Transcription
Welcome everyone. In this video, we will solve an interview-related case, just like how MK asks. And today, I'm joined by a former consultant, Alara. Welcome.
Before we begin, if you're preparing for case interviews, check out our Get to Offer course. It's packed with videos, case studies, and drills. We also offer one-on-one coaching. You can book a free 50-minute intro call on our website to explore how we can best support you. Shall we get started?
>> Yes.
>> All right. In this case, our client is Blankware. They are a major North American supplier of unbranded t-shirts, primarily selling to customization companies and fashion brands that supply large retailers, the likes of Walmart and Target. The company operates five manufacturing facilities in the US, and they offer three main product lines. So, the names are Dailyware, Active Flex, and Echo Basic. Dailyware is your standard cotton blank shirt for everyday use. Active Flex are shirts designed for physical activity, made with breathable materials to help keep the wearer dry. And we have Echo Basic. So, these are the shirts made from recycled fabrics, targeting environmentally conscious buyers. Although our client's sales volumes and prices per product category have remained steady over the past 5 years, Blankware has seen its profit margin fall from 12% to 7%. The leadership team is unsure what's driving this margin erosion and is looking for help in identifying the root causes and potential levers to improve financial performance. So, I'd like to start the case by discussing with you what might be the main causes behind this profitability decline. Where would you like to start?
>> Okay. Uh, so before I start, uh, if it's okay, I just want to recap, um, to make sure that I got all the client information correct. So, our client is called Blankware, and they create unbranded t-shirts that they end up selling to large, uh, retail stores. And they have five factories where they produce the t-shirts in the US, and they sell three different types of products. Is that correct?
>> That's right.
>> And although their prices and volumes have remained the same in the past five years, we have seen about a 5% drop in profitability from 12 to 7%.
>> That's correct.
>> Okay. So, if I can take a moment, then I'm just going to come up with an outline that I can then propose to you as a potential approach.
>> Sure. Before you do this, is there anything you would like to clarify just to deepen your knowledge about the case?
>> Uh, yes. So, I would like to clarify two points. The first one being, you've mentioned that we produce in the US. But are all our, um, clients or retailers that we sell to also in the US?
>> No. So, the client's a North American player. Their manufacturing facilities are based in the US, but they also export their products to Canada and Mexico.
>> Okay. And then the second thing that I would like to ask before, um, I drop out my approach is, uh, does the client have a specific goal in terms of what profitability they want to reach back to? What do they want to do?
>> Yeah, that makes sense. Uh, let's just say that the goal would be to get back to the origin levels of 12% profit margin in the next two years.
>> Okay. Thank you. All right, I'll give you a couple of minutes if you like. I would like to break down, uh, my approach into two main buckets. The first one being a quantitative analysis, and then the second one being a qualitative analysis of the situation. And then within these buckets, I would like to break it down into internal as well as external factors that we're going to analyze.
>> I'll start with the quantitative first.
>> Sure.
>> So, when I look at the internal information, I would like to first obtain if we do have information of our financials split by, uh, product, region, and manufacturing facility. By product, it would be the three main products that we produce. By region, it would be where we sell the goods to. And then manufacturing facilities is which one of the five might be maybe a problem. And the reason I'm doing this is to understand where maybe the problematic point is. The second one, I would like to have is a breakdown of the variable and fixed costs of each of these. And among variable costs, it could be maybe the raw materials we're using, utilities. And then among fixed, it could be overhead, administrative stuff, or even the factory facility itself. Then I would like to look at our external analysis. And in external analysis, I would like to focus on competitors. This is because I need to understand if this is an industry-wide issue or if this is a US issue. If everyone's costs are rising, then my attention would be different. I think the second point that I'm going to analyze today is our qualitative factors, and this one I'm going to start with our internals will be split into people, processes, and technology. So, under people, I would like to understand, are we training our employees correctly? Are they doing something wrong? Have they slowed down in the previous years? Maybe they're inefficient with what they're doing. The second one is our processes. So, I'm assuming that we're creating different customized shirts for different clients. You know, when we're switching maybe the manufacturing portion of it, are problems occurring or is it slow? And then of course, technology. We bought the goods 5 years ago, and you know, maybe they're outdated at this point, or they might have maintenance issues that are increasing our costs. And then finally, uh, in the qualitative bucket, I would like to look at external problems, and that could be regulations that have occurred, if we're importing raw materials from countries and now we're getting taxed for it. It could be supplier-side issues, given their costs and, you know, maybe potential problems. And then of course, logistics or anything that might be related to actually the shipment of the goods.
>> Okay. So, as per your framework, I understand that you wanted to isolate this issue further and talk about the cost side. Is that correct?
>> Exactly.
>> Let's take a look at how the candidate has performed so far. Starting with her strengths. Just like in most McKinsey cases, the initial prompt was quite long. However, the interviewee managed to capture it all and provided a strong recap at the start of the case, demonstrating a good understanding of the client's situation. Her framework directly addressed the issue, offering a structure to analyze specifically where the decline in profitability is coming from. Just like in real-life turnaround projects in consulting, she suggested isolating the issue quantitatively first, then following up with brainstorming the underlying qualitative drivers. Now, let's look at a few areas where she could have done better. While she asked great questions about geographical reach and financial goals, she did so after being prompted by the interviewer. She could have asked them more proactively. Although the interviewer clarified early on that this isn't a price or volume issue, hence not a revenue issue, the interviewee could have explicitly acknowledged that it's a cost issue. Doing so would have better framed why her framework focused only on that lever. She could have also been more precise with some of the investigation areas in her framework. Looking back at the internal section of her quantitative analysis, there are two things she could have done better. First, she said she wants to know the financial split by product, region, and facility. But it wasn't clear whether she meant revenues, costs, or both. Instead, she could have been more precise and said historical cost trends across products, regions, and facilities. Second, she mentioned that she'd like to look at the variable and fixed cost breakdown. But again, she could have been clearer and asked about the historical cost trends of specific variable and fixed costs.
>> As the next part of the case, I would like to brainstorm together what might be some key cost items for the client. You already had some ideas, but what I'd like to do is I'd like to share with you the following exhibit where you can find some more details about the t-shirt manufacturing processes. Take a look at this and let's expand further on your previously listed out cost items.
>> Okay. If you give me a moment, I'm going to analyze the exhibit for a bit.
>> Sure.
>> Okay. Uh, so as far as I understand, exhibit one shows us the different steps in actually producing a t-shirt itself. And, uh, using these, if you can give me a moment, I'm going to come up with potential costs that could be affecting us.
>> Okay.
>> All right. So, uh, given exhibit one and the previous information that I provided you on my approach, I've decided to split potential costs into five different buckets. So, I would like to start with our our biggest, I think, contributor in what we're doing, which is raw materials. Uh, so I would like to, I think, analyze maybe the two main raw materials that we might be using, which is fabric and dyes. To deep dive into these, the fabric, I would like to understand, are we using different materials? And if we're using the same materials, have the costs of those increased? Similarly, with dyes, have the costs increased? The second thing I would like to take a look at, which I think is a big part of the manufacturing process, are our labor. Uh, have, uh, are wages increased? Or, you know, are there issues when we compare it to the competition? And then are there problems with maybe overtime pay that we're doing, um, or the hours that maybe some of the people are working? The third one that I would like to look into is, of course, an analysis of our manufacturing facilities. Are there issues again, as I previously mentioned, in utilities, the actual machines, um, and the maintenance portion of either the plant floor itself or, again, the machines? And then the fourth thing that I'd like to look into is, once we're done, uh, with the big buckets, it's the actual order itself. Do we have a good quality control? What are our defects? What are our potential spoilages that maybe over the years might have slipped? And then the final thing is packaging. You know, have the costs of packaging increased, shipping them out, maybe the materials that we're using.
>> Okay, that makes a lot of sense. Now, what I'd like to do is share with you the next exhibit where you can find more information about our benchmarking study. We've looked at our client's cost items and we compared to a couple of other competitors. Take a look at this exhibit and please let me know your thoughts.
>> Okay, thank you. If you can give me a moment, I'm going to, um, try and understand the exhibit a little bit.
>> Sure.
>> Um, before I get back to you with my analysis. Okay. So, just to clarify, this exhibit shows us the cost of manufacturing across our competitors, and it goes through several main points, uh, such as, uh, our main buckets, raw material costs, machinery, spoilage costs, overhead, and labor. And this shows the cost per 100 t-shirts in US dollars. Data that's not available is shown in gray boxes.
>> Yeah. So, imagine that we had spoken with some experts in this field, and they just couldn't give this information to us.
>> Okay. So, starting at the top, raw material. Okay. So, 102, 102 looks like it's about the same fabric, thread, dyes, almost exactly the same, um, as our competitors. Machinery and equipment. You know, we have 20, competitor 2 is 21, 8, 9, sevens, fives. Yep. It looks like we're on in line, uh, with the market there as well. Spoilage costs, I think, um, draw a little bit of, um, my interest because it looks like we're more than, or nearly double what our competitors are, you know, having, which is we have 20, they have nine and 13. So, that might be a point that we deep dive into. Overhead costs, it looks like we're on par. And then of course, labor costs. On average, they're about the same, but I'm noticing a little bit of an outlier in our overtime for hourly employees. We're paying 15, and everyone else seems to be paying around eight or nine.
>> Makes sense. So, you want to focus on two cost items: spoilage and overtime. Correct?
>> Correct.
>> Okay. So, let's get first started with the spoilage costs. First of all, what does spoilage mean in the context of manufacturing? Let's talk about that, and then let's together brainstorm what might be driving this issue for the client.
>> Okay. So, I would say that given that we are producing t-shirts, spoilage, my assumption would be either based on potential defects that are occurring, the t-shirt is spoiled, and we can no longer sell it to the retailer. The other issue could be that maybe the way that we're storing it in our distribution centers or the way that we're packaging it, um, humidity, etc., might be deteriorating, um, some of the clothing that we're creating. And then I think the third point would be the actual materials that we're using. Are we buying too many dyes? Are, is our fabric getting old? Maybe eaten by moths and is no longer usable.
>> Okay. Even though I cannot fully confirm the root causes of the spoilage problem, we understand that there are four key factors that currently help our client reduce their spoilage costs. And I'll show you a table in a second where you will find those four factors for the client. And we're going to be comparing to our competitor. And here you're going to find the likes of different technologies and surveillance programs and all. Just assume that if you're using technology A, they're using technology B. And I'd like to go through it one by one together and decide on whether we should retain them or switch. Does that make sense?
>> Okay, that makes sense.
>> Let's take a look at it together then.
>> Okay. So, if you can give me a moment, I'm just going to try and understand this chart a little bit before I dive into my analysis. Okay. So, just to confirm, uh, my understanding before I deep dive into maybe the potential problems that I see, uh, this exhibit shows us the potential impact on spoilage given different initiatives that we currently have in place. It says that a 1% spoilage decrease equals to about $40,000 in annual spoilage costs. What does that mean?
>> I am understanding that as meaning if the initiative reduces the spoilage by 1%, we are saving $40,000 in spoilage costs.
>> Okay. And then just to confirm, uh, we are utilizing a type of technology, and the competitor is utilizing a type of technology, and we have to decide based on impact whether we switch to their technology or not.
>> Yeah, that's it. So, I just need you to tell me one out of those four factors which one should we keep and which ones we should match, and second, for those that we will decide to switch, how much profits we could get out of it.
>> Okay. Okay, if you give me a minute, let me quickly do the calculations.
>> Sure.
>> So, for spoilage detection, it seems like we have a 2% decrease, which is equal to about $80,000 in savings. And it costs us $9,000 to maintain, giving us a net of about $71,000. Round that to 70. Our competitor, the technology that they're using is decreasing it by 6% times 40. So, it's about $240,000 in decrease, and it costs them $30,000 to maintain. So, yeah, it costs a little bit more, but they're saving about $210,000 in spoilage. Given we're saving 70, um, it seems like there's about 140k in dollars that they seem to be benefiting more than us, given their technology.
>> So, it seems like the first one, I think, might be good to consider whether we should switch or not, but I'm going to come back to that, sure.
>> in my final analysis. The second one is the machinery surveillance program. We also have a 2% decrease in that, which, you know, is an $80,000 in savings for us, but we're spending $320,000. That's, um, you know, a net minus of, I'd say, like 240k that we're losing.
>> That's right.
>> I mean, it's a little concerning to me that we're spending that much on something but not really getting that much benefit. But,
>> on that point, I could add that let's say that there's other uses for that particular programs too. So, they're not just there to reduce the spoilage cost.
>> Okay. So, we might have to maintain it versus our competitor gets a 4% spoilage decrease. So, about 160k, but, you know, annual cost to maintain is 440. So, it seems like they're also minus 280k. Not much better than us. So, I don't think that's something we should consider. Okay. And switching.
>> Okay. Employee training program. We have a 1% spoilage decrease. So, about 40k in savings, but we're spending 14k on it, which is about 26,000 net that we have. um, versus our competitor is a 3% spoilage decrease, which they're saving around 120k, but, you know, given that they have a 30k annual cost to maintain plus of 90k. So, given the stark difference between those, I think that's another area that I would like to look into. Okay. So, then the other thing that I'm going to look into is our employee incentive program. It looks like we are saving about 2% in spoilage, which equates to about $80,000 in money monetary savings, but it costs $12,000. So, I'd say about a 68k in net for us, and then our competitor is saving 1%, so 40k, but spending only 8k, about 32k. We have a much higher benefit. And what would be the total benefit for the client if you were to switch? I believe it was the first and the third factor. Okay. So, given that we've decided to focus on spoilage detection technology and the employee training program, going to slightly round and say that, uh, in the first one, we're saving about 140k net, the difference. And then in the second one, so about 200, 204,000, um, that we're saving by just switching those two technologies.
>> That makes sense. Quite significant, right?
>> Yeah, quite significant.
>> Now, let's review the candidate's performance once more. Pay attention to how she asks for time each time she's presented with a new exhibit or needs to answer a question. It's a great practice that improves the quality of her answers and also shows strong composure. She also did a phenomenal job working through the exhibits. In the second exhibit, she started with a high-level explanation to make sure she understood the data labels correctly, an important step given the complexity of the table. Although the interviewer didn't ask a direct question when showing the exhibit, the candidate recognized that she needed to dig deeper and isolate the issue. With that mindset, she got straight to the point and identified the two problematic cost items quickly. In the third exhibit, she followed a similar approach. She first aligned with the interviewer on how to interpret the table and the assumptions behind it, such as the potential for spoilage cost reduction and that the client and competitor one are using different technologies and other key factors. This step was particularly important since the client can't simply triple the investment to triple the yield.
>> If I remember right, you said earlier that you also wanted to look into the overtime cost. So, let's do a similar exercise and brainstorm together some of the reasons leading to this problem.
>> Mhm. Okay. Just give me a minute and, uh, let me put down some thoughts.
>> Sure.
>> I have a few different assumptions as to why we might have our overtime costs be nearly double our competitors. And, um, I would say that I think it might gear a little bit more around, uh, our worker efficiency as well as maybe our processes. Uh, so the first question would be, um, our hourly pay. Are we paying people significantly more for overtime compared to competitors? The second one is the efficiency of our, you know, workers. Are they making, I don't know, two clothes and t-shirts an hour versus someone else maybe in another factory is making four? And that ties into worker training. Have we actually trained them to do this in the best way possible? Maybe not. And then machinery. Is our machinery actually suitable for them to optimize their working methods or sewing processes? Um, and then finally, just the overall process of maybe, are you sewing the hems first or the collar first, or if we can change any of those.
>> They could all be valid. What I'll do is I'll share with you the last exhibit of the case where you can find more information about our labor. Take a look at this and let me know what's going on in there and as a result of it, what do you think the client should work on so that they could minimize the cost of this too. All right, let's take a look at it together.
>> Okay. So, if you can give me a moment, I'm going to analyze exhibit 4 and get back to you.
>> Sure.
>> To confirm, exhibit number four is an overview of labor allocation and pay per processing unit, and we are comparing our setup with two other competitors. So, I'm just going to go from top to bottom a little bit just to go over the data. It seems like we have four crews, 10 people per crew, um, two shifts, four days on that we're working, four days off, 365 days of production, so we're working every day. Our annual hours per employee, 2100. Overtime is 200. Oops. It seems like it's significantly higher than our competitors, but I'll get back to that. Um, and then our hourly wage seems, uh, in line, 30 and 45. Okay. So, I think when I, um, look at competitor 1 and 2, uh, it seems like competitor 2 is a smaller shop than us, given that they have less days of production, a smaller crew that seems to work less. Yeah.
>> So, I'm going to take competitor 1 as my primary, I think, right?
>> Sorry. Sorry. Benchmark. Yeah. Okay.
>> Okay. So, I want to start from the bottom this time because, um, I do think that, you know, wages might play a part in our costs. So, to get that out of the way, it seems like our overtime hourly wage is in line with what our competitor is paying. In fact, we're paying less than them, $45 versus 48. Our base hourly wage is lower, $30 versus 31. Annual hours per employee, so annual base hours is about the same, 2100. Um, but our annual overtime is twice. So, I'd probably mark that as something to look into. And then our crew and shift setup. So, we're both working 365 days, but a difference I see here is, um, when we work, uh, so it seems like we do 4 days on, 4 days off, uh, versus our competitor is doing six days on and two days off.
>> That's right.
>> We have 12-hour shifts. So, two shifts, and as far as I understand, someone is working for 12 hours in the factory non-stop, versus they have three shifts, eight hours each. So, that's another, I think, stark difference that I see.
>> Okay.
>> Um, and then our crew size is the same. So, given these, I would like to propose that maybe, um, the reason our costs are so high might have to do with our shift count and the way that we work. Would that be a probable?
>> Let's dig deeper here. So, you raised here that our shift structures are different and also the fact that our employees are working more overtime. So, what's the correlation here? Can we dig deeper here?
>> Yeah. So, just off of, um, I think common sense, if someone is working for 12 hours straight, the productivity that you're going to achieve from them in the first eight hours is probably going to be different than the last four hours when they're tired.
>> So, maybe we should analyze the curve if we have data on that to see if they're producing less as time gets on.
>> So, and how would that lead to the need for staying overtime for our client? I'd say because we probably can't get done with the amount of shirts that everyone needs to. Maybe the targets that we've set in place aren't being hit because people are tired of not producing as much.
>> Okay.
>> Um.
>> What about the second factor? The fact that our employees take a little longer break than the competitor ones. How would that impact overall productivity?
>> So, even though we have four days off, and that might initially seem like a nice thing, I would counter-argue that maybe in like the four days, they lose the momentum and they forget things, and, you know, moving people in and out might be a problem.
>> And how do we fix it?
>> I would propose, of course, we would need more information, but just off this, I would propose that we maybe change our shift structure to emulate what competitor one is doing, where we have three shifts of eight hours each, and, uh, we do a six days on, two days off method.
>> All right, as our next step, I would like us to quantify how much profits we could generate if you were to switch our competitor one's shift structure. As you do this, there's one assumption that I'd like you to make though. As we change the shift structure, let's suppose that we will also match our client's hourly salaries.
>> Okay. Just to confirm before I go into it, annual base hours are being kept the same, but this time our overtime hours are 100. Our base annual wage will convert to 31, and overtime will convert to 48. But the initial calculation of our current will be based on given.
>> That's right. So, in the new scenario, we will perfectly mimic competitor one. Okay. If you can give me a moment while I quickly calculate this.
>> Sure.
>> All right. You seem like you got the right number. So, just walk me through your approach, please.
>> Okay. So, currently our employees are working 2100 hours and they're being paid $30. So, multiplying that, we get $63,000 as our base pay per employee. We are paying them $45 for overtime pay for 200 hours, giving us an overtime average of $9,000 per employee. In total, our average employee cost is about $72,000. If we switch to the new system, competitor one, they'll still work 2100 hours in base hours, but this time we're paying them slightly more at $31, which gives us $65,100 as our base salary. A little higher, but it, you know, evens out when we factor in that they're now working half the time over overtime, 100 hours at $48, which gives us $4,800 in total, equating to about $69,900 per employee. If we take the difference of that, we're saving about $2,100 per employee multiplied by 40 employees because we have four crews with 10 people in each crew. That gives us about an $84,000 saving.
>> That makes sense. I didn't mention earlier, but there is also an incremental cost for the client of shifting their shift structure, and that will be $5,000.
>> Okay. So, if it's going to cost us $5,000 to implement this new system, I'm assuming this is a fixed cost, but in the initial year, then minus $5,000, we'd be saving about $79,000 net.
>> All right, that sounds good. Let's go ahead and conclude the case. So, do you mind just providing a summary of your findings?
>> Of course. And give me a moment.
>> Sure.
>> Um, I'll quickly come up with a summary. Okay. So, given that we've analyzed the exhibits and the financials provided by the client, it seems like we have two main drivers of costs. The first one is spoilage, and the second one is our employees. Starting with spoilage, it seems like if we were to change our detection technology as well as employee training program, we could save about $200,000 a year net. The second one is the shift and working style. As we just analyzed, if we change to competitor one's style, which is three shifts instead of two, and, um, less hours per employee, eight instead of 12, we could save about $80,000 net in the initial year for employees, leading to about $280,000 in total savings. Of course, we would have to analyze this in, uh, greater detail, but I feel like just by doing this, we could at least get the company a little bit back on track.
>> All right, sounds great. Thanks a lot for your time.
>> Thanks.
>> In summary, the candidate delivered a strong performance throughout the case. Let's now review her performance using the Prep Matter scorecard, starting with problem-solving and insights. Starting with structure, her framework addressed the question directly, though she could have made her data requests, such as the historical cost breakdown, even more explicit. Moving to judgment, her business acumen was evident throughout the case. She understood why she was shown each exhibit and reached conclusions quickly. One of the most impressive moments was when she went beyond the data in exhibit 4 and used her judgment to highlight the productivity issue related to the current labor shift structure. For rigor, the case involved two numerical components in exhibit 3 and exhibit 4. She handled both without any calculation errors. Just as importantly, she explained her numerical approach before computing the figures, which made it easy for the interviewer to follow her logic. In terms of creativity, she performed strongly when brainstorming reasons for spoilage and overtime costs. She came up with a thorough and relevant list of hypotheses tailored to the t-shirt manufacturing context. On synthesis, she was able to communicate the "so what" of her analysis well throughout the case. However, her final recommendation could have been improved in two ways. First, she did not need to sum up the savings from the spoilage and labor initiatives since the $80,000 labor shift savings were per processing unit, not companywide. Second, it is always helpful to end the case by outlining some risks and next steps for the recommended strategies. Now, let's move on to communication and presence. Starting with presence, she clearly showed the McKinsey go-getter profile throughout the case. It felt more like two experienced consultants working through a real client problem rather than a typical candidate-interviewer exchange. Looking at precision, she got to the point quickly each time she worked through an exhibit. As mentioned earlier, taking a moment before speaking and understanding why she was shown each exhibit helped her stay focused and concise. In terms of active listening, given the interviewer-led nature of the case, she was asked a number of questions throughout. She seemed to understand all of them clearly, and the interviewer rarely had to repeat himself, which allowed the conversation to flow smoothly. Finally, on relationship management, she kept the interviewer engaged by asking for clarifications when needed and consistently sharing her thought process. She also maintained a positive and collaborative tone throughout the.