Swiss Coffins – The Death Business

After the prompt, the candidate is entitled to ask some questions. Data to be provided to the candidate: 

• Our main target as a company is profitability. Although we are proud traditional manufacturers, profit generation is the key decision-making criteria, since it´s the only way to survival
• Our main competitors currently are:
  • Traditional coffin manufacturers: of which we are the biggest. No market share data is needed at this point
  • New and/or converted players that leverage technology vs. a handmade approach
• Comparison vs. the new industrialized manufacturing method in key aspects:
  • New technology substitutes most human work in the manufacturing process
  • Production times are halved with the new technology
  • The new technology does not allow for personalization, since products are standardized

Example of an excellent structure (presented as an issue tree):

ECONOMIC ANALYSIS

• Profitability analysis: given that client has already clarified that they are mostly focused on profitability, conduction of deep analysis on:
  • Revenue: ​Coffin sales is our main revenue source. We must perform and P x Q breakdown (price per quantity).
    • Price: How does the new price compare to the old one? Is price affected by losing the handcrafted process and personalization?
    • Quantity: Can we produce significantly more with industrialized way? Is there demand for this delta in production, or would it only generate inventory?
  • Cost: We must deep dive on the different costs that will be incurred, and how they compare between the two manufacturing methods.
    • Fixed: The new industrialized method has a big initial CAPEX investment
    • Variable: Variable costs should dramatically go down, as most of the human work is substituted. Is the new CAPEX investment needed compensated by lower variable costs? If so, in which timeline?
• Market and competitor landscape analysis , in order to calculate our previously explained profitability equation:
  • Market size: population and death rates, as well as people´s preferences when it comes to being buried vs. cremated
  • Market fragmentation: Who are the other players? (current and potential, other traditional manufacturers may be thinking of doing the same as us)
  • ​Estimated market trends: both short and medium term
    • Potential number of users 
    • Industry growth rate
• Operational approach: Once we have clarity on profitability and we understand the market and its direction, we would make a decision between:
  • Continue with our handcrafted manufacturing process: if the new method doesn´t imply improved profitability
  • Change to new industrialized process: if the new method improves profitability
  • Exit: if the new method is better than the current one but we cannot convert, or if the industry overall is not attractive anymore and is best to liquidate assets and leave.

RISKS AND OTHER CONSIDERATIONS:

• Brand perception risk when changing the historic handcraft manufacturing and adopting and industrialized approach
• Usage forecast: population aging, new trends substituting traditional burials, etc
• Capability risks with highly specialized tech
• Social impact of workers layoff, if they were substituted by technology
• Government regulation regarding burying regulation and alternatives

IMPORTANT NOTE: The last section, "risk and other factors" -that can be called many ways, i.e., risks, further consideration, qualitative considerations, considerations beyond financials, etc- , that encompass the risks of the operation, are key in the case. Structures without them lack a key part of the analysis

Figure 1 exemplifies an excellent issue tree presented solution  for the case

Example of an excellent exhibit analysis:

An excellent candidate understands straight ahead of the meaning of "average life expectancy" in market sizing problems: 

• Little´s law: the number of elements in the system (i.e., total population) divided into lead time (i.e., the average number of years each person lives)
• Intuitively, every year, 1/70th of the population will turn 71 and therefore (on average) will die

A very solid quantitative candidate realizes quickly that no complicated calculations are needed since you have the number 70 both in the denominator (1/70 people die yearly) and in the numerator (70% of people prefer coffins to cremation).

Example of a good exhibit analysis:

An average/good candidate performs the operations step by step:

Example of an excellent exhibit analysis:

This is a HARD problem with lots of information, in which being very diligent and following clear steps is key:

1. Prepare a table with the info that we have: 

• Price = $5,000
• COGS= $4,800, of which:
  • $480 (10% of $4,800) is material cost
  • $4,320 (90% of $4,800) is labor
  • *TIP*: it´s easier to calculate the 10% of 4,800 first (since it´s only removing one zero), and then to the subtraction of 4,800-480 to obtain the other 90%

4. We know from previous calculations that our client sells 9,000 coffins per year (10% of a 90,000 total market). 

See Figure 2 for the table and explanations

Now, let´s calculate profitability figures if the client were to adopt the new industrialized method:

1. Let´s start with the costs, that change in the new model:

• Material costs are the same: $480
• Labor costs will be reduced to 1/3 of what they currently are: $4,320 / 3 = $1,440
• Hence, total new COGS is $1,920

2. Gross profit is the same = 4%. 

3. Since we know that Gross profit = (Price - COGS) / Price, we solve for the new price (profit = 1 - COGS/price ; price = cost / (1-margin) = $1,920 / (1-4%) = $2,000

4. Contribution margin is $80, calculated as price - COGS

5. Since our market share is now 20% instead of 10%, total sales are 18,000 coffins/year

6. The total contribution (i.e., what you obtain "clean" from each ALL SALES deducting COGS) is $1,440,000, obtained as 8,000 coffins * $80/coffin

7. Total profit is -$60,000, obtained subtracting $1,500,000 of Fixed Costs from the total contribution - And we haven´t subtracted the CAPEX investment yet

Example of an extraordinary exhibit analysis:

An extraordinary candidate realizes that, for this operation to be worth it, the price drop needs to be less than 50% (since we would increase sales x2 because we double our market share). Since we will keep the gross margin equal (which means that the decrease in costs would translate directly into a decrease in price), we are told that the most significant cost (labor cost is 90% of all COGS) is reduced to 1/3 to what it is now, we can already see that it´s not going to be worth it. 

Very few candidates see this from the beginning, but it´s not difficult, once you have done enough of these problems! If you have the overall picture in your mind, it´s a couple of multiplications that can save you LOTS of trouble and mathematics. 

See Figure 3 for the complete table

As we can see, the new method would yield fewer profits than the original one ($300,000 vs. -$60,000 yearly profit), despite the increase in market share. It´s not worth it to adopt the new technology since the price drop would be so significant that it wouldn´t compensate for the extra sales. 

• It´s not worth adopting the new technology, since we would lose money vs. our current profit
• We should maintain our business as it is, which generates $300,000 per year
• As the next steps, and given that the client wants to maximize profitability, we should look into additional revenue sources, such as other uses that could be given to the current manufacturing facilities