Saffron Retail: Build the Line or Keep Buying?
Operations
hard40 min0 submissionsGoldman Sachs
Scenario
Saffron Retail is a mature-stage apparel retail business in India. It currently buys a key component from a third-party supplier and is considering manufacturing it in-house.
Current position:
- Annual volume: 82k units
- Supplier price: ₹596 per unit, delivered
The in-house proposal:
- Capital cost: ₹115 Cr, useful life 9 years
- Variable cost in-house: ₹441 per unit
- Additional fixed operating cost: ₹11 Cr per year
Complications:
- Demand for the end product could move ±40% over the next three years
- The supplier has offered a price reduction if a three-year commitment is signed
- In-house production would take about 14 months to reach full yield
The COO is convinced building is obviously cheaper because the unit cost is lower.
Supporting data
current
- annual volume k
- 82
- supplier price per unit
- 596
in house
- capex
- 115
- ramp months
- 14
- asset life years
- 9
- annual fixed opex
- 11
- variable cost per unit
- 441
uncertainty
- demand swing pct
- 40
derived hints
- breakeven volume k
- 1535
- annualised fixed cost
- 23.8
- contribution per unit
- 155
Your task
Advise the COO. Your answer should provide:
- Analysis — the economics of both options, computed, including the volume at which they break even.
- Risks — what makes the in-house case fail, and what you would monitor.
- Recommendation — a specific decision, and the volume threshold that would reverse it.
State any assumptions you make.
Ready to move forward? Up next: Wavelength Media: Review This DCF Before It Goes to the ICNext question
How you'll be graded
100 points, 60% to pass.
- recommendation20
- risk assessment25
- problem structuring25
- quantitative analysis30
Hint
Reveal suggested structure
Fixed vs variable split; breakeven volume; demand risk against irreversible capex; option value of the supplier deal