Cost Reduction Case Interview: How to Ace This Type of Case

cost reduction case interview

Consultants help clients navigate their toughest business problems, and cutting costs is one of the most perennial and complex challenges that companies face. Because cost cutting is so important, the cost reduction case interview is one of the most typical cases you’ll encounter in a consulting interview. 

In this article, we’ll discuss:

  • What to expect from a cost reduction case interview
  • Real-world examples of cost reduction consulting cases
  • Key frameworks to use in cost reduction cases 
  • Strategies to solve a cost reduction case interview
  • 3 tips to ace your cost reduction case interview

Let’s get started!

What is a Cost Reduction Case Interview?

Keeping costs low is vital for the success of any business. Since “profit = revenue – cost,” the equation is simple: alongside growing revenues, reducing costs is one of 2 ways companies can increase profits. 

As a result, companies are always looking to reduce their cost base. In good economic times, doing so enables them to free up more cash to invest in out-marketing competitors, growing geographically, or launching new products. In bad economic times, revenues are often down, and cutting costs can be the most effective way to keep the company profitable.

In a cost reduction case interview, you will face a client looking to cut costs. Perhaps they have an issue with spiraling costs, and they need you to figure out the root cause before developing solutions. Or perhaps they are performing well, but have set ambitious cost reduction targets. Either way, it is your job to comprehensively understand their current cost position, before figuring out the most pertinent ways to reduce the amount of money the client spends.

Answering the Question-What is a Cost Reduction Case Interview

Examples of Cost Reduction Case Studies

Because cost-cutting is so important, consultants are asked to help with cost reduction questions across every industry, including retail, banking, oil & gas, and many more. Let’s look at some real client examples:

Volkswagen’s Ambitious Plans to Cut Costs

In early 2023, German car manufacturer Volkswagen faced dwindling profit margins. They had lost market share in the vitally important Chinese market and faced growing costs associated with the transition to electric vehicles. As a result, their profit margin had shrunk to 3%. 

In response to the situation, Volkswagen announced ambitious plans to cut costs, with a goal of boosting profitability to 6%. They targeted $10.8 billion in cost reductions through 3 initiatives:

  1. Simplifying their product range, discontinuing some poorly-performing car models
  2. Improving their manufacturing process across their biggest plants
  3. Reducing headcount in certain functions, such as in admin and HR

Walmart Cements its Dominance

In 2010, Walmart was already the leading retailer in the world, but they weren’t content to sit back. Instead, the grocery giant announced a cost-cutting initiative that would help them increase profits by $12 billion over the next 5 years, knowing that you must stay ambitious to stay ahead.

Walmart set about cutting costs in 2 ways:

  1. Procuring products directly from manufacturers: Previously, Walmart had bought 80% of its products from third-party suppliers. By cutting out the middlemen, they could reduce costs by 15%.
  2. Consolidating suppliers globally: Before 2010, Walmart had made purchases on a country-by-country basis. By consolidating procurement, they could leverage greater economies of scale to cut costs.
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Key Cost Reduction Case Frameworks

In a cost reduction case, you start by comprehensively understanding your client’s cost base. This is always the first step, whether they have a specific problem that they want you to figure out or are simply looking to improve. 

To gain a granular and comprehensive understanding of your client’s situation, you should break out the client’s cost base into its constituent parts. There are several ways to do this. You could separate costs into “fixed costs” and “variable costs,” or you could categorize costs based on the different stages of the “value chain.” 

There is no single right way to lay out your framework. The key to success is ensuring that your framework is customized to the case, and laid out in a MECE (mutually exclusive and collectively exhaustive) way. If you are unfamiliar with this concept, read our article on MECE.

“Fixed” and “Variable” Costs

A “fixed cost” is a cost that doesn’t go up as the client’s company produces more products or services, while a “variable cost” is a cost that increases as volume goes up. There is nuance for each industry, but generally, rent, maintenance, salaries, and overheads (like HR and finance) are “fixed costs.” Materials, distribution, and utilities are “variable costs.”

For example, for a company making luxury watches, the rent they pay on their store in downtown New York is a “fixed cost” since it is always the same. Conversely, the cost of the metals that make the watches is a “variable cost,” the more watches they make, the greater the cost. 

The graphic below illustrates the difference between these 2 broad cost types:

Cost Reduction Case Interview-Graphic Showing Fixed vs Variable costs

“Value Chain”

Another way of categorizing costs is based on the “value chain.” A “value chain” groups all of the activities a company completes to serve its customers into broad steps, from inbound logistics like the procurement of parts to after-sales services. 

Each of these activities has associated costs, so the “value chain” can also be useful for categorizing costs, especially in cases with a strong operational element.

Cost Reduction Case Interview-Value Chain Framework

Digging Deeper: Benchmarking Against Competitors and Prior Years’ Performance

Once you have broken client’s costs into clear and MECE categories, you can use “benchmarking” to help you identify trends in client performance and opportunities for improvement. 

“Benchmarking” is comparing the client’s performance to other companies in the same industry or their own historical performance. By benchmarking, you can identify areas where the client is doing worse than their peers or their own past performance. 

Having rigorously analyzed costs, you will be ready to propose options your client can pursue to hit their cost reduction targets.

How to Solve a Cost Reduction Case Interview

Similar to other types of consulting cases, there are 4 key steps to solving a cost reduction case. 

  1. The Opening: This is when you gain a clear sense of the client’s situation and objectives.
  2. The Structure: This is where you lay out a clear approach to conducting the analysis and cracking the case.
  3. The Analysis: This is when you dive into the details and figure out how best to help your client.
  4. The Recommendation: This is when you present your findings back to the client with clarity.

Let’s take a look at an example.

How to Solve a Cost Reduction Case Interview

Cost Reduction Case Study Example: Defense Contractor

Situation

The client is a defense contractor based in the US who makes helicopters and fighter jets for the Air Force. They have experienced growing costs and have asked for help to solve the issue.

Opening

In the opening, it’s your job to ask follow-up questions so that you clearly understand the client’s context and goals. In this situation, you discover that the client has been experiencing this issue for the last 2 years and that they have a target to cut costs by $200 million in the first year.

Structure

In the structure, the aim is to lay out a clear plan of attack for the analysis that you will later conduct. In this case, you might lay out a structure that asks 3 main questions, with sub-questions that further clarify what you need to get to grips with. 

The structure could be:

  1. What part of the client’s cost base is performing poorly?
    • Fixed costs: what are the client’s current fixed costs?
    • Variable costs: what are the client’s current variable costs?
    • Benchmarking against competitors: how is the client performing in these areas versus their competitors?What part of the client’s cost base is performing poorly?
    • Benchmarking against historical performance: how is the client performing compared to previous years?

2. What is the root cause of this poor performance?

    • Internal changes: what has the client changed operationally or organizationally, causing increased costs
    • External changes: what has changed in the market that is affecting the client’s cost position?

3. What solutions will help the client resolve the issue? 

By following this framework, you’ll be able to identify what aspects of cost have increased, and then determine the reasons for that increase. This will allow you to start thinking about tailored solutions that will reduce the client’s costs and boost profits.

Analysis

Once you have laid out your approach, you are told that the client has an overall cost base of $5 billion per year, with avionics, which are high-tech radar and electronics systems for jets and helicopters, making up almost a third of the overall costs. Furthermore, the avionics category has seen increased spending in the last 2 years. 

The client then presents you with the following chart:

Cost Reduction Case Interview - Avionics Costs Graphic

Take a moment to review the information in this chart before reading on. What conclusions can you draw from it?

An analysis of the chart identifies that the client’s procurement of avionics equipment is fragmented. There are 3 separate avionics suppliers, each providing several different types of systems for each of 4 different projects. The client pays higher prices for the same equipment when the projects are smaller. 

You crunch the numbers and figure out that if they bought in bulk and paid the lowest prices across the board, they could save $85 million. Since this data only pertains to one of 3 suppliers, you extrapolate from there. If the same savings are available in the other supplier relationships, you can help the client cut costs by $255 million, reaching their targets.

Recommendation

During the recommendation, you synthesize your findings for the client. You make a recommendation, saying that they should cut costs by focusing on avionics, and provide reasoning that draws from the analysis you have conducted. 

This case was adapted from one in the Michigan Ross Casebook.

How to Prepare for a Cost Reduction Case Interview

3 Tips on Preparing for a Cost Reduction Case Interview

1. Ensure You Are MECE in Your Cost Categories

Make sure that you aren’t reiterating any components of cost across different branches of your diagnostic framework. The best advice is to stick to one framework for cost categorization (fixed vs. variable or value chain) to avoid any confusion.

2. Familiarize Yourself with Cost Components by Industry

Get to know the different aspects of cost for various industries. You will set yourself apart if you understand that research and development is a huge cost driver in the pharma industry, and know the difference between upstream and downstream activity in the oil & gas industry. (Upstream activity involves getting fossil fuels out of the ground and to the refinery. Downstream activity involves getting refined fuels to the retail gas stations or oil companies who sell them to consumers.)

3. Understand Cost Reduction Trends

Familiarize yourself with trends in cost reduction. Know how automation and AI are used to disrupt industries and reduce headcount and how the gig economy has reclassified labor as a variable cost. This will help you to generate creative and insightful solutions for your clients.

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– – – – – – –

In this article, we’ve covered:

  • What to expect in a cost reduction case interview
  • Examples of cost reduction case studies
  • Key frameworks that will help you solve a cost reduction case
  • How to work through the sections of a cost reduction case interview
  • 3 tips on how to prepare for this type of case

Still have questions?

If you have more questions about the cost reduction case interview, leave them in the comments below. One of My Consulting Offer’s case coach will answer them.

Other people prepping for case interviews found the following pages helpful:

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