Tata Motors to Set Up New Courier Company in Mumbai ...

Case Type: new business.
Consulting Firm: Parthenon Group first round job interview.
Industry Coverage: automotive, motor vehicles; freight delivery, shipping services.

Case Interview Question #00518: Your client is Tata Motors Limited (NYSE: TTM), a multinational automotive corporation headquartered in Mumbai, India. Currently Tata Motors is South Asia?s largest automobile company and the eighteenth largest motor vehicle manufacturing company in the world by volume. Part of Indian multinational conglomerate the Tata Group, Tata Motors was formerly known as TELCO (TATA Engineering and Locomotive Company). Its products include passenger cars, trucks, vans and coaches.

Recently, your client Tata Motors wants to set up a new courier company that delivers messages, packages, and mail. Couriers are distinguished from ordinary mail services by features such as speed, security, tracking, signature, specialization and individualization of express services, and swift delivery times, which are optional for most everyday mail services. As a premium service, couriers are usually more expensive than usual mail services, and their use is typically restricted to packages where one or more of these features are considered important enough to warrant the cost.

How will you help your client to evaluate if the courier service is the right business for Tata Motors to get into?

Possible Answer:

Candidate: Before I proceed with the analysis, I want to make sure I understand the business model correctly. I think at its simplest, a courier company basically picks up a package from point A and delivers it to point B. The company adds value, differentiates itself and earns money from its supply chain.

Interviewer: This is a simple model, but I think it works well for our purpose.

Candidate: OK. In that case, first, I would like to get some information on the market where the client plans to operate. What is the existing competition? What geography is the company going to serve?

Interviewer: Let?s assume that the client plans to operate in the city of Mumbai. There are, maybe, one or two other companies operating there. Not much competition.

Candidate: OK. In that case I think I want to focus on the profitability of running such a business.

Interviewer: I think it makes sense to proceed this way.

Candidate: I will look at both revenues and costs. We can estimate daily revenues if we know the expected daily business volume and the average price charged per customer. For the latter, I am assuming that the client offers just one type of service (since this is an intracity courier company). Is that a fair assumption?

Interviewer: That?s fine. You can assume the service is priced at Rs. 7.

Candidate: If the company processes 100,000 packages per day, it will earn daily revenue of Rs. 700,000. Now moving to the cost side, I think there are three main cost drivers for the company ? transportation/shipment, advertising and promotion and other general and administrative (G&A) costs.

Interviewer: Good. Why don?t you examine these in detail?

Candidate: I will look at the transportation costs first since I believe these are going to be critical in deciding if the business is profitable. I will assume Mumbai is a linear city, 40 km in length and 10 km wide.

We will have collection centers distributed along the length of the city at equal intervals. Our customers will be able to drop their packages at these centers and collect the receipt. In reality of course, the distribution will not be uniform, since some areas will warrant more stores while it may not be feasible to have centers in some other regions.

Interviewer: That?s a fair assumption. Carry on.

Candidate: Now I need to determine the number of such centers that the company needs. From there, I will determine the number of employees to get a sense of the costs. Let me assume that each service center remains open from 9AM to 4PM. With a one hour lunch break, that gives us six business hours per center. Let?s assume that each customer takes five to ten minutes to process. If each service center is manned by one employee, then it can handle roughly 50 customers per day. Here again, the timings of the service centers could vary across the city, but I am looking at an average shop.

Interviewer: You?re doing fine.

Candidate: So if one service center can handle 50 customers per day, to service 100,000 customers we will need 2,000 centers spread across the city. (Brief pause) That sounds like a large number to me.

Interviewer: No, it will come up to around that. Go on.

Candidate: OK, so we will need 2,000 employees to staff these centers. Then we will also need delivery boys.

Interviewer: Let?s assume that some of these employees can also double up as delivery boys. We can appropriately adjust the timings at some of the stores. Let?s say there are a total of 3,000 operational staff members.

Candidate: I think we will need to pay each employee around Rs. 6,000 per month. That means a daily salary of Rs. 200. So for 3,000 staff members, it comes to around Rs. 600,000 per day.

Interviewer: What are your thoughts at this point?

Candidate: Well, just going by the fact that the transportation costs are coming to around Rs. 600,000 per day when our revenue is Rs. 700,000, I don?t think this business looks very profitable. We haven?t accounted for the advertising costs or even fixed costs yet.

Interviewer: I see. But given that this is a very rough estimate, perhaps we are in a position where the business might be profitable and we can look at areas where we can cut costs or spend efficiently.

Candidate: I think advertising will be very important in this business. I personally think that customers will choose a courier company that they think is reliable and safe. Since this is a new company, and the sector is also underdeveloped in the city, I think they will have to focus on building a brand. Consumers are more likely to consider a brand as reliable if they have heard of it. But perhaps we could structure the employees? salary so that a part of it is a bonus linked to the amount of business they bring in. That way we could save on some of the advertising costs.

Interviewer: I think you have done an excellent job. We?ll end here. Thank you.

Comments: The interviewer was looking for a bottom-up analysis rather than a top-down. In a bottom-up analysis, the interviewer is usually looking to see if the candidate is able to grasp how a business runs at the ground level and what the key drivers will be.

Source: http://www.consultingcase101.com/tata-motors-to-set-up-new-courier-company-in-mumbai/

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