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CASE EXAMINATION
Fleet Management Group Inc. (FMG)
AUGUST 2010
2011 The Society of Management Accountants of Canada. All rights
reserved. / Registered Trade-Marks/Trade-Marks are owned by The
Society of Management Accountants of Canada.
No part of this document may be reproduced in any form without
the permission of the copyright holder.
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August 2010 Case Examination
TABLE OF CONTENTS
August 2010 Case Examination
Page Case Question: Backgrounder
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1 Additional Information
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17 General Comments on Performance
....................................................... 26 Steps
for Approaching Business Strategy
................................................ 35 Marker
Assessment Guide
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39 Solution Notes for Markers
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49 Sample Response Successful Attempt #1
............................................ 57 Sample Response
Successful Attempt #2 ............................................
85 Sample Response Unsuccessful Attempt
........................................... 112
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August 2010
Case Examination
Backgrounder
The background information relating to the Case Examination
(Backgrounder) is provided to candidates in advance of the
examination date. The Backgrounder contains information about both
the fictitious company and the industry involved in the case.
Candidates are expected to familiarize themselves with this
information in preparation for the analysis that will be required
during the Case Examination.
Candidates should note that they will not be allowed to bring
any written material, including the advance copy of this
Backgrounder, into the examination centre. A new copy of this
Backgrounder, together with Additional Information about the
company and a supplement of formulae and tables, will be provided
at the writing centre for the Case Examination.
Only the following models of calculators are authorized for use
during the Case Examination:
1. Texas Instruments TI BA II Plus (including the professional
model) 2. Hewlett Packard HP 10bII (or HP 10Bii) 3. Sharp EL-738C
(or EL-738)
Candidates are reminded that no outside research on the industry
related to this case is required. Examination responses will be
evaluated on the basis of the industry information provided in the
Backgrounder and Additional Information.
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Fleet Management Group Inc. (FMG) Backgrounder
Overview FMG is a privately owned Canadian company that provides
vehicle leasing, rental, and related services to corporate
customers in both the public and the private sectors. FMG operates
from a single facility located in Mainway, a mid-sized Canadian
city near the U.S. border. Mainway Mainway (the City) has a
population of 500,000 and, as a border town, a diverse economy
supported by major employers in the transportation, manufacturing,
and tourism industries. Both the Citys population and the average
household income have grown slightly faster than the provincial
average, and all forecasts indicate that these trends should
continue well into the future. History In 1968, a new department of
municipal government was established in order to streamline vehicle
purchasing, monitor vehicle maintenance and use, and lower variable
vehicle operating costs. The Fleet Services Department was formed
by consolidating the operations of several small fleets in various
existing departments, such as Parks, Public Works, and Social
Services. For this new department, the City chose a convenient,
downtown location and built a facility to house administrative
offices, a full-service garage, a body shop, and a parts
department. The Fleet Services Department began by requiring
monthly mileage reports from drivers, adopting a standardized
classification system for vehicles, and streamlining the purchasing
process. A preventive maintenance program was established and
monthly maintenance reminders were mailed to drivers. Vehicles were
serviced on site and, at the same time, inspected for damage and
abuse. As a result of these changes, capital and variable vehicle
operating costs fell sharply and the Fleet Services Department was
widely seen as a success. Throughout the years, fleet management in
the City continued to improve. Eventually, the departments managers
became convinced that municipal procedures and regulations were an
impediment to further service improvements. In 2002, they presented
the City manager with a proposal to privatize the department. The
proposal was hotly debated at council meetings but passed by a
narrow margin. In July 2002, the assets of the Fleet Services
Department were sold to a consortium of its staff, led by the
departments existing management. Fleet Management Group (FMG) was
incorporated, and the company adopted a June 30 year-end.
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The Fleet Management Industry Many companies outsource fleet
responsibilities in order to reduce costs and focus on core
business. Professional fleet management companies reduce vehicle
life cycle costs by applying best practices related to asset
management, cost management, and information technology, as
outlined in Table 1.
Table 1: Best Practice Areas in Fleet Management
Asset Management Cost Management Information Technology
Choosing the right vehicle for the job
Buying in bulk Maximizing utilization Managing vehicle safety
Minimizing life cycle costs Optimizing the replacement
process Using alternative financing Managing the supply chain
Ensuring the best resale value Maintaining preventive
maintenance
Optimizing licensing and legal costs
Managing repair costs Facilitating accident
reporting and driver safety
Managing risk Managing fuel with
respect to purchasing, consumption, and emissions
Collecting, analyzing, and capitalizing on business
intelligence
Reporting on life cycle costs
Using technology and other automated sources to collect
information
The fleet management industry is large, increasingly global, and
dominated by large companies. In North America, the three largest
companies fill the needs of almost two-thirds of the marketplace
with over two million vehicles under management. In Canada, the
largest firm manages approximately 120,000 vehicles, whereas the
10th largest manages a mere 6,000. Leases and rental arrangements
with a fleet management company differ greatly from those that an
individual consumer encounters at a car dealership or rental
company. Fleet management company agreements are business to
business and usually involve many vehicles at one time. Vehicles
remain the property of the fleet management company (lessor) and
never become the property of the company leasing and using the
vehicles (lessee). Typically, the lessee appoints a vehicle
coordinator to act as the fleet management companys primary
administrative contact. The vehicle coordinator assigns vehicles to
drivers, receives and reviews reports from the lessor, and approves
payment of lessors invoices. In addition, administrative services
are usually included with each vehicle for an additional fee. For
example, the lessee can select a maintenance agreement for the
vehicle or choose to have fuel and repair invoices directed to the
fleet management
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company for consolidation for payment. These services can be
charged to the lessee in various ways. The option selected by all
of FMGs customers, converts oil, fuel, and regularly scheduled
maintenance costs to an amount per kilometre; this charge is billed
monthly, after the driver has reported the number of kilometres
driven. All other repairs are charged in addition to the per
kilometre rate. FMG Operations FMG provides fleet management
support in three areas: leasing and rental, repair and maintenance,
and fleet management services. Leasing and Rental FMG offers
vehicles for lease, short-term rental (i.e. daily or weekly), and
long-term rental (i.e. more than a month). Leases are fixed-term
contracts, usually for 48, 60, or 72 months, whereas rental
contracts are more flexible, allowing customers to return vehicles
at their discretion. Table 2 describes the composition of FMGs
fleet.
Table 2: FMG Fleet Composition (as at June 30)
By Service Type (in units) 2010 2009 2008 2007 Leased 2,173
2,152 2,077 2,036 Long-term rental 438 434 419 411 Short-term
rental 109 108 104 102 Awaiting reassignment 65 64 62 61 Awaiting
disposal 28 28 27 26 Total 2,813 2,786 2,689 2,636
By Vehicle Category (in units) 2010 2009 2008 2007 Trucks 1,607
1,556 1,466 1,400 Vans 827 840 833 839 Cars 379 390 390 397 Total
2,813 2,786 2,689 2,636
Because FMG depends on municipal departments for most of its
revenue, the companys operating cycle is aligned with the Citys
budgeting process. Beginning in July of each year, FMG identifies
the leases due to expire within the next year and the vehicles
reaching the end of their economic lives. FMG passes this
information to its customers and asks them to indicate what
replacement and additional vehicles will be needed for the
following year. At the same time, FMG reviews its internal
projections related to demand for its short-term and long-term
rental vehicles. While customers review their requirements, FMG
researches the latest automotive manufacturing developments and
updates the vehicle category descriptions in the
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companys classification system. These descriptions outline the
minimum features and accessories necessary for a vehicle to meet
FMGs standards for a given category. Additional features can add
thousands of dollars to the basic price of a vehicle. FMGs
classification system provides a way to compare vehicle makes,
models, and additional features across manufacturers. Once
customers have indicated their intentions for the following year,
FMG aligns their requirements with the vehicle categories that
match most closely. In September, FMG issues a request for tender
to the major manufacturers. They reply within a month, proposing
models and additional features that meet or exceed category
standards. FMG evaluates the tender responses and selects a
supplier for each category based on best price. For each category,
FMG converts the tendered price of the chosen manufacturer into a
lease rate over the customers desired term, communicates this rate
to the customer in November, and requests a formal commitment to
lease. This timing works well for government customers since
budgets have been established and departments can finalize their
vehicle requirements. In December, FMG issues purchase orders to
the manufacturers. New vehicles arrive from the manufacturers in
February and March. FMG uses its garage to add custom features
requested by the customer on the initial order. FMG insures the
vehicle using its in-house brokerage firm then contacts the
customer to arrange pickup of the new vehicle and return of the
old, if applicable. Finally, the new lease contract is completed.
Typically, vehicles returned after the lease expires are sold at
auction. However, in some cases, vehicles in reasonable condition
are retained for FMGs long-term rental pool. These older vehicles
are popular with the Parks Department, which tends to need vehicles
for up to six months over the summer season. Maintenance and road
crews also prefer the older vehicles, whose residual values are
less affected by the minor dents and scratches associated with
hauling equipment, gravel, and other materials. For short-term
rentals, FMG maintains a pool of newer vehicles. To reserve a daily
rental vehicle, clients contact the customer service centre by
phone or e-mail. By purchasing vehicles once annually, FMG
maximizes its volume discounts. These discounts are reflected in
the companys competitive lease and rental rates. Purchase and
disposal data for FMGs fleet are given in Table 3.
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Table 3: FMG Fleet Purchase and Disposal Data (as at June
30)
2010 2009 2008 2007 Acquisitions (in units) 279 298 325
339Disposals (in units) 252 201 272 281Average purchase price
(000s) $34.9 $27.8 $30.1 $37.1Average disposal proceeds (000s) $4.9
$6.1 $6.4 $4.6Fleet Size (in units) 2,813 2,786 2,689 2,636
Repair and Maintenance FMG operates a full-service repair
facility dedicated to FMG vehicles and to customers using FMG fleet
management services, but is closed to the general public. The
facility is equipped with the latest technology for diagnosing
problems with computerized vehicles. The garage has 16 service bays
to address mechanical issues, such as the need for an oil change or
new brakes, a computerized diagnostic scanner, and 2 personal
computers to access technical specifications, vehicle schematics
and repair information. Vehicles on full-service leases receive a
wash and fill-up with every maintenance appointment and, since the
facility is within walking distance from city hall, this service is
popular with municipal employees who have meetings downtown. FMG
operates a body shop and fabrication centre that focuses on body
repairs, windshield replacement, and custom metal fabrication. This
area has a frame machine, a downdraft paint booth, and other
equipment needed to rebuild a vehicles body and frame, typically
after a collision. The body shop supervisor works closely with
insurance adjustors and FMGs insurance administrators to process
accident claims and keep costs low. Because of FMGs relatively low
accident rate and the ability to fix scratches and dents in its own
body shop, the company enjoys comparatively low insurance rates for
its vehicles. To support both the garage and the body shop, FMG
operates a parts department that is stocked with the most commonly
replaced parts as well as a small number of consumables (e.g. oil
filters, windshield wipers, etc.). To keep inventory costs low, FMG
obtains most of the parts through wholesale contracts with
manufacturers supply depots and aftermarket parts warehouses.
Because fleet composition is constantly changing, FMG retenders
these contracts annually and usually specifies a cost-plus
arrangement. FMG parts typically comprise 45% of total vehicle
repair and maintenance costs. When a part is needed, the garage
mechanic or body shop technician takes a work order to the parts
counter. If the item is not in stock, the parts technician orders
it from the appropriate supply depot. Delivery drivers circulate on
fixed routes throughout the city, often stopping at FMG two or
three times per day. A part not stocked at the supply depot can be
shipped to FMG from a regional distribution centre, usually within
two
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days. When the part arrives at the repair facility, the parts
technician records the item in the inventory system, issues it to
the appropriate work order, and alerts the mechanic or technician
who requested it. The repair facility operates at close to capacity
throughout the year, with the busiest season beginning in February.
When the new vehicles arrive, the parts department increases its
inventory of common automotive accessories, such as running boards
and truck box liners. The body shop does more fabrication work for
vehicle customizations, such as tool cages and cargo racks. In
addition to outfitting new vehicles and conducting pre-delivery
inspections, the garage inspects returning vehicles and reports to
the fleet manager on likely vehicles for the long-term rental pool.
To accommodate the increased number of vehicles being handled by
the repair facility, FMG rents space in a parking lot a few blocks
away. The operations manager has considered adding another shift
during this busy period but, because quality automotive technicians
are in short supply, has refrained from doing so. Both the repair
facility and its technicians maintain several accreditations. For
example, as a Certified Vehicle Inspection Centre, FMGs garage is
allowed to inspect and certify vehicles for roadworthiness
according to regulations set down by the provincial Ministry of
Transportation. Vehicles need roadworthiness certificates in order
to be registered when their ownership changes. In addition, most of
FMGs body shop technicians have extensive I-CAR training. Formed by
the collision repair industry in 1979, I-CAR sets down
internationally recognized standards for automotive body repair.
The repair facility services approximately three-quarters of FMGs
vehicles; the remainder are serviced by vendors throughout the
city, partly for reasons of customer convenience. These vendors
include local service stations, repair facilities and car
dealerships. Regardless of where the vehicles are maintained, FMG
is responsible for providing its customers with high-quality
service. As a result, the company reviews and approves the other
service providers in order to ensure that they meet FMGs standards.
Even though competition is stiff in the retail repair market, FMGs
management believes that operating the garage and body shop gives
FMG a competitive advantage over other fleet management companies.
Specifically, operating the garage and body shop ensures that FMGs
fleet manager has intimate and timely knowledge of maintenance
issues that arise within the companys fleet. Fleet Management
Services Fleet management services aim to minimize variable vehicle
operating costs and improve usage reporting. In combination with a
leased vehicle, the fleet management services package creates a
full-service lease that is well received by customers in both the
public and private sectors. FMGs fleet management services package
includes: a credit card for fuel purchases and minor repairs, a
pre-authorization and audit system
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for external and major repairs, preventive maintenance notices
and tracking of all vehicle history. FMGs Gas & Go credit card
is accepted at service stations and repair facilities throughout
the city. This card allows drivers to charge fuel purchases and
minor repairs (i.e. those costing less than $100) when they cannot
visit FMGs facility, or choose not to. FMG receives detailed
information electronically for every Gas & Go transaction. This
enables the company to track fuel consumption and repairs for each
vehicle. The Gas & Go system also consolidates purchases, which
reduces the number of bills customers receive and allows FMG to
take advantage of bulk fuel discounts. The card is encoded to
authorize vehicle-related expenses but rejects personal items, such
as chocolate bars and cigarettes. For repairs that cost more than
$100, FMG offers a Repair Authorization Service (RAS) using a
network of approximately 125 repair facilities throughout the city.
FMG relies on this network both to provide convenience for
customers and to perform specialized repairs (e.g. the rebuild of a
transmission). To be a part of the RAS network, a vendor must apply
to the program and pass an inspection. When asked to service an FMG
vehicle, the approved vendor contacts FMGs customer service centre.
The customer service staff check the vehicles repair history,
ensure that the service is not covered by warranty, confirm the
prices to be charged and issue a purchase order over the telephone.
After the repair has been completed, an FMG licensed mechanic
audits the invoice before it is paid. The mechanic checks for
billing errors, discounts, cost consistency and duplication of
work, then codes the work completed and enters the details into
FMGs maintenance system. FMGs preventive maintenance program was
developed to optimize the life and dependability of its vehicles.
By tracking mileage and repair history, the program can identify
vehicles due for maintenance and notify drivers in advance that
their vehicles need service. Well-maintained vehicles are safer and
more reliable, last longer, and have lower operating costs. For
each vehicle, FMG maintains a complete history, including initial
cost, maintenance and repairs, fuel consumption, and distance
travelled, in a series of administrative and financial systems. FMG
also offers a Consulting and Information Service that helps
customers analyze these statistics in order to optimize fuel
consumption as well as vehicle utilization and replacement.
Management Team and Shareholders An organizational chart for FMG is
provided in Appendix A. The management team is headed by Denise
Descartes, P. Eng., who led the buyout in 2002. She holds an MBA in
marketing and was a process engineer for one of the major auto
manufacturers before joining the Citys Fleet Services Department.
As CEO, she is
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evaluated by the Compensation Committee of the Board of
Directors according to various qualitative criteria as well as the
companys income before taxes. Don Chestnut started with the Fleet
Services Department as a garage mechanic in 1979 and has been Fleet
Manager since 1990. He earned a Diploma in Management by taking
evening courses and has acquired extensive knowledge relating to
the operating characteristics of FMGs fleet. His evaluation is
based on the achievement of fleet utilization and operating cost
targets. Guy Simmons, Operations Manager, joined FMG in 2006 after
operating his own repair shop for 22 years. He was recruited by
Descartes, who liked his no-nonsense style. Simmons oversees the
garage, body shop, parts department, and customer service centre.
He is evaluated according to the income before taxes of the
Operations department. Kathryn Chow, Support Services Manager, has
14 years of progressive management experience with various
companies. She is responsible for billing, lease administration,
and insurance. She also supervises the administrative support and
information technology staff. She is evaluated primarily on the
achievement of pre-stated annual objectives, such as shortening the
billing cycle. Albert OGrady, CMA, is Finance Manager. Before
joining FMG, he worked as a controller in a large consulting firm.
He supervises the accounting and finance staff and is responsible
for collections, accounts payable, financing, and rate setting.
Along with Descartes, he was a key player in the buyout. OGradys
evaluation is based on meeting pre-stated annual financial
objectives, such as reducing financing charges. Teresa Singh,
Marketing Manager, has been with FMG since 2003 and holds a degree
in commerce with a marketing major. She has a background in sales
and was an executive with a car rental agency for a number of
years. She is responsible for all marketing and sales for FMG. Her
evaluation is based on meeting leasing and rental revenue targets.
Board of Directors FMGs Board of Directors is comprised of five
individuals. Alex Normek acts as Chair. During his tenure as city
engineer, he recruited Descartes and became very familiar with FMGs
operations. Noriko Yatamoto, a lawyer who specializes in
intellectual property, acts as FMGs corporate counsel. Jarislav
Demchuk is co-owner of DM Construction, a mid-sized construction
company with offices throughout the province. He also owns a number
of service stations and convenience stores through various
corporations.
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Mario Wellington was FMGs Assistant Finance Manager before his
retirement in 2003. Wenellie Chan has a background in sales and
marketing in a variety of industries including automotive parts,
sporting goods and computer software. Chan is a long-time friend of
Descartes. The Board meets monthly to review progress reports,
financial results, and major proposals presented by Descartes and
selected members of the management group. On at least an annual
basis, the Board scrutinizes FMGs vision and mission statements
(see Appendix B) to ensure that they continue to reflect the
current viewpoint of the Board, management, staff and shareholders
(Table 4 provides a list of the shareholders). The last annual
review took place in late 2009, at which time the Board also
conducted an environmental scan (see Appendix B).
Table 4: Shareholdings
Shareholders Common Shares
Price per Share
Share Capital
Denise Descartes 4,000 $100 $400,000 Albert O'Grady 3,000 100
300,000 Don Chestnut 2,250 100 225,000 Kathryn Chow 2,000 100
200,000 25 current and former staff members 7,250 100 725,000 10
private investors 16,500 100 1,650,000 Total 35,000 $3,500,000
Sales and Marketing FMG acquires most of its new business
through recommendations from existing customers. Because of the
companys history, FMGs primary target market continues to be public
sector organizations. Nevertheless, marketing staff regularly
attend trade conventions and conferences and host a booth at the
Citys annual AutoFest, an event aimed at the consumer market. FMG
also advertises in several fleet and transportation magazines, but
this is mainly to build its brand. Recently, FMG has had moderate
success in targeting small organizations such as daycare centres,
churches, and youth groups. These organizations have limited access
to capital and usually transport people instead of goods. FMGs
preventive maintenance program is a key selling point in this
market, since it ensures that vehicles receive regular safety
inspections. Another key selling point is the low monthly lease
rate made possible by FMGs willingness to lease over longer periods
than many of its competitors. On the negative side, these
organizations typically operate only one or two vehicles, which
results in a low return on the sales investment.
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Facility FMG operates from the facility constructed by the City
for the fledgling Fleet Services Department as well as the
neighbouring lot that the City purchased in 1980. When the
department was privatized, management recognized the convenience of
the downtown location and, as part of the 2002 buyout negotiations,
secured a 25-year lease for the original facility and adjoining lot
at a competitive rate. The extra lot allowed the new company to
expand its parking area and install both underground fuel tanks and
a sophisticated pumping system to fuel vehicles on site. The entire
facility is fenced and well-lit at night, ensuring relative safety
for the vehicles. Staffing The culture at FMG is unusual and
reflects its unique history. Most of the longest-serving employees
are also part owners, having bought shares during the buyout. They
are dedicated and hard-working, whereas the non-shareholder staff
are less engaged. The high level of competition in the automotive
repair sector means that automotive technicians have many
employment opportunities from which to choose. As a result,
employee turnover within the industry is high and FMG has found it
difficult to hire and retain both mechanics and body shop
technicians. All FMG employees participate in setting performance
targets that are aligned with company goals. However, the company
does not have a formal bonus system to reward employees when
targets are met. Information Systems for Billing and Fleet
Management Leasing costs arising from the acquisition and operation
of each vehicle are charged monthly to the corresponding customer.
This monthly amount is calculated using both fixed and variable
rate portions. FMG amortizes the capital cost of the vehicle as
well as a designated amount for overhead and profit over the term
of the lease or rental agreement. This calculation produces the
fixed rate portion of the monthly payment. The variable rate
portion reflects the operating cost of the vehicle and is recovered
from the customer based on the number of kilometres driven. For
each customer, FMG uses the actual operating costs (i.e. fuel, oil,
repair, and maintenance costs) of all vehicles within a particular
category (i.e. trucks, vans, or cars) to calculate average
operating costs. The company then allocates these costs according
to the kilometres forecast for the next year and translates this
figure into a rate per kilometre. Although this budgeting system
exposes FMG to some risks, it has proven to be accurate to date.
Customers greatly appreciate the conversion of intermittent and
fluctuating costs to a predictable charge that is easy to
understand, simplifies administration, and facilitates
budgeting.
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Information technology is increasingly important in the effort
to ensure accurate billing, budgeting, and monitoring of vehicle
expenses. FMG uses a custom-built system to run its business and
deliver its fleet management program. Accounting and Finance FMG
uses the Confederation Bank to meet the companys financing needs
and has a good relationship with the banks loan officer. FMG
carries long-term debt related to vehicle purchases as well as a $4
million line of credit to cover temporary cash shortfalls.
Repayment of the long-term debt for vehicle purchases is generally
scheduled over five years. Interest rates for the long-term debt
vary from year to year and interest on the line of credit is prime
rate plus 2%, which is generally higher than the interest on
long-term debt. Instead of financing new vehicles individually, FMG
arranges for a single, large loan each year. Historically, FMG
borrows approximately 55% to 60% of the cost of replacement
vehicles. This is quite low for the industry, since other companies
frequently finance close to 100% of vehicle purchases. FMG covers
the remaining 40% to 45% of the cost with internal funds.
Generally, FMG prefers to use its line of credit and delays taking
on new debt as long as possible. As a result, a negative cash
balance has become a way of doing business for the company. FMG
presents its financial statements (Appendices C and D) in
accordance with Canadian Generally Accepted Accounting Principles.
The Boards Audit Committee reviews the audited financial
statements. Depreciation and Capital Cost Allowance (CCA) rates are
provided in Table 5.
Table 5: Depreciation and CCA Rates
Asset Depreciation Rate CCA Rate Vehicles 30%, declining balance
30% Office, garage and body shop equipment
20%, declining balance 20%
Electronic data processing equipment and systems software
55%, declining balance 55%
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Appendix A Fleet Management Group Inc.
Organizational Chart As at June 30, 2010
Board of Directors
Denise Descartes CEO
Supervisors (3)
Garage Mechanics (16)
Customer Service Staff (3)
Body Shop Technicians (3)
Parts Technicians (2)
Information Technology
Staff (6)
Billing, Lease and Insurance
Staff (4)
Technical Support Staff (2)
Accounting and Finance Staff (3)
Marketing Staff (2)
Guy Simmons Operations Manager
Kathryn Chow Support Services
Manager
Don Chestnut Fleet Manager
Albert OGrady Finance Manager
Teresa Singh Marketing Manager
Administrative Support Staff
(2)
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Appendix B Fleet Management Group Inc.
Vision, Mission, and Environmental Scan December 2009
Vision: To provide complete vehicle and equipment management
services to public and private sector organizations of all sizes.
Mission: We are committed to providing our customers with a
complete range of reliable, quality vehicles and fleet management
services. We are dedicated to continuous improvement in order to
efficiently deliver both public and private sector transportation
programs.
Strengths Offers a complete range of fleet
management services Skilled management team Has an integrated,
full-service garage and
body shop Has a 25-year lease for its facility in a
convenient, downtown location Offers short-term and long-term
rental
programs in addition to leases to meet the vehicle needs of all
customers
Has the latest repair facility technology Is a Certified Vehicle
Inspection Centre Mechanics and technicians are accredited Budgets
accurately Has a good relationship with the bank Offers a long
leasing cycle
Weaknesses Depends on the City for most of its
revenue Has a diverse fleet, which increases
parts costs and maintenance complexity
Relies heavily on a line of credit for financing
Non-shareholder staff are less engaged
Does not have a formal bonus system to reward employees when
targets are met
Opportunities A large number of owner-operated fleets
could benefit from proper fleet management
Expectation that the Citys population will continue to grow
Expectation that the Citys average household income will
continue to grow
Many small organizations require affordable, reliable lease
vehicles
Threats High degree of competition from other
fleet management and financing companies
Low barriers to entry in the automotive repair sector
Limited supply of quality automotive technicians
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Appendix C Fleet Management Group Inc.
Condensed Balance Sheet (audited) As at June 30
(000s)
2010 2009 2008 2007 Assets Current Assets:
Cash $ 113 $ 90 $ 94 $ 133Receivables 2,075 1,678 1,530
2,094Inventories 157 196 59 52Prepaid expenses 1,580 1,478 1,307
1,034
3,925 3,442 2,990 3,313Non-Current Assets:
Carrying value1 of vehicles 36,193 34,006 32,665 31,200Carrying
value1 of equipment and other capital assets 634 656 704 686
36,827 34,662 33,369 31,886Total Assets $40,752 $38,104 $36,359
$35,199 Liabilities and Shareholders Equity Current
Liabilities:
Line of credit $ 2,942 $ 2,351 $ 2,451 $ 3,456Payables and
accruals 2,422 1,918 1,073 1,226Unearned revenue 889 862 833
403
Current portion of long-term debt 5,286 6,695 4,425 4,043 11,539
11,826 8,782 9,128Non-Current Liabilities:
Long-term debt 14,136 11,331 13,067 11,972 25,675 23,157 21,849
21,100Shareholders Equity:
Share capital 3,500 3,500 3,500 3,500Retained earnings 11,577
11,447 11,010 10,599
15,077 14,947 14,510 14,099Total Liabilities and Shareholders
Equity $40,752 $38,104 $36,359 $35,199 1 Cost less accumulated
depreciation.
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Appendix D Fleet Management Group Inc.
Condensed Statement of Income and Retained Earnings (audited)
For the Years Ended June 30
(000s)
2010 2009 2008 2007 Revenues: Vehicle rent and leases $11,853
$12,135 $11,204 $10,860Vehicle variable1 10,646 10,502 9,795
9,190Repairs 810 794 741 611Insurance commissions 290 259 223 328
23,599 23,690 21,963 20,989Expenses: Vehicle expenses:
Depreciation 7,322 7,101 6,551 5,945Insurance premiums 2,734
2,559 2,265 1,978Fuel and oil 5,080 5,289 4,798 4,004Repairs and
maintenance 3,281 3,033 2,943 2,618
18,417 17,982 16,557 14,545Salaries 1,923 1,837 1,699
1,664Administrative expenses 1,188 1,153 1,050 1,010Depreciation:
equipment and other capital assets 115 120 113 108Interest expense
940 926 914 836 22,583 22,018 20,333 18,163Income before income
taxes 1,016 1,672 1,630 2,826Income taxes (38%) 386 635 619
1,074Net income $ 630 $ 1,037 $ 1,011 $ 1,752 Opening retained
earnings $11,447 $11,010 $10,599 $ 9,047 Net income 630 1,037 1,011
1,752 Dividends (500) (600) (600) (200)Ending retained earnings
$11,577 $11,447 $11,010 $10,599
1 Revenue received through the variable rate charged on a per
kilometre basis.
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August 2010 Case Examination
Additional Information (Time Allowed: 4 hours)
Notes:
i) Candidates must NOT identify themselves in answering the
question.
ii) All answers must be written on official answer sheets or in
official electronic files. Work done on the Additional Information
or on the Backgrounder will NOT be marked.
iii) Included in the examination envelope is a standard
supplement consisting of formulae and tables that may be useful for
answering the question.
iv) Examination materials MUST NOT BE REMOVED from the
examination writing centre, except for the Instruction Sheet to
Electronic Exam Writers, if applicable. All used and unused answer
sheets, working papers, Backgrounder, Additional Information, the
supplement and, if applicable, a USB key containing electronic
answer files must be sealed in the examination envelope and
submitted to the presiding officer before the candidate leaves the
examination room. Candidates writing the examination electronically
must keep the Instruction Sheet to Electronic Exam Writers, which
provides instructions for uploading their responses following the
examination.
v) Only the following models of calculators are authorized for
use on the Case Examination:
1. Texas Instruments TI BA II Plus (including the professional
model) 2. Hewlett Packard HP 10bII (or HP 10Bii) 3. Sharp EL-738C
(or EL-738)
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Fleet Management Group Inc. (FMG) Additional Information
Update
The automotive industry in general struggled throughout the
recession that started in 2008. Most commercial fleet managers
experienced fleet reductions, decreased budgets, and layoffs. Many
fleet customers asked to renegotiate parts of their contracts,
raised their minimum requirements for vehicle use, and delayed
replacing vehicles when leases expired. These pressures are
expected to continue through to the end of 2011.
On the positive side, many fleet managers were able to negotiate
better pricing on parts from their suppliers. In addition, most
vehicle prices either remained constant or dropped slightly. Both
pricing trends are expected to continue through to 2012. Fuel
prices stabilized in 2009 and only gradual increases are expected
as the economy recovers.
Although FMG remained profitable during the downturn, and even
added new private sector customers, the Board of Directors was
disappointed with the companys overall performance as reflected in
the 2010 audited financial statements. Revenues decreased slightly
and variable vehicle operating costs increased. These factors
combined to decrease profits. The Board expressed its
dissatisfaction with the reduced dividend payment for 2009-10 and
directed management to develop a plan to return FMG to the 2008-09
net income level of $1.037 million by June 30, 2011.
Municipal Budget Cuts
During the recession, Mainway (the City) increased spending in
order to take advantage of federal and provincial stimulus
programs. Although this enabled the launch of important
infrastructure projects, it also increased the Citys debt. When
several of the projects developed cost overruns, the City faced
greater financial pressure on many sides. As a result, the
municipal council recently announced significant reductions in
discretionary spending for the next fiscal year.
When Denise Descartes and Teresa Singh contacted the Citys
vehicle coordinators to better understand the effect of these
changes on FMG, they discovered that the cuts are to be implemented
across the board. Although the City cannot cancel signed lease
agreements, it plans to reduce its lease expense by replacing fewer
vehicles. In addition, daily and monthly rentals are to be
curtailed and the total distance driven reduced. Descartes
calculated that the Citys spending cuts will reduce FMGs net income
after tax by $100,000 in 2010-11.
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Police Department Fleet
Not long after the budget cuts were announced, Descartes
received a call from Nelson Riley, Chief of Police for the City.
For many years, the Police Department elected to manage its fleet
of cruisers in house, outfitting and servicing the vehicles at its
own maintenance yard and repair shop in the downtown core. Now,
Riley is being pressured to find savings in his administrative
budget. Having experienced good service from FMG with respect to
occasional car rentals for City business and having received
positive feedback about FMGs service and staff from other municipal
departments, he contacted FMG with a proposal to manage the fleet
of police cruisers.
Riley suggested an arrangement in which the Police Department
would sell its cruisers to FMG for $1.2 million. The department
would then rent or lease the vehicles back over their remaining
life. As part of Rileys proposal, FMG would hire the departments
mechanics and guarantee a 5% reduction in the cruisers variable
operating costs. FMG would also purchase the building, equipment
and land at carrying value and continue to use the departments
maintenance yard and repair shop. The details Riley provided are
found below.
Mainway Police Department Selected Data for the Year Ended June
30, 2010
Item Value
Carrying value of vehicles $1,200,000 Carrying value of building
and equipment $125,000 Market value of building and equipment
$155,000 Cost of land $100,000 Market value of land $300,000
Mechanics salaries $130,000 Kilometres driven per year 32,000 km
Number of cruisers in the fleet 140 Average age per cruiser 4.7
years
Thompson Construction Limited (TCL)
TCL is involved in the construction industry and has offices
across Canada. The manager of the local office is looking for ways
to cut costs and improve the tracking of variable operating costs
for his offices trucks. He is also looking for a maintenance
program provider that delivers better service than their current
provider. Singh met the manager through her marketing contacts and
described FMGs fleet management services, including the Gas &
Go Card. Interested, the manager asked Singh to send him a proposal
and indicated that, if the program proved to be successful at the
local level, he would be happy to present the program to TCLs
national office.
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TCL would be the first customer to purchase fleet management
services from FMG without leasing or renting any vehicles. This
venture would be a different operating model for FMG.
Keyfleet Information System (KIS)
Under Kathryn Chows guidance, the information technology (IT)
staff recently consolidated FMGs custom-built systems into a
single, integrated fleet management information system. They named
it the Keyfleet Information System (KIS).
Chow believes that KIS has the potential to be used for managing
large fleets of vehicles and equipment throughout North America.
When she demonstrated the system at a recent trade show, it was
well received. Several of the fleet managers in attendance
expressed enough interest to schedule a follow-up call.
Senior Management Meeting
On August 3, 2010, FMGs senior management met to discuss the new
developments and other issues.
Don Chestnut was excited by the Police Department opportunity.
He suggested that expanding FMGs fleet would improve the companys
purchasing power and result in cost savings.
Guy Simmons looked forward to having more mechanics on staff and
use of the police repair shop. He also pointed out that the police
maintenance yard could be used during the busy season to park extra
vehicles.
Given that FMG has no experience with the police cruisers,
Albert OGrady recommended that FMG plan to replace half of the
departments fleet in each of the next two years and move to a
five-year leasing cycle with the new vehicles. The results of his
analysis are found in Appendix A.
In researching for the TCL proposal (see Appendix B), Singh had
contacted several friends with ties to the construction business.
She reported that they had worked on several projects with TCL and
had very positive comments to make about the company. She also
highlighted that TCL would build FMGs private sector customer
base.
Simmons pointed out that he would have to add staff in order to
service TCL properly. He also noted that since the local office is
only two blocks away, most of the TCL repair and maintenance work
would likely come to FMGs facility instead of going through the
vendor network. Under that scenario, FMG would not have enough
capacity to service all of its customers in a timely fashion. In
addition, Simmons indicated that he knows some of the TCL employees
and that it is typical for them to use company cards to fuel their
personal vehicles.
Chestnut remarked that TCLs fleet consists mainly of heavy-duty
trucks. As a result, he expects higher fuel and oil costs than
those generated by FMGs other private sector
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clients. Nevertheless, the added volume could result in some
cost savings with respect to parts, fuel and oil. Lastly, he
pointed out that FMGs mechanics would need some specialized
training in order to repair and maintain these trucks properly but
hasnt investigated the training costs yet.
Chow noted that since FMG would not own the TCL trucks, IT
system changes would be needed in order to accommodate this
business. After the meeting, OGrady gathered the financial
information in Appendix C.
This mention of IT systems led Descartes to ask Chow to
elaborate on her recent memo regarding KIS (see Appendix D). Chow
is excited about developing KIS as a marketable product that FMG
would license and support. She cautioned that, in order to
commercialize the system, KIS would require further development to
remove FMGs logos, create standardized user templates, and complete
refinements based on the trade show feedback. In addition, Chow
expects that one-time marketing costs of $125,000 would be needed
to launch the program in its first year.
Singh interjected to say that $125,000 is not nearly enough for
a new product launch and that it could cost three to four times
more to market KIS effectively. Chestnut suggested that by selling
KIS they might be selling off a competitive advantage because, in
his opinion, KIS is one of the best software programs he has seen.
Chestnut also commented that numerous fleet management software
providers are already established in the marketplace.
Chow pointed out that her staff have the capacity to complete
the required system changes for either TCL or KIS, but not both. If
FMG were to pursue both alternatives at the same time, the company
would have to hire external contractors to complete the system
changes for one of the projects at an estimated cost of
$200,000.
Chow voiced her concern about control and quality assurance when
using external contractors rather than internal staff. In addition,
Descartes raised the point that three of FMGs private investor
shareholders co-own a software company that sells to the fleet
management industry. She is concerned about the possibility of a
backlash if FMG enters the same market space.
Descartes then informed the group that a formal bonus system for
staff is currently in the planning stage and asked for their
thoughts on appropriate performance measures. Simmons wanted
measures based on customer service. OGrady suggested measures based
on internal processes. Singh felt that measures should be based
solely on financial performance.
Additional Information
Immediately following the meeting, OGrady asked his assistant
finance manager, Deidre Blake, CMA, to analyze FMGs current
operations and research the issues discussed at the meeting. Blake
interviewed management and staff, reviewed operating and financial
information, and compiled the following summary:
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1. FMG has a tax rate of 38% and uses an after-tax discount rate
of return of 9% when setting fixed rates and evaluating capital
projects.
2. Since the meeting, OGradys research has led him to conclude
that the construction industry has been severely hampered by the
recent recession. He wonders about TCLs financial health and
whether or not FMG should be concerned about TCLs viability and
capacity to pay bills in a timely fashion.
3. Simmons provided an update on the renovations to FMGs
fuelling station. The contractor had discovered small amounts of
fuel leaking from the 8-year-old underground tanks, and the cost to
remediate the environmental damage was estimated at $125,000.
Chestnut noted that this would delay the work and that the
renovations seriously restricted access to the parking lot. He
wondered why FMG should bother with remediation, since the leak was
small and the area paved over. Descartes was concerned that the
additional cost for remediation would jeopardize FMGs ability to
meet the Boards net income target.
4. Discussions with the parts supervisor revealed that,
occasionally, mechanics and body shop technicians accessed the
parts inventory directly, especially when parts staff were busy,
and that sometimes the parts they took were not charged to work
orders correctly. The supervisor estimated that this might affect
up to 15% of parts transactions.
5. There have been recent acts of vandalism to the parking
garage that FMG rents during the busy season. When Simmons recently
contacted the owner to discuss the issue, he discovered that the
lot had been sold to a building developer.
6. The Confederation Bank is willing to provide FMG with up to
$1.5 million to finance the police department alternative. This
loan would be repayable over three years at 6.25%.
7. When FMG was privatized, the existing staff agreed to
withdraw from the Citys union. However, several non-shareholder
employees recently investigated the possibility of re-establishing
a union within FMG. If FMG absorbs the unionized Police Department
mechanics, decisions will have to be made about both their union
membership and their pay scale, which is significantly higher than
that of FMGs mechanics.
Required
As Deidre Blake, CMA, prepare a report for FMGs senior
management team advising them on how to address the issues
discussed at the management meeting as well as any other
organizational issues and concerns requiring their attention.
Include details of your analysis, support for your recommendations,
and an action plan to implement those recommendations. In
undertaking this task, you will need to take into consideration
your background knowledge of the company and industry as well as
the additional information provided herein.
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Appendix A Analysis of Police Department Alternative
August 8, 2010 TO: Denise Descartes, CEO FROM: Albert OGrady,
Finance Manager SUBJECT: Fleet management services for Mainway
Police Department After analyzing the available information, I have
determined the following with respect to the Police Department
alternative: Recommended Pricing for Police Department Fleet
Annual lease fee for existing fleet $6,200 per cruiserAnnual
lease fee for new fleet $10,500 per cruiserVariable operating rate
(for existing and new fleet) (This rate achieves the required 5%
savings.)
$0.165 per km
Estimated Costs for Police Department Fleet
Variable operating rate $0.12 per kmInsurance $1,300 per
cruiser
Recommended Replacement Schedule for Police Department Fleet
Year 2 Year 3 Number of new cruisers 70 70
Additional Information
Annual volume savings in parts, fuel and oil $80,000 Purchase
price + capital improvements per cruiser1 $39,000 Disposal value
(after decommissioning) per cruiser $2,500 Current rental cost of
parking space per year2 $25,000
Notes 1 Chestnut found that FMGs buying power provided better
pricing for similar vehicles. 2 This cost is for the parking space
that FMG currently rents during the busy season
for excess vehicles coming off lease and arriving to go out on
lease.
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Appendix B Thompson Construction Limited (TCL)
Fleet Management Proposal TO: Local Office Manager, Thompson
Construction Limited FROM: Teresa Singh, Marketing Manager, Fleet
Management Group Inc. SUBJECT: Fleet management services I am
pleased to present a proposal for FMG to provide fleet management
services to TCL. Our proposal includes use of the Gas & Go Card
for your fuel and oil purchases, access to our Repair Authorization
Service, a preventive maintenance program, and reports from our
Consulting and Information Service.
Proposed Pricing Fleet Management Services
Rate per vehicle $200Number of vehicles 420 $84,000
Fuel and oil Variable fuel and oil rate (per km) $0.195Number of
kilometres 9,500,000 $1,852,500
For repairs and maintenance completed through our vendor
network, FMG will pre-authorize repairs, audit invoices, and
present TCL with a single, consolidated invoice for easy payment.
These charges are not included in the Variable fuel and oil
rate.
Appendix C
Thompson Construction Limited (TCL) Fleet Management Costs
TO: Denise Descartes, CEO FROM: Albert OGrady, Finance Manager
SUBJECT: Fleet management services for Thompson Construction
Limited (TCL) From discussions with the management team, I have
determined that the following costs apply to the TCL alternative:
Salary for additional staff $87,500 IT systems changes (through
external contractors if KIS alternative is pursued simultaneously)
$200,000 Annual cost savings in parts, fuel and oil through
increased volume discounts $46,000 Variable fuel and oil rate (per
kilometre) $0.145
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Appendix D Keyfleet Information System (KIS)
Licensing Alternative TO: Denise Descartes, CEO FROM: Kathryn
Chow, Support Services Manager DATE: July 23, 2010 SUBJECT:
Licensing Keyfleet Information System (KIS) As you know, our IT
staff have developed a custom fleet management information system
called the Keyfleet Information System (KIS). KIS tracks the full
life cycle of every vehicle in the fleet, recording all revenues
and expenses. It runs the preventive maintenance program, produces
invoices, and keeps detailed information on each vehicle. KIS
Online is accessible over the internet and gives customers
invaluable reports on their leased and rented vehicles. A recent
study shows that KIS compares favourably with software from leading
fleet management information system vendors, and has several
innovative features not yet found in the marketplace. Existing
staff could perform the development tasks required to commercialize
the software, but additional staff would be needed to deliver IT
support services for customers. If we start these development tasks
within the next 4 to 6 weeks, I expect KIS to generate revenues and
add to FMGs net income for the current fiscal year. The following
table summarizes our expected revenues and expenses per customer in
several possible scenarios:
Expected Revenues and Expenses (per customer) Number of Year 1
Annually1 Customers Probability Revenues
5 30% Licence fees and maintenance $85,000 $10,000 11 50%
Expenses 15 20% IT support services $12,000 $3,000
Marketing, sales, and travel $7,000 $0 Administration, telecom,
and other $4,000 $1,500
An additional, one-time expense of $125,000 would be required
for marketing KIS in the first year. 1 These are ongoing revenues
and expenses after Year 1 and we expect customers to maintain their
software license for at least 5 years.
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August 2010 Case Examination Fleet Management Group Inc. (FMG)
General Comments on Performance
Case Background and Required Element
The August 2010 Case Examination focuses on Fleet Management
Group Inc. (FMG). FMG is a privately-owned Canadian company that
provides vehicle leasing, rental, and related services to corporate
customers in both the public and the private sectors.
The automotive industry in general struggled throughout the
recession that started in 2008. Although FMG remained profitable,
the Board of Directors was disappointed with the companys
performance. The Board directed management to develop a plan to
return FMG to the 2008-09 net income level of $1.037 million by
June 30, 2011. Shortly thereafter, FMGs most important customer
(the City of Mainway) announced spending cuts expected to reduce
FMGs net income after tax by $100,000 in 2010-11.
To meet the Boards net income target and mitigate the City
budget cuts, the senior management team identifies the following
alternatives to consider:
1. Acquire the Police Departments fleet of police cruisers and
rent or lease them back. 2. Sell fleet management services to
Thompson Construction Limited (TCL) without
leasing vehicles. 3. Develop FMGs custom-built Keyfleet
Information System (KIS) as a marketable
product that FMG would license and support.
The Required element of the case is as follows:
As Deidre Blake, CMA, prepare a report for FMGs senior
management team advising them on how to address the issues
discussed at the management meeting as well as any other
organizational issues and concerns requiring their attention.
The response should also ensure financing is available to
support recommended capital expenditures and operating requirements
(e.g. the Police fleet and fuel tank remediation).
General Approach and Expectations
Throughout Year 1 of the SLP, candidates have been taught to
apply the Steps for Approaching Business Strategy. They have
completed several practice case exams using these Steps, have
received written feedback on their performance, and have revisited
the approach repeatedly during their Interactive Sessions. Because
of this attention, expectations related to candidates general
approach and performance are high.
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Recommended Approach
The examination writer should use a systematic approach to
analyze the alternatives and solve the issues in the case. For this
case, the Steps direct the writer to:
1. Review the current situation given the changes in the
environment outlined in the Additional Information (e.g. update the
SWOT; recognize the objectives, constraints, and preferences; and
prepare a financial assessment). From this review, candidates gain
an understanding of the important facts and are able to identify
the issues and alternatives that require analysis.
2. Analyze the alternatives for dealing with the issues. The
analyses should include a qualitative assessment of the pros and
cons and a quantitative analysis of the profitability and
feasibility of each of the alternatives. Appropriate balance and
depth are expected in these analyses. Relevant financial and
non-financial information documented in the situational analysis
should be interpreted and used. As well, appropriate functional
tools and concepts should be applied correctly.
3. Make supported recommendations and provide evidence that the
recommended strategy is logical, feasible, and addresses the Boards
direction to return FMG to the 2008-09 net income level of $1.037
million by June 30, 2011, taking into consideration the significant
operating issues such as the $100,000 decrease of net income
resulting from City cuts, the $125,000 remediation of the leaking
fuel tank, and the 15% of parts transactions that are recorded
incorrectly.
4. Analyze the relevant minor issues requiring attention and
develop an implementation plan. The analysis of the minor and
implementation issues should be appropriately incorporated into the
various sections of the report. The implementation plan should
include actions to support the major recommendations and address
the significant operating issues and current weaknessesespecially
those specific to the recommended course of action.
5. Prepare the response in the form of a formal report for FMGs
senior management. The report should advise management of the
proposed recommendations and implementation plan.
Responses Above Expectations
In general, the best responses show good understanding of the
information provided in the case. They draw on this information to
provide relevant and useful analysis. They demonstrate sound
judgment. They apply an appropriate approach to solving business
problems. The following approaches are reflected in these
responses:
1. Systematically collecting data relevant to both the internal
and external environments (situational analysis) and recognizing
the pertinent and most relevant changes between the established
SWOT in the Backgrounder and the current situation in the
Additional Information.
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2. Using this data to analyze the alternatives and minor
issues.
3. For the alternatives analyzed and for the recommendations as
a whole, providing convincing answers to each of the following
questions:
a) Is it profitable? (Uses decision and profitability analysis
toolsF3)
b) Does it provide an acceptable return on investment? (Uses
capital budgeting tools such as net present valueF5)
c) Is there money available to pay for it? (Compares financing
required against financing availableF5)
d) Does it address the constraints/targets set by key
stakeholders while managing appropriate risks and organizational
issues? (Calculates and compares financial measures, manages risk,
and manages organizational resourcesF2, F4, F5, F6)
4. The most convincing proposals are those that are logical,
feasible, and supported with accurate quantitative evidencebacked
by reasonable assumptions and a balanced qualitative analysis that
considers a wide range of factors and perspectives.
5. Providing recommendations consistent with the analyses.
6. Providing a plan that enumerates the who/what/when/how much
needed to implement the recommendations, including the minor
issues.
These responses clearly follow the Steps for Approaching
Business Strategy.
Responses Meeting Expectations
Responses that meet expectations follow a reasonable but often
incomplete approach to the case. In particular, these responses
differ from the best responses by:
1. Collecting fewer points on the relevant changes in the
internal and external environments from the Backgrounder to the
Additional Information, and by sometimes identifying irrelevant or
redundant SWOT points.
2. Using less of the current situation data to analyze the
alternatives and minor issues.
3. Analyzing fewer alternatives, in limited depth, with weaker
quantitative analysis.
4. Considering issues and/or alternatives in isolation, without
providing a global, comprehensive view (e.g. by not providing
summary schedules that pull analyses together and highlight the
combined effect of recommendations).
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5. Providing recommendations consistent with the analyses, but
which are less convincing and have less support.
6. Providing a limited implementation plan, frequently without
addressing all of the who/what/when/how much questions related to
the strategic recommendations.
Responses Below Expectations
In weak responses, the alternatives are not sufficiently
analyzed, one or two aspects of the case are overemphasized or,
conversely, many aspects are addressed but only at a superficial
level.
Some weak responses reflect a simple approach that does not
place enough focus on the important issues and alternatives. These
responses do not effectively address the case in a comprehensive
and integrative manner. For example, in analyzing the alternatives,
this case requires the use of quantitative analysis to determine
profitability, estimate future earnings, and compare these to
corporate goals within the limits of the available financing.
Specific Comments on Candidate Performance
Overall, performance on this examination was acceptable. Most
responses
1. reflect an effort to use a systematic process for problem
solving and decision making;
2. focus mainly on the alternatives identified by senior
management;
3. address the most important minor and implementation issues;
and
4. present a report in a reasonably acceptable format.
Where Responses Did Well
The following aspects were well done on this exam:
1. SWOT update. Most responses provided a reasonable update of
FMGs current situation.
2. Integrating the preferences of senior managers. In their
analysis of individual alternatives, almost all responses included
at least one reference to the preferences of FMGs senior managers
(e.g. Chestnut is excited about the Police acquisition).
3. Financial assessment. Most responses provided a reasonable
assessment of FMGs financial situation, usually touching on
liquidity, coverage, and profitability ratios. Better responses
also recognized that FMGs preference for using its line of credit
to
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finance vehicle purchases created unnecessary interest expense
and cash flow problems for the company.
Many responses also provided a reasonable interpretation of FMGs
current financial situation. Many responses used the following
process well: State the number. State its direction in the last few
years. State why the number is important. (e.g., FMG's current
ratio for 2009/10 stands at 0.34 and has fluctuated in recent
years. A current ratio below a benchmark 2.0 is typically a warning
that a company may have trouble producing enough liquid assets to
meet its short-term obligations. In this case, the low ratio
reflects FMG's preference for using its line of credit to avoid
taking on debt.)
With repeated emphasis on the meets expectation standard of
three or four relevant ratios for two or three years through
practice case exams in Year 1 of the SLP, better responses
distinguish themselves through more meaningful interpretation.
4. Capital investments, tax shields, and salvage values. With
repeated visits to capital investment decisions in Year 1 of the
SLP (e.g. Body Benefits, BR Lighting, BC Coast Cruises),
expectations for this competency are high. Many candidates
assembled the correct inputs and applied the appropriate formulae
when analyzing the initial acquisition of the Police fleet. (Fewer
candidates correctly handled the two-year turnover of the
fleet.)
5. Qualitative functional concepts related to strategic
management, governance, risk, and ethics. Most responses addressed
a few qualitative functional concepts related to strategic
management (e.g. countering the lingering effects of the
recession), internal control (e.g. parts not charged to work orders
correctly), risk (e.g. non-shareholder employees considering
re-establishing a union), and ethics (e.g. managers weighing
convenience and income over the environmental damage caused by the
leaking fuel tank).
6. Fewer responses dealt as well with qualitative functional
concepts related to performance management, performance
measurement, financial management, and financial reporting. Still,
many candidates recognized that TCL would stretch capacity in the
repair facility, especially during the busy season.
7. Format and communication. Candidates seem to have learned
what a business report should look like. Most responses contained
the necessary sections, used a mix of narrative and bullet points,
and were reasonably articulate for a report written in four hours
under exam conditions.
Not surprisingly, these are all things candidates could bring in
with them on exam day. For example, in this case, all the
information needed to create the financial assessment was provided
in the Backgrounder. Similarly, candidates have learned that
references to the mission, constraints, and stakeholder preferences
are easy links that show signs of integration.
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Where Responses Could Improve
The following tips identify areas where responses could be
improved in subsequent exams:
1. Use all aspects of the current situation. Many responses made
repeated references to the mission, stakeholder preferences, and
weaknesses. While these are relevant points, seeing them over and
over again at the expense of more pertinent integrative connections
is tedious, shows limited audience awareness, and generally makes
for weak analyses.
Candidates should also remember that the qualitative analysis
should be specific. A statement that This alternative is consistent
with the mission provides limited information to the reader.
Contrast this with a statement like Providing fleet management
services to TCL without leasing vehicles is consistent with FMGs
mission to provide a complete range of fleet management services
and supports its vision to serve private sector organizations of
all sizes.
2. Establish the target as part of the situational analysis.
This case gave FMGs management a specific mandate: increase net
income to $1.037 million by June 30, 2011 (i.e. this fiscal year).
With such a clear goal in mind, responses should be equally clear
about whether recommendations will or will not meet it. This
requires a quantitative benchmarka statement like This alternative
adds $400K of income, which meets the Boards goal is false if the
company needs $500K to reach the goal. It is also potentially
misleading to a reader who is not aware of the target. Since false
and misleading statements receive no credit, responses that claimed
they met the Boards goal without showing it did poorly.
A simple calculation of the target in the situational analysis
would help:
Establishing the target Board target $1,037Less: 2010 Net Income
(after tax) (630)Plus: Impact of expected City cuts 100Plus: Fuel
tank remediation 125Incremental net income needed (after tax)
507
3. Stop repetition and points of limited value in the
situational analysis. Many responses mechanically applied a
template to the situational analysis, producing unnecessary
repetition and wasting time in the process. The following tips can
improve responses:
a) Usually, identifying a point once is sufficientit need not be
repeated in a different category. For example, the ongoing effects
of the recession is a threat to FMG. Once identified as a threat,
the point need not be repeated as a key risk factor. Repetition of
specific points shows weak understanding of
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the categories in the situational analysis. (The exception is
when the classification of a point depends on your point of view.
In this case, the stable but slowly increasing fuel prices is an
opportunity if customers are willing to accept price increases, but
a threat if they are price sensitive.)
b) Identifying key success factors that are actually strengths
(e.g. good management) confuses the internal and external
environments. Key success factors are typically items that every
organization in the industry must do well. As a result, they are
usually a feature of the external environment. On this exam, many
candidates listed key success factors like Uses bulk purchasing and
then immediately repeated them as strengths. Such candidates wasted
time identifying the internal environment twice and did not
identify the external KSF.
c) Preferences of distant stakeholders with limited bearing on
the case need not be identified. For example, noting that the bank
is a key stakeholder and has a preference for seeing its loans
repaid is self-evident and adds little value. Likewise, candidates
can assume the government prefers compliance with the law, citizens
prefer clean air and water, and customers prefer high quality goods
and services.
d) Finally, repeating points identified in the Backgrounder SWOT
adds no value and can be hazardous. For example, the Additional
Information highlights that a formal bonus system is currently in
the planning stage and that managers have different ideas about
appropriate performance measures. Responses that identified Does
not have a formal bonus system from the Backgrounder and provided
recommendations without considering managers preferences shows
limited awareness of the case.
4. Use quantitative tools appropriately. By design, the Case
Exam is designed to test a range of quantitative skills. After a
series of practice exams in which capital budgeting played an
important role, many responses focused on NPV analysis at the
expense of other tools. In this case, the following tools were most
appropriate:
a) For the Police acquisition, determining net income in the
first year is much more important than calculating net present
value. The police cruisers are near the end of their expected life
and FMG has a chance to lock in a new customer for a long time.
(Albert OGradys plan suggests replacing 70 cruisers in Year 3 with
five-year leasesthis implies at least an eight-year horizon for the
alternative.) FMG might be willing to take a loss on the initial
buy in return for longer term gainprovided it can still meet the
Boards net income target.
b) Many responses calculated a net present value for the TCL and
KIS alternatives using discounted cash flows. Because there are no
significant
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capital expenditures for either of these alternatives, NPV
calculations are irrelevant and obscure the alternatives effects on
net income.
c) Although NPV analysis is appropriate for evaluating the
long-term replacement of the Police cruisers, many responses used a
cumbersome approach based on discounted cash flows. The responses
adjusted each cash flow to present value (sometimes removing income
tax from each line), then summed the present values. This results
in repeated application of the same present value factor. A more
efficient approach would establish net cash flows for each year and
then apply the present value factor once, to the bottom line.
A secondary advantage to this approach is that it makes the
adjustment from cash flows to net income easy and straightforward.
(Discounted cash flow analysis does not establish incremental net
income. Net income includes non-cash expenditures like amortization
and the accounting loss on the sale of police cruisers. It also
includes interest payments. Net present value is not income.)
d) For the KIS alternative, the expected number of customers
should be calculated and used to determine expected profitability
of the alternative. (Again, many responses used the cumbersome
approach of applying the probability factors against every line
item and then summing the adjusted values.) The analysis of the KIS
alternative should also consider sensitivity related to the
uncertain number of customers or marketing expenses.
e) For the recommended alternatives, available financing should
be compared against financing required to confirm the
recommendations feasibility.
5. The following highlight the most common quantitative errors
witnessed on this case:
a) Using discounted cash flows to calculate the NPV of the
Police fleet without establishing incremental net income. In
addition, many responses compounded the error by comparing NPV to
net income (e.g. NPV of $400K meets the Boards net income
target).
b) There was no attempt to explicitly consolidate and compare
net incomes produced by the alternatives to the amount needed to
satisfy the Boards net income target of $1.037 million by June 30,
2011.
c) No attempt was made to calculate and compare financing
required against the financing available (line of credit, bank loan
for police fleet, working capital), especially if the Police
acquisition is recommended.
d) Not accounting for the replacement of the cruisers correctly
(e.g. using incorrect time horizons, calculating values for 1, 70,
140, or 210 cruisers, assigning cash inflows and outflows to the
wrong year).
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e) Using distance travelled by one cruiser (32,000 KM) to
calculate variable revenues and costs for the fleet. (It is not
reasonable to assume that 140 police cruisers only travel 32,000 km
combined in a year.)
f) Failing the reasonableness check. Many responses produced
numbers without stopping to see if they were reasonable. For
example, if a candidate calculates that a $200,000 investment
produces a $457 million net present value, it is reasonable to see
that there is an error.
6. Apply all concepts from Year 1 of the SLP: As noted
previously, expectations are high related to concepts and tools
candidates take up in Year 1 of the SLP. With three targeted
readings, an assignment, and an Interactive Session activity on
performance evaluation in Module 2, it is startling that most
responses made only a weak attempt at providing advice to Descartes
on appropriate performance measures for a bonus system.
7. Analyze minor and implementation issues: A one-sentence
recommendation does not constitute analysis of a minor or
implementation issue. Many responses would benefit from the
following example:
Problem A contractor has discovered small amounts of fuel
leaking
from underground tanks. Consequence Expected remediation costs
are $125,000, which will
impede FMGs ability to meet the Boards goal. On the other hand,
the expected damage to FMGs reputation from being seen as a
polluter could cost more in the long run.
Recommendation Fix the tank Implementation Simmons to authorize
the contractor to proceed with
remediation immediately.
8. Focus on the right audience. Many responses highlighted links
for markers rather than arguing pros and cons for senior
management. For example, language like the following was common:
Police mechanics are unionized (links to weakness). Since the
senior managers would not know about or understand links, such
comments show poor communication.
It was also noted that some responses that provide such advice
were wrong or inconsistent with the case facts. For example, in the
previous comment, the Police union is not currently a feature of
FMGs environment, so no link would be awarded. Further, FMGs
union-related weakness is that non-shareholder employees are less
engaged, and several have recently explored re-establishing a
uniona point not established in the responses brief comment. Thus,
in addition to showing poor communication, the advice highlights
the responses confusion about the case.
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Steps for Approaching Business Strategy 1. Overview Quickly read
through the information to develop an understanding of the
following:
a) Organization on which the case is based; b) Industry in which
it operates; c) Major issues and specific
opportunities/alternatives that need to be addressed; d)
Information included in the exhibits (e.g. quantitative data,
organizational charts,
etc.); e) Role that you are required to assume; f) Actions that
you are required to perform; and g) Audience of your report (e.g.
senior management, board of directors).
2. Situational Analysis
Read through the case in detail and begin developing a
situational analysis. As you read, highlight or make notes on key
information that will be used in developing a framework or planning
structure for your analysis. For example, use a system such as code
letters and words in the margins, to categorize the information
(e.g. S for strength, KSF for key success factor, TX for tax rate,
MI for major issue, O for external opportunity, etc.), or
categorize and document the information directly in the response.
Within the situational analysis, be sure to do the following:
a) Identify the stated or implied mission, vision, strategic
direction, and strategic
goals. b) Determine the key stakeholders needs and/or
preferences. c) Determine whether there are any constraints that
require consideration or targets
that must be met. d) Scan the organizations internal and
external environments, and identify the
strengths, weaknesses, general opportunities, and threats
(SWOT). Include an assessment of the organizations current
financial situation. Some tools that will help in identifying SWOT
points include Porters Five Forces and PESTE, as well as analyses
of ratios, trends, profitability, target customers, target markets,
variances, etc. In a time-limited situation such as the Case
Examination, if the information provided includes a high-level
SWOT, it is not necessary to repeat these points or audit them.
Focus on identifying new SWOT points based on information not
previously available and the results of the financial
assessment.
e) Within the SWOT analysis, identify the competitive advantages
and the key success factors (KSFs) for the organization and/or
industry (i.e. the critical opportunities and strengths of the
organization that must be maintained or enhanced in any suggested
recommendations). Also identify the key risks (i.e. the critical
weaknesses and threats that must be eliminated or mitigated).
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3. Identification of Major Strategic Issues and Alternatives
a) Identify the major strategic issues that need to be addressed
(e.g. specific business opportunities that should be considered,
critical weaknesses and threats that must be eliminated or
mitigated if the organization is going to be successful) and list
them in order of importance.
b) Identify the alternatives for addressing the major strategic
issues.
4. Analysis of Alternatives for Addressing the Major Strategic
Issues
Analyze each strategic alternative both quantitatively and
qualitatively, identify the pros and cons, and consider both
internal and external factors (i.e. provide a balanced analysis).
Demonstrate integrative thinking by considering the cause and
effect relationships among the various factors, issues, and
alternatives. Within the analyses, be sure to do the following: a)
Deal with ambiguous or uncertain information by making
reasonable
assumptions based on case facts, applying decision analysis
under uncertainty concepts and tools, or performing sensitivity
analysis. Clearly state and, if necessary, justify all assumptions
made.
b) In the quantitative analyses, apply appropriate functional
competency tools and concepts to analyze the relevant information
(e.g. profitability analysis, net present value, return on
investment, etc.). Interpret the results of all calculations.
c) In the qualitative analyses, provide a balanced discussion of
the pros and cons of each alternative using case facts and the
results of the quantitative analyses.
d) Identify (usually as a con) any specific risks associated
with each alternative. e) Make specific references to the points
made in the provided SWOT (in the Case
Examination) and the situational analysis performed in step 2
(e.g. discuss how the alternative uses the strengths, takes
advantage of the opportunities, mitigates or eliminates the
weaknesses and threats, meets the imposed constraints, etc.).
f) Consider each alternative from the points of view of the
various stakeholders, and how it aligns with the organizations
mission, vision, goals, and/or strategic direction. As well,
consider the effects of one alternative on another, or on other
issues.
5. Recommendations
a) Rank each alternative in terms of important criteria (e.g.
goals, important constraints, key success factors, specific
targets, profitability, key stakeholders preferences, how easily
the cons can be resolved, etc.). Consider whether the alternative
sufficiently addresses the major strategic issues, is aligned with
the organizations overriding objective, is a good fit with the
internal and external environments, and makes good economic
sense.
b) Clearly state your recommendation(s) for resolving the major
strategic issues. Briefly support your choice of alternative(s)
based on the most important criteria.
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c) Ensure that your recommendations collectively form a cohesive
package that is feasible and viable. Provide proof in the report
that the necessary aggregate resources (e.g. physical capacity,
financing) either are available or can be readily acquired, that
constraints are not breached, and that specific targets are
met.
6. Implementation Plan
Create a plan for implementing the recommended strategies for
resolving the major issues. In developing the implementation plan,
be sure to do the following: a) Identify and analyze the
implementation issues, such as those concerning
change management, acquiring the required resources (financial
and human), and resolving the cons previously identified in step 4
for the recommended strategies.
b) Address the operational and other minor issues (e.g. ethical,
internal control). Discuss how solving these problems can affect
the implementation of the major recommendations, and/or how they
affect other minor issues and weaknesses.
c) Make clear and actionable recommendations pertaining to the
implementation issues and minor issues.
d) Provide an action plan to implement the strategic and
operational recommendations that clearly defines each action, who
is responsible, the critical due dates, and the resources
required.
7. Financial Forecast
Prepare an appropriate financial forecast (e.g. projected net
income, projected return on investment, projected cash flow, pro
forma financial statements, etc.) taking into consideration the
financial implications of the strategic, implementation, and
operational recommendations made and stating all assumptions.
Outline in the body of the report the expected future financial
outcomes as a result of implementing the recommendations. Most of
the calculations for this step should already have been completed
in addressing steps 4, 5 and 6.
8. Written Report
Present your answer in a professional manner using a formal
report format consisting of the following components in the
following order: cover page, one-page executive summary that
represents the report in short (i.e. summarizes all the major and
most important minor issues and recommendations), table of contents
(not required for the Case Examination), introduction, body
(including analyses, recommendations, implementation plan, action
plan), conclusion, appendices/exhibits, and references/bibliography
(not required for the Case Examination). Present the contents of
the report in a well-written manner that reflects an appropriate
tone for the receivers of the report.
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Present the quantitative analyses in appendices, exhibits or
tables, and reference them in the body of the report. Provide
labels and audit trails for all calculations. Provide the details
of the situational analysis (e.g. SWOT, ratios, benchmarking, etc.)
in appendices, and summarize the highlights of the most important
factors and issues in the body of the report.
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August 2010 Case Examination Fleet Management Group Inc.
(FMG)