Hypothesis testing questions

So, what you want to do here is validate

a) On an absolute basis, your client's Total costs are higher

b) On a relative basis, Labour costs as a proportion of Total costs are higher

Note: the reason you are excluding assessing Non-Labour costs as a proportion of total is only because of the steer from the interviewer. This is something to watch out for though in other cases - making an assumption that one bucket is the largest slice of the pie when there could be others.

Breaking each down,

a - you have already validated as the interviewer has confirmed

b - you need to know Labour Costs as % of Total Costs - Client vs. Competitor

(Correct, you got this)

Now, if I was the interviewer, the next question I would ask to test critical thinking would be, how would you check why Labour Cost was higher. You answered this separately - decompose Labour Cost into its components:

• Value - hourly rate or equivalent for Client vs. Competitor
• Volume - manhours per unit or time for Client vs. Competitor

With these two pieces of information, you can analyse efficiency. A good next step would be thinking about recommendations e.g. if value is the reason why - offshoring or if volume is - increasing productivity such as through automation.

Hope that helps

Hi!

If you already know that the labor costs caused the problem, what else do you need to benchmark? It would be useless.

You just need to look deeper into the labour costs to find the root cause of the increase:

• What type of labour caused the increase? – we don't have here the specifics of the case but if we talk about an automobile factory, is that the highly qualified engineers or common workers or overhead etc.?
• What drives the increase within this type of labour? i.e. is that the amount of labour or the compensation?
• If the problem is the amout of labour, why the amount was increased? Higher volume of production? More inefficiencies? 
• If this is the compensation, why the compensation was increased? Market situation? Changes in production?

So, what you need to try to do is to get to the root of the problem. Again, benchmark is not helping you to do that at this stage.

Hope that's helpful!

Best,
Daniel

Hello,

Your first point is important if you want to size the problem but won't give you any hint to find a solution. I would focus my first analysis on the actual labor costs asking for:

• # workers / production, comparing it with our competitors (it could be nice to breakdown them into direct and indirect labor costs). This is important to understand if we are overstaffed
• Average salary, comparing it with our competitors or similar industries in our country
• % of absenteism
• Time needed to produce a unit that is important to understand if our technologies are obsolete or our processes inefficient

Hope it helps,
Luca

Hello!

These questions are very very common, specially as you come to the end of a case. 

For this case particularly, in order to determine the analysis that you would conduct to find out whether the client's higher labor cost caused the higher overall cost: 

• Benchmark with historical client´s data: looking at changes from the past is always going to give you hints
• Benchmark against competitors in the cost´s breakdown
• Benchmark the rest of the costs (excluding this time labour cost) to see if any of the other costs seems also out of order -if not, it´s easier to think that labour cost is driving the change-. 

Hope it helps!

Cheers,

Clara

I would suggest the following approach:

1. Understand the component of the labor cost, e.g. base salary, overtime, healthcare, bonus, other benefits
2. Understand the drivers of each component, e.g. working hour, productiviy / hour, #of sickdays, distance from home (for transport benefit)
3. Understand the historical trend of each of those drivers and find any anomaly
4. Benchmark could be helpful if we have, however, if we already determined that labor cost is the reason overall cost is higher than competitor this could be less prority

Hi there,

there are normally only two ways to benchmark, which are those you mentioned:

1. Compare with the previous performance of the firm in the past
2. Compare with competitors

Comparing with other costs won’t help much, as doesn’t offer reference on the “optimal” level in the industry. Also, if other costs changed as well in the meantime, this will create bias in your analysis.

Best,

Francesco

Hi, I confirm the 2 most important aspect to conduct in a benchmark is looking at historical trends and competitor numbers.

Best,
Antonello