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    Cost Drivers

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    Joe Costanzo is owner of a growing chain of grocery stores in the Richmond, Virginia and the Washington, D.C. area. Joe's stores specialize in organic and other specialty foods and other specialty products, which have attracted a strong following. As his business matures, Joe is now more interested in understanding how he can better manage the profitability of his stores. In particular, he is interested in understanding what drives the costs in his business.


    As a potential consultant to Joe, develop a proposal for a consulting engagement which would focus on the profitability and cost driver issues Joe is concerned about. The proposal should address which types of cost drivers should be studied and why. Also, the proposal should identify what are likely to be the important cost drivers in this business.

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    Solution Preview

    Considering the inventory position change based on this consumer choice is huge. Since
    the grocery store owners have fewer stores to stock goods in, they can reduce the right place
    problem drastically. For the twenty groceries I could go to, they each must keep at least
    one box of cereal on the shelf, expecting me to show, so that's 20 boxes in the grocery
    supply chain and one in my pantry. The grocery store owners flip the model. They still need to
    keep one unit in each store for me but have only two stores. They sell it in four times the
    unit size of the grocery, so the two stores carry eight units compared to the grocery.
    In this simple scenario the grocery store owners have triple the inventory and reduce
    the supply chain inventory reduced their inventory by 70%. That is great from a
    perspective of capital and cash flow. Now averages and lots of statistics will change
    these relationships slightly, but the point is dramatic. The grocery store owners have moved a
    major position of inventory to the consumer from the general supply chain.
    This effect is some dramatic, that one has to wonder in a lot of the expansion of the late
    nineties, at the consumer level, was due to the expansion of membership within the
    grocery store owners and therefore inventory moving to the consumer, but not actually being

    Increase consumption
    'No stockouts'. Say that to a supply chain executive and they are teeming with joy.
    Stockouts occur mainly because of poor timing or not the 'Right time'. When I go into to
    store and the Raisin Bran is not there, I am unlikely to come back at another time to get
    just that item. So the theory goes that that is a ...