Assignment #3: Powell Logistics Case Study A. Defining the issue The immediate issue is to make a decision on the future of the family company. B. Analyzing the Case Data * The truck transportation industry is a vital part of the Canadian economy with $43 billion in sales annually and employing 400,000 people * The for-hire sector accounts for 40% of the transportation industry in Canada * The for-hire sector has 2 service offerings: TL – Truck load, only full load between 2 locations and LTL – Less than load, pick up from various locations reorganize then deliver to end customer.
Traditionally LTL charge more. * Trucking industry experiencing 3 major issues * Cost of fuel, increased operating costs forced to implement fuel surcharge * Canadian dollar value increase over US dollar, affected cost advantage of Canadian manufactured goods, decreasing transfer of goods between Canada and US * Shortage of qualified truckers with aging workforce, increasing wages * Strong competition in trucking: Traveller’s Transportation Services, long standing same market as Powell, service offering included small customer orders using vans which Powell did not offer * Yellow Transportation, global competitor, publicly traded with large financial resources, high technology using online tools reducing costs * Powell in operation since 1979, with steady growth, with a fleet of straight trucks, tractor trailers and brokerage services. * License to carry general freight throughout Canada and the US. Midsized company showing significant profitability, focusing on LTL services for higher margins even though more effort and expertise was required to manage the loads * Advanced technology including dispatch and satellite tracking in place as well as extensive trucking experience * Family business with eldest son acting as Vice President of Operations with many years of experience and no formal business training, daughter with formal education heading up the Human Resources section of the business and the youngest son responsible for Sales and customer relationships. Current operations included year round business with little seasonal fluctuations * 80 drivers working 5 days per week * Loads were picked up from location A and delivered to one of 5 warehouses, placed on another truck with optimized route for location B (software driven route optimization) * Sales growth would trend the same for the next year as the previous. C. Generating Alternatives 1) Buy New Warehouse and Combine Operations Pros: Reduction in costs including rent, labour, fuel, and administration salary costs.
Cons: A total $10 million investment was required to cover $2 million for the land and $5 million loan financed at 5% annually. 2) Sell the Business Pros: There is interest, business is overall doing well and the timing is right in order to get as much value through selling. Cons: Direct access to cash flow stops and the family members work future is jeopardized. 3) Pass the business on to his children Pros: The 3 Powell children are and have been heavily involved in the family business each having their own expertise. Cons: Who to select as the CEO from the 3 Powell children.
D. Selecting Decision Criteria: * John Powell wants to retire * The family’s interest is of utmost importance * Improve financial position of PLI * Decrease operating expenses through streamlining operational costs * Decrease liabilities and pay down on debts to improve leverage. * Maintaining their competitive advantage/specialty in the LTL transport service. * Provide continued employment for the Powell children. * Maintaining their loyal customers. E. Assessing Alternatives: 1. Buy New Warehouse and Combine Operations STRENGHTHS| WEAKNESSES| Industry experience * Decrease operating costs| * Long term debt * Some additional long term debt from other Powell companies still outstanding throwing off debt ratio| OPPORTUNITIES| THREATS| * Streamline Operations| * Economic downturn * Competition| 2. Sell the Business STRENGHTHS| WEAKNESSES| * Interest from 3rd party * Pay off all Powell Debt | * Family member work future questionable * Cash flow| OPPORTUNITIES| THREATS| * Partnership possibility| * Economic downturn| 3. Pass the business on to his children
STRENGHTHS| WEAKNESSES| * John Powell retires * Powell children available and able to take on the family business * Customer base remains * Restructure and plan to streamline and gain on debt ratios | * Multi site inefficiencies still exist| OPPORTUNITIES| THREATS| * Plan to achieve financial position to support new warehouse in the future * Restructure plan development| * Economic downturn| F. Selecting the Preferred Alternative Passing the business on to his children is the preferred alternative. Financial Analysis Although PLI is forecasted for continued growth with revenue expected to reach 28 million dollars in 2010, PLI still faces the problem of shrinking net income due to significant increases in their operating expense. * Closer examination shows that PLI’s expenditures in Administrative Wages and Benefits are rising dramatically, and they’re the main contributor to the increase of Operating Expenses. Operating Expenses as a percentage of Total Revenue is out pacing the growth of Gross Revenue, and it won’t be much longer before Operating Expenses negate Gross Revenue and put PLI in the red. The Balance Sheet shows the asset values for ‘related companies’ has decreased by 19. 9% from 2006 to 2007, but the debt these ‘related companies’ have incurred has increased dramatically by 93. 1%, This is obviously putting a tremendous strain on PLI’s financial health. * A combined warehouse/main office will reduce salary costs with savings projected at $60,000 per year. If PLI were to take a 10 million dollar loan amortized over 25 years to realize an increase of $60,000 per year to their Operating Income, they would be well short of their $400,000 annual principle payment. Additionally, PLI would most likely only be able to obtain a high risk interest rate a lending institution would not approve this loan given the slim profit margins of PLI in an extremely competitive market. * When reviewing the financial ratios, we find PLI highly leveraged, and they will be in a very precarious position if there was a margin call on their debts. * The increasing debt of PLI will most likely negate any possibility of a leveraged expansion. G. Developing an Action and Implementation Plan Who| What| When|
John Powell| Frank Powell named as successor and President of PLI| Nov 2007| Frank Powell| Corporate restructure announcement to reduce staff, wages and/or operating expenses| Jan 2008| Frank Powell| Sell Powell related businesses that are increasing debt burden on PLI. Sales proceeds pay down debt and any costs associated to restructure| Dec 2008| Frank Powell / Ryan Powell| Review and implement new rates and service offerings to ensure these compete with competition| Jan 2009 to July 2010| Frank Powell| Revisit $10 million expansion project| July 2010|