Doing Business Right

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This is the study that explore the solution of point to point model then extend it to multistops operating model for the purpose of improving profit

This is the study that explore the solution of point to point model then extend it to multistops operating model for the purpose of improving profit

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  • 1. Doing BusinessRightRe-defining Right AssetsAnd Profitable NetworkFor Local TransportationCompanyBy: Mohammed Salem Awad Consultant Tel : 00967734777518 Email: 1-10-2007Accounting for Managers Course 1
  • 2. Re-defining Right Assets and Profitable Network For local Transportation Company (Practical Case Study)Setting:Local Transportation Company is public sector company, owned by government, itserve most of Yemen cities, from south to north and from east to west territories, itsstructure is governed by a bureaucracy system controlled by the government, its goalsto serve the society andbe a profit organization, ithas a wide fleet of busesand many maintenancecenters in the maingovernorates, that supportthe network operation.The corporation has threebranchesi.e Sanaa , Aden andAl-Mukalla, the last two are belong to the southern territories, after a unification ofYemen, it become one main transportation company in Yemen, with a hugemanpower, so to derive the company to the profitable track., the governmentsapproved its privation, while lead to realize more 3000 workers , to adopt arestructure program, but still the company does not reported a profit situation.Accounting for Managers Course 2
  • 3. Defining the Problem:One of the major issues of local transportation company is surviving in verycompetitive environments, in 2001 the company carried about 391442 Pax while in2005 it carried 224933.The frequency also reduced significantly from about 10,000 to 6000 trips.The general passenger trend is going down and that part of losing the local market isdue to establishments and penetration of new private transportations companies, asAl- Rowshan and Al-Ayessai, and. The company loses many markets as Albaidah,Mareb, Saadah, and many destinations from other branches.Why the situation become deteriorated and becomes worse and worse while theprivate sector is doing well.The problem is concerning a management, governments policy and lack of clear and competitive fare strategy, no renewed for fleet, no vision and strategy,poor handling and service poor management teams, the company shrinkage andbecome small and definitely if we refer to the income statement it will show asequence of loses for the period of 2001 to 2005.So what are the right assets to operate, how to create a competitive fare strategy andhow to develop an effective network that will enhance and maximize the profit.Analysis and discussion:Accounting for Managers Course 3
  • 4. The company situation can be improve by applying many concepts of the accountingstudy 1- Selecting Right Assets 2- Developing Competitive Fare Strategy 3- Cost Targeting ( by developing optimum unit cost ) 4- Maximize the profits – by using right decision management 5- Maximize the profits - by utilize the capacity.And that can be done by a sequence of analysis concerning operating network asshown below Point to Point Approach Multi- Stops Approach Defining Fleet Fare Competitive Redefining Profit Demand Reposition Analysis Fare Optimum Maxim- Strategy Network izationIn this study we developed a number of sequences analysis, deriving us into twodirections. First: Point to Point Operating Network. This is the initial solution ofthe problem, based on U curve techniques, and reflects Input Data, DemandPassengers and Market Fare, Fleet Repositioning, Fare Analysis, and CompetitiveFare Strategy. Second: Multi Stops Operating Network (Realistic) In this part weextend the problem to a more practical and realistic situation, using the concept ofmulti stops operating, to redefine the optimum operating network by implementingthe seat allotments ratios (Marginal decision) that will maximize the profit.While the opportunity of increasing the seat pitch of the buses shows a significantincreases in profit.The cost deriver factor in this study is ASK (Available Seat Kilometers).Data Collection:Accounting for Managers Course 4
  • 5. Three inputs we need 1- Demand of passengers per city ( 2001 data base – we can use forecast data but company situation is going down ) 2- Market Fare ( Applicable current market fare - 2007 ) 3- Distance between Cities ( in kilometers )Defining Demand:Based on 2001 passenger carried we started and used these data as Definingbasic and selecting a lowest market fare in market. DemandWhile a network of the routs is setup (point to point)U Curve Technique:This technique on to two costs 1- Cost of Offering Service (Cost of Seat). Total Cost COST IN US$ 2- Cost Losing Opportunity – B Cost of Lose A Cost of Seat Revenue (Cost of Losing Revenue).Total Cost is the sum of the two. No. Of SeatsWe use the above relevant data mentioned above to develop a solutionwhile the Right Capacity is a function of ⎧Size of Traffic Passengers - point to point ⎫ ⎪ ⎪ ⎪ Applied Market Fare ⎪ f =⎨ ⎬ ⎪ Network Structure - Stage Length ⎪ ⎪ ⎩ Cost of ASK ⎪ ⎭and the frequency is a function of Traffic Size Passengers.But Frequency and Capacity are two terms interrelated, if capacity increase frequencywill decrease and vs versa.Accounting for Managers Course 5
  • 6. DATA INPUT 1 1So what is the right capacity and optimum frequency to operate?And by considering the input of a passenger, market fare, and distance between citieswhile the cost is consider as step function, as shown in Input Table, a number ofspread sheet solution is created but 1 shows a loses market due to improper farestructure at a cost of 0.015 cent / ASKSo by using the spreadsheet solution andputting the cost as stepfunction from 0.001Cent/ ASK to 0.017Cent/ ASK (costdriver).A graph plotted for theoptimum results ofseats against the costused for the specifiedinput. As shown in graph.Accounting for Managers Course 6
  • 7. Since the typical seat configuration of the buses range from 44 seats to 50 seats, so thecorresponding optimum cost will be from 0.013 to 0.017 Cent/ASK which tends us toselect 48 seats as the best and typical solution at 0.015 cent/ASK.We recalculate the analysis again but this time at 0.015 Cent/ASK to reflect theoptimum seat required (U Curve Tech) as shown in the figure.It shows a 48 seat is the optimum results, while the corresponding cost for 45 seat is0.0125 cent /ASK Which current applied layout or seat configuration for the buses ofthe existing companies as Al- Rweeshan and Al Ayissai ,having the type of bus i.e Al-Rweeshan operate Mercedes and Al –Al Ayissai operate a Musobitshii buses. Eachcompany has its own evaluation cost of the buses per ASK (Confidential). But wederive it as 0.0125 cent/ASK for our existing network.Accounting for Managers Course 7
  • 8. Fleet Reposition :The Fleet Company can be positioning its fleet (assets) on theoptimum operating curve by considering two factors Fleet Reposition 1- Configuration of the Bus per company ( Number of seats – normally from 40 to 50 seats) 2- Actual Cost of Available Seat kilometers for each fleet per company (confidential cost )Only three transportation companiesThe company that lies on the line (blue) and have minimum cost value is the best one.While the other companies should targeted the cost to achieve the optimumoperation cost values.Optimum Operating Curve:If the thumb has 32 characters, and if the Eye has 520 characters so how we cancharacterize the operation of the company, as each company has which so called alearning curve, also in transportation company owned a optimum operating curve thatdefine the characterize of the company in terms of Distance , Demand, Market Fare,and Cost , defining the best solution and positioning the current assets, ( Buses ) Al –Rewshan Al Ayssai Local CompanyAccounting for Managers Course 8
  • 9. Fare Analysis:The concept of fare analysis is to apply idea of changingmarket fare, to achieve the right fare structure, and that can Farebe identified when the number of frequency become 1 ( As it Analysisis constrained by the lowest value in the spread sheet. So thedecisions can be hold as the following: 1- Cost of Seats + Cost of Losing Opportunity = (Minimum) tend to develop the U curve. 2- By lowering the market fare, this will tends that the cost of seat will be equal or greater revenue earned so the spread sheet will report 1 frequency rather to calculate the number of frequencies this will define the losing routes as it is shown in the following table while if we increase the percentage this will show at which increase percentage will recover.Two sectors already reported loses in the first analysis as 1 now we try to developthis range by change percentage of Market Fare. Unfavorite % Fare Favorite % Fare Range RangeAccounting for Managers Course 9
  • 10. Competitive Fare Strategy:In the above analysis it shows many of the routes are subjected toloses, so will develop a competitive fare strategy to response the Competitivecompetitive market fare. Our analysis will be in two directions Fare Strategy 1- Omitting losing routes and develop a profitable Margin of the Fare Structure. 2- Dealing these loses routes with multi-stops operation approach, so these routes are subsides by another profitable routes 5% And here we are going to apply the first step. ReductionWhich shows we can reduce the overall percentage Fare structure by 5 % withouteffecting our profit margin (off course will reduce but still we are in the profit marginrange). The company can set up an individual fare policy, and apply the right fareuntil it phase out the other competitors.Accounting for Managers Course 10
  • 11. Redefining Optimum Network:Since our pervious approach, point to point, shows some routes are Redefiningunprofitable, so we will demonstrate a multi stops approach to Optimumimprove the profit of multi stop segment operation NetworkSo let us considerSANAA – TAIZ- ADEN – MUKLEAIn this routes some sectors profitable and the other sectors are unprofitable, we apply0.95 fare competitive strategy for profitable sectors ( SANAA-TAIZ , SANAA-ADEN , TAIZ-ADEN , ADEN-MUKALLA ) while Fare of unprofitable sectors isunchanged i.e remain at the level Market Fare as shown by Yellow strips ( SANAA-MUKALLA , TAIZ-MUKALLA) .So by considering a 45 seat and optimum cost at 0.0125 cent/ASK, While the demandof unprofitable routes remain unchanged, but demand of profitable routes can beadjusted to take only the share that maximize the profits, in multi stops operationwhile the remaining profitable routes can be treated as direct operating servicebetween the cities (point to point approach – as it is a profitable routes)Even SANAA – MUKALLA and TAIZ – MUKALLA are unprofitable sectors, butthe overall results of Multi stops operation is profitable one = 18,830 USD.Also the cost of one trip by this case = total cost / no. of frequency = (171217)/(291) = 588.375 USDAccounting for Managers Course 11
  • 12. And that is done at 34 (inch) pitch (distance between the heads of two seats insequences)While the load factors of the cabin of the bus is always greater than 90 %.i.e the cabin load factor ( annual operation ) =SANAA-TAIZ = 97 %TAIZ-ADEN = 99 %ADEN-MUKALLA = 93 %Profit Maximization:Since the normal distance between seats is 34 inches, at seatconfiguration of 45 seats as indicated by a blue color seats, but Profitthere is an opportunity to maximize the profit, by utilizing Maxim- izationmaximum possible capacity of the seat cabin i.e by reconsideringthe pitch distance of seats to 30 inch (which is a normal high density seatconfiguration of economic airlines – seat layout) this will lead to increase the numberof seats by one row i.e ( 4 seats ) which indicated by yellow seats, leading to total seatnumbers of 49 seat, and that will definitely improve the profit . 34 30Accounting for Managers Course 12
  • 13. Summary:The problem of local transportation is solved by implementing and defining the rightassets to operate and designing a profitable operating network, based on twoapproaches or scenarios First : point to point and the second multi stops operation,bearing in minds the cost deriver in a transportation situation which is ASK (Available Seat Kilometer ) while in a multi stop operation a marginal decision factorsplay an important rule in maximizing the profit i.e seat allotment ratio, which is basedon demand , market fare and cost, deriving to get a maximum cabin load factor with ahigh yield, while in point to point approach , companies can easily positioning theirfleet by using optimum operating curve to achieve high performance and theyimprove it by targeting the cost .Also a competitive market fare strategy is developed based on U curve techniques andmapping a frequency factor to define Favorite and Un-favorite percentage range ofMarket fare which consequently defining the profitable and loses routes in thenetwork.Contact:Mohammed Salem AwadConsultantTel : 00967734777518Email: smartdecison2002@yahoo.comAccounting for Managers Course 13