Starfire’s Dilemma 案例分析

Case:Starfire’s DilemmaFor Starfire (SF) Company, the dilemma is that, their biggest customer FHP wants to add two new routes, but SF doesn’t have enough capacity to take this task. So we use financial analysis, capacity analysis and strategic analysis to deal with this problem.1.Financial analysisWe assume that there are three methods if SF accepts the requirement of adding new route. And we assume there are 52 weeks per year, while we’l l increase 156,000 miles = 52*3,000 miles per year.If we using existing capacity to meet FHP’s use, we assume that our revenue will increase by $335,400 =$2.15*156,000 miles. At the same time the variable cost keeps constant as $1.39 per mile, while the variable income increases by $216,840 = $1.39*156,000 miles. And the fixed cost keeps constant, too. So the net operating income will increase by $118,130.55.We can find that the income will increase. But at the same time, we have to suffer the risk that a rig breaks down. SF has to keep the relationship among clients as SF has to keep every route goes well.If we add new truck and tra iler to meet FHP’s use, we assume that our revenue will increase by $343,200 =$2.20*156,000 miles. At the same time the variable cost keeps constant as $1.39 per mile, while the variable income increases by $216,840 = $1.39*156,000 miles. And the fixed cost will increase by $50,000 per year due to the depreciation and maintenance, etc. So the net operating income will increase by $75,930.55.We can find that the income won’t increase so much.If FHP doesn’t provide higher rate or we do not develop new customers to earn profit, we have no incentive to buy new equipment.If we add hire independent contractors to meet FHP’s use, we assume that our revenue will increase by $343,200 =$2.20*156,000 miles. At the same time the variable cost will increase by $257,400 = $1.65*156,000 miles. And the fixed cost will increase by $20,000 per year due to the depreciation and maintenance, etc. So the net operating income will increase by $65,800.We can find that the income won’t increase so much. If FHP doesn’t provide higher rate, we have no incentive to hire independent contractors.All in all, according to the financi al analysis, we’d better to accept the proposal with the existing capacity. But we also have to pay attention to the potential risk.2.Capacity analysisWe can find that if we keep using existing capacity, we have to focus on the working hours for employees, and the amount of trucks and trailers.Firstly, we don’t need to concern much on the employees. Because the salaries we paid for drivers is basically based on the miles, that means it is kind of variable cost and changed according to the miles.So the most important thing is to use the equipment in a better way, while we assume that the equipment is depreciated in straight method. For now, we drive 11,250,000 miles per year, which is 85% of total potential miles. So the total potential miles is 1,323,529.41 miles per year. If we accept the proposal, the miles we have to drive is 11,406,000 miles per year, which is 86.18%.We have 90 trucks and 180 trailers in total. According to the data, we can simply assume that there are always 77 trucks and 153 trailers on the way. If we accept the proposal withexisting capacity, and if we can assign the labors and equipment in the best way, we only need to add one more truck and two more trailers on the way. That means we can still have 12 trucks and 25 trailers waiting in case of rig breaking down.So it’s possible for us to accept the proposal with existing capacity.3.Strategic analysisAs the trucking industry is kind of ‘Red Ocean’ industry, many companies provide similar services. The FHP Company w on’t compensate for any cost although they change their trucking company. So the competitive strategy for SF Company is Cost-leadership and Focus.In terms of focus, SF Company should keep good relationship with FHP, and provide more kinds of services for them, in case FHP finds a new trucking company with lower price.In terms of cost-leadership, SF needs to reduce both variable costs and fixed cost. To reduce the variable costs, SF cannot buy new equipment or hire independent contractors. So SF will still focus own existing capacity. But at the same time, we still have to lower the risk that a rig breaks down. SF has to keep the relationship among clients as SF has to keep every route goes well. They can hire more employees to meet the incremental demand, while pay more on insurance and training to keep the trucks working well. To reduce fixed costs, they may keep good maintenance to make longer useful years for fixed assets, as they can reduce the depreciation expense.4.Executive summaryAccording to our analysis, we believe thatwe can accept the proposal with existing capacity. But we still have to prepare for potential risk. At the same time, we’d better provide better services for all of our customers, and reduce both the variable costs and fixed costs.。