Bain Case 2

• Office Vending Services Inc.

Situation

Office Vending Services Inc. is a global leader in vending machines services for small
and large businesses.

They provide a full service to their clients. This includes installing machines at client site,
refills and repair.

They collect revenues only from snack sales and choose the variety of products they sell
in their vending machines themselves.

Complication

Over the past few years, their profits have dropped significantly and the CEO is unable to
figure out why.

The CEO asks Bain to identify the root causes of the problem and propose
actionable solutions.

Question 1 of 11

You would start to tackle this problem by looking at which factors:

Industry trends 5-year market value evolution Fixed and variable costs
Revenues and costs Competitors' actions

Bain's answer

Using an External/Internal framework will help us determine whether our client's profitability
problem is industry-wide or unique to them. If it is internal, we will look at our client's revenues
and costs to isolate the problem.
If it is external, we will need to investigate the cause of the industry decline (consumer trends,
substitutes, etc.).

It is more straight-forward to look into external factors first (Is the market and overall profit pool
growing? Have there been new recent entrants to the market?). Therefore, looking at industry
trends would be our likely first step.

Question 2 of 11

To identify if the declining profitability is an internal issue of our client or if it is an industry

trend, John, the partner on your case, asks you to contact our information department, called
Bain IS (Information Services).

They propose several reports that might be of help. The client does not want to spend more than
$3000 for this analysis.

Please select the report you want to purchase.

Industry Report #1 Industry Report #2 Customer Insights Analyst Report

Bain's answer

Your objective is to identify the driver that really matters. You need to know about the market:

• Have total market sales and the overall profit pool gone up or down in recent years?
• How have different competitors' profitability evolved over the past decade—is everyone facing
pricing pressure and/or increased costs?

The analyst report includes all this information.

Question 3 of 11

Based on info purchased by IS, let's look at the market profit trend for snack sales from vending
machines.

What would be your first conclusions based on this information?

Bain's answer

The profit trend of the vending machines sales is positive (5%) for the overall market. Therefore,
the problem of Office Vending Services' profitability is internal.

Question 4 of 11

What would the next step be to find the root cause of our client's internal profitability problem?
Bain's answer

A basic revenue and cost framework enables us to cover all factors impacting profitability and
quickly identify the drivers that matter. We need to look both at revenues and costs and the
component parts of each.

Question 5 of 11

At this stage, the Bain team would likely start to form its "answer-first" hypothesis to guide its
analysis and help drive to a recommendation in the most efficient manner possible.

You and your colleague Sarah, a consultant on the team, head to a team room to write your ideas
on a white board based on your early insights that you will then share with the team manager.

How would you suggest laying out a hypothesis at this point?

Bain's answer

A potential hypothesis at this point might be:

Office Vending Services' decline in profitability has been caused by internal factors due to
stagnated revenue growth that hasn't stayed in line with rising fixed and variable costs.

Remember, an early hypothesis is simply a tool to help guide our analysis, not a final answer. It
will be revised and fine-tuned as we learn more information.

Question 6 of 11

Given our profitability framework and initial hypothesis, what would be your next steps to
investigate further and what questions would you like answered?

A selection of possible questions is given below. Which of these are most relevant at this stage?

Has the client launched new products recently? How have competitors' profits evolved?
Have our client's individual snack prices changed recently? Has the volume of our snack
sales declined? Has our client invested heavily in new equipment recently or had an increase
in overhead? Did the cost of goods sold increase? Did our client reduce his marketing
spend?
Bain's answer

Asking the right questions upfront will allow the team to quickly determine which of the four
potential drivers is responsible for our client's decline in profitability.

We have laid out what we consider to be the most critical questions at this stage under each of
the four drivers of profitability. The interviewers responses are below.

Your questioning has identified "quantity" to be the key driver of declining profitability. We can
now update our hypothesis to show that a reduction in snack sales volume from vending
machines is driving the decline in revenues.

The team gets together to discuss this early insight. Suzanne, the team manager, states:

"Since the industry's profit pool is growing and gross margins are constant, we can conclude that
the overall vending machine market is growing. This means that our client must be losing share
to their competitors. Our next step is to figure out why."
Question 7 of 11

With quantity identified as the key driver of profit decline, the client agrees to pay for temporary
staff to perform market research. Based on their findings, Sarah, a consultant on your team,
created the attached slide. Now we need to understand how our client compares to the
competition on delivering on the customers' most valued needs.

Given the market research presented in this slide, why do you think our client's volumes are
dropping?

Client's volumes are dropping because of (you can select more than one):

Overall market decline Products offered are not meeting customers' needs Client is
not offering sufficient snack variety Customers finding substitutes in other markets (café,
convenience store, newsagent, etc.) Vending Services Inc. prices are too high Customers
are tempted by competitors' modern machines
Bain's answer

Through our structured investigation, we have quickly established drivers of the client's falling
profitability (see image).

Conclusions from the market research show:

• Products offered are not meeting customer needs (i.e., too few low-fat options)
• Although their individual and average prices have not changed over time internally, our client's
snack prices are perceived as much higher than competitors

Question 8 of 11

In order to solve the problem and make an actionable recommendation, we need to understand
the drivers of each identified problem.

How would you answer the following?

• Why do you think the client is underperforming on price?

• What are the immediate next steps or analysis needed to identify the source of the pricing
problem?
Bain's answer

Two factors are most likely to be forcing Office Vending Services to maintain their higher
prices:

• Greater product variety (adds complexity to their operations and doesn't allow them to reach
full purchasing scale from suppliers)
• Modern machines are likely to have higher leasing costs

These two factors put our client at a cost disadvantage to the competition.

The next step is to understand how our cost structures compare to those of our competitors in
order to fully assess our competitive performance.
Question 9 of 11

A comparison of our cost structure to that of our competition confirms that our client is unable to
compete on price due to structurally higher costs.

Although the client's costs have not increased recently, those of their competitors are lower.
Suzanne asks you to investigate how to reduce costs to allow Office Vending Services Inc. to
price their snacks more competitively.

Ben, an associate consultant on the team, puts together a data request to the client to get more
internal information. The client returns the following exhibits.

Read them carefully to extract all of the necessary information.

One of the ways to reduce Office Vending Services' costs is to reduce its product complexity.

Based on the exhibits, would you stop distributing any products? If so, which ones?
 1 2 3 4 5 6 7 8 I would recommend not dropping any
existing products

Bain's answer

Based on the information in Exhibit 1, one way to maximize sales force efficiency would be to:

Keep products that currently make up ~80% of our client's total profit margin

We also want to be sure the remaining products will have enough low-fat options, as this is
valued by customers.

Following these guidelines, products 2,7, and 8 could be excluded

Question 10 of 11

Suppose you stop selling products 2, 7 and 8.

You decide to reallocate the volume (12,000 units) to either vendor 1, or vendor 4, or a new
vendor 9 who have proposed the following:

Vendor/Product 1

20% discount on historical volumes and 25% discount on incremental volumes of their product

Vendor/Product 4

20% discount on all volumes of product 4 and will subsidize part of the client's admin staff
(equivalent to 1 FTE) in charge of the product orders processing
Vendor/Product 9

A new vendor has a fat-free product with COGS of $2. While there is no product discount, their
modern procurement system will allow our client to reduce its admin staff by 2 FTE.

Remember from Exhibit 2, each product eliminated creates a 7% reduction in salary and benefit
costs.

X CLOSE

For simplicity, you can calculate this additional administrative savings for Vendors 4 & 9 off the
original SG&A baseline costs, not the post-complexity reduction SG&A costs

What option do you choose?

What is that option's monthly impact on COGS and SG&A?

Your answer:

I would reallocate the volume to:

Vendor 1 Vendor 4 New vendor 9

This option would result in:

Total monthly COGS savings of

$ %

Total monthly SG&A savings of

$ %

Bain's answer

Let's analyze each vendor's proposition:

Exhibit 1 told us that our monthly cost of goods sold (COGS) is $126,500. In eliminating
products 2, 7 and 8, we must reallocate their 12,000 units to Vendors 1, 4 or new Vendor 9
Like all case interviews—there is no one "right answer" in how you draw conclusions from the analytics
and make recommendations to the client. We want to hear your thought process and logic. Here are
some of our thoughts about each option:

Question 11 of 11
Through our investigations we have discovered the root cause of Office Vending Services Inc.'s
falling profitability. However, we now need to make actionable recommendations to help them
reverse their performance trend.

What actions do you advise your client to undertake to increase their profits?

Bain's answer

Key Recommendations

To reverse the trend in falling profitability, there are several key steps we would recommend the
client to do (note:all of these options were not fully analyzed in this practice case):

Reduce the number of product varieties sold, Consider keeping only those which account for
80% of gross margin dollars.This will reduce complexity, decrease COGS and SG&A costs and
will allow you to negotiate discounts with remaining vendors.
Stock more low-fat options within the reduced inventory, This will increase number of snacks
sold and improve profitability.
Deprioritize leasing newer, more expensive machines, Customers don't care and older
machines are cheaper
Allocate cost savings to reduce prices, This will attract more customers, increase snack sales
and drive profits
Investigate a competitor acquisition, Client could benefit from cost synergies (e.g., SG&A)
and economies of scale (e.g., COGS).