Halloran Metals Final

Q.1) The main difference between Halloran and Allied operating strategy is related to their location and quantity of inventory. Halloran’s strategy is of keeping many strategically located warehouses in different areas, each equipped with special and distinct product lines to cater for the unique customer needs of the area in which the ware house is located. Halloran prides itself in giving the customer customer what it wants in just a single day. It has optimized operations that enhance its ability to deliver the steel products to a customer in a single day’s time. Halloran operates with different warehouses connected with each other via a shuttle service that transfers parts and steel products within different warehouses as per requirements. This shuttle service is the  backbone of Halloran’s Halloran’s operations, operations, and is the main reason why why Halloran is is able to deliver deliver its products products in a single day. Halloran strategy is of delivering the order to the customer every time, irrespective irrespective of the volume ordered by the customer. By doing this and keeping delivery time to a minimum, Halloran is able to charge a high margin from its customers, and at the same time building relationships relationships with them and retaining them due to excellent service. As per customer requirements, If Halloran feels that customers in a particular area require a special type of product they are willing to invest in building or acquiring a warehouse just for that area. Apart from the shuttle service, Halloran has a fleet of trucks for each warehouse that also help in the logistics of the company. These trucks were of two types, 20 tons and 10 tons. The 10 ton trucks are used to deliver products to the customers, whereas the other trucks are used to deliver products from one warehouse to the other as per the requirements of a particular warehouse. Hence Halloran caters each individual customer and looks to improve margins by keeping high inventory in its many warehouses and delivering superior service. On the other hand, Allied’s operating strategy is very different. As oppos ed to Halloran, Allied just has a very large single warehouse, with a size of 400,000 sq.feet, more than six times the size of Halloran’s largest warehouse. This warehouse stores both the inventory and the processing processing equipment. Allied Allied operating strategy depends on volumes. It does not have the same product line width and it does not have the large customer base that Halloran has. Allied stacks its inventory with fewer items than Halloran (40% less) and delivers its products in truckload quantities, quantities, frequently reducing price on high volumes volumes to boost sales. Allied has also invested in building fabrication equipment in its warehouse. Allied has more focus on processing as compared to Halloran Metals. Due to this logistics and warehousing structure, Allied simply cannot deliver the goods to customers within 24 hours like Halloran. However, it can offer better prices to its customers as compared to Halloran. For instance, Allied delivers delivers customers truckloads of goods. Due to this, it can lower its own transport costs and offer discounts to customers. Hence Allied’s focus is that of maximizing sales through offering discounts to its customers, and targeting fewer but regular customer, whereas for Halloran, its policy is different. It logistic and warehousing structure potrays it as a customer service intensive company, that prides itself on delivering customers their products quickly and maintains relations with them by having a variety of products. Due to this, it is able to charge more and keep a large customer base. Hence one is a price intensive company whereas the other is a service intensive company. Q.2) Allied’s strategy was similar to Halloran’s until 1995, when a change in top management saw a change in operating strategy. Allied Allied discarded some of its customers and narrowed its product lines, deciding to serve  just high volume volume customers. This policy has many many strengths and weaknesses. weaknesses. Firstly, Firstly, it is a cost intensive intensive policy. By keeping just one warehouse, Allied has been able to cut down on the high costs needed to support and maintain different warehouses. It operates with a single warehouse, where all the inventory and processing equipment is present. It also operates on a full truck policy. It serves those customers that order truck load quantities. This policy further reduces its transport costs, as full truck load delivery of goods is cheaper. Furthermore, due to focus on high volumes, Allied can both get and give discounts from its own suppliers and its customers. This makes its products less expensive as compared to those of Halloran. This is evident from the financial statements statements provided by Allied. IN both the year 2000 and 2001, Sales of Allied A llied are higher than those of Halloran’s. This is due to the high volume policy adopted. The cost of operations fo r Allied is also much less when compared to Halloran’s. Its operating expense is $ 17,032 as opposed to Halloran’s which is $ 32,886 in 2001. This is due to its cost cutting measures that Allied takes. However, this strategy also has many weaknesses. Allied’s inventory risk is much higher than that of Halloran’s. All of its inventory is placed in a single warehouse, meaning that the inventory has a very high risk and insurance and safety costs would be very high. In case of an accident, Allied’s Allied’s operation s would be severely disrupted. Also, due to the fact that it operates on full truckload policy, it won’t be feasible for Allied to deliver low volume products to its customers. Hence those customers, that order less volume goods, cannot be served by Allied, therefore it is left

with just those customers that want high volumes, and therefore it cannot increase its customer base if it keeps this operating strategy. Also, since it has one warehouse, Allied cannot reduce its delivery time. It needs 4 to 5 days to deliver the goods to areas that are far away. This leads to a competitive disadvantage. disadvantage. Furthermore, due to limited product lines, those customers that need specific products can never be served by Allied. All in all, Allied strategy is a very limited one, which reduces the costs but also reduces the reach of the company. Halloran’s policy also has many strengths and weaknesses. Halloran’s different warehouses operate independently. independently. Each of them order and keep goods keeping in mind the unique customer demands of their area. By doing this, they are able to deliver the exact goods to the customers and hence charge a higher price for it. Halloran’s policy also gives it a competitive edge in terms of customer reach and delivery time. Halloran’s policy of delivering goods to customers in one day means more customer loyalty and retention. This is evident from the fact that Halloran has 10000 customers whereas Allied has just 6000. Keeping warehouses at different locations reduces the inventory risk and allows Halloran to keep many different product lines. However, this policy also has many weaknesses. Firstly, it is very costly. The cost of operating different warehouses and the shuttle that links them is very high. Halloran also has to keep a much larger inventory in total to service the needs of its customers. In fact in 2001, the inventory to total asset % is 44% as compared to 26% for Allied in 2001. As mentioned earlier, Halloran has an operating expense of $ 32,886, meaning that running this system is very high. Also, the logistical cost for Halloran is very high. It does not operate at a full truckload policy, hence every delivery it makes is very high as compared to that of Allied. Due to keeping different product lines, Halloran can compete with its competitors in terms of pricing. This gives it a big disadvantage especially especially when compared to that of Allied. This is evident from the fact that Halloran has fewer sales than those of  Allied for both years 2000 and 2001. An economic downturn however, would affect Allied more than Halloran. Allied strategy depends on high volumes. In economic downturn, productivity would decrease and hence customers would not require high volumes, hence high volumes would not be in demand. Therefore, operating costs of Allied would rise more than those of Halloran, as it won’t operate on full truckload capacity anymore. anymore. This is evident from the financial statements statements of Allied, which shows that in 2001, the year where the downturn started Allied is showing a loss. (Loss of $ 44,000), whereas Halloran is still showing a profit. But Allied’s strategy would benefit it in an economic upturn. As productivity would rise, High volume goods would be in demand and Allied operating costs would decrease and it would benefit from its operating structure. Q3Halloran’s logistics strategy is to cater to small orders in the minimum amount of time i.e. one day. It is involved in Stage one processing which requires modest equipment. Intermediate processing needs large investments in equipment. Halloran operates from seven warehousing locations and carries excess inventory in all the locations at all times. This is a part of their logistics and marketing strategy of not turning down a single order or customer regardless of its size. Due to which it runs different economic risks in a market which is price competitive and growth-oriented at the same time. Moreover, in order to increase customer goodwill, it extends credit terms to their loyal customers beyond the usual 30 days period and results increasing the risk of  recovering accounts receivable. receivable. Referring to Exhibit 1, the income statement section shows that the operating expenses are high-particularly the cost of warehousing which limit operating profit. Under liabilities section, it shows that the company is highly leveraged and is showing high accounts payable figures depicting high default and liquidity risks. If a company fails to perform well in future years, it can default in making payments to its creditors which will consequently affect overall operations and limit company’s ability to borrow in future. It can also face problems in securing capital for capital expenditure and, thereby, running liquidity risk. To further emphasize on this point, we compare Halloran and Allied’s quick ratios. Quick  ratio is a measure of  assets-Inventories)/Current company’s ability to meet its short -term obligations. Quick Ratio = (Current assets-Inventories)/Current liabilities Halloran (2001) = (51,438-30,980)/29,75 = 0.68 Allied (2001) = (45,518-19,364)/22,710 (Figures (Figures from Exhibit 6) =1.15 High quick ratio means that a company is more capable of meeting its short-term obligations and has strong financial condition. Quick ratio ratio analysis shows that Allied is in a better position to cater to increased customer demand in future and to bring operational efficiency. Due to lower quick ratio, Halloran faces problems in bidding for bulk-buying and making large investments investments in equipment. It also faces certain difficulties in expanding its operations due to its highly leveraged and inventory-intensive inventory-intensive nature. A complete analysis of  ratios is given in  Appendix1.

Halloran has tried to reduce its risks b y exploiting small investment investment opportunities. The company buys a small depot, strengthens its customer base, and builds a warehouse in that location to fulfill the demand arising from that area. It reduces both default and liquidity risk. It keeps Halloran in a position to make debt repayments and leaves it with ample cash to meet its short-term obligations provided there is no hiccup in the overall supply chain system. And to account for the equipment need, it has developed in-house equipment but with time, the replacement cost is increasing which will be critical to meet the changes in industry. Industrial changes include technological innovation, innovation, latest equipment requirements and efficient supply chain system. So far, Halloran had been successful with this operational style. Q4) As we have seen that currently Halloran is severely hit with recession, they are carrying loads of inventory and their operating costs are high. So a change in their operating strategy is definitely needed. Firstly their strategy of satisfying “all” customers, regardless of their profitability profitability and their growth potential is not the right strategy and is not sustainable. For example a customer might be giving them an order of for example 1 tons urgent. Here, neither full truck load economies, nor purchasing economies are achieved with this order size, but they are still supplying him in one day. Then this is by no means cost-effective. This will drastically increase their operating costs and unless that customer could become a “potential profitable customer”, such service is not justified. If we analyze the cost of materials materials and operating costs, as shown in Exhibit 2, we see that Hallaron has a very healthy gross profit margin, but the problem is in its operating expenses which reduce the GP by almost 80% is 2000 ( 24.35 to 4.39) and almost 85%(22.76 to 3.55) in 2000. So this is the major area that demands the attention. So first of all they need to divide their customers based on customer profitability and customer’s “ potential” profitability. profitability. A matrix like Appendix 3 will come up. So as we can see that customers in Group C are the ones that are causing the most problems. Providing them with urgent logistics increases trucking costs as they usually do not order full truck loads, which are about 17% (Appendix 2) of total operating costs. Furthermore they increase the order processing cost reflected in the G&A expenses which are about 23 %(Appendix 2) of total operating costs in 2001. With large profitable orders this cost is spread over more units. So now the groups that are impotant are A, B and D, with B and not C. Currently Harrolan has split its 10000 customers into three categories based on revenue. But this s hould be changed to profitability, profitability, and customers with the largest profitability and growth potential should be provided premium service. This change should be done because as it is mentioned in the case that large orders are not usually profitable as the margins are very low on then, so a small order might be more profitable than a large one. If we analyze the Map of locations given in the case we see that Hallaron has seven s even facilities facilities that are pretty spread. To transport material from one branch to another, Worcester shuttle service is used. So for example Wilkes-Barre is very near to Binghamton, and when Binghamton needs inventory from Wikes-Barre, WikesBarre transfers it to Worcester who then transfers it to Binghamton. This heavily increases increases the cost of the inventory and cost of the shuttle service. If we see the quick ratio of Hallaron (.69) and inventory as percentage of total assets (44%, appendix 1) it clearly reflects reflects that they are keeping inventory and a lot of cash is tied in that inventory which could have have been put to better use. Further interest is also being paid on this cash. So what Jim needs to do is that places that are nearer should not necessarily have to pass through Worcester if  transporting on a truck directly would be more cost effective. Newburgh, Binghamnton Binghamnton and wikes-Barre are closer so they can use trucking more often, and the rest catered through Worcester. This is substantially reduce there in-transit inventory. But the problem with this is that flat-rolled steel that is a major product is only made at Worcester, so for that we can continue with the shuttle service. But in the long-run they should create a processing facility at Newburgh, Binghamnton or Wikes-Barre. This will help them in geographical expanision as well. Also what we can s ee at the map is that the 4 locations (Concord, Lynn, Worcester and Woonsokett are very near to each other. So rather than each having its own warehouse, we can have one single warehouse for them, this will reduce the total inventory and the warehousing cost. Reducing warehouse from 7 to 4 would greatly reduce the warehousing cost, which is the largest component (27% in 2001) in the operating costs. These measures will greatly help Hallaron to increase its profitibilty both in the short run as well as the long run. Here important point to note is that an analysis of the delivery time should be made before its implementation. implementation. These measures will increase delivery times. So firstly the time should be less than 3 days. Secondly customers customers in Group G roup B (Appendix 2) must get delivery within 24 hours. Customers in group A and D can get in 36 hours and less than 3 for C. So given these constraints they should implement these measures.

APPENDIX 1 YEAR 2001

RATIO

HALLORAN

ALLIED

Sales to Asset

2.39

2.33

Debt to Equity

1.11

0.34

Inventory Turnover

5.7

9.02

Current Ratio

1.73

2.00

Quick Ratio

0.69

1.00

% of inventory in total asset

43.8%

25.6%

% of fixed assets in total assets

39%

27.1%

Appendix 2 Allied Gp margin Operating profit margin Warehousing as %age of Total operating cost Trucking as %age of Total operating cost Selling as %age of Total operating cost Occupancy as %age of Total operating cost G&A as %age of Total operating cost Total operating cost

Appendix 3 on next page

Hallaron

2000

2001

2000

2001

14.20% 5.04%

10.31% 0.63%

24.35% 4.39%

22.76% 3.55%

25.98% 17.32% 22.41% 8.15% 26.14% 100.00% 30934

27.05% 17.42% 23.86% 9.17% 22.50% 100.00% 32886

Appendix 3 Group A

Group B

LOW Profitability

HIGH Profitability

HIGH Potential profitability

HIGH Potential Profitability

Group C

Group D

LOW Profitability

HIGH Profitability

LOW Potential Profitability Profitability

LOW Potential Profitability Profitability

Profitibilty X axis Potential profitability Y axis