Capacity Management For Freight Industry Essay.

Costs Relevant for Adding Two Additional Loads Per Week

Describe about the Capacity Mangement for Freight Industry.

1. The costs which are relevant for Overland Trucking for adding two additional loads per week will be

Fuel, Insurance

Oil lubricants

Tolls

Parts and Small Tools

Hourly Wages: drivers

Trailer Pool Expense

These costs are relevant because the company will have to bear additional costs if the additional loads were added to existing fleet.

The costs which are relevant for Overland Trucking for adding two additional loads per week will be

Fixed Insurance cost

Security cost

Salaries: Garage and office

Accounting Fees

Supplies and Computer maintenance.

These costs are not relevant because the company will bear these costs even if the additional loads were not added. Adding these two loads will not make any change in these costs and hence they are irrelevant costs.

2. Given,

Revenue:

FHP offered revenue per mile including FSC and miscellaneous = $2.15

Expenses:

Insurance = 0.06

Fuel = 0.78

Oil Lubricants = 0.01

Tolls = 0.01

Parts and Small Tools = 0.07

Hourly wages: Drivers = 0.44

Trailer Pool Expense = 0.02

Total Variable Expense = 1.39

Thus, Contribution per mile = Revenue – Variable expense = $0.76

Total Contribution = no. of loads* miles per week* no. of weeks* Contribution per mile

= 2* 1500* 52* 1.24 = 118560

Increase in contribution margin = 118560/ 15638480 *100% = 0.758%

Thus if the fixed cost does not increase by a greater than the contribution margin then it makes sense to add the additional loads to the fleet.

3. The implications of expanding the fleet size are

The company will have to raise debt to fund the additional loads and the current economic conditions are not favorable to raise debt.

The routes suggested by FHP will be in new and unfamiliar environment for the Overland which can face issue with the terrain and new markets increasing unexpected costs.

The Overland management might become inefficient with the sudden increase in the fleet size and newer routes and hence may not be able to handle the existing system as efficiently as it used to.

Thus all the above factors are the risks involved in the expansion of Overland.

4. Given,

Increase in fixed costs = 50000

Revenue from FHP per mile = 2.20

Contribution Margin = Revenue – Variable cost = 2.20 - 1.39 = 0.81

Thus break even = Fixed Costs/ Contribution Margin = 50000/ 0.81 = 61728.39 miles

Revenue and Expenses

The company needs to sign 5-year contract with FHP.

Miles per year to be travelled = no. of weeks * miles per week = 52* 1500 = 78000

Total additional miles the company needs to travel = No. of years* miles per year= 5* 78000 = 390000

Additional income in 5 years = Contribution per mile * number of miles – fixed costs = 0.81* 390000 -50000 = 265900

Additional income per year = 265900/5 = 53180

Increase in profitability = 53180/ 3681810* 100% = 1.444%

5. Given,

Wage to independent contractor per mile = 1.65

Increase in fixed costs = 20000

Revenue from FHP per mile = 2.20

Contribution Margin = Revenue – Variable cost = 2.20 - 1.65 = 0.55

Thus break even = Fixed Costs/ Contribution Margin = 20000/ 0.55 = 36363.63 miles

The company needs to sign 5-year contract with FHP.

Miles per year to be travelled = no. of weeks * miles per week = 52* 1500 = 78000

Total additional miles the company needs to travel = No. of years* miles per year= 5* 78000 = 390000

Additional income in 5 years = Contribution per mile * number of miles – fixed costs = 0.55* 390000 -20000 = 194500

Additional income due to outsourcing per year = Contribution per mile * number of miles in one year – fixed costs = 0.55* 78000 -20000 = 22900

Increase in profitability from FHP contract= 22900/ 3681810* 100% = 0.622%

Thus, if the company is willing to add the loads for FHP contract it should use own trucks instead of independent contractors.

6 a. Over-land might choose independent contractors even if the variable cost is high because the company needs to invest additional amount in the purchase of the vehicles. The current economic conditions are not very favorable to incur a debt which will add burden to the balance sheet of the company. Also the current management feels that it is working to its full capacity and will not be able to manage the additional load ad it can affect the efficiency of the company. Thus in these cases they may want to choose independent contractors to take advantages of the contract and not affect the existing system.

6 b. The management will be indifferent between choosing independent contractors or owning it themselves if the net additional income from both the cases are equal.

Over-land will incur a cost of 50000 if it purchases additional equipment for the contract. If the company also has to bear costs apart from the cost of procuring the equipment which reduces its net income from the contract from 53180 to 22900 then they will be indifferent to both options.

Also if Over-land finds the indirect costs which have affected the overall net income of the company due to purchase and management of the new rigs and the net income after purchasing the rigs is same as the net income with independent contractors, it will be indifferent to both the alternatives.

7. The Landstar trucking Company uses independent contractors and hence the major expense incurred by the company is in renting the transport from the independent contractors

J B Hunt Transportation Services on the other hand uses its own rigs and company drivers. Thus the major expenses for the company are purchasing the rigs and payment to the drivers.

Risks Involved in Expansion of Overland

In case the economic demand is high, J B Hunt will produce higher profits as the contribution margin for the company is higher than the Landstar trucking Company.  This is because the company owns the vehicle and can reduce the various expenses it incurs in running the vehicle whereas in case of independent contractors, the same is not possible as they have already fixed the rates and hence no economies of scale can be applied to it.

The cost structure of Landstar trucking Company is less risky than the J B Hunt Transportation Services if the economic conditions are poor. This is because the company does not own any rigs and hence will not incur fixed costs when there is a low demand. Whereas J B Hunt Transportation Services owns the rigs and thus the fixed costs due to depreciation costs, employee wages, etc. will be high even if the demand is low. Thus it is riskier compared to The Landstar trucking Company.

8. Capacity of a firm is defined as the highest sustainable output rate. Thus for Over-land, the capacity is the maximum number of miles a rig can travel without drop in efficiency and incurring additional costs.

The challenges Overland’s management faces while defining and managing capacity are

Mismatch of supply and demand: The company needs to estimate the number of rigs it requires to cater to the demand accurately as more number of rigs will lead to additional costs to the company whereas less number of rigs can affect the service level provided by the company.

Linking capacity to decision making: Over-land management team should be able to closely link the existing capacity of the company to the various strategies and must consider the impact of capacity utilization in taking decision for future expansions.

Expansion challenges of capacity: The management needs to decide when the company should increase its capacity. The company should take into account the various factors as increase in demand, cost of procuring new equipment, cost of debt, cost of choosing independent contractors, other alternatives and other challenges while deciding expansion.

The capacity of the Over-land is the potential miles it can travel in a given time period. The company owns 90 trucks. In the year 2013, the number of miles travelled by all the Over-land trucks combined = 11250000.

Thus each truck travelled mile per year = 11250000/ 90 = 125000

Actual capacity per week = 125000/ 52 = 2403.82 miles

The company utilizes only 85 % of the potential miles per year.

Thus the potential number of miles per year = 125000/ 0.85 = 147058.82.

In one week, potential number of miles that can be travelled = 147058.82/ 52 = 2828.05 miles.

Thus for one driver per rig the theoretical capacity will be 2828.05 miles

Practical capacity = 0.85* 2828.05 = 2403.84 miles.

References

Capacity Mangement. (n.d.). Retrived from https://www.investopedia.com/terms/c/capacity-management.asp?layout=infini&v=5E&orig=1&adtest=5E

Capacity issues among challenges facing the freight industry. (n.d.). Retrived from https://www.cts.umn.edu/Publications/catalyst/2014/february/freightindustry

J.B. HUNT TRANSPORT SERVICES, INC. (n.d.). Retrieved from https://www.sec.gov/Archives/edgar/data/728535/000143774914002605/jbht20131231_10k.htm