We've got another fresh business problem for Rocket Blocks experts to solve in today's mock interview. Today's case is Mckenzie inspired and takes the classic question of profitability and puts it up against the potentially less familiar industry of port and cargo economics. Watch as our expert develops a structure, works through some math, and analyzes a nuanced bubble chart as part of solving this case.
As a reminder, if you want to get better at solving uh complicated charts, you should be practicing actively and deliberately. At the very least, pause this video each time a question is asked to try your own answer out loud. And when you're ready to get feedback on your chart analysis, come to Rocket Blocks and try our drills.
Good luck and have fun casing. >> Okay, so your client is Harbor Link Ports. Uh so Harbor Link Ports is a national operator of commercial seapports in a European country.
They operate six ports in that country. Uh and in one major coastal city there are four ports overall of these commercial seab ports. Three of those four are operated by our client Harbling ports.
Uh including one called Port East, which we'll talk a little bit more about. Um and then in addition to those three, there's another one by a competitor. Um and [clears throat] over the last year, Port uh Port East's profits have declined significantly.
Um while Harbor Link port uh as like the overall company their other ports have remained stable or they've improved. And if you look at the the kind of macro picture overall country level trade volumes are flat to slightly up. So the CEO of the client has asked us to understand why Port East's profitability has declined and what Harbor Link ports should do about it.
>> Great. Okay. This is really exciting.
I've never worked with ports before, so I'm excited to learn a little bit about it. >> Um, to start off, I'm wondering if you can tell me a little bit more about the goal of this case. I know that you've mentioned it's to um understand why the profitability has decreased, but I'm wondering if there's a particular profitability target.
Maybe if you could even share is the company unprofitable given these profitability decreases or are they still profitable just not as profitable as they would like to be? Any more information you could shed on that? >> Yeah.
Yeah, good question. Um, so on on the last point that you mentioned, so basically from a profitability standpoint, Port East was down 15 million euros since last year. >> So they're they were up at at about 40 million uh and now they're down to 25.
So a 15 million delta there. >> And and really what we're trying to understand is like why that profitability has declined despite stable regional traffic and strong volume. uh and basically what they should do about it.
>> Okay, great. That makes a lot of sense. Next, I'm wondering if you can tell me a bit about the business model of a port.
So, my hypothesis is that uh there's some type of fee per ship that comes into the port. Maybe a fee per hour or maybe even a fee per minute or a different interval time interval. That's going to be my hypothesis, but I'd love to hear if if I'm wrong about that.
>> Sure. Yeah. So on on the business model, basically ships will come into the port.
The port unloads the containers on the ship with cranes and basically puts those containers either into storage or we might load them directly onto a truck. And then from a fee and revenue standpoint, uh the ships coming in are going to pay a cost per ton of unloaded containers. So it's it's not a cost per ship.
Okay, >> that's you know a reasonable assumption, but it's it's really a cost per ton based on the weight of those containers that get unloaded. Got it. Okay, that makes sense.
And then just as I think about profit, one last question here. Profit is revenue minus cost. I think I understand the revenue piece a little bit better now.
From a cost perspective, what would be the major costs of a port? I'm guessing like >> there's some type of capex. There's yeah equipment.
Um maybe labor. I'm not sure how automated ports are. And then I'm not really sure what else.
Could you shed some light on that? Yeah, good question. I would say labor and wages are a big part of it.
>> Okay. >> Um there's also the equipment, right? So there there's going to be operating the equipment and ongoing maintenance of that equipment.
>> Yep. >> And then to to run it, utilities and electricity feeding the uh the cranes is very important. So these are these are electric cranes and consume quite a bit of power.
So yeah, electricity is is fairly significant. >> It all comes back to power, doesn't it? Totally.
>> I love it. I love it. Okay.
Do you mind if I just take a minute to to structure my thoughts here before we jump in? >> Yeah, go for it. >> Perfect.
Okay, I'm ready to chat through if you're ready as well. >> All right, let's do it. >> Okay.
Oh, I don't know if you're going to be able to. Okay, I think that should be okay. Perfect.
So, since in this case, um, the key question here is why have profit has profitability been decreasing and what can we do about it? So I want to use a fairly straightforward structure here of just the typical profitability structure. So we know that profit equals revenue minus costs.
Of course under revenue there's volume and price. And then under cost there's variable and fixed. So first let's talk about volume under revenue.
Um as we think about volume what we want to think about is the number of tons of throughput that goes through this port. Um, so I want to think about any operational constraints that might be um happening to make the the amount of throughput go through be less. I also want to think if maybe there's some customer service constraints like uh for example, I could see if uh the customer service or if the availability isn't exactly what the ships are expecting, maybe they don't want to come back to this port.
So there's going to be less volume because of that. The other thing that I'd see is maybe there's less. You mentioned that there's uh two other ports that are owned by this company and a whole other port that's owned by a different company in the same city.
Maybe this port is farther away from like transport. Maybe there's some type of railway system or a new highway that was built closer to the other ports and that's making people not want to come to this port. Um and then the other thing I'd think of is maybe a product mix.
So, as you mentioned that the revenue model is based on per ton. I'm thinking that maybe there could be lighter things that are going to this port just for some reason maybe again because of the customer mix. Um, so it's not they're still at full operational capacity and the throughput is the same but it's just lighter things.
So they're they're it doesn't count as the same amount of throughput. The other thing under revenue would be price. Um, so I think that there could be an increasing share of lowerpriced segments.
Again, I don't know enough about the industry to know like what those segments might be, but I could imagine that there's different segments. Um, and then the other thing I'm thinking about is are there certain discounts or promises that were made by this port that weren't made by the others for some reason? And then under costs, I think there's variable and fixed costs.
So, under variable costs, you mentioned energy. I'm wondering if there's anything strange going on with the energy situation. um maybe like different rates or uh maybe it's a different distributor that's going to this port than the other ports and something's happened with that distributor.
Um so I'd want to look into the energy piece there. And then the other thought I have around variable costs are like if there's overtime or extra shifts again maybe because of that uh the operational constraints or maybe because of something else. And then under fixed costs I think we'd have the regular labor which you mentioned is a big piece.
So I'd want to look into has anything changed with the labor? And then we also have assets and depreciation under the fixed cost. So are they investing more into capex for some reason?
And if so, uh what is that looking like? Um so what I'd want to do is understand which is the key driver of the profitability decrease. Is it one thing?
Is it multiple things? And then based on that thing, look at what the next steps are to actually fix that without knowing which of those it is. It's hard for me to suggest next steps at this point.
Um, so maybe we can start by just diving into that revenue piece. And I'd want to understand a little bit more about the volume mix. Has the throughput decreased or how has it changed over time?
And what were the key drivers or segmentation of that? >> Here's some feedback from Chris. After the prompt, Tessa shared that she's never worked with ports before.
Her clarifying questions drill in on the nature of the business to help her build understanding that will inform her approach. As a bonus, it's worth noting that Tessa is able to demonstrate confidence in these few steps despite her lack of industry context. While she may not have experience in ports, she does have experience working with problems in new industries.
The structure includes a classic profitability buckets. However, Tessas use the industry specific revenue and cost items that were discussed after the prompt. This is a great practice to make your classic frameworks feel custom and client specific for any given case.
Finally, Tessa ends by discussing how she will use her framework to solve the problem. We're going to investigate revenues and costs to see what's driving the drop in profitability and then use that intel to recommend a solution. This is a subtle but critical bit of casing that newer casers often miss.
We're not writing a term paper on port economics. We're trying to solve a problem for a specific client. >> Yeah, that's great.
I like the framework and you're you're raising a lot of the correct points here uh around, you know, f focusing on financials and profitability. So, I'm I'm going to bring up a chart here, >> and I'd love to get your thoughts on this uh once this is up. >> Okay, great.
Um, so I can see that we have a chart up here. Um, on the x-axis we have annual throughput in millions of tons and this is for city port performance last year. So, I'm guessing that this is for the port that is unprofitable today.
Um, and then the annual throughput. Oh, no. Oh, sorry.
city port performance. This is for all of the ports that are in this European major European city. Okay, that makes more sense.
>> So then on the x axis, just back to that we have annual throughput in millions of tons ranging from 0 million tons to 20 million tons. Okay. And then on the y ais we have an ebita margin ranging from 0% to 30%.
Great. Okay. And then we can see plotted on here is every one of the ports in that city with the dark blue being Harbor Link and the light blue being the competitor.
And then there's just a couple more notes on here. The circle size represents inflow of ships per year. So the bigger the circle, the more ships are coming in, which we know isn't necessarily correlated with the profitability or the number of tons.
Um, and actually we can fairly clearly see that on here since Port Central and Port East seem to be similar sizes. is port central actually bigger with port east having more throughput. So different ships can contain different number of tons that are being offloaded.
Um but that still might be a clue for something else. And then we have two orange lines here which is the average of the city overall. Okay.
So the average number of tons and the average I beta margin. Great. Okay.
So what I want to do is look at each of the circles here. So starting with Port East, which is just completely standing out to me since it has the highest amount of throughput and the lowest margin. Of course, that's not surprising given what we know.
But it's interesting that it has the highest amount of throughput. So that means that when we sort of look at this uh revenue piece, it's probably not volume that's the driver. It's probably the price um or the costs, sorry.
So anything but the volume is probably the driver. when we look at some of the other ports. So when we look at port south and port central, we can see that they actually have higher EBIT margins than port west which is the competitor.
So that is interesting. We do know in our company what is happening and that's a really unique situation to be in to be able to say oh can we just look at the other ports that we know are doing well. It's not like they're all competitor companies.
We would be able to you know ask and maybe get some advice from their general manager to figure out what to do next. Um, so I think the next thing that I would want to do is actually look into Port East a little bit more and see if we can understand anything either about the price and how the price mix has changed or about some of the costs. >> Here's some feedback from Chris.
Tessa clears the chart and explains what we're looking at before diving into insights. Critically, she catches an error in her own understanding as she talks through the chart. Her communication is very strong as she methodically describes all components of the chart.
This is a great example of what it looks like to maintain competence during a case, even if things aren't going 100% perfectly. Tessa immediately begins organizing this new information in the context of her original framework. She says it's not volume that's a driver, so we can focus on the remaining areas I identified.
Her framework wasn't a standalone answer to a business quiz at the start of the case. It was a northstar she's actively using to solve a case as new information is revealed. Tessa's point that, hey, we know what profitable ports look like at our company.
we can compare is a great example of a second level insight about how the information in the chart can be useful to solve the case. Again, Tessa finishes this section with a suggestion of where to go next. She's in the driver's seat as we solve this problem for our client.
>> Yeah, that's a great point. That's a really good point. So, let's let's dive into that a little bit more and I have another question for you.
>> Okay, so basically we're going to talk a little bit about electricity and the costs here. So the the management of Port East, they suspect that operational efficiencies, especially around electricity supply, are a key part of Port East's profit problem. >> Okay.
>> So Port East uses electric grab cranes to unload bulk cargo from ships and then the port typically runs two 8hour shifts per day. Um but because of frequent brownouts, so like you know electricity just going down um and contract limits with the power utility, each shift loses on average about 2 hours of power during that 8 hour shift. >> So while cranes sit idle, uh the labor is still paid.
Um so that's like an extra cost. >> Okay. And I think as we go through the exercise, an assumption you can make is there's enough demand, like cargo demand, to use any extra capacity we take.
>> Okay, great. >> So, I've I've talked about a few numbers, but I'll I'll bring up the rest of these numbers here um just to help you think through uh through the question, but really the question is, what is Port East's theoretical maximum daily throughput in tons? This would be if if there were no electricity downtime.
Okay, >> I guess part two would be assuming demand is sufficient to fill any additional capacity, what is the annual profit lost due to electricity related crane downtime? >> That is a lot of information. So maybe if I can just chat through that a little bit with you um to make sure that I fully understand.
So I think the ultimate goal here seems to be um given the electricity constraints and given the electricity issue that uh Port East has already identified, what is the annual profit lost of that specific problem? And the sub question that's sort of maybe a step in terms of finding that is what is the throughput that's lost per year um in terms of the electricity situation that we have. Um I think like uh su super super interesting.
So as we think about theoretically daily theoretical daily throughput I want to just keep that in my mind as I read this information. So we know the following the number of electric grains. Okay.
Okay. So, the number of cranes that are used to do that work is three. Maximum scoops per crane per hour.
So, that's like the maximum time the crane can like physically scoop, I'm guessing. >> Exactly. >> Okay, great.
>> So, I think about that as just like number of containers kind of, >> right? Okay, great. Yeah, number of containers.
Average tons per scoop is 12 tons. Shifts per day is two. Hours per shift eight.
Okay. Okay. This this all makes sense.
So, do you actually mind if I just take a minute to structure how I might think about this given how much information we've we've gotten? >> Yeah, please. >> Perfect.
>> Okay, I'm ready. So, I think that there's two parts to this question. Part one being the difference between the theoretical profit versus the actual profit given the electricity constraints.
And that's going to give us a number in terms of number of tons per year in lost profit. Then that for part two we need to understand the profit per ton and then we need to multiply the profit per ton by the lost throughput because of the electricity issue. Does that sound right as like a very high level structure?
>> Yeah, I love it. That's great. >> Perfect.
Okay. So then for part one um I think we need to understand the theoretical throughput and we need to understand the actual throughput and then we need to find the difference between those two. So as I think about how to calculate the theoretical throughput, I think we use the information that we have on the screen here.
So we do scoops per crane per hour times tons per scoop times number of cranes. And that will essentially get us the number of tons per hour. Then we'll need to take the number of tons per hour multiplied by the number of hours per day, which is 16 because that's two shifts per day times 8 hours per shift.
And that will get us the theoretical throughput per day in tons. Then I think that it's actually quite easy to uh in go back to that sort of sub point we might have had about the number of tons per hour and just multiply that by two hours because that's the throughput lost per day and then that will get us the throughput lost per day. Does that make sense?
>> That's great. Yeah, you walked through that well. >> Okay, perfect.
So scoops per crane per hour is 90 * tons per scoop is 12 * number of cranes is 3. So we have 90 * 12 * 3 12 * 3 is 36 36 * 90 3,240. Does that sound right?
>> All right. Yep. So that would be 3,240 tons per hour that is produced uh for an operational hour at the port.
Um so now we could say for a theoretical throughput day, we'd need to multiply 3,240 tons per hour times 16 hours per day. And that's going to get us the total number of tons per day that we could realistically Actually, you know what? I don't think we even need to calculate that, do we?
I think if we just take the tons per hour and we multiply it by two, which is the lost time per day that the >> uh brown out is happening, then we'll be able to get the lost throughput per day. >> That would be right. Yep.
>> Okay. Okay. So, sorry I was making it more complicated than I needed to.
So, we need to take the 3,240 tons per hour and we need to multiply it by 2 hours per day. uh 3,246. Okay.
So, 6,480 tons per day, which is lost. Does that sound right? >> That is.
That's great. >> Okay, great. Um, and then I know that we eventually want year, but I'm going to suggest that we actually just wait until we do part two and then we multiply the final number for part two by a year if that works for you.
Okay, >> sure, we can do that. Great. So for part two, we want to understand the profit per ton.
And I don't think we have any information. Let me just check. Yeah, the earlier information I don't think included anything about profit per ton.
So when we think about profit per ton, I think we would want to think about the revenue per ton. So that's probably fairly fixed as a price uh minus the cost per ton. And the cost per ton being the variable cost plus the fixed costs.
Um, for the fixed costs, I'm guessing we just have some type of like enterprisewide number that we use for um per ton of of how we se spread it over the year. For variable costs, I'm wondering if there's like a labor cost per ton. Maybe there's even an electricity cost per ton and we can think about it as that granular because it is like how much it takes for one scoop.
Yeah, I'm wondering if we have any information on that. >> Yeah, good question. So on on the revenue side, we have a handling fee of €3 per ton.
So that's the revenue side. And then on the cost part of it, there's sort of two components of the uh the variable cost. Uh so the first is going to be labor maintenance.
Uh you basically labor and maintenance excluding the electricity part and that is 0. 5 and then the electricity component is. 2.
>> Great. Okay. So, the profit per ton u and I guess we're looking to do like the margin per ton.
So, not the true profit. Is that right? >> Right.
Yeah, that'll work. >> Okay, great. So, the profit per ton equals revenue minus cost.
So, €3 minus 5 cents minus2. So, that equals €230 um in terms of profit per ton. And now we need the profit per ton multiplied by the tons per day uh which is the 6,480 the lost tons per day I should call that and then that will be multiplied by 365 days.
So this is this is quite a a calculation. Do you mind if I do a little bit of rounding here or do we need to get the exact number for this one? >> I think rounding is okay.
Let's do that. >> Okay. So let's imagine that in terms of um lost uh time per day.
So we have the 6,480 um actually sorry I actually just looked up on my paper and did I write this wrong or are the brown outs 2 hours per shift? >> Uh 2 hours it's it's 2 hours uh per shift per shift. I only did two hours per day.
Oh, it's Yeah, you're right. Okay. Sorry about that.
>> I did two hours per day. So, I'm going to need to multiply that number by two or I did two hours uh yeah, per day. So, I need to multiply the throughput per day that I have of 6,480 by two.
Um so that's 12, 960 tons per day. Perfect. >> Are you with me on my Okay, great.
I'm with you here. 12,950 pounds per day. >> Okay, great.
So, maybe if we round that to like 13,000. >> Okay. >> Uh which is pretty close.
And then we need to multiply that by the 230 uh in terms of gross margin per ton. I don't think we can really round that because that would make a big difference. So 13 * 2 29 + 30 cents is 900.
Okay. 29,900 per day euros in in gross margin. Does that sound right?
>> Uh yeah, I think so. I think that's in the general ballpark with the rounding. >> Okay, great.
And then we'll multiply that maybe we'll multiply it by 360 if that works. >> Perfect. >> So >> that's close enough.
>> 300. And perfect. And I'll multiply that by 60.
Okay. And we're getting about 10,700,000. A little bit more.
So 10,750,000 without doing the full calculation. Is that >> okay? I see you nodding.
>> That's in the region. Yeah. >> And that actually makes a lot of sense if I go back to the original question and I think about how you mentioned that the profit decreased by 15 million last year.
So this being a very significant portion of that, but probably there are some other factors as well. maybe some of that customer service stuff that I mentioned, people the customers being frustrated with the issues that are being caused and I'm sure they have their own other costs that are that are adding up. So, okay.
Uh to answer the question, the annual profit lost is about€ 10. 7 million euros and that's the key driver to the profit decreases. So, the next thing I would want to do is brainstorm and think about some of the potential solutions that we might be able to um come up with as a a solution for this.
>> Here's some feedback from Chris. Similar to clearing the chart, Tessa starts this exercise by saying, "Hey, what are we doing with this math? What are we trying to learn?
" And as she shares some thoughts on what this new information might mean for the client before she actually does any calculations. This is an option for candidates who may struggle in math. You can frontload some of the business insights portion of a math calculation before you rev up on crunching numbers.
It may help you narrow down the actual calculations you need to do, and you may find it easier to think about the business insights before you spend a few minutes doing tough, challenging mental math. Next, Tessa spends a minute laying out the actual math she wants to do all the way through to the final output she was looking for at first. This is a key step that shows she can translates from what do I want to learn into how do I get there?
Combined with her last steps, this was two or three minutes spent well on blocking out the specifics of this math problem. Even if she totally flubs the actual calculations, it's clear that she has the business acumen and math setup down and could reasonably be expected to solve a problem like this, especially if she had a spreadsheet in front of her. Of course, Tessa is pretty good at math and successfully executes her calculations.
If you want to get faster and more accurate at math, check out the mental math drills on rocket blocks. After Tessa finishes her math, she contextualizes her output. The laws due to brownouts is a huge chunk of the reported 15 million euro loss of profit mentioned in the case prompt.
As always, Tessa drives the case forward by suggesting a next exercise that builds on the prior work. >> Yeah, I think that's a great point. So, why don't we shift gears a little bit and and talk about that?
So looking beyond this immediate electricity issue, um how how could Harbor Link ports derisk and improve the long-term resilience and profitability of Port East? And we'd why why don't we think about this in terms of I guess three different areas. So there's operations, >> uh commercial strategy, and then risk management on the assets.
>> Okay. Um, so starting off with operations. Um, so the question here is how to use operations to derisk Port East.
Um, I think the main thing that comes to mind is how to put together a better operational strategy regarding energy. So if we're having uh brownouts this frequently, I think there's kind of two key pieces. The one is invest in our own energy generation.
Maybe they could have on-site solar. Maybe there even a generator, a backup generator or maybe even a backup distributor. I don't know how the energy regulation works in this country, but if it's possible to have um a different like local distributor than the one they have or to have two so that they can kind of switch between the two, that could be a good idea.
Or my second idea is to actually just have storage on site. So, if it's about two hours per shift, that would be a fairly small battery and way way cheaper than $10 million per year to just implement a battery backup system and keep 4 hours of extra capacity um stored all the time. Uh and then so that that would be my operational piece.
In terms of commercial uh commercial and portfolio, I would say the uh the most important thing here is that there are probably certain types of goods and services and companies in which speed and reliability are more important than others. And I h I have hypotheses that maybe like food and beverage related uh goods need to be more reliable and faster and maybe like very um like retail for example maybe could be lower. I think that it really does depend.
But whether we could diversify our as our our commercial strategy across the three ports in the city to even say to customers like do you mind risking a little bit of um reliability at this one port if you're across all three and thinking about that and then in terms of risk management um I would say uh the key thing is sort of continuing to diversify in different types of ports in different locations. It seems like this happened all at one time in one year, this energy issue that this port is having. And if that's true, that's pretty concerning in terms of uh the reliability of electricity at ports in general.
So I would say try and understand try and continue diversifying the ports as they have, but maybe even having three out of their I think we mentioned that they just have six ports in total. Having three out of their six ports in one city might not really be diverse enough. Maybe they should think about diversifying.
um beyond cities. So, I think there are some good strategies to actually mitigate against this um and and uh and I think that it should be pretty easy to add that battery backup. So, that's going to be my main number one recommendation coming out of this and uh uh but I'm happy to discuss anything further.
>> Yeah, that's great. That's a good list and I I like the battery point. And maybe maybe to push that a bit, I'm wondering if if you could flag maybe two or three of the recommendations you had as quick wins that you could recommend most strongly to management.
>> Yeah, absolutely. Um, so I would say uh quick win number one is going to be diversifying the customer risk across the three ports to make it so that customers who don't need the reliability are coming into Port East and perhaps there's some type of discount for them as a result. Number two is the battery backup.
And number three I would say is um I would say number three is to I I didn't mention this but I'm going to I'm going to have a a new third one here which is to think about how the labor and the management might be able to still make use of the time when the brown oats are happening and to have people like mentally and physically prepared for that to happen and uh to be still doing something productive during that time, but able to just jump right back into it as soon as the electricity comes back on. >> Yeah, awesome. That's a great point.
>> Here's some feedback from Chris. Tessa uses data from the prior exercises in her suggestions, that is four hours of extra capacity. This demonstrates great communications and understanding the common threads throughout the case.
Tessa handles her follow-up questions with a well structured answer. It's important to remember to be structured even deep into a case like this. Okay.
So maybe just as a final wrap-up then uh Harbor Link Port CEO has asked you to summarize your recommendation. So I guess what should Harbor uh Harbor Link Ports do about Port East's uh profitability challenges and why? >> Great.
Uh Port East has had profitability challenges over the past year due to unreliable electricity which is a key part of their um operational process. As a result of this, um, there have have been about two hours per shift of brownout periods and those two hours per shift have have led to about 10. 75 million in lost uh, gross margin.
As a result of this, I believe that um, Harbor Front ports at Port East should focus on creating a more reliable energy infrastructure to their port. uh namely creating a backup system so that they don't have to deal with these brownouts. In addition to that, they should make sure that their labor force is properly educated and knows what to do.
And they should think about how to diversify their contracts so that the contracts that don't need as much throughput are coming through Port East or as much reliability are coming through Port East um to maintain all customer satisfaction. Thank you. >> All right, Tessa, great work here.
Well done on the case. >> Thanks so much. Here's some feedback from Chris.
Tessa provides an answer first summary with strong recommendations. >> Hey everyone, it's Kenton Kesi here, the founder of Rocket Blocks. Thank you so much for watching this mock interview video.
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