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Bus maintenance
Topic Difficulty Style
Business situation Beginner Candidate-led (usual style)
Operations strategy
Profitability analysis

Your client, BusCo, is a passenger bus company in Uganda, Africa. Due to


the poor road conditions, maintenance plays a very important role in the
reliability and quality of BusCo’s services.

BusCo outsourced all of its bus maintenance operations to MaintainCo in


the last years. However, especially last year, BusCo was very disappointed
with the maintenance provided. The bad service caused delays in service as
well as trip cancellations.

Now BusCo is considering doing its maintenance in-house. However, an


investment amortization period of 4 years or less is required.

The CEO wants to know from you if they should pursue the in-house
maintenance strategy next year?
Comments

This case does not require any complicated analysis of the industry
(customers, market or competitors). However, it covers an issue, which is
quite often faced by business all around the world. Should we do it in-house or
should we hire someone to do it elsewhere (outsource)?

These problems always have two sides: a financial/economical side


(measured in dollars) and a strategic side (difficult to translate into
money/costs but as relevant as the economics).

The case does NOT require any specific framework. However, a very clear
analysis structure should be laid out from the beginning of the case and
followed throughout.
Remember, the interviewer wishes to measure how organized and
structured the interviewee is.

Short Solution

BusCo should do the maintenance in-house.


It should invest in the facilities and not rent them.
Paragraphs highlighted in green indicate diagrams or tables that can be
shared in the “Information to share” section.

Paragraphs highlighted in blue can be verbally communicated to the


interviewee.

Paragraphs highlighted in orange indicate hints for you how to guide the
interviewee through the case.

Suggested case structure:

I. Economic comparison

First, the economics regarding the change should be considered:

Costs of in-house maintenance vs. outsourced costs


Payback time of in-house alternative

At this stage, the interviewee should ask for the main costs that the
in-house maintenance would require. You should first request an estimate of
the main costs of the maintenance operation.
Information that can be shared on the interviewee’s inquiry:

The required facilities can be acquired in two different ways:


Scenario 1: Acquisition of the facilities
Scenario 2: Renting the facilities
Since the outsourcing costs are flat-rate per bus, we will also
break down in-house costs per bus to be able to compare the
two.

Share Table 1 with the in-house costs in both scenarios and Table 2
with the extern costs, if inquired.

The candidate should brainstorm before you share the information!

The candidate should be able to calculate costs for both scenarios.

Scenario 1

A calculation method is described in Table 3.

In Scenario 1 savings would be $1m per year.


The investment would pay off in 3.5 years and therefore be below
the amortization limit of 4 years.

Scenario 2

A calculation method is described in Table 4.

In Scenario 2 savings would be $0.7m per year.

The investment would pay off in a bit less than 3 years, also below
the payback limit stated.

II. Advantages/risks

This is a more subjective analysis of the change comparing


advantages/opportunities against disadvantages/risks.
Scenario 1: In-house maintenance buying facilities

Advantages

BusCo would possess a very valuable real state asset (worth $1.5m).
The investment would be paid back in 3.5 years.
Less dependence of facilities contracts and less vulnerability to
changes in price or even to cancelation of rent contracts from the part of
the facility owners.

Risks/disadvantages

If the in-house maintenance does not work as expected (because of a


number of reasons like lack of capabilities and expertise, lack of
qualified work-force etc.), BusCo would see itself with a “useless” real
state asset that it would have to resell possibly for less than the buying
price of $1.5 million.

Scenario 2: In-house maintenance renting facilities

Advantages

More flexibility in case the in-house service does not work as


expected. The facilities investment ($1.5 million) would not be
required.
Payback time would be better: less than 3 years against 3.5 years if
buying facilities.

Risks/disadvantages

If the in-house service works, then after 3.5 years the company would
not own the facilities worth $1.5m as in scenario 1.
Rent is very likely to increase after 5 years.

Scenario 3: Keep maintenance outsourced

Advantages

No upfront investment needed.


Focus on core business: transporting passengers.
Risks/disadvantages

Service will be likely unsatisfactory again.


Decrease of revenues and loss of customers as a consequence of
bad service and delays caused by poor maintenance.

III. Conclusion

There is no right or wrong answer as long as the decision/recommendation is


well founded.
One possible closing for this case could be:

I believe that the BusCo should try to do its maintenance in-house next
year. Indeed, it should buy the facilities it will need instead of renting
them.

Main reasons

The economics analysis showed that investing in the in-house


maintenance would respect the firm’s investment payback policy of 4
years.
Although there is the risk of running a new business operation, we know
that nowadays the outsourced service is a very low-quality one.
It jeopardizes the reputation and customer loyalty of the firm.
By running the maintenance in-house, BusCo would be able to set a
high quality service standard.
By buying the facilities instead of renting them, BusCo would have paid
back the investment in a very significant real state asset in as early
as 3.5 years. This asset could even increase significantly in value
with the real-estate industry seeing a boom in emerging markets (like
Uganda).
Each employee can complete 20 maintenances per month.
The costs of renting are assumed to remain constant in the next 5
years.