influence
* Shift to less profitable products

Question #2: How can we determine if our client’s costs are too high? (Steer to Exhibit #1 — competitor cost ratios)

Exhibit #1

a. Client’s Costs by Business Unit

b. Average Cost Ratios by Competitor

Possible Solution:

Calculations

Comparing to competitors’ average cost ratio, SupplyCo. is in the bottom 25% in all three business units.

Question #3: How could the client improve these ratios?

Possible Answer:

The client could improve these ratios by:
(a) raising prices to increase sales
(b) renegotiating supplier agreements
(c) finding cost efficiencies in back office.

Question #4: Brainstorm ideas for revenue growth.

Note to Interviewer: After initial brainstorm — push for more ideas.

Question #5: (Show Exhibit #2) If the client company SupplyCo. needs to gain another $50 million in profit, which of the following three scenarios should they pursue? They can pursue more than one at once.

Exhibit #2: Three Options

Option A: Pharmaceutical Companies

* Providing basic raw materials and supplies to pharmaceutical companies.
* Market Size: $50 billion
* Average Margin: 35%
* Competition: 8 competitors hold 10% market share each
* Customers: Major pharmaceutical companies.
* Likely market share: Unknown

Option B: Recycled Products

* Providing recycle pulp and materials for paper, cardboard, and packaging to paper product companies, greeting card companies, etc.
* Market Size: $2.7 billion
* Average Margin: 15%
* Competition: Other paper and packaging companies.
* Customers: Paper product companies, greeting card companies, suppliers to restaurants, coffee shops, etc. Uses existing customers that SupplyCo. is acquainted with.
* Likely market share: 10%

Option C: Janitorial Supplies for small/medium business

* Provide janitorial supplies to small to medium sized businesses.
* Market Size: $10 billion
* Average Margin: 10%
* Competition: Generally smaller supply companies; regional players.
* Customers: small to medium sized businesses. Unknown customers, but similar demands as current customer list.
* Likely market share: 2%

Possible Solution:

* Option A should not be pursued because (i) expected market share is unknown (ii) it is completely outside from the client’s competency.
* Either Option B or Option C alone fails to achieve $50 million in profits.
* The client should pursue Option B & C in tandem.

5. Conclusion

a. Sample Recommendation

* The client’s costs are too high relative to its sales; the client must achieve greater synergies and should then pursue recycled products and expand its customer base in janitorial supplies.

b. Potential Risks

* Reaching smaller companies for janitorial supplies may be more costly and could drive up SG&A costs.
* Entering recycle products business will mean competing with established players.

c. Next Steps

* Investigate costs associated with expanding janitorial supplies sales networks.
* Seek financing to support simultaneous expansion in two markets.