Case:Starfire’sDilemma

ForStarfire(SF)Company,thedilemmaisthat,theirbiggestcustomerFHPwantstoaddtwonewroutes,butSFdoesn’thaveenoughcapacitytotakethistask.Soweusefinancialanalysis,capacityanalysisandstrategicanalysistodealwiththisproblem.

Financialanalysis

WeassumethattherearethreemethodsifSFacceptstherequirementofaddingnewroute.Andweassumethereare52weeksperyear,whilewe’llincrease156,000miles=52*3,000milesperyear.

SFservicesFHP’sneedswithexistingcapacity.

$

NoNewRoutes

AddNewRoutes

11,250,000miles

11,406,000miles

Revenue

26,325,560.00

2.34

26,660,960.00

2.37

Cost

-

Variablecost

15,668,470.00

1.39

15,885,739.45

1.39

Fixedcost

6,975,280.00

0.62

6,975,280.00

0.62

NetoperationIncome

3,681,810.00

0.33

3,799,940.55

0.34

IfweusingexistingcapacitytomeetFHP’suse,weassumethatourrevenuewillincreaseby$335,400=$2.15*156,000miles.Atthesametimethevariablecostkeepsconstantas$1.39permile,whilethevariableincomeincreasesby$216,840=$1.39*156,000miles.Andthefixedcostkeepsconstant,too.Sothenetoperatingincomewillincreaseby$118,130.55.

Wecanfindthattheincomewillincrease.Butatthesametime,wehavetosuffertheriskthatarigbreaksdown.SFhastokeeptherelationshipamongclientsasSFhastokeepeveryroutegoeswell.

Investinoneadditionaltruckandtrailer.Andwithafive-yearcontractwithFHP.

$

NoNewRoutes

AddNewRoutes

11,250,000miles

11,406,000miles

Revenue

26,325,560.00

2.34

26,668,760.00

2.37

Cost

-

Variablecost

15,668,470.00

1.39

15,885,739.45

1.39

Fixedcost

6,975,280.00

0.62

7,025,280.00

0.62

NetoperationIncome

3,681,810.00

0.33

3,757,740.55

0.33

IfweaddnewtruckandtrailertomeetFHP’suse,weassumethatourrevenuewillincreaseby$343,200=$2.20*156,000miles.Atthesametimethevariablecostkeepsconstantas$1.39permile,whilethevariableincomeincreasesby$216,840=$1.39*156,000miles.Andthefixedcostwillincreaseby$50,000peryearduetothedepreciationandmaintenance,etc.Sothenetoperatingincomewillincreaseby$75,930.55.

Wecanfindthattheincomewon’tincreasesomuch.IfFHPdoesn’tprovidehigherrateorwedonotdevelopnewcustomerstoearnprofit,wehavenoincentivetobuynewequipment.

Cooperatewithindependentcontractors.Andwithafive-yearcontractwithFHP.

$

NoNewRoutes

AddNewRoutes

11,250,000miles

11,406,000miles

Revenue

26,325,560.00

2.34

26,668,760.00

2.37

Cost

-

Variablecost

15,668,470.00

1.39

15,925,870.00

1.40

Fixedcost

6,975,280.00

0.62

6,995,280.00

0.61

NetoperationIncome

3,681,810.00

0.33

3,747,610.00

0.33

IfweaddhireindependentcontractorstomeetFHP’suse,weassumethatourrevenuewillincreaseby$343,200=$2.20*156,000miles.Atthesametimethevariablecostwillincreaseby$257,400=$1.65*156,000miles.Andthefixedcostwillincreaseby$20,000peryearduetothedepreciationandmaintenance,etc.Sothenetoperatingincomewillincreaseby$65,800.

Wecanfindthattheincomewon’tincreasesomuch.IfFHPdoesn’tprovidehigherrate,wehavenoincentivetohireindependentcontractors.

Allinall,accordingtothefinancialanalysis,we’dbettertoaccepttheproposalwiththeexistingcapacity.Butwealsohavetopayattentiontothepotentialrisk.

Capacityanalysis

Wecanfindthatifwekeepusingexistingcapacity,wehavetofocusontheworkinghoursforemployees,andtheamountoftrucksandtrailers.

Firstly,wedon’tneedtoconcernmuchontheemployees.Becausethesalarieswepaidfordriversisbasicallybasedonthemiles,thatmeansitiskindofvariablecostandchangedaccordingtothemiles.

Sothemostimportantthingistousetheequipmentinabetterway,whileweassumethattheequipmentisdepreciatedinstraightmethod.Fornow,wedrive11,250,000milesperyear,whichis85%oftotalpotentialmiles.Sothetotalpotentialmilesis1,323,529.41milesperyear.Ifweaccepttheproposal,themileswehavetodriveis11,406,000milesperyear,whichis86.18%.

Wehave90trucksand180trailersintotal.Accordingtothedata,wecansimplyassumethattherearealways77trucksand153trailersontheway.Ifweaccepttheproposalwithexistingcapacity,andifwecanassignthelaborsandequipmentinthebestway,weonlyneedtoaddonemoretruckandtwomoretrailersontheway.Thatmeanswecanstillhave12trucksand25trailerswaitingincaseofrigbreakingdown.

Soit’spossibleforustoaccepttheproposalwithexistingcapacity.

Strategicanalysis

Asthetruckingindustryiskindof‘RedOcean’industry,manycompaniesprovidesimilarservices.TheFHPCompanywon’tcompensateforanycostalthoughtheychangetheirtruckingcompany.SothecompetitivestrategyforSFCompanyisCost-leadershipandFocus.

Intermsoffocus,SFCompanyshouldkeepgoodrelationshipwithFHP,andprovidemorekindsofservicesforthem,incaseFHPfindsanewtruckingcompanywithlowerprice.

Intermsofcost-leadership,SFneedstoreducebothvariablecostsandfixedcost.Toreducethevariablecosts,SFcannotbuynewequipmentorhireindependentcontractors.SoSFwillstillfocusownexistingcapacity.Butatthesametime,westillhavetolowertheriskthatarigbreaksdown.SFhastokeeptherelationshipamongclientsasSFh