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Highlights

    Client Goal

    Our client is Urban Grocers. Urban Grocers has approached Oliver Wyman to help determine if it should change the truck fleet it uses for transporting groceries.

    Description of situation

    Urban Grocers runs a successful grocery and fresh produce business in the US. Urban Grocers leases and operates a portion of their truck fleet to transport groceries and produce from distribution centers to stores. They are considering changing their fleet from 53- to 58-foot-long trucks, as this will increase the volume of goods that can be delivered for potential sale.

    Should Urban Grocers switch truck sizes?

    Question 1: Develop an approach and structure to solve the problem

    Helpful hints:

    • Identify the main objective
    • Write down key facts and important information that may be used now or later in the case
    • Feel free to ask the interviewer for an explanation over anything that is not clear to you
    • Ask for a few minutes to gather your thoughts and write down a framework for addressing the main case question and objectives

    Evaluation criteria:

    • Ability to identify the key question and pertinent information
    • Ability to structure a problem in a clear and effective manner
    • Ability to verbally communicate problem structure in a succinct format

    The main objective is to evaluate the business case for a transition to larger trucks. A sample framework may look like the following:

     

    Profitability

    • Operating costs savings: fuel efficiency, maintenance costs, changes to trucking staff/workforce, and so forth
    • Revenue potential: ability to sell additional fresh product delivered before product goes stale using the same shelf space
    • Additional synergies: increased capacity, enhanced supplier relationship, and so forth

     

    Operational feasability

    • Potential changes in transportation routes
    • Potential changes to loading/unloading processes
    • Impact to delivery schedules

     

    Regulatory/Legal impact

    • Impact to truck driver union labor agreements (for example, compliance with maximum drive time allowed)
    • Regulatory or legal restrictions (for example, compliance with state and federal transportation regulations)
    • Environmental implications/meeting environmental, social, and governance (ESG) thresholds

    The main objective is to evaluate the business case for a transition to larger trucks. A sample framework may look like the following:

     

    Profitability

    • Operating costs savings: fuel efficiency, maintenance costs, changes to trucking staff/workforce, and so forth
    • Revenue potential: ability to sell additional fresh product delivered before product goes stale using the same shelf space
    • Additional synergies: increased capacity, enhanced supplier relationship, and so forth

     

    Operational feasability

    • Potential changes in transportation routes
    • Potential changes to loading/unloading processes
    • Impact to delivery schedules

     

    Regulatory/Legal impact

    • Impact to truck driver union labor agreements (for example, compliance with maximum drive time allowed)
    • Regulatory or legal restrictions (for example, compliance with state and federal transportation regulations)
    • Environmental implications/meeting environmental, social, and governance (ESG) thresholds

    Question 2: Calculate the costs

    What additional costs would Urban Grocers incur by making this transition?

    Key considerations and data:

    • The larger trailers would carry 10% more volume with the same number of trips
    • Note: They do not expect costs to rise in a 1:1 proportion, because different types of costs are expected to change in different ways

    Estimated operating cost changes for truck operations:

    • Fuel costs: Current fuel costs are $700,000 per year, which will increase 8% due to the greater amount of weight carried
    • Labor costs: Labor costs for loaders and unloaders total $500,000 per year, which are expected to increase by 10% in proportion to the volume of goods that need to be moved off and on the trucks. Labor costs for drivers to operate the trucks total to $900,000 per year, and these costs are not expected to change since the total number of trucks trips will remain the same
    • Short-term lease costs: The new trucks’ combined short-term leases will cost an additional $80,000 per year. Further, driving heavier trucks the same distance will cost a total additional $15,000 per year in maintenance
    • Insurance costs: Currently, insurance costs $60,000 per year, which is expected to increase by 5%
    • Overhead costs: There is no expected change to overhead costs

    We must calculate the change in operating costs incurred by the change in truck sizes on a per year basis.

    • Fuel: $700,000 per year x 8% = $56,000 additional costs per year
    • Labor: $500,000 per year x 10% = $50,000 additional costs per year (no additional costs for drivers)
    • Short-term lease costs: $80,000 in total additional leasing costs for all new, longer trucks + $15,000 in additional maintenance costs per year = $95,000 additional costs per year
    • Insurance: $60,000 per year x 5% = $3,000 additional costs per year
    • Overhead: No additional costs incurred

     

    Adding up all the costs, the total additional operating costs per year: $56,000 + $50,000 + $95,000 + $3,000 = $204,000

     

    Conclusion

    The cost of operation will increase by $204,000 total for switching over Urban Grocer’s total trucking fleet. We would need further information on volume and revenue numbers to understand if switching truck fleets would be profitable.

    We must calculate the change in operating costs incurred by the change in truck sizes on a per year basis.

    • Fuel: $700,000 per year x 8% = $56,000 additional costs per year
    • Labor: $500,000 per year x 10% = $50,000 additional costs per year (no additional costs for drivers)
    • Short-term lease costs: $80,000 in total additional leasing costs for all new, longer trucks + $15,000 in additional maintenance costs per year = $95,000 additional costs per year
    • Insurance: $60,000 per year x 5% = $3,000 additional costs per year
    • Overhead: No additional costs incurred

     

    Adding up all the costs, the total additional operating costs per year: $56,000 + $50,000 + $95,000 + $3,000 = $204,000

     

    Conclusion

    The cost of operation will increase by $204,000 total for switching over Urban Grocer’s total trucking fleet. We would need further information on volume and revenue numbers to understand if switching truck fleets would be profitable.

    Question 3: Determine whether the additional profitability can overcome added costs

    Would Urban Grocers be able to generate enough additional revenue to cover the increase in costs? How would this impact Urban Grocers’ overall profitability?

    Key considerations and data:

    • We know that the volume of product delivered will increase by 10%
    • Assume Urban Grocers trucks deliver $8,000,000 of revenue generating product per year
    • Assume the marginal profit on these goods is 30%

    • With a 10% increase in volume, we see that each truck would generate an additional $8,000,000 x 10% = $800,000 revenue per year
    • Marginal profits on $800,000 of revenue are $800,000 x 30% = $240,000
    • $240,000 additional revenue – $204,000 additional costs per year = $36,000 profit

     

    Conclusion

     

    Switching to larger trucks will generate additional profit that will slightly exceed the operating costs by $36,000 per year. This might indicate that this is a good idea, but it is such a relatively small number that it might not outweigh the risks. Urban Grocers will probably need to study this in more detail, because the smallest disruption in their operations will more than offset this small amount of additional profit.

     

    Example of additional creative thinking

     

    Also, with additional products, there is a lower risk of product stock-out in stores (for example, the chance that a product sells out before additional deliveries arrive) which creates potential for additional revenue generation.

    • With a 10% increase in volume, we see that each truck would generate an additional $8,000,000 x 10% = $800,000 revenue per year
    • Marginal profits on $800,000 of revenue are $800,000 x 30% = $240,000
    • $240,000 additional revenue – $204,000 additional costs per year = $36,000 profit

     

    Conclusion

     

    Switching to larger trucks will generate additional profit that will slightly exceed the operating costs by $36,000 per year. This might indicate that this is a good idea, but it is such a relatively small number that it might not outweigh the risks. Urban Grocers will probably need to study this in more detail, because the smallest disruption in their operations will more than offset this small amount of additional profit.

     

    Example of additional creative thinking

     

    Also, with additional products, there is a lower risk of product stock-out in stores (for example, the chance that a product sells out before additional deliveries arrive) which creates potential for additional revenue generation.

    Question 4: Consider potential downsides or risks

    What are the potential downsides or risks associated with transitioning Urban Grocers’ transportation? Can we mitigate those risks in any way?

    Helpful hints:

    • Use your existing knowledge of the industry and personal experience to inform your ideas
    • Consider impacts and implications from all different aspects of business (for example, sales, operations, digital, and so on)
    • Be creative and think outside the box while keeping your ideas structured

    Evaluation criteria:

    • Ability to brainstorm and be creative
    • Ability to come up with multiple ideas
    • Ability to be flexible and adapt ideas as needed

    Potential risks

    • Product velocity: volumes can vary significantly by store, since demographics of a store’s location play a role – suburban stores usually move more produce than urban ones
    • Product perishability: some products are highly perishable and may go stale before being sold, especially since the shelf space in stores is not changing, nor is warehouse space
    • Product margins: grocery margins are typically very small (often in the single digits). Simply put, the change in delivery cost plus change in profit margin on additional sales (if any) needs to be greater than the cost of stale product
    • Operational challenges: Other relatively less critical concerns associated with the larger trucks include additional stress on road infrastructure, labor and machinery required to load and unload larger trucks, safety risks posed by larger rigs, and environmental concerns

     

    Potential mitigants

    • Pilot the program as proof of concept: Piloting the larger trucks at a few distribution centers to prove the concept, perhaps with higher velocity or longer shelf-life groceries like eggs rather than milk
    • Pass on costs to the customer: Assuming customers would be willing to bear an increase in prices, Urban Grocers could slightly increase its prices to ensure it maintains in current margins. This is likely incredibly hard to do given the stiff competition in the grocery market
    • Increase safety and labor trainings: Provide more trainings to loaders and unloaders to ensure all employees are aware of the additional safety risks associated with larger trucks and rigs. This cost alone may offset the profitability of this plan

    Potential risks

    • Product velocity: volumes can vary significantly by store, since demographics of a store’s location play a role – suburban stores usually move more produce than urban ones
    • Product perishability: some products are highly perishable and may go stale before being sold, especially since the shelf space in stores is not changing, nor is warehouse space
    • Product margins: grocery margins are typically very small (often in the single digits). Simply put, the change in delivery cost plus change in profit margin on additional sales (if any) needs to be greater than the cost of stale product
    • Operational challenges: Other relatively less critical concerns associated with the larger trucks include additional stress on road infrastructure, labor and machinery required to load and unload larger trucks, safety risks posed by larger rigs, and environmental concerns

     

    Potential mitigants

    • Pilot the program as proof of concept: Piloting the larger trucks at a few distribution centers to prove the concept, perhaps with higher velocity or longer shelf-life groceries like eggs rather than milk
    • Pass on costs to the customer: Assuming customers would be willing to bear an increase in prices, Urban Grocers could slightly increase its prices to ensure it maintains in current margins. This is likely incredibly hard to do given the stiff competition in the grocery market
    • Increase safety and labor trainings: Provide more trainings to loaders and unloaders to ensure all employees are aware of the additional safety risks associated with larger trucks and rigs. This cost alone may offset the profitability of this plan

    Question 5: Provide a recommendation

    The CEO of Urban Grocers walks into your meeting. What is your recommendation, should Urban Grocers take the deal?

    Helpful hints:

    • Take a moment to gather your thoughts and review your findings from each part of the case
    • Start with a clear answer and then follow with supporting details
    • Keep it concise (approximately 30 seconds to 1 minute)

    Evaluation criteria:

    • Ability to synthesize information from the entire case and highlight the most critical components
    • Ability to verbally communicate a concise recommendation in an effective, confident, and persuasive manner

    Through our analysis, we learned that this deal is, at first glance, a profitable venture for Urban Grocers, generating an additional $36,000 total for Urban Grocers annually.

     

    While the deal is marginally profitable on paper, Urban Grocers should probably not take this route given the risks and costs that were not yet studied as part of this first estimation. Training costs,

    disruption in moving to the new trucks, or other issues could easily overwhelm the profits from the shift in truck size.

    Through our analysis, we learned that this deal is, at first glance, a profitable venture for Urban Grocers, generating an additional $36,000 total for Urban Grocers annually.

     

    While the deal is marginally profitable on paper, Urban Grocers should probably not take this route given the risks and costs that were not yet studied as part of this first estimation. Training costs,

    disruption in moving to the new trucks, or other issues could easily overwhelm the profits from the shift in truck size.