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Copy of To maintain high quality service while growing organically
Transcript of Copy of To maintain high quality service while growing organically
Balance Sheet and Income Statement analysis:
After defining, how do we measure it?
What if we refuse the offer?
Use existing capacity and take rigs out of reserves
Buy 1 trailer and use independent contractors
Avoid any risk of expanding too quickly
Lose FHP as a client
Prove Starfire incapable of grasping opportunities
Decrease morale and confidence in Starfire as a company
Might be "leaving money on the table"
No new debt or additional costs
No need to deal with independent contractors
No need to use all of the vehicles in reserve , so there is still a safety net
Starfire is more likely to survive under this situation, as no new debt has been incurred
If future debt needs arise, they will be less leveraged
Possible need for even more trucks in the future
Small possible need for debt acquisition if economy goes very sour
Starfire may be taking on a bigger commitment than they can handle
The best quoted rate from an independent contractor was $1.65 per mile
FHP agrees to pay Starfire $2.20 per mile if the 5-year contract is signed
Starfire has less personal strain on their current capacity
New fixed, long term annual costs will be incurred, and likely new debt to finance it
Customer relationships may suffer due to unpredictable and possibly unreliable independent contractors
Not a very large profit margin gap between Starfire's per mile expenses and what FHP is offering
Starfire's liabilities for product lost or damaged in transit goes up for lack of control over independent contractors
Starfire cannot guarantee deadlines due to unpredictable and possibly unreliable independent contractors
Although new vehicles won't be bought now, they may be in the future if independent contractors don't work out
Along with the benefits previously mentioned (no independent contractor uncertainty, no new debt, etc.), Strategy 1 is beneficial for many reasons.
Financial strain is minimized
Opportunity is fully worth the risk
Puts Starfire in the best possible financial position for:
Handling current demands
Allowing for time to plan their next move and future strategy with FHP and other clients, etc.
Starfire doesn't maximize their potential profits; They sacrifice them for less risk.
Starfire must take out of reserves, yet this ends up serving a dual purpose of increasing capacity utilization among their fleet.
Starfire may still need to either dip further into reserves in the future, or buy new trucks if demand requires it.
How do pros outweigh costs?
As far as financial statements go, Strategy 1 is the second best option we have. But, when we weight the costs of Strategy 3 (the most financially opportunistic option), the risks are simply too high to accept. Strategy 1 has none of the same risks, and very few of its own. Plus, it still adds an additional $124,642 in operational income per year.
How will it help?
By minimizing the risks of the situation, Starfire can buy itself some time to do several things. One of these is to find better means to maximize capacity utilization, others explained next. This option will also help Starfire improve their reputation as a company by showing they can take advantage of opportunities and handle large client demands. Additionally, this option will give Starfire greater price bargaining power over FHP in the future.
Starfire's next steps as a company
Starfire can use the time they have given themselves to plan their next move as a company in how they would like to acquire new clients, how to handle the unavoidable need for more vehicles in their fleet as growth occurs, the riskiness vs. benefits of acquiring debt in the future to satisfy capacity growth needs, etc.
Buy 1 new truck and trailer
FHP will pay Starfire $2.20/mile with the 5-year contract
No need to take from reserves with an additional truck and trailer
Additional costs are fixed, so predictable
Starfire is still in direct control of their customer relationships
Additional fixed, annual costs of $50,000 will be incurred
Additional debt will likely be incurred to finance the additional financial burden if profits can't finance the plan
There isn't a very large profit margin gap between Starfire's per mile expenses and what FHP is offering
How to define capacity?
Several definitions exist:
Operating at full capacity utilization, all the time.
Theoretical capacity, reduced by unavoidable operating interruptions, ie. scheduled maintenance time, shutdowns for holidays, etc.
Nearly identical to practical capacity, but observes different events, ie. machine downtime, variations in employee skill, plant closings, etc.
We believe the most effective way to define capacity is with Productive Capacity's definition as it takes into account the definition of Practical Capacity. Productive capacity removes unrealistic ideas of operating at maximum capacity 100% of the time, and takes into account normal delays.
We decided the best way to measure Starfire's capacity is the amount of time a truck could in a perfect world continue to operate at full utilization, where 85% capacity utilization is a reasonable operating level. This takes into account traffic delays, necessary downtime, mandatory driving breaks, etc.
In measuring capacity, Starfire must consider factors such as weight, miles possible vs. miles attainable, percent of time trucks are utilized, fixed/variable/total costs of items such as:
Gas: a commodity with a very volatile price
Traffic: often a very unpredictable problem
Lights: waiting is wasted time
Accidents: these create traffic of their own, not to mention the delay created if the company truck is one vehicle damaged, Etc.
Long Term Liabilities:
Starfire is compensated for both miles to and from locations
Logically impossible to create financial statements as though return load can be made
Not reasonably estimable until a return possibility is identified, and secured
Additional fixed annual costs for purchasing new truck and trailer or new trailer for independent contractor DO NOT include variable or other fixed expenses associated with them
These costs will be proportionately increased
Slip seating consideration NOT included, separate variable, different parameters, not in this analysis
Profit over current: $35,656
Profit over current: $323,470
Profit over current: $124,642
Long Term Liabilities:
Long Term Liabilities: