2014 IMA Student Case Competition Winner

2014 IMA Student Case Competition Winner



yeah yeah you know I'm spending the been thinking over this FHP proposal I just think this is a huge opportunity for us to grow the business and not to mention SF HP becomes more dependent on our services will be in a stronger position to negotiate future rate increases I know you're requested dead but there's more than one way it's a grow our fleet if you consider using independent contractors all right how you doing boss you wanted to guess yeah come on TC good week awesome well good so I'm telling you graduate for you i Finch Peter biggest customer wants to add traditional routes to their existing distribution chain and they're trying to make a deal with us so I've got the contracts right here for you guys and I need to brief Alan James on all the potential of this new contract I'll need to get a capacity financial and strategic analysis of this contract guess I'm gonna given up my credit yeah yeah yeah you can do anything a pair of it all right awesome thanks so much guys we'll see you back on Friday all right hey Theodore could you send me a copy of your analysis yeah sure thing Thanks if you look here at the first chart exhibit one it has a capacity analysis now FHP is asked to do two additional round trips on a weekly basis these trips would add three thousand miles per week and one hundred and fifty six thousand miles for the whole year now ideally the best way to do this would be by just having one try to run this route twice but to be able to do that the drivers gonna have to complete the routing under 70 hours is that is the driving restriction imposed on an 8 day period by federal regulations unfortunately this isn't really feasible for any of our drivers because they'd have to average about 86 miles an hour the whole trip and as you and I both know that's not going to happen they can't do that but looking at our logs and Starfire's logs over the last 30 years as well as industry standards most trucks average about 55 to 60 miles an hour on these cross-country journeys what this means is that one driver alone isn't going to be enough to fulfill FHP needs we're gonna have to either use any two drivers and have them staggered so that they're driving opposite directions and the grab gets done about every three days that way for the use of slip seating method where we have one driver drive and pick up the goods and swap in a new driver but I still going to be a little bit complicated and we'll run into some our restrictions or the other option that we've thought about would be a team driving scenario where you're still paying the two drivers but you don't have these our limitations because each driver can drive and then rest and these driving and resting periods are alternated between the two drivers the other thing that this table shows is the max amount of miles that one truck can go on an 8 day period as well as during the year period Starfire's potential mileage in one year is between 14 and 18 million miles now I see here you have total projection capacity the total budget passed you can you can you explain the difference for me as you know our president and CEO Alan likes to only use a budget capacity based on 85% of total miles now this is because sometimes our truck drivers face delays that aren't forcing night traffic delays or loading and unloading delays when they're dropping off their goods so what our team decided to do was run these projections at 85% capacity based on the 90 tractors that we have and even if we were to add the additional route the FHP is asking us to add we would still be well within the budget of capacity adding that route to the total amount of mile as we drove last year furthermore we also wanted to look at how much the incremental cost associated with having to rent tractors if we were to put an additional one of our spare tractors into service right now so if you're going to exhibit – they're about three hundred and seventy thousand semis breakdown every year this equates to about 18 percent of all trucks being broken down at some point during the year now most trucks when they're broken down require about four days to fix and get on the road again so if you flip to exhibit three it'll show you how much the costs are associated with renting a tractor and trailer on a daily basis and a weekly basis as well as the additional mileage rate that is charged now these numbers by themselves don't actually tell the whole story because the likelihood of having more than two or three tractors break down at the same time isn't a hundred percent so if you look at exhibit four there's a probability weighted incremental cost table that takes the chance of one tractor breaking down multiplies it by the amount of reserved tractors that have to figure out what the probability of having all of our reserve tractors in use and having an additional breakdown happen we took this probability and multiplied that by the total weekly cost to rent a tractor and a trailer and came up with an incremental cost of putting one more of our spare tractors into service at only four hundred and fifty dollars on a yearly basis it's not necessary for Alan to go out and buy another tractor or buy additional trailers but using the existing capacity that we have here we can fulfill F HP's demands yes and as Theodore said talking about the debt we don't feel that it's necessary that we would have to go out and buy another tractor and trailer but looking at some of the statistics here comparing our debt ratios both just the debt ratio and the debt to equity ratio with similar companies in the market Landstar and JD hunt you can see by looking at the table that Starfire's debt to equity ratio and debt ratio are far below the ratios of Landstar JD hunt one thing that's important to note is that Landstar uses primarily independent contractors so a lot of the tractors and trailers that they use aren't actually on their balance sheet which is why their ratios are much lower than JP huns so if you go to the next next exhibit you can see I've done a SWOT analysis or strengths weaknesses opportunities and threats and you can see in our strengths we have a long history of being very reliable delivering quality service and as I mentioned from the last exhibit we have very low debt ratios compared to other confirms the opportunities that are open to us with this new route is that we could expand into a new market because we don't have any routes going to that particular location as well we can increase our market share as Theodore mentioned the rabbit efficiencies that we can build in by using team drivers instead of a single driver or a slip seat slip seating is really really important because we can test that out on this new route to see how well it works which means if it's successful on this route we can actually move those efficiencies and expand it to our other routes which frees up existing capacity could enable us to take on even more wraps in the future without having to buy any additional tractors or trailers so this Rob you like a trial route for others yeah exactly and it would it would show us exactly how viable of an option that is for future routes thank you all so much we also prepared a couple of puff-puff a comparison analysis you can see in these charts and here we'll actually see the impact on the balance sheet and the income statement so I highlighted a couple important factors here as you can see we have both the existing capacity if we buy the tractor-trailer and the independent contractor now after saying before we lean heavily towards the existing capacity especially for this one line here the profit we made the most profit using our existing existing capacity as you can see it Alan Gross is the other two by a fair margin of about $50,000 also if you look at the red that we find on this chart here we can find the added fixed costs that will appear on our balance sheets are greatly increased by the tractor-trailer and by the independent contractor so looking at this and we can just add our financials if we do want to increase our bottom line our best bet is to go towards the existing capacity to break that up even further we decided to analysis of a per mile as you can see on the second chart there here we can see the problem per mile is a 75 cents with using our existing capacity whereas tractor and trailer and also the independent contractor we don't profit as much because we have to be paying off our loans as well as be paying off different permits and things for the independent actors also we wanted to make you aware that we made some changes to the fixed costs and our variable costs we found that in our direct cost we have payroll taxes however some of those payroll taxes will be proportioned to the amount of hours that our employees are driving and therefore they've actually considered a variable cost after we allocating that we could find a more accurate variable cost to apply to the existing capacity and the tractors and trailers all right thanks for this analysis that was great I'll summarize all the key points to this send it over to Alan James and see if we can make him decide to add this extra wrap thanks a lot many of my students are out there but I wanted to call and talk about the main points of your analysis something you could just recap those by real quick sure thing first off we found off we found out that we can still add this route within our existing capacity we won't have to purchase any new tractors or trailers we'll just have to hire on new drivers for it in order to do so we'll also be able to try out team driving they'll be a cost effective way of adding this route and only having to use one of our trucks but in de nessam strategic factors of this decision it is a little bit risky because we will have the risk of over reliance in FHP having them take on a larger percentage of our revenues but this will give us a really big opportunity to get into new markets and financially this would be a great decision because we be able to pull in about a hundred and ten thousand dollars in profit every year with this new I really appreciate your extra work Roger I'm glad that someone was willing to take a chance but if you extras like you know something that they've got will be profitable for the business it looks like and work out really well for

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