Operations Management - Decision Analysis Projects

PROJECT Times are tight in eastern North Carolina. Many people have lost their jobs and slipped behind

PROJECT

Times are tight in eastern North Carolina. Many people have lost their jobs and slipped behind in car payments. You are currently "out of a job" and thinking about going into the repossession business. People are falling behind on their car payments to used car lots, dealerships, credit unions, finance companies and banks at an alarming rate. Currently about 3% of all auto loans are 30 days overdue. The opportunity to turn these late payments into a business seems very promising. You have decided to develop a business plan for recommending / not recommending engaging in the "repo" business in rural eastern North Carolina. The question is simple – should you consider this as a potential profitable business. Your model will be required to secure funding and provide a "road map" to profitability. You and your spouse have decided to call the business Reputable Repossession.

Reputable Repossession will have two potential modes of operation. The simplest will be to find the auto, generate the proper paper work and carry to the requestor’s designated location. The second mode of operation will be to not only do the first activities but also to provide a repossession lot to store the secured vehicle. The first mode is less expensive to establish than the second mode; however, the second offers more revenue through the storage fees associated with the repossession.

Break Even Analysis
The first analysis is a rough cut at the profitability of the enterprise in the two modes – repossession only or repossession and store.
Repossess Only
Costs associated with the Reputable Repossession for the repossession and delivery to the client site will be:
Labor Per Week: Reputable Repossession (RR) will require two part-time persons for 20 hours per week each, at $8 per hour.
Special Insurance: The repossession business requires special insurance that will cost about $900 per month. The reason for this high rate is that autos are damaged or alleged to be damaged during the repossession process.
Special Equipment: You will require a "low boy" wrecker for grabbing the cars. This will cost about $6000 per year. You will also need a phone upgrade for your at-home phone for this operation. The equipment will cost $150 per month.
Some costs vary with the number of repossessed autos. The costs associated with a simple repossession are in the following table.
Table 1

Variable Cost for Repossession without Storage

Area	$ Per Repossession
Wear on the Wrecker	37
Gas	9
Documentation Fees	10
Photo	2

Repossess and Store
Costs associated with the Reputable Repossession for the repossession and store will be:
Labor Per Week: Reputable Repossession (RR) will require three full-time person for 40 hours per week, at $9 per hour.
Real Estate: RR real estate costs revolve around the repossession lot. For your break even, assume the lot will cost about $50,000 and the building will need to be about 750 square feet at 70 dollars per square foot to build. Borrow this money from the bank at 7% interest with a 15-year fixed rate loan. To this payment, add $200 per month for insurance, $350 for utilities, and $100 a month for property taxes.
Special Insurance: The repossession business requires special insurance that will cost about $900 per month. The reason for this high rate is because autos are damaged or alleged to be damaged during the repossession process.
Special Equipment: You will require a "low boy" wrecker for grabbing the cars. This will cost about $6000 per year.
Some costs vary with the number of repossessed autos. These costs associated with a repossession with a storage lot are in the following table.
Table 2

Variable Cost for Repossession with Storage

Area	$ per Repossession
Wear on the Wrecker	35
Gas	5
Documentation Fees	5
Photo	2

Your first action will be to determine the total fixed and variable cost for the two modes of operation. The formula for break-even volume is equal to cost fixed divided by price per repossession minus the cost variable for repossession. ( See pages 8 – 9 in Text )
To do this first estimation you will need to have the price that you will charge for each repossession. For the repossession only charge $299. On a repossession and storage, you will have the $299 for the pick-up. The storage will be for 30 days at $5 per day for another $150. This will yield on average $449 on a repossession and storage.

Quantity to Repossess
Now that you have finished the analysis on the number of vehicles that you will need to repossess to break-even, you must now determine if there are sufficient potential "repossess-able" vehicles in your target area. To determine the number of potential vehicles you have sent a survey to all of the target suppliers of repossession leads. You have targeted credit unions, banks, car lots (mainly small used car operations), car dealerships, and muli-state loan companies. You generated a survey and sent to all of the targeted businesses.
Figure 1
Survey Instrument

Reputable Repossession

Reputable Repossession will begin offering repossession services in your area.

Based on your valuable input, we plan to operate in one of two modes: pick up and store or pick up only. Please give us your honest opinion on the potential of us helping you to recover your property. Our rates are $299 for pick-up and $5 per day for storage.

Name of your organization: _______________________________

1) Would you use our service if we offered discrete repossession and stored on our lot? Y N

2) Would you use our service if we only delivered to your designated location? Y N

3) Approximate number of repossessions required each quarter (ex: 4 ^th Qtr 2008) _____

4) Town with most repossessions (Circle One)

Greenville Wilson Jacksonville Kinston Goldsboro

5) What per cent do you think the repossession business will change next year? (Circle one)

-60% -50% -40% -30% -20% -10% No Change +10% +20% + 30% +40% +50% +60%

The responses to this survey are what you will need to determine the feasibility of your operation. Although you sent to many establishments, only the ones who responded will be counted as potentials to share their repossession needs with you. The following table provides the responses. The results are in "cars per quarter."
Table 3
Survey Results

Reply #	Source	# of Cars per Quarter	Type	Pick up & Store	Pick Up Only	Town	Percent Change
1	Smiths Auto	4	Used Lot	y	y	Jacksonville	20
2	Sand Hill Bank	5	Bank	y	y	Greenville	0
3	Save Loan Shop	5	Loan	n	y	Greenville	10
4	Quick Cash	6	Loan	y	n	Greenville	0
5	Bank of South	4	Bank	y	y	Jacksonville	20
6	Mouse Motors	4	Used Lot	y	n	Jacksonville	20
7	Jakes Lot	2	Used Lot	y	n	Wilson	0
8	J&J Deals	3	Used Lot	y	y	Jacksonville	20
9	Cheap Rentals	3	Used Lot	n	y	Greenville	10
10	GMMC	3	Loan	y	n	Goldsboro	10
11	Town Group	5	Dealer	y	y	Kinston	10
12	Credit Home	4	Loan	y	n	Jacksonville	30
13	Johns Auto	4	Dealer	y	y	Jacksonville	30
14	JB’s Auto	3	Dealer	y	n	Wilson	0
15	Wilson Bank	5	Bank	y	y	Goldsboro	10
16	Mil CL	2	CU	y	y	Jacksonville	20
17	Glassford Ford	6	Dealer	y	y	Jacksonville	20
18	Joes Deals	2	Used Lot	y	y	Wilson	0
19	Gold Star Fin	4	CU	y	y	Goldsboro	10
20	Froggies	3	Used Lot	y	y	Wilson	0
21	Temple Dodge	3	Dealer	y	y	Greenville	0
22	Marine Motors	2	Used Lot	n	y	Greenville	10
23	University GMC	4	Dealer	y	n	Jacksonville	30
24	East Coast CU	5	CU	y	n	Jacksonville	20
25	Nickel Bank	3	Bank	y	y	Wilson	-20
26	Jaspers	4	Loan	y	n	Wilson	0
27	Easy Cash	3	Loan	y	y	Greenville	0
28	Quick Loans	2	Loan	y	n	Wilson	-10
29	Tags Motor	2	Used Lot	y	y	Jacksonville	30
30	Jim Dollar Man	3	Loan	y	n	Goldsboro	10
31	East Honda	1	Dealer	y	y	Wilson	0
32	SeaSide Toyota	4	Dealer	y	y	Greenville	10
33	Max's Motor	2	Used Lot	y	y	Greenville	10
34	Royal Lexus	3	Dealer	y	y	Goldsboro	10
35	Taddy's Wheels	4	Used Lot	y	n	Kinston	10

The previous table provided all of the responding targeted suppliers of repossessions to your planned business. Notice that some potential customers would use one type of service (Pick up only or Pick up and Store) but not the other type. Replies 3 and 4 are examples of this activity. The last column represents the percent that the customer feels the repossessions will change in the next year.
You will need to summarize the number of potential repossessions by type of service, type of customer (Used Lot, Dealer, etc), and location. To predict the "state of nature" of the repossession business summarize the percentages in the right hand column. You will need the number "down", "neutral", and "up." Count the number with a positive as up, neutral as zero change and negative as down. For instance the probability of down is 2 of 35. Place this information in a presentable format.
When you finish this analysis you should assume you will only capture 50 percent of the repossessions. This is a conservative assumption; however, this should be an achievable goal.

Days In Storage

Your spouse has located some valuable information on "days in storage." First, the 30 days in storage, assumed earlier in section 1, seems to be less than the area is actually experiencing when vehicles go into storage. Another repossession and storage, the competing company, has the following days in storage (see table 4) for their last 35 vehicles. Use the information from this table to determine the average days in storage. Also, compute the standard deviation on these repossessions. (See page 498 and 499 in text.) Once this is complete, compute the impact on first quarter profits in the repossession and store mode. Use the table 4 average rather than the "30 days" for the store time of a vehicle.
Table 4
Days in Storage

Actual Days Cars Held in Repossession Lot
20	60	65	55	30
36	21	41	30	10
21	34	10	29	33
60	56	34	17	23
83	12	20	30	20
24	49	19	28	32
56	84	30	15	38

Assume a normal distribution for the 35 observations. You are fifty percent positive your days will be less than the average and fifty percent sure it will be more than the average. If you use your 30 day storage interval, how sure are you that you will have more than 30 days based on this data. As in all of the sections, comment on these findings and the impact on the decision regarding the repossession business. To be conservative maintain the 30 days for storage and continue your analysis.

Type of Business
RR will need to determine the type of business "Do Not engage", "Repossession Only", or "Repossession and Storage." Do not engage is do not enter the repossession business. The technique used will be the decision analysis for maximax, maximin, equal likelihood, and expected value. The process will require at least three steps. The following table will help. This table provides the per cent change based on feed back from the potential customers.
Table 5
Decision Payoff Base

Per Cent	Down	Same	Up
Do Not Engage	-15	Same	16.5
Repossession Only	-15	Same	16.5
Repossess & Store	-15	Same	16.5

From this table, recreate the table two more times. The first time will be with the number of repossessions for the type of operation by quarter. For the quantities use the "50 per cent of the totals" that you computed in section two. Regenerate the table with the number of repossessions in each cell. Of course, the "same" uses the "50 percent of the repos" numbers generated in section 2, but the quantities of repossession for down and up will need to be adjusted by the percentages in the above table.
Once this table is complete you need to revisit the profit equation of chapter one. With this revisit, you recreate the table for the second time. The equation Z= VP – C _f – VC _v is used to compute the contents of the payoff table. Once the table is completed, provide the type of operation using the maximax, maximin, equal likelihood, and expected value for the decision making criteria. (See pages 512 – 525 in the text)
For the expected value you will need the probabilities of the states of nature. The probabilities are based on the fraction of "down" compared to the total, "stay the same" to total, and "up" compared to the total. These fractions come from the table in section 2. At this point chose the best mode of operation based on the expected value criteria.

Forecasting Future Business
For Reputable Repossession the future number of repossession will be needed. In the previous section a mode of operation was selected based on expected value. Now, forecast the future using the season adjustment technique. (See page 682 in the text). Use the selected mode of operation for the analysis. Your selected mode will be repossess only or repossess and store the vehicle.
The following figure provides the number of automobile repossessions in the United States.
Figure 2
Repossessions in USA

Notice these numbers are in thousands and your numbers are in units. You must adjust the section two data to fit this scale. Assume your section two data will be gathered in the fourth quarter of 2008.
Forecast the repossessions by year for 2009 through 2012. Next, convert these repossessions into yearly profit/loss by year for 2009 through 2012. Now, repeat the process (both repossessions and profit/loss) by quarter for the quarters for 2009 through 2012.
Remember your first quarter repossession must be a number approximating or equal to the number of expected repossessions found in section 2. This will be 50% of the targeted repossessions found in table 3.

Marketing Activity
After discussing with others in the repossession business, you have determined a method to build your business. From their inputs, you have determined if you visit with a gift and visit "enough of the customers" you will build additional repossessions. The success rate, time spent, and gift price with each type of businesses is listed in the following table.
Table 6
Marketing Activity Factors

Type of Business	Repos per Visit	Time Required	Cost of Gift
Used Lot	0.18	2	25
CU	0.14	6	8
Dealer	0.20	4	18
Loan	0.15	2	20
Bank	0.22	6	10

Now, to read the above table, the following is provided. If you visit 100 Used Lots you will gain an additional 18 repossessions per quarter. For each visit to a Used Lot you will need two hours and you will need to deliver a $25 gift.
Thus, your goal is to visit and maximize the number of additional repossessions that will be awarded to RR. You have a couple of additional restrictions. The first is that you will not visit businesses that did not reply to your original survey. Thus, table two data will provide the maximum number of visits that can be made to each type of business. You plan to allocate no more than 200 hours to "drum up" business. You also plan to spend no more than $350 on gifts. Analyze your visits as integers. You do not want to perform fractions of a visit.
How many visits should you make to each type of business? What is the expected number of quarterly additional repossessions that you will obtain from this activity (round to a whole repossession)? (See page125 in the text) How much additional profit will come from these repossessions per quarter?

Location of Reputable Repossession

Locate the Reputable Repossession site based on the number of repossessions in the towns specified in the survey in part 2. Do not include the additional repossessions gained in section 6. Use only the repossessions identified currently in the survey. Use all of the repossessions identified. Do not vary this by the type of business (pick up only or full repo and store) that you will be operating. The following map may help in your examination . (See page 463 in the text)

Figure 6

Map of Eastern North Carolina

The star does not indicate the location. It is merely the point needed by the MapQuest software to display this beautiful map. Give the town and highway best suited to minimize your travel.

Make sure your summary includes the type of business to engage, the profits per year, the location, and the amount you will increase your repossessions by engaging the marketing campaign.

This project will require investigation. Even with investigation, assumptions will need to be made. State your assumptions. Determine what data will be needed to determine the answer for each of the areas.

In your report, include Table Summaries 7 through 14 that contain key information of your analysis for each of the 7 identified areas. Place these summary tables in your report as you explain the significance of each table.

During each week, plan to dedicate time for questions about needed information. As this project progresses, some "slight" adjustments may be made as more consulting data become available.

Price: $32.39

Solution: The downloadable solution consists of 19 pages, 1339 words and 5 charts.
Deliverable: Word Document