Fleet Management Group August 2010 CaseExamBook CMA

CASE EXAMINATION

Fleet Management Group Inc. (FMG)

AUGUST 2010

2011 The Society of Management Accountants of Canada. All rights reserved. / Registered Trade-Marks/Trade-Marks are owned by The Society of Management Accountants of Canada.

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August 2010 Case Examination

TABLE OF CONTENTS


Page Case Question: Backgrounder ................................................................................... 1 Additional Information ..................................................................... 17 General Comments on Performance ....................................................... 26 Steps for Approaching Business Strategy ................................................ 35 Marker Assessment Guide ....................................................................... 39 Solution Notes for Markers ....................................................................... 49 Sample Response Successful Attempt #1 ............................................ 57 Sample Response Successful Attempt #2 ............................................ 85 Sample Response Unsuccessful Attempt ........................................... 112


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August 2010

Case Examination

Backgrounder

The background information relating to the Case Examination (Backgrounder) is provided to candidates in advance of the examination date. The Backgrounder contains information about both the fictitious company and the industry involved in the case. Candidates are expected to familiarize themselves with this information in preparation for the analysis that will be required during the Case Examination.

Candidates should note that they will not be allowed to bring any written material, including the advance copy of this Backgrounder, into the examination centre. A new copy of this Backgrounder, together with Additional Information about the company and a supplement of formulae and tables, will be provided at the writing centre for the Case Examination.

Only the following models of calculators are authorized for use during the Case Examination:

1. Texas Instruments TI BA II Plus (including the professional model) 2. Hewlett Packard HP 10bII (or HP 10Bii) 3. Sharp EL-738C (or EL-738)

Candidates are reminded that no outside research on the industry related to this case is required. Examination responses will be evaluated on the basis of the industry information provided in the Backgrounder and Additional Information.


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Fleet Management Group Inc. (FMG) Backgrounder

Overview FMG is a privately owned Canadian company that provides vehicle leasing, rental, and related services to corporate customers in both the public and the private sectors. FMG operates from a single facility located in Mainway, a mid-sized Canadian city near the U.S. border. Mainway Mainway (the City) has a population of 500,000 and, as a border town, a diverse economy supported by major employers in the transportation, manufacturing, and tourism industries. Both the Citys population and the average household income have grown slightly faster than the provincial average, and all forecasts indicate that these trends should continue well into the future. History In 1968, a new department of municipal government was established in order to streamline vehicle purchasing, monitor vehicle maintenance and use, and lower variable vehicle operating costs. The Fleet Services Department was formed by consolidating the operations of several small fleets in various existing departments, such as Parks, Public Works, and Social Services. For this new department, the City chose a convenient, downtown location and built a facility to house administrative offices, a full-service garage, a body shop, and a parts department. The Fleet Services Department began by requiring monthly mileage reports from drivers, adopting a standardized classification system for vehicles, and streamlining the purchasing process. A preventive maintenance program was established and monthly maintenance reminders were mailed to drivers. Vehicles were serviced on site and, at the same time, inspected for damage and abuse. As a result of these changes, capital and variable vehicle operating costs fell sharply and the Fleet Services Department was widely seen as a success. Throughout the years, fleet management in the City continued to improve. Eventually, the departments managers became convinced that municipal procedures and regulations were an impediment to further service improvements. In 2002, they presented the City manager with a proposal to privatize the department. The proposal was hotly debated at council meetings but passed by a narrow margin. In July 2002, the assets of the Fleet Services Department were sold to a consortium of its staff, led by the departments existing management. Fleet Management Group (FMG) was incorporated, and the company adopted a June 30 year-end.


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The Fleet Management Industry Many companies outsource fleet responsibilities in order to reduce costs and focus on core business. Professional fleet management companies reduce vehicle life cycle costs by applying best practices related to asset management, cost management, and information technology, as outlined in Table 1.

Table 1: Best Practice Areas in Fleet Management

Asset Management Cost Management Information Technology

Choosing the right vehicle for the job

Buying in bulk Maximizing utilization Managing vehicle safety Minimizing life cycle costs Optimizing the replacement

process Using alternative financing Managing the supply chain Ensuring the best resale value Maintaining preventive

maintenance

Optimizing licensing and legal costs

Managing repair costs Facilitating accident

reporting and driver safety

Managing risk Managing fuel with

respect to purchasing, consumption, and emissions

Collecting, analyzing, and capitalizing on business intelligence

Reporting on life cycle costs

Using technology and other automated sources to collect information

The fleet management industry is large, increasingly global, and dominated by large companies. In North America, the three largest companies fill the needs of almost two-thirds of the marketplace with over two million vehicles under management. In Canada, the largest firm manages approximately 120,000 vehicles, whereas the 10th largest manages a mere 6,000. Leases and rental arrangements with a fleet management company differ greatly from those that an individual consumer encounters at a car dealership or rental company. Fleet management company agreements are business to business and usually involve many vehicles at one time. Vehicles remain the property of the fleet management company (lessor) and never become the property of the company leasing and using the vehicles (lessee). Typically, the lessee appoints a vehicle coordinator to act as the fleet management companys primary administrative contact. The vehicle coordinator assigns vehicles to drivers, receives and reviews reports from the lessor, and approves payment of lessors invoices. In addition, administrative services are usually included with each vehicle for an additional fee. For example, the lessee can select a maintenance agreement for the vehicle or choose to have fuel and repair invoices directed to the fleet management


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company for consolidation for payment. These services can be charged to the lessee in various ways. The option selected by all of FMGs customers, converts oil, fuel, and regularly scheduled maintenance costs to an amount per kilometre; this charge is billed monthly, after the driver has reported the number of kilometres driven. All other repairs are charged in addition to the per kilometre rate. FMG Operations FMG provides fleet management support in three areas: leasing and rental, repair and maintenance, and fleet management services. Leasing and Rental FMG offers vehicles for lease, short-term rental (i.e. daily or weekly), and long-term rental (i.e. more than a month). Leases are fixed-term contracts, usually for 48, 60, or 72 months, whereas rental contracts are more flexible, allowing customers to return vehicles at their discretion. Table 2 describes the composition of FMGs fleet.

Table 2: FMG Fleet Composition (as at June 30)

By Service Type (in units) 2010 2009 2008 2007 Leased 2,173 2,152 2,077 2,036 Long-term rental 438 434 419 411 Short-term rental 109 108 104 102 Awaiting reassignment 65 64 62 61 Awaiting disposal 28 28 27 26 Total 2,813 2,786 2,689 2,636

By Vehicle Category (in units) 2010 2009 2008 2007 Trucks 1,607 1,556 1,466 1,400 Vans 827 840 833 839 Cars 379 390 390 397 Total 2,813 2,786 2,689 2,636

Because FMG depends on municipal departments for most of its revenue, the companys operating cycle is aligned with the Citys budgeting process. Beginning in July of each year, FMG identifies the leases due to expire within the next year and the vehicles reaching the end of their economic lives. FMG passes this information to its customers and asks them to indicate what replacement and additional vehicles will be needed for the following year. At the same time, FMG reviews its internal projections related to demand for its short-term and long-term rental vehicles. While customers review their requirements, FMG researches the latest automotive manufacturing developments and updates the vehicle category descriptions in the


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companys classification system. These descriptions outline the minimum features and accessories necessary for a vehicle to meet FMGs standards for a given category. Additional features can add thousands of dollars to the basic price of a vehicle. FMGs classification system provides a way to compare vehicle makes, models, and additional features across manufacturers. Once customers have indicated their intentions for the following year, FMG aligns their requirements with the vehicle categories that match most closely. In September, FMG issues a request for tender to the major manufacturers. They reply within a month, proposing models and additional features that meet or exceed category standards. FMG evaluates the tender responses and selects a supplier for each category based on best price. For each category, FMG converts the tendered price of the chosen manufacturer into a lease rate over the customers desired term, communicates this rate to the customer in November, and requests a formal commitment to lease. This timing works well for government customers since budgets have been established and departments can finalize their vehicle requirements. In December, FMG issues purchase orders to the manufacturers. New vehicles arrive from the manufacturers in February and March. FMG uses its garage to add custom features requested by the customer on the initial order. FMG insures the vehicle using its in-house brokerage firm then contacts the customer to arrange pickup of the new vehicle and return of the old, if applicable. Finally, the new lease contract is completed. Typically, vehicles returned after the lease expires are sold at auction. However, in some cases, vehicles in reasonable condition are retained for FMGs long-term rental pool. These older vehicles are popular with the Parks Department, which tends to need vehicles for up to six months over the summer season. Maintenance and road crews also prefer the older vehicles, whose residual values are less affected by the minor dents and scratches associated with hauling equipment, gravel, and other materials. For short-term rentals, FMG maintains a pool of newer vehicles. To reserve a daily rental vehicle, clients contact the customer service centre by phone or e-mail. By purchasing vehicles once annually, FMG maximizes its volume discounts. These discounts are reflected in the companys competitive lease and rental rates. Purchase and disposal data for FMGs fleet are given in Table 3.


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Table 3: FMG Fleet Purchase and Disposal Data (as at June 30)

2010 2009 2008 2007 Acquisitions (in units) 279 298 325 339Disposals (in units) 252 201 272 281Average purchase price (000s) $34.9 $27.8 $30.1 $37.1Average disposal proceeds (000s) $4.9 $6.1 $6.4 $4.6Fleet Size (in units) 2,813 2,786 2,689 2,636

Repair and Maintenance FMG operates a full-service repair facility dedicated to FMG vehicles and to customers using FMG fleet management services, but is closed to the general public. The facility is equipped with the latest technology for diagnosing problems with computerized vehicles. The garage has 16 service bays to address mechanical issues, such as the need for an oil change or new brakes, a computerized diagnostic scanner, and 2 personal computers to access technical specifications, vehicle schematics and repair information. Vehicles on full-service leases receive a wash and fill-up with every maintenance appointment and, since the facility is within walking distance from city hall, this service is popular with municipal employees who have meetings downtown. FMG operates a body shop and fabrication centre that focuses on body repairs, windshield replacement, and custom metal fabrication. This area has a frame machine, a downdraft paint booth, and other equipment needed to rebuild a vehicles body and frame, typically after a collision. The body shop supervisor works closely with insurance adjustors and FMGs insurance administrators to process accident claims and keep costs low. Because of FMGs relatively low accident rate and the ability to fix scratches and dents in its own body shop, the company enjoys comparatively low insurance rates for its vehicles. To support both the garage and the body shop, FMG operates a parts department that is stocked with the most commonly replaced parts as well as a small number of consumables (e.g. oil filters, windshield wipers, etc.). To keep inventory costs low, FMG obtains most of the parts through wholesale contracts with manufacturers supply depots and aftermarket parts warehouses. Because fleet composition is constantly changing, FMG retenders these contracts annually and usually specifies a cost-plus arrangement. FMG parts typically comprise 45% of total vehicle repair and maintenance costs. When a part is needed, the garage mechanic or body shop technician takes a work order to the parts counter. If the item is not in stock, the parts technician orders it from the appropriate supply depot. Delivery drivers circulate on fixed routes throughout the city, often stopping at FMG two or three times per day. A part not stocked at the supply depot can be shipped to FMG from a regional distribution centre, usually within two


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days. When the part arrives at the repair facility, the parts technician records the item in the inventory system, issues it to the appropriate work order, and alerts the mechanic or technician who requested it. The repair facility operates at close to capacity throughout the year, with the busiest season beginning in February. When the new vehicles arrive, the parts department increases its inventory of common automotive accessories, such as running boards and truck box liners. The body shop does more fabrication work for vehicle customizations, such as tool cages and cargo racks. In addition to outfitting new vehicles and conducting pre-delivery inspections, the garage inspects returning vehicles and reports to the fleet manager on likely vehicles for the long-term rental pool. To accommodate the increased number of vehicles being handled by the repair facility, FMG rents space in a parking lot a few blocks away. The operations manager has considered adding another shift during this busy period but, because quality automotive technicians are in short supply, has refrained from doing so. Both the repair facility and its technicians maintain several accreditations. For example, as a Certified Vehicle Inspection Centre, FMGs garage is allowed to inspect and certify vehicles for roadworthiness according to regulations set down by the provincial Ministry of Transportation. Vehicles need roadworthiness certificates in order to be registered when their ownership changes. In addition, most of FMGs body shop technicians have extensive I-CAR training. Formed by the collision repair industry in 1979, I-CAR sets down internationally recognized standards for automotive body repair. The repair facility services approximately three-quarters of FMGs vehicles; the remainder are serviced by vendors throughout the city, partly for reasons of customer convenience. These vendors include local service stations, repair facilities and car dealerships. Regardless of where the vehicles are maintained, FMG is responsible for providing its customers with high-quality service. As a result, the company reviews and approves the other service providers in order to ensure that they meet FMGs standards. Even though competition is stiff in the retail repair market, FMGs management believes that operating the garage and body shop gives FMG a competitive advantage over other fleet management companies. Specifically, operating the garage and body shop ensures that FMGs fleet manager has intimate and timely knowledge of maintenance issues that arise within the companys fleet. Fleet Management Services Fleet management services aim to minimize variable vehicle operating costs and improve usage reporting. In combination with a leased vehicle, the fleet management services package creates a full-service lease that is well received by customers in both the public and private sectors. FMGs fleet management services package includes: a credit card for fuel purchases and minor repairs, a pre-authorization and audit system


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for external and major repairs, preventive maintenance notices and tracking of all vehicle history. FMGs Gas & Go credit card is accepted at service stations and repair facilities throughout the city. This card allows drivers to charge fuel purchases and minor repairs (i.e. those costing less than $100) when they cannot visit FMGs facility, or choose not to. FMG receives detailed information electronically for every Gas & Go transaction. This enables the company to track fuel consumption and repairs for each vehicle. The Gas & Go system also consolidates purchases, which reduces the number of bills customers receive and allows FMG to take advantage of bulk fuel discounts. The card is encoded to authorize vehicle-related expenses but rejects personal items, such as chocolate bars and cigarettes. For repairs that cost more than $100, FMG offers a Repair Authorization Service (RAS) using a network of approximately 125 repair facilities throughout the city. FMG relies on this network both to provide convenience for customers and to perform specialized repairs (e.g. the rebuild of a transmission). To be a part of the RAS network, a vendor must apply to the program and pass an inspection. When asked to service an FMG vehicle, the approved vendor contacts FMGs customer service centre. The customer service staff check the vehicles repair history, ensure that the service is not covered by warranty, confirm the prices to be charged and issue a purchase order over the telephone. After the repair has been completed, an FMG licensed mechanic audits the invoice before it is paid. The mechanic checks for billing errors, discounts, cost consistency and duplication of work, then codes the work completed and enters the details into FMGs maintenance system. FMGs preventive maintenance program was developed to optimize the life and dependability of its vehicles. By tracking mileage and repair history, the program can identify vehicles due for maintenance and notify drivers in advance that their vehicles need service. Well-maintained vehicles are safer and more reliable, last longer, and have lower operating costs. For each vehicle, FMG maintains a complete history, including initial cost, maintenance and repairs, fuel consumption, and distance travelled, in a series of administrative and financial systems. FMG also offers a Consulting and Information Service that helps customers analyze these statistics in order to optimize fuel consumption as well as vehicle utilization and replacement. Management Team and Shareholders An organizational chart for FMG is provided in Appendix A. The management team is headed by Denise Descartes, P. Eng., who led the buyout in 2002. She holds an MBA in marketing and was a process engineer for one of the major auto manufacturers before joining the Citys Fleet Services Department. As CEO, she is


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evaluated by the Compensation Committee of the Board of Directors according to various qualitative criteria as well as the companys income before taxes. Don Chestnut started with the Fleet Services Department as a garage mechanic in 1979 and has been Fleet Manager since 1990. He earned a Diploma in Management by taking evening courses and has acquired extensive knowledge relating to the operating characteristics of FMGs fleet. His evaluation is based on the achievement of fleet utilization and operating cost targets. Guy Simmons, Operations Manager, joined FMG in 2006 after operating his own repair shop for 22 years. He was recruited by Descartes, who liked his no-nonsense style. Simmons oversees the garage, body shop, parts department, and customer service centre. He is evaluated according to the income before taxes of the Operations department. Kathryn Chow, Support Services Manager, has 14 years of progressive management experience with various companies. She is responsible for billing, lease administration, and insurance. She also supervises the administrative support and information technology staff. She is evaluated primarily on the achievement of pre-stated annual objectives, such as shortening the billing cycle. Albert OGrady, CMA, is Finance Manager. Before joining FMG, he worked as a controller in a large consulting firm. He supervises the accounting and finance staff and is responsible for collections, accounts payable, financing, and rate setting. Along with Descartes, he was a key player in the buyout. OGradys evaluation is based on meeting pre-stated annual financial objectives, such as reducing financing charges. Teresa Singh, Marketing Manager, has been with FMG since 2003 and holds a degree in commerce with a marketing major. She has a background in sales and was an executive with a car rental agency for a number of years. She is responsible for all marketing and sales for FMG. Her evaluation is based on meeting leasing and rental revenue targets. Board of Directors FMGs Board of Directors is comprised of five individuals. Alex Normek acts as Chair. During his tenure as city engineer, he recruited Descartes and became very familiar with FMGs operations. Noriko Yatamoto, a lawyer who specializes in intellectual property, acts as FMGs corporate counsel. Jarislav Demchuk is co-owner of DM Construction, a mid-sized construction company with offices throughout the province. He also owns a number of service stations and convenience stores through various corporations.


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Mario Wellington was FMGs Assistant Finance Manager before his retirement in 2003. Wenellie Chan has a background in sales and marketing in a variety of industries including automotive parts, sporting goods and computer software. Chan is a long-time friend of Descartes. The Board meets monthly to review progress reports, financial results, and major proposals presented by Descartes and selected members of the management group. On at least an annual basis, the Board scrutinizes FMGs vision and mission statements (see Appendix B) to ensure that they continue to reflect the current viewpoint of the Board, management, staff and shareholders (Table 4 provides a list of the shareholders). The last annual review took place in late 2009, at which time the Board also conducted an environmental scan (see Appendix B).

Table 4: Shareholdings

Shareholders Common Shares

Price per Share

Share Capital

Denise Descartes 4,000 $100 $400,000 Albert O'Grady 3,000 100 300,000 Don Chestnut 2,250 100 225,000 Kathryn Chow 2,000 100 200,000 25 current and former staff members 7,250 100 725,000 10 private investors 16,500 100 1,650,000 Total 35,000 $3,500,000

Sales and Marketing FMG acquires most of its new business through recommendations from existing customers. Because of the companys history, FMGs primary target market continues to be public sector organizations. Nevertheless, marketing staff regularly attend trade conventions and conferences and host a booth at the Citys annual AutoFest, an event aimed at the consumer market. FMG also advertises in several fleet and transportation magazines, but this is mainly to build its brand. Recently, FMG has had moderate success in targeting small organizations such as daycare centres, churches, and youth groups. These organizations have limited access to capital and usually transport people instead of goods. FMGs preventive maintenance program is a key selling point in this market, since it ensures that vehicles receive regular safety inspections. Another key selling point is the low monthly lease rate made possible by FMGs willingness to lease over longer periods than many of its competitors. On the negative side, these organizations typically operate only one or two vehicles, which results in a low return on the sales investment.


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Facility FMG operates from the facility constructed by the City for the fledgling Fleet Services Department as well as the neighbouring lot that the City purchased in 1980. When the department was privatized, management recognized the convenience of the downtown location and, as part of the 2002 buyout negotiations, secured a 25-year lease for the original facility and adjoining lot at a competitive rate. The extra lot allowed the new company to expand its parking area and install both underground fuel tanks and a sophisticated pumping system to fuel vehicles on site. The entire facility is fenced and well-lit at night, ensuring relative safety for the vehicles. Staffing The culture at FMG is unusual and reflects its unique history. Most of the longest-serving employees are also part owners, having bought shares during the buyout. They are dedicated and hard-working, whereas the non-shareholder staff are less engaged. The high level of competition in the automotive repair sector means that automotive technicians have many employment opportunities from which to choose. As a result, employee turnover within the industry is high and FMG has found it difficult to hire and retain both mechanics and body shop technicians. All FMG employees participate in setting performance targets that are aligned with company goals. However, the company does not have a formal bonus system to reward employees when targets are met. Information Systems for Billing and Fleet Management Leasing costs arising from the acquisition and operation of each vehicle are charged monthly to the corresponding customer. This monthly amount is calculated using both fixed and variable rate portions. FMG amortizes the capital cost of the vehicle as well as a designated amount for overhead and profit over the term of the lease or rental agreement. This calculation produces the fixed rate portion of the monthly payment. The variable rate portion reflects the operating cost of the vehicle and is recovered from the customer based on the number of kilometres driven. For each customer, FMG uses the actual operating costs (i.e. fuel, oil, repair, and maintenance costs) of all vehicles within a particular category (i.e. trucks, vans, or cars) to calculate average operating costs. The company then allocates these costs according to the kilometres forecast for the next year and translates this figure into a rate per kilometre. Although this budgeting system exposes FMG to some risks, it has proven to be accurate to date. Customers greatly appreciate the conversion of intermittent and fluctuating costs to a predictable charge that is easy to understand, simplifies administration, and facilitates budgeting.


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Information technology is increasingly important in the effort to ensure accurate billing, budgeting, and monitoring of vehicle expenses. FMG uses a custom-built system to run its business and deliver its fleet management program. Accounting and Finance FMG uses the Confederation Bank to meet the companys financing needs and has a good relationship with the banks loan officer. FMG carries long-term debt related to vehicle purchases as well as a $4 million line of credit to cover temporary cash shortfalls. Repayment of the long-term debt for vehicle purchases is generally scheduled over five years. Interest rates for the long-term debt vary from year to year and interest on the line of credit is prime rate plus 2%, which is generally higher than the interest on long-term debt. Instead of financing new vehicles individually, FMG arranges for a single, large loan each year. Historically, FMG borrows approximately 55% to 60% of the cost of replacement vehicles. This is quite low for the industry, since other companies frequently finance close to 100% of vehicle purchases. FMG covers the remaining 40% to 45% of the cost with internal funds. Generally, FMG prefers to use its line of credit and delays taking on new debt as long as possible. As a result, a negative cash balance has become a way of doing business for the company. FMG presents its financial statements (Appendices C and D) in accordance with Canadian Generally Accepted Accounting Principles. The Boards Audit Committee reviews the audited financial statements. Depreciation and Capital Cost Allowance (CCA) rates are provided in Table 5.

Table 5: Depreciation and CCA Rates

Asset Depreciation Rate CCA Rate Vehicles 30%, declining balance 30% Office, garage and body shop equipment

20%, declining balance 20%

Electronic data processing equipment and systems software

55%, declining balance 55%


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Appendix A Fleet Management Group Inc.

Organizational Chart As at June 30, 2010

Board of Directors

Denise Descartes CEO

Supervisors (3)

Garage Mechanics (16)

Customer Service Staff (3)

Body Shop Technicians (3)

Parts Technicians (2)

Information Technology

Staff (6)

Billing, Lease and Insurance

Staff (4)

Technical Support Staff (2)

Accounting and Finance Staff (3)

Marketing Staff (2)

Guy Simmons Operations Manager

Kathryn Chow Support Services

Manager

Don Chestnut Fleet Manager

Albert OGrady Finance Manager

Teresa Singh Marketing Manager

Administrative Support Staff

(2)


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Appendix B Fleet Management Group Inc.

Vision, Mission, and Environmental Scan December 2009

Vision: To provide complete vehicle and equipment management services to public and private sector organizations of all sizes. Mission: We are committed to providing our customers with a complete range of reliable, quality vehicles and fleet management services. We are dedicated to continuous improvement in order to efficiently deliver both public and private sector transportation programs.

Strengths Offers a complete range of fleet

management services Skilled management team Has an integrated, full-service garage and

body shop Has a 25-year lease for its facility in a

convenient, downtown location Offers short-term and long-term rental

programs in addition to leases to meet the vehicle needs of all customers

Has the latest repair facility technology Is a Certified Vehicle Inspection Centre Mechanics and technicians are accredited Budgets accurately Has a good relationship with the bank Offers a long leasing cycle

Weaknesses Depends on the City for most of its

revenue Has a diverse fleet, which increases

parts costs and maintenance complexity

Relies heavily on a line of credit for financing

Non-shareholder staff are less engaged

Does not have a formal bonus system to reward employees when targets are met

Opportunities A large number of owner-operated fleets

could benefit from proper fleet management

Expectation that the Citys population will continue to grow

Expectation that the Citys average household income will continue to grow

Many small organizations require affordable, reliable lease vehicles

Threats High degree of competition from other

fleet management and financing companies

Low barriers to entry in the automotive repair sector

Limited supply of quality automotive technicians


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Appendix C Fleet Management Group Inc.

Condensed Balance Sheet (audited) As at June 30

(000s)

2010 2009 2008 2007 Assets Current Assets:

Cash $ 113 $ 90 $ 94 $ 133Receivables 2,075 1,678 1,530 2,094Inventories 157 196 59 52Prepaid expenses 1,580 1,478 1,307 1,034

3,925 3,442 2,990 3,313Non-Current Assets:

Carrying value1 of vehicles 36,193 34,006 32,665 31,200Carrying value1 of equipment and other capital assets 634 656 704 686

36,827 34,662 33,369 31,886Total Assets $40,752 $38,104 $36,359 $35,199 Liabilities and Shareholders Equity Current Liabilities:

Line of credit $ 2,942 $ 2,351 $ 2,451 $ 3,456Payables and accruals 2,422 1,918 1,073 1,226Unearned revenue 889 862 833 403

Current portion of long-term debt 5,286 6,695 4,425 4,043 11,539 11,826 8,782 9,128Non-Current Liabilities:

Long-term debt 14,136 11,331 13,067 11,972 25,675 23,157 21,849 21,100Shareholders Equity:

Share capital 3,500 3,500 3,500 3,500Retained earnings 11,577 11,447 11,010 10,599

15,077 14,947 14,510 14,099Total Liabilities and Shareholders Equity $40,752 $38,104 $36,359 $35,199 1 Cost less accumulated depreciation.


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Appendix D Fleet Management Group Inc.

Condensed Statement of Income and Retained Earnings (audited) For the Years Ended June 30

(000s)

2010 2009 2008 2007 Revenues: Vehicle rent and leases $11,853 $12,135 $11,204 $10,860Vehicle variable1 10,646 10,502 9,795 9,190Repairs 810 794 741 611Insurance commissions 290 259 223 328 23,599 23,690 21,963 20,989Expenses: Vehicle expenses:

Depreciation 7,322 7,101 6,551 5,945Insurance premiums 2,734 2,559 2,265 1,978Fuel and oil 5,080 5,289 4,798 4,004Repairs and maintenance 3,281 3,033 2,943 2,618

18,417 17,982 16,557 14,545Salaries 1,923 1,837 1,699 1,664Administrative expenses 1,188 1,153 1,050 1,010Depreciation: equipment and other capital assets 115 120 113 108Interest expense 940 926 914 836 22,583 22,018 20,333 18,163Income before income taxes 1,016 1,672 1,630 2,826Income taxes (38%) 386 635 619 1,074Net income $ 630 $ 1,037 $ 1,011 $ 1,752 Opening retained earnings $11,447 $11,010 $10,599 $ 9,047 Net income 630 1,037 1,011 1,752 Dividends (500) (600) (600) (200)Ending retained earnings $11,577 $11,447 $11,010 $10,599

1 Revenue received through the variable rate charged on a per kilometre basis.


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Additional Information (Time Allowed: 4 hours)

Notes:

i) Candidates must NOT identify themselves in answering the question.

ii) All answers must be written on official answer sheets or in official electronic files. Work done on the Additional Information or on the Backgrounder will NOT be marked.

iii) Included in the examination envelope is a standard supplement consisting of formulae and tables that may be useful for answering the question.

iv) Examination materials MUST NOT BE REMOVED from the examination writing centre, except for the Instruction Sheet to Electronic Exam Writers, if applicable. All used and unused answer sheets, working papers, Backgrounder, Additional Information, the supplement and, if applicable, a USB key containing electronic answer files must be sealed in the examination envelope and submitted to the presiding officer before the candidate leaves the examination room. Candidates writing the examination electronically must keep the Instruction Sheet to Electronic Exam Writers, which provides instructions for uploading their responses following the examination.

v) Only the following models of calculators are authorized for use on the Case Examination:

1. Texas Instruments TI BA II Plus (including the professional model) 2. Hewlett Packard HP 10bII (or HP 10Bii) 3. Sharp EL-738C (or EL-738)


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Fleet Management Group Inc. (FMG) Additional Information

Update

The automotive industry in general struggled throughout the recession that started in 2008. Most commercial fleet managers experienced fleet reductions, decreased budgets, and layoffs. Many fleet customers asked to renegotiate parts of their contracts, raised their minimum requirements for vehicle use, and delayed replacing vehicles when leases expired. These pressures are expected to continue through to the end of 2011.

On the positive side, many fleet managers were able to negotiate better pricing on parts from their suppliers. In addition, most vehicle prices either remained constant or dropped slightly. Both pricing trends are expected to continue through to 2012. Fuel prices stabilized in 2009 and only gradual increases are expected as the economy recovers.

Although FMG remained profitable during the downturn, and even added new private sector customers, the Board of Directors was disappointed with the companys overall performance as reflected in the 2010 audited financial statements. Revenues decreased slightly and variable vehicle operating costs increased. These factors combined to decrease profits. The Board expressed its dissatisfaction with the reduced dividend payment for 2009-10 and directed management to develop a plan to return FMG to the 2008-09 net income level of $1.037 million by June 30, 2011.

Municipal Budget Cuts

During the recession, Mainway (the City) increased spending in order to take advantage of federal and provincial stimulus programs. Although this enabled the launch of important infrastructure projects, it also increased the Citys debt. When several of the projects developed cost overruns, the City faced greater financial pressure on many sides. As a result, the municipal council recently announced significant reductions in discretionary spending for the next fiscal year.

When Denise Descartes and Teresa Singh contacted the Citys vehicle coordinators to better understand the effect of these changes on FMG, they discovered that the cuts are to be implemented across the board. Although the City cannot cancel signed lease agreements, it plans to reduce its lease expense by replacing fewer vehicles. In addition, daily and monthly rentals are to be curtailed and the total distance driven reduced. Descartes calculated that the Citys spending cuts will reduce FMGs net income after tax by $100,000 in 2010-11.


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Police Department Fleet

Not long after the budget cuts were announced, Descartes received a call from Nelson Riley, Chief of Police for the City. For many years, the Police Department elected to manage its fleet of cruisers in house, outfitting and servicing the vehicles at its own maintenance yard and repair shop in the downtown core. Now, Riley is being pressured to find savings in his administrative budget. Having experienced good service from FMG with respect to occasional car rentals for City business and having received positive feedback about FMGs service and staff from other municipal departments, he contacted FMG with a proposal to manage the fleet of police cruisers.

Riley suggested an arrangement in which the Police Department would sell its cruisers to FMG for $1.2 million. The department would then rent or lease the vehicles back over their remaining life. As part of Rileys proposal, FMG would hire the departments mechanics and guarantee a 5% reduction in the cruisers variable operating costs. FMG would also purchase the building, equipment and land at carrying value and continue to use the departments maintenance yard and repair shop. The details Riley provided are found below.

Mainway Police Department Selected Data for the Year Ended June 30, 2010

Item Value

Carrying value of vehicles $1,200,000 Carrying value of building and equipment $125,000 Market value of building and equipment $155,000 Cost of land $100,000 Market value of land $300,000 Mechanics salaries $130,000 Kilometres driven per year 32,000 km Number of cruisers in the fleet 140 Average age per cruiser 4.7 years

Thompson Construction Limited (TCL)

TCL is involved in the construction industry and has offices across Canada. The manager of the local office is looking for ways to cut costs and improve the tracking of variable operating costs for his offices trucks. He is also looking for a maintenance program provider that delivers better service than their current provider. Singh met the manager through her marketing contacts and described FMGs fleet management services, including the Gas & Go Card. Interested, the manager asked Singh to send him a proposal and indicated that, if the program proved to be successful at the local level, he would be happy to present the program to TCLs national office.


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TCL would be the first customer to purchase fleet management services from FMG without leasing or renting any vehicles. This venture would be a different operating model for FMG.

Keyfleet Information System (KIS)

Under Kathryn Chows guidance, the information technology (IT) staff recently consolidated FMGs custom-built systems into a single, integrated fleet management information system. They named it the Keyfleet Information System (KIS).

Chow believes that KIS has the potential to be used for managing large fleets of vehicles and equipment throughout North America. When she demonstrated the system at a recent trade show, it was well received. Several of the fleet managers in attendance expressed enough interest to schedule a follow-up call.

Senior Management Meeting

On August 3, 2010, FMGs senior management met to discuss the new developments and other issues.

Don Chestnut was excited by the Police Department opportunity. He suggested that expanding FMGs fleet would improve the companys purchasing power and result in cost savings.

Guy Simmons looked forward to having more mechanics on staff and use of the police repair shop. He also pointed out that the police maintenance yard could be used during the busy season to park extra vehicles.

Given that FMG has no experience with the police cruisers, Albert OGrady recommended that FMG plan to replace half of the departments fleet in each of the next two years and move to a five-year leasing cycle with the new vehicles. The results of his analysis are found in Appendix A.

In researching for the TCL proposal (see Appendix B), Singh had contacted several friends with ties to the construction business. She reported that they had worked on several projects with TCL and had very positive comments to make about the company. She also highlighted that TCL would build FMGs private sector customer base.

Simmons pointed out that he would have to add staff in order to service TCL properly. He also noted that since the local office is only two blocks away, most of the TCL repair and maintenance work would likely come to FMGs facility instead of going through the vendor network. Under that scenario, FMG would not have enough capacity to service all of its customers in a timely fashion. In addition, Simmons indicated that he knows some of the TCL employees and that it is typical for them to use company cards to fuel their personal vehicles.

Chestnut remarked that TCLs fleet consists mainly of heavy-duty trucks. As a result, he expects higher fuel and oil costs than those generated by FMGs other private sector


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clients. Nevertheless, the added volume could result in some cost savings with respect to parts, fuel and oil. Lastly, he pointed out that FMGs mechanics would need some specialized training in order to repair and maintain these trucks properly but hasnt investigated the training costs yet.

Chow noted that since FMG would not own the TCL trucks, IT system changes would be needed in order to accommodate this business. After the meeting, OGrady gathered the financial information in Appendix C.

This mention of IT systems led Descartes to ask Chow to elaborate on her recent memo regarding KIS (see Appendix D). Chow is excited about developing KIS as a marketable product that FMG would license and support. She cautioned that, in order to commercialize the system, KIS would require further development to remove FMGs logos, create standardized user templates, and complete refinements based on the trade show feedback. In addition, Chow expects that one-time marketing costs of $125,000 would be needed to launch the program in its first year.

Singh interjected to say that $125,000 is not nearly enough for a new product launch and that it could cost three to four times more to market KIS effectively. Chestnut suggested that by selling KIS they might be selling off a competitive advantage because, in his opinion, KIS is one of the best software programs he has seen. Chestnut also commented that numerous fleet management software providers are already established in the marketplace.

Chow pointed out that her staff have the capacity to complete the required system changes for either TCL or KIS, but not both. If FMG were to pursue both alternatives at the same time, the company would have to hire external contractors to complete the system changes for one of the projects at an estimated cost of $200,000.

Chow voiced her concern about control and quality assurance when using external contractors rather than internal staff. In addition, Descartes raised the point that three of FMGs private investor shareholders co-own a software company that sells to the fleet management industry. She is concerned about the possibility of a backlash if FMG enters the same market space.

Descartes then informed the group that a formal bonus system for staff is currently in the planning stage and asked for their thoughts on appropriate performance measures. Simmons wanted measures based on customer service. OGrady suggested measures based on internal processes. Singh felt that measures should be based solely on financial performance.

Additional Information

Immediately following the meeting, OGrady asked his assistant finance manager, Deidre Blake, CMA, to analyze FMGs current operations and research the issues discussed at the meeting. Blake interviewed management and staff, reviewed operating and financial information, and compiled the following summary:


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1. FMG has a tax rate of 38% and uses an after-tax discount rate of return of 9% when setting fixed rates and evaluating capital projects.

2. Since the meeting, OGradys research has led him to conclude that the construction industry has been severely hampered by the recent recession. He wonders about TCLs financial health and whether or not FMG should be concerned about TCLs viability and capacity to pay bills in a timely fashion.

3. Simmons provided an update on the renovations to FMGs fuelling station. The contractor had discovered small amounts of fuel leaking from the 8-year-old underground tanks, and the cost to remediate the environmental damage was estimated at $125,000. Chestnut noted that this would delay the work and that the renovations seriously restricted access to the parking lot. He wondered why FMG should bother with remediation, since the leak was small and the area paved over. Descartes was concerned that the additional cost for remediation would jeopardize FMGs ability to meet the Boards net income target.

4. Discussions with the parts supervisor revealed that, occasionally, mechanics and body shop technicians accessed the parts inventory directly, especially when parts staff were busy, and that sometimes the parts they took were not charged to work orders correctly. The supervisor estimated that this might affect up to 15% of parts transactions.

5. There have been recent acts of vandalism to the parking garage that FMG rents during the busy season. When Simmons recently contacted the owner to discuss the issue, he discovered that the lot had been sold to a building developer.

6. The Confederation Bank is willing to provide FMG with up to $1.5 million to finance the police department alternative. This loan would be repayable over three years at 6.25%.

7. When FMG was privatized, the existing staff agreed to withdraw from the Citys union. However, several non-shareholder employees recently investigated the possibility of re-establishing a union within FMG. If FMG absorbs the unionized Police Department mechanics, decisions will have to be made about both their union membership and their pay scale, which is significantly higher than that of FMGs mechanics.

Required

As Deidre Blake, CMA, prepare a report for FMGs senior management team advising them on how to address the issues discussed at the management meeting as well as any other organizational issues and concerns requiring their attention. Include details of your analysis, support for your recommendations, and an action plan to implement those recommendations. In undertaking this task, you will need to take into consideration your background knowledge of the company and industry as well as the additional information provided herein.


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Appendix A Analysis of Police Department Alternative

August 8, 2010 TO: Denise Descartes, CEO FROM: Albert OGrady, Finance Manager SUBJECT: Fleet management services for Mainway Police Department After analyzing the available information, I have determined the following with respect to the Police Department alternative: Recommended Pricing for Police Department Fleet

Annual lease fee for existing fleet $6,200 per cruiserAnnual lease fee for new fleet $10,500 per cruiserVariable operating rate (for existing and new fleet) (This rate achieves the required 5% savings.)

$0.165 per km

Estimated Costs for Police Department Fleet

Variable operating rate $0.12 per kmInsurance $1,300 per cruiser

Recommended Replacement Schedule for Police Department Fleet

Year 2 Year 3 Number of new cruisers 70 70

Additional Information

Annual volume savings in parts, fuel and oil $80,000 Purchase price + capital improvements per cruiser1 $39,000 Disposal value (after decommissioning) per cruiser $2,500 Current rental cost of parking space per year2 $25,000

Notes 1 Chestnut found that FMGs buying power provided better pricing for similar vehicles. 2 This cost is for the parking space that FMG currently rents during the busy season

for excess vehicles coming off lease and arriving to go out on lease.


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Appendix B Thompson Construction Limited (TCL)

Fleet Management Proposal TO: Local Office Manager, Thompson Construction Limited FROM: Teresa Singh, Marketing Manager, Fleet Management Group Inc. SUBJECT: Fleet management services I am pleased to present a proposal for FMG to provide fleet management services to TCL. Our proposal includes use of the Gas & Go Card for your fuel and oil purchases, access to our Repair Authorization Service, a preventive maintenance program, and reports from our Consulting and Information Service.

Proposed Pricing Fleet Management Services

Rate per vehicle $200Number of vehicles 420 $84,000

Fuel and oil Variable fuel and oil rate (per km) $0.195Number of kilometres 9,500,000 $1,852,500

For repairs and maintenance completed through our vendor network, FMG will pre-authorize repairs, audit invoices, and present TCL with a single, consolidated invoice for easy payment. These charges are not included in the Variable fuel and oil rate.

Appendix C

Thompson Construction Limited (TCL) Fleet Management Costs

TO: Denise Descartes, CEO FROM: Albert OGrady, Finance Manager SUBJECT: Fleet management services for Thompson Construction Limited (TCL) From discussions with the management team, I have determined that the following costs apply to the TCL alternative: Salary for additional staff $87,500 IT systems changes (through external contractors if KIS alternative is pursued simultaneously) $200,000 Annual cost savings in parts, fuel and oil through increased volume discounts $46,000 Variable fuel and oil rate (per kilometre) $0.145


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Appendix D Keyfleet Information System (KIS)

Licensing Alternative TO: Denise Descartes, CEO FROM: Kathryn Chow, Support Services Manager DATE: July 23, 2010 SUBJECT: Licensing Keyfleet Information System (KIS) As you know, our IT staff have developed a custom fleet management information system called the Keyfleet Information System (KIS). KIS tracks the full life cycle of every vehicle in the fleet, recording all revenues and expenses. It runs the preventive maintenance program, produces invoices, and keeps detailed information on each vehicle. KIS Online is accessible over the internet and gives customers invaluable reports on their leased and rented vehicles. A recent study shows that KIS compares favourably with software from leading fleet management information system vendors, and has several innovative features not yet found in the marketplace. Existing staff could perform the development tasks required to commercialize the software, but additional staff would be needed to deliver IT support services for customers. If we start these development tasks within the next 4 to 6 weeks, I expect KIS to generate revenues and add to FMGs net income for the current fiscal year. The following table summarizes our expected revenues and expenses per customer in several possible scenarios:

Expected Revenues and Expenses (per customer) Number of Year 1 Annually1 Customers Probability Revenues

5 30% Licence fees and maintenance $85,000 $10,000 11 50% Expenses 15 20% IT support services $12,000 $3,000

Marketing, sales, and travel $7,000 $0 Administration, telecom, and other $4,000 $1,500

An additional, one-time expense of $125,000 would be required for marketing KIS in the first year. 1 These are ongoing revenues and expenses after Year 1 and we expect customers to maintain their software license for at least 5 years.


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August 2010 Case Examination Fleet Management Group Inc. (FMG) General Comments on Performance

Case Background and Required Element

The August 2010 Case Examination focuses on Fleet Management Group Inc. (FMG). FMG is a privately-owned Canadian company that provides vehicle leasing, rental, and related services to corporate customers in both the public and the private sectors.

The automotive industry in general struggled throughout the recession that started in 2008. Although FMG remained profitable, the Board of Directors was disappointed with the companys performance. The Board directed management to develop a plan to return FMG to the 2008-09 net income level of $1.037 million by June 30, 2011. Shortly thereafter, FMGs most important customer (the City of Mainway) announced spending cuts expected to reduce FMGs net income after tax by $100,000 in 2010-11.

To meet the Boards net income target and mitigate the City budget cuts, the senior management team identifies the following alternatives to consider:

1. Acquire the Police Departments fleet of police cruisers and rent or lease them back. 2. Sell fleet management services to Thompson Construction Limited (TCL) without

leasing vehicles. 3. Develop FMGs custom-built Keyfleet Information System (KIS) as a marketable

product that FMG would license and support.

The Required element of the case is as follows:

As Deidre Blake, CMA, prepare a report for FMGs senior management team advising them on how to address the issues discussed at the management meeting as well as any other organizational issues and concerns requiring their attention.

The response should also ensure financing is available to support recommended capital expenditures and operating requirements (e.g. the Police fleet and fuel tank remediation).

General Approach and Expectations

Throughout Year 1 of the SLP, candidates have been taught to apply the Steps for Approaching Business Strategy. They have completed several practice case exams using these Steps, have received written feedback on their performance, and have revisited the approach repeatedly during their Interactive Sessions. Because of this attention, expectations related to candidates general approach and performance are high.


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Recommended Approach

The examination writer should use a systematic approach to analyze the alternatives and solve the issues in the case. For this case, the Steps direct the writer to:

1. Review the current situation given the changes in the environment outlined in the Additional Information (e.g. update the SWOT; recognize the objectives, constraints, and preferences; and prepare a financial assessment). From this review, candidates gain an understanding of the important facts and are able to identify the issues and alternatives that require analysis.

2. Analyze the alternatives for dealing with the issues. The analyses should include a qualitative assessment of the pros and cons and a quantitative analysis of the profitability and feasibility of each of the alternatives. Appropriate balance and depth are expected in these analyses. Relevant financial and non-financial information documented in the situational analysis should be interpreted and used. As well, appropriate functional tools and concepts should be applied correctly.

3. Make supported recommendations and provide evidence that the recommended strategy is logical, feasible, and addresses the Boards direction to return FMG to the 2008-09 net income level of $1.037 million by June 30, 2011, taking into consideration the significant operating issues such as the $100,000 decrease of net income resulting from City cuts, the $125,000 remediation of the leaking fuel tank, and the 15% of parts transactions that are recorded incorrectly.

4. Analyze the relevant minor issues requiring attention and develop an implementation plan. The analysis of the minor and implementation issues should be appropriately incorporated into the various sections of the report. The implementation plan should include actions to support the major recommendations and address the significant operating issues and current weaknessesespecially those specific to the recommended course of action.

5. Prepare the response in the form of a formal report for FMGs senior management. The report should advise management of the proposed recommendations and implementation plan.

Responses Above Expectations

In general, the best responses show good understanding of the information provided in the case. They draw on this information to provide relevant and useful analysis. They demonstrate sound judgment. They apply an appropriate approach to solving business problems. The following approaches are reflected in these responses:

1. Systematically collecting data relevant to both the internal and external environments (situational analysis) and recognizing the pertinent and most relevant changes between the established SWOT in the Backgrounder and the current situation in the Additional Information.


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2. Using this data to analyze the alternatives and minor issues.

3. For the alternatives analyzed and for the recommendations as a whole, providing convincing answers to each of the following questions:

a) Is it profitable? (Uses decision and profitability analysis toolsF3)

b) Does it provide an acceptable return on investment? (Uses capital budgeting tools such as net present valueF5)

c) Is there money available to pay for it? (Compares financing required against financing availableF5)

d) Does it address the constraints/targets set by key stakeholders while managing appropriate risks and organizational issues? (Calculates and compares financial measures, manages risk, and manages organizational resourcesF2, F4, F5, F6)

4. The most convincing proposals are those that are logical, feasible, and supported with accurate quantitative evidencebacked by reasonable assumptions and a balanced qualitative analysis that considers a wide range of factors and perspectives.

5. Providing recommendations consistent with the analyses.

6. Providing a plan that enumerates the who/what/when/how much needed to implement the recommendations, including the minor issues.

These responses clearly follow the Steps for Approaching Business Strategy.

Responses Meeting Expectations

Responses that meet expectations follow a reasonable but often incomplete approach to the case. In particular, these responses differ from the best responses by:

1. Collecting fewer points on the relevant changes in the internal and external environments from the Backgrounder to the Additional Information, and by sometimes identifying irrelevant or redundant SWOT points.

2. Using less of the current situation data to analyze the alternatives and minor issues.

3. Analyzing fewer alternatives, in limited depth, with weaker quantitative analysis.

4. Considering issues and/or alternatives in isolation, without providing a global, comprehensive view (e.g. by not providing summary schedules that pull analyses together and highlight the combined effect of recommendations).


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5. Providing recommendations consistent with the analyses, but which are less convincing and have less support.

6. Providing a limited implementation plan, frequently without addressing all of the who/what/when/how much questions related to the strategic recommendations.

Responses Below Expectations

In weak responses, the alternatives are not sufficiently analyzed, one or two aspects of the case are overemphasized or, conversely, many aspects are addressed but only at a superficial level.

Some weak responses reflect a simple approach that does not place enough focus on the important issues and alternatives. These responses do not effectively address the case in a comprehensive and integrative manner. For example, in analyzing the alternatives, this case requires the use of quantitative analysis to determine profitability, estimate future earnings, and compare these to corporate goals within the limits of the available financing.

Specific Comments on Candidate Performance

Overall, performance on this examination was acceptable. Most responses

1. reflect an effort to use a systematic process for problem solving and decision making;

2. focus mainly on the alternatives identified by senior management;

3. address the most important minor and implementation issues; and

4. present a report in a reasonably acceptable format.

Where Responses Did Well

The following aspects were well done on this exam:

1. SWOT update. Most responses provided a reasonable update of FMGs current situation.

2. Integrating the preferences of senior managers. In their analysis of individual alternatives, almost all responses included at least one reference to the preferences of FMGs senior managers (e.g. Chestnut is excited about the Police acquisition).

3. Financial assessment. Most responses provided a reasonable assessment of FMGs financial situation, usually touching on liquidity, coverage, and profitability ratios. Better responses also recognized that FMGs preference for using its line of credit to


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finance vehicle purchases created unnecessary interest expense and cash flow problems for the company.

Many responses also provided a reasonable interpretation of FMGs current financial situation. Many responses used the following process well: State the number. State its direction in the last few years. State why the number is important. (e.g., FMG's current ratio for 2009/10 stands at 0.34 and has fluctuated in recent years. A current ratio below a benchmark 2.0 is typically a warning that a company may have trouble producing enough liquid assets to meet its short-term obligations. In this case, the low ratio reflects FMG's preference for using its line of credit to avoid taking on debt.)

With repeated emphasis on the meets expectation standard of three or four relevant ratios for two or three years through practice case exams in Year 1 of the SLP, better responses distinguish themselves through more meaningful interpretation.

4. Capital investments, tax shields, and salvage values. With repeated visits to capital investment decisions in Year 1 of the SLP (e.g. Body Benefits, BR Lighting, BC Coast Cruises), expectations for this competency are high. Many candidates assembled the correct inputs and applied the appropriate formulae when analyzing the initial acquisition of the Police fleet. (Fewer candidates correctly handled the two-year turnover of the fleet.)

5. Qualitative functional concepts related to strategic management, governance, risk, and ethics. Most responses addressed a few qualitative functional concepts related to strategic management (e.g. countering the lingering effects of the recession), internal control (e.g. parts not charged to work orders correctly), risk (e.g. non-shareholder employees considering re-establishing a union), and ethics (e.g. managers weighing convenience and income over the environmental damage caused by the leaking fuel tank).

6. Fewer responses dealt as well with qualitative functional concepts related to performance management, performance measurement, financial management, and financial reporting. Still, many candidates recognized that TCL would stretch capacity in the repair facility, especially during the busy season.

7. Format and communication. Candidates seem to have learned what a business report should look like. Most responses contained the necessary sections, used a mix of narrative and bullet points, and were reasonably articulate for a report written in four hours under exam conditions.

Not surprisingly, these are all things candidates could bring in with them on exam day. For example, in this case, all the information needed to create the financial assessment was provided in the Backgrounder. Similarly, candidates have learned that references to the mission, constraints, and stakeholder preferences are easy links that show signs of integration.


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Where Responses Could Improve

The following tips identify areas where responses could be improved in subsequent exams:

1. Use all aspects of the current situation. Many responses made repeated references to the mission, stakeholder preferences, and weaknesses. While these are relevant points, seeing them over and over again at the expense of more pertinent integrative connections is tedious, shows limited audience awareness, and generally makes for weak analyses.

Candidates should also remember that the qualitative analysis should be specific. A statement that This alternative is consistent with the mission provides limited information to the reader. Contrast this with a statement like Providing fleet management services to TCL without leasing vehicles is consistent with FMGs mission to provide a complete range of fleet management services and supports its vision to serve private sector organizations of all sizes.

2. Establish the target as part of the situational analysis. This case gave FMGs management a specific mandate: increase net income to $1.037 million by June 30, 2011 (i.e. this fiscal year). With such a clear goal in mind, responses should be equally clear about whether recommendations will or will not meet it. This requires a quantitative benchmarka statement like This alternative adds $400K of income, which meets the Boards goal is false if the company needs $500K to reach the goal. It is also potentially misleading to a reader who is not aware of the target. Since false and misleading statements receive no credit, responses that claimed they met the Boards goal without showing it did poorly.

A simple calculation of the target in the situational analysis would help:

Establishing the target Board target $1,037Less: 2010 Net Income (after tax) (630)Plus: Impact of expected City cuts 100Plus: Fuel tank remediation 125Incremental net income needed (after tax)

507

3. Stop repetition and points of limited value in the situational analysis. Many responses mechanically applied a template to the situational analysis, producing unnecessary repetition and wasting time in the process. The following tips can improve responses:

a) Usually, identifying a point once is sufficientit need not be repeated in a different category. For example, the ongoing effects of the recession is a threat to FMG. Once identified as a threat, the point need not be repeated as a key risk factor. Repetition of specific points shows weak understanding of


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the categories in the situational analysis. (The exception is when the classification of a point depends on your point of view. In this case, the stable but slowly increasing fuel prices is an opportunity if customers are willing to accept price increases, but a threat if they are price sensitive.)

b) Identifying key success factors that are actually strengths (e.g. good management) confuses the internal and external environments. Key success factors are typically items that every organization in the industry must do well. As a result, they are usually a feature of the external environment. On this exam, many candidates listed key success factors like Uses bulk purchasing and then immediately repeated them as strengths. Such candidates wasted time identifying the internal environment twice and did not identify the external KSF.

c) Preferences of distant stakeholders with limited bearing on the case need not be identified. For example, noting that the bank is a key stakeholder and has a preference for seeing its loans repaid is self-evident and adds little value. Likewise, candidates can assume the government prefers compliance with the law, citizens prefer clean air and water, and customers prefer high quality goods and services.

d) Finally, repeating points identified in the Backgrounder SWOT adds no value and can be hazardous. For example, the Additional Information highlights that a formal bonus system is currently in the planning stage and that managers have different ideas about appropriate performance measures. Responses that identified Does not have a formal bonus system from the Backgrounder and provided recommendations without considering managers preferences shows limited awareness of the case.

4. Use quantitative tools appropriately. By design, the Case Exam is designed to test a range of quantitative skills. After a series of practice exams in which capital budgeting played an important role, many responses focused on NPV analysis at the expense of other tools. In this case, the following tools were most appropriate:

a) For the Police acquisition, determining net income in the first year is much more important than calculating net present value. The police cruisers are near the end of their expected life and FMG has a chance to lock in a new customer for a long time. (Albert OGradys plan suggests replacing 70 cruisers in Year 3 with five-year leasesthis implies at least an eight-year horizon for the alternative.) FMG might be willing to take a loss on the initial buy in return for longer term gainprovided it can still meet the Boards net income target.

b) Many responses calculated a net present value for the TCL and KIS alternatives using discounted cash flows. Because there are no significant


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capital expenditures for either of these alternatives, NPV calculations are irrelevant and obscure the alternatives effects on net income.

c) Although NPV analysis is appropriate for evaluating the long-term replacement of the Police cruisers, many responses used a cumbersome approach based on discounted cash flows. The responses adjusted each cash flow to present value (sometimes removing income tax from each line), then summed the present values. This results in repeated application of the same present value factor. A more efficient approach would establish net cash flows for each year and then apply the present value factor once, to the bottom line.

A secondary advantage to this approach is that it makes the adjustment from cash flows to net income easy and straightforward. (Discounted cash flow analysis does not establish incremental net income. Net income includes non-cash expenditures like amortization and the accounting loss on the sale of police cruisers. It also includes interest payments. Net present value is not income.)

d) For the KIS alternative, the expected number of customers should be calculated and used to determine expected profitability of the alternative. (Again, many responses used the cumbersome approach of applying the probability factors against every line item and then summing the adjusted values.) The analysis of the KIS alternative should also consider sensitivity related to the uncertain number of customers or marketing expenses.

e) For the recommended alternatives, available financing should be compared against financing required to confirm the recommendations feasibility.

5. The following highlight the most common quantitative errors witnessed on this case:

a) Using discounted cash flows to calculate the NPV of the Police fleet without establishing incremental net income. In addition, many responses compounded the error by comparing NPV to net income (e.g. NPV of $400K meets the Boards net income target).

b) There was no attempt to explicitly consolidate and compare net incomes produced by the alternatives to the amount needed to satisfy the Boards net income target of $1.037 million by June 30, 2011.

c) No attempt was made to calculate and compare financing required against the financing available (line of credit, bank loan for police fleet, working capital), especially if the Police acquisition is recommended.

d) Not accounting for the replacement of the cruisers correctly (e.g. using incorrect time horizons, calculating values for 1, 70, 140, or 210 cruisers, assigning cash inflows and outflows to the wrong year).


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e) Using distance travelled by one cruiser (32,000 KM) to calculate variable revenues and costs for the fleet. (It is not reasonable to assume that 140 police cruisers only travel 32,000 km combined in a year.)

f) Failing the reasonableness check. Many responses produced numbers without stopping to see if they were reasonable. For example, if a candidate calculates that a $200,000 investment produces a $457 million net present value, it is reasonable to see that there is an error.

6. Apply all concepts from Year 1 of the SLP: As noted previously, expectations are high related to concepts and tools candidates take up in Year 1 of the SLP. With three targeted readings, an assignment, and an Interactive Session activity on performance evaluation in Module 2, it is startling that most responses made only a weak attempt at providing advice to Descartes on appropriate performance measures for a bonus system.

7. Analyze minor and implementation issues: A one-sentence recommendation does not constitute analysis of a minor or implementation issue. Many responses would benefit from the following example:

Problem A contractor has discovered small amounts of fuel leaking

from underground tanks. Consequence Expected remediation costs are $125,000, which will

impede FMGs ability to meet the Boards goal. On the other hand, the expected damage to FMGs reputation from being seen as a polluter could cost more in the long run.

Recommendation Fix the tank Implementation Simmons to authorize the contractor to proceed with

remediation immediately.

8. Focus on the right audience. Many responses highlighted links for markers rather than arguing pros and cons for senior management. For example, language like the following was common: Police mechanics are unionized (links to weakness). Since the senior managers would not know about or understand links, such comments show poor communication.

It was also noted that some responses that provide such advice were wrong or inconsistent with the case facts. For example, in the previous comment, the Police union is not currently a feature of FMGs environment, so no link would be awarded. Further, FMGs union-related weakness is that non-shareholder employees are less engaged, and several have recently explored re-establishing a uniona point not established in the responses brief comment. Thus, in addition to showing poor communication, the advice highlights the responses confusion about the case.


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Steps for Approaching Business Strategy 1. Overview Quickly read through the information to develop an understanding of the following:

a) Organization on which the case is based; b) Industry in which it operates; c) Major issues and specific opportunities/alternatives that need to be addressed; d) Information included in the exhibits (e.g. quantitative data, organizational charts,

etc.); e) Role that you are required to assume; f) Actions that you are required to perform; and g) Audience of your report (e.g. senior management, board of directors).

2. Situational Analysis

Read through the case in detail and begin developing a situational analysis. As you read, highlight or make notes on key information that will be used in developing a framework or planning structure for your analysis. For example, use a system such as code letters and words in the margins, to categorize the information (e.g. S for strength, KSF for key success factor, TX for tax rate, MI for major issue, O for external opportunity, etc.), or categorize and document the information directly in the response. Within the situational analysis, be sure to do the following:

a) Identify the stated or implied mission, vision, strategic direction, and strategic

goals. b) Determine the key stakeholders needs and/or preferences. c) Determine whether there are any constraints that require consideration or targets

that must be met. d) Scan the organizations internal and external environments, and identify the

strengths, weaknesses, general opportunities, and threats (SWOT). Include an assessment of the organizations current financial situation. Some tools that will help in identifying SWOT points include Porters Five Forces and PESTE, as well as analyses of ratios, trends, profitability, target customers, target markets, variances, etc. In a time-limited situation such as the Case Examination, if the information provided includes a high-level SWOT, it is not necessary to repeat these points or audit them. Focus on identifying new SWOT points based on information not previously available and the results of the financial assessment.

e) Within the SWOT analysis, identify the competitive advantages and the key success factors (KSFs) for the organization and/or industry (i.e. the critical opportunities and strengths of the organization that must be maintained or enhanced in any suggested recommendations). Also identify the key risks (i.e. the critical weaknesses and threats that must be eliminated or mitigated).


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3. Identification of Major Strategic Issues and Alternatives

a) Identify the major strategic issues that need to be addressed (e.g. specific business opportunities that should be considered, critical weaknesses and threats that must be eliminated or mitigated if the organization is going to be successful) and list them in order of importance.

b) Identify the alternatives for addressing the major strategic issues.

4. Analysis of Alternatives for Addressing the Major Strategic Issues

Analyze each strategic alternative both quantitatively and qualitatively, identify the pros and cons, and consider both internal and external factors (i.e. provide a balanced analysis). Demonstrate integrative thinking by considering the cause and effect relationships among the various factors, issues, and alternatives. Within the analyses, be sure to do the following: a) Deal with ambiguous or uncertain information by making reasonable

assumptions based on case facts, applying decision analysis under uncertainty concepts and tools, or performing sensitivity analysis. Clearly state and, if necessary, justify all assumptions made.

b) In the quantitative analyses, apply appropriate functional competency tools and concepts to analyze the relevant information (e.g. profitability analysis, net present value, return on investment, etc.). Interpret the results of all calculations.

c) In the qualitative analyses, provide a balanced discussion of the pros and cons of each alternative using case facts and the results of the quantitative analyses.

d) Identify (usually as a con) any specific risks associated with each alternative. e) Make specific references to the points made in the provided SWOT (in the Case

Examination) and the situational analysis performed in step 2 (e.g. discuss how the alternative uses the strengths, takes advantage of the opportunities, mitigates or eliminates the weaknesses and threats, meets the imposed constraints, etc.).

f) Consider each alternative from the points of view of the various stakeholders, and how it aligns with the organizations mission, vision, goals, and/or strategic direction. As well, consider the effects of one alternative on another, or on other issues.

5. Recommendations

a) Rank each alternative in terms of important criteria (e.g. goals, important constraints, key success factors, specific targets, profitability, key stakeholders preferences, how easily the cons can be resolved, etc.). Consider whether the alternative sufficiently addresses the major strategic issues, is aligned with the organizations overriding objective, is a good fit with the internal and external environments, and makes good economic sense.

b) Clearly state your recommendation(s) for resolving the major strategic issues. Briefly support your choice of alternative(s) based on the most important criteria.


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c) Ensure that your recommendations collectively form a cohesive package that is feasible and viable. Provide proof in the report that the necessary aggregate resources (e.g. physical capacity, financing) either are available or can be readily acquired, that constraints are not breached, and that specific targets are met.

6. Implementation Plan

Create a plan for implementing the recommended strategies for resolving the major issues. In developing the implementation plan, be sure to do the following: a) Identify and analyze the implementation issues, such as those concerning

change management, acquiring the required resources (financial and human), and resolving the cons previously identified in step 4 for the recommended strategies.

b) Address the operational and other minor issues (e.g. ethical, internal control). Discuss how solving these problems can affect the implementation of the major recommendations, and/or how they affect other minor issues and weaknesses.

c) Make clear and actionable recommendations pertaining to the implementation issues and minor issues.

d) Provide an action plan to implement the strategic and operational recommendations that clearly defines each action, who is responsible, the critical due dates, and the resources required.

7. Financial Forecast

Prepare an appropriate financial forecast (e.g. projected net income, projected return on investment, projected cash flow, pro forma financial statements, etc.) taking into consideration the financial implications of the strategic, implementation, and operational recommendations made and stating all assumptions. Outline in the body of the report the expected future financial outcomes as a result of implementing the recommendations. Most of the calculations for this step should already have been completed in addressing steps 4, 5 and 6.

8. Written Report

Present your answer in a professional manner using a formal report format consisting of the following components in the following order: cover page, one-page executive summary that represents the report in short (i.e. summarizes all the major and most important minor issues and recommendations), table of contents (not required for the Case Examination), introduction, body (including analyses, recommendations, implementation plan, action plan), conclusion, appendices/exhibits, and references/bibliography (not required for the Case Examination). Present the contents of the report in a well-written manner that reflects an appropriate tone for the receivers of the report.


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Present the quantitative analyses in appendices, exhibits or tables, and reference them in the body of the report. Provide labels and audit trails for all calculations. Provide the details of the situational analysis (e.g. SWOT, ratios, benchmarking, etc.) in appendices, and summarize the highlights of the most important factors and issues in the body of the report.


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August 2010 Case Examination Fleet Management Group Inc. (FMG)

Documents

Fleet Management Group August 2010 CaseExamBook CMA