CASE 6-1 CBN Railway Company CEO John Spychalski is concerned about a problem th

Question

CASE 6-1 CBN Railway Company

CEO John Spychalski is concerned about a problem that has existed at CBN railroad for almost 20 years now. The continuous problem has been that the locomotives used by the company are not very reliable. Even with prior decisions to resolve the problem, there still has not been a change in the reliability of these locomotives. Between 2006 and 2007, 155 new locomotives were purchased and one of CBN's repair shops was renovated. The renovated shop has been very inefficient. Spychalski estimated that the shop would complete 300 overhauls on a yearly basis, but instead it has only managed to complete an average of 160 overhauls per year.

   The company has also been doing a poor job servicing customers (that is, providing equipment). CBN has averaged only 87 to 88 percent equipment availability, compared to other railroads with availability figures greater than 90 percent. Increased business in the rail industry has been a reason for trying to reduce the time used for repairing the locomotives. CBN's mean time between failure rate is low—45 days—compared to other railroads whose mean time between failure rates is higher than 75 days. This factor, Spychalski feels, has contributed to CBN's poor service record.

   CBN is considering a new approach to the equipment problem: Spychalski is examining the possibility of leasing 135 locomotives from several sources. The leases would run between 90 days to 5 years. In addition, the equipment sources would maintain the repairs on 469 locomotives currently in CBN's fleet, but CBN's employees would do the actual labor on the locomotives. The lease arrangements, known as “power-by-themile” arrangements, call for the manufacturers doing the repair work to charge only for maintenance on the actual number of miles that a particular unit operates. The company expects the agreements to last an average of 15 years. John Thomchick, the executive vice president, estimates that CBN would save about $5 million annually because the company will not have to pay for certain parts and materials. Problems with the locomotives exist throughout CBN's whole system, and delays to customers have been known to last up to five days. Spychalski and Thomchick feel that the leasing arrangement will solve CBN's problems.

Do you think that the decision to lease the locomotives was the best decision for CBN?

Explanation / Answer

I think CBN made the right choice in leasing the locomotives, and gaining an equipment source. In light of the terrible metrics they were facing on mean time, availability and overhaul times they had to make a drastic decision fast. Without having the revenue to invest in another new shop, and more locomotives, rather than lose the business a lease was a great option at that time. However it’s a short term fix, and will not propel the company to higher profits if they have to high of a cost to lease.

If the company will save 5 billion annually as John Thomchick believes, then that money should be ‘saved’ for a purchase of new locomotives to supplement the new ones purchased in 2007. Spending the next several years decommissioning the older engines in favor of bringing in new equipment that belongs to CBN versus a lease. They would also have the revenue to build another overhaul shop, train their employees and rebuild their company internally. All of these changes could happen over the 5 year span of the original lease. Thus allowing them to end the lease arrangement in favor of running their own equipment and shops at a gain due to better equipment, training and employees.

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