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7/28/2019 PT2011 Case-study WaterMaintenanceInPeakland
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Strategy for water pump
maintenance in Peakland
Peak Time preliminary round case
Disclaimer: all data is fictional, yet based on real life business patterns
Case study prepared by Civitta Analytics & Management Consulting www.civitta.lt
http://www.civitta.lt/http://www.civitta.lt/7/28/2019 PT2011 Case-study WaterMaintenanceInPeakland
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The company: PeakWater
PeakWater is a state owned company providing
integrated water systems for the citizens of Peakland.
Integrated water systems include Water supply,
Sanitation, and Wastewater treatment
The company was established in 2002, when the ruling
government made a decision to merge all local
municipality water utility companies to achieve
economies of scale and introduce more modern
management and investment practices
So far, PeakWater has mostly lived up to the
expectations and cut on costs. Water quality has been
improved thanks to extensive investments in water
sanitation facilities
State owned water supply company...
However, water supply disruptions have become more
prevalent. Planned disruptions grew continuously in duration
and caused discontent among citizens for their bad timing.
Moreover, supply system failures caused by unfavorable
external circumstances have become more frequent and are
taking longer to liquidate.
The management of PeakWater has been attributing the
above problems to the aging of the water supplyinfrastructure and to insufficient levels of investment to
renew it
In 2010 it was revealed that FixIt, a subsidiary responsible for
the maintenance of the water supply system, may be highly
inefficient and may prevent PeakWater from improving water
supply services
...which faces efficiency issues
-4-24
-136-166
-144-150-153-167
-45
2008 20102009200720062005200420032002
6,1325,5485,256
4,6724,380
2008 2010200920072006
Peakwater profit, millions of currency units, 2002 - 2010 Service downtime, minutes, 2006 - 2010
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FixIt: water pump maintenanceWhen PeakWater started operations as a merged company in early 2002, all maintenance activities were carried out by the companys own
resources. These maintenance operations include:
- Repairs of water facility
- Repairs of water pumps
- Repairs of real-time decentralized treatment doser- Operative help in the event of a water shortage
In 2007, the government advised that all maintenance activities for utility companies should be separated from their core activities, hence,
outsourced, in order to control costs and encourage savings through efficiency improvements. A few months later, in 2008, FixIt was born as a
subsidiary of PeakWater. FixIt was given all the employees and assets which were used in maintenance, in return for a 100% holding of its shares.
This meant that now PeakWater would buy maintenance services from FixIt. In theory, PeakWater could carry out public tenders to choose the best
contractor, however, to date PeakWaters managers have chosen to purchase almost all maintenance operations from FixIt in order to ensure that
FixIt received a constant revenue flow. At first this seemed like a success: maintenance costs dropped immediately after the separation of FixIt.
In addition to maintenance activities, another extensive activity by PeakWater is investment projects, such as laying new pipelines , renewing old ones,
or building new pumps and reservoirs. Most investment projects are contracted through public tenders. In 2010 FixIt decided that it should also start
entering these tenders. It immediately became apparent that FixIt is uncompetitive the prices they could offer for investment projects were 20-30%
higher than those of other contractors.
PeakWater is concerned that if FixIt is that inefficient for investments projects, it might as well be underperforming in the maintenance work on
which PeakWaters performance heavily depends. Moreover, if FixIt continues to lose all bids on investment projects, it will never ensure proper
funds for improving their operations.
215 216 216166 172 171
201020092008200720062005
FixIt (before 2008 - PeakWater itself)
External contractors
PeakWaters maintenance costs, millions of currency units
400 337 369493 453 452
201020092008200720062005
PeakWaters investment projects, millions of currency units
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What should PeakWater do with its maintenance work?
There are several strategic alternatives
Purchase maintenance
contracts in the open market
FixIt should compete
with other
companies: more
incentive to improve
Privatisation of FixIt
PeakWater would get
some revenue and the
new owner would be
eager to make FixIt
more efficient
Enforce restructuring of
FixIt to increase efficiency
PeakWater has little
competence to
improve FixIt, however,
any efficiency gains
would benefit
PeakWater directly
Insource Fixit, reintegrating
it back to PeakWater
Since FixIt is critical to the
success of PeakWater, the
company should closely
watch these activities and
ensure necessary support
Alternatives for PeakWatersmaintenance activities
Keep in mind:
Continuous supply of water is crucially important to municipalities water supply outagespose a substantial political risk
Emergency service needs to be operational 24/7 - some accidents have to be dealt with assoon as they happen
Both PeakWater and FixIt have inherited an old-school type of thinking. Employees arevery reluctant to adapt to changes in the market and say that the company has beenoperating well enough and that it should remain so
A private equity company has expressed an interest in adding FixIt to its existing portfolio ofsimilar companies, which would increase the risk of market monopolization
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Your task
PeakWater shareholders have hired you to consult them on what to do with the water pump
maintenance function (currently performed by FixIt).
Your task:
Examine the situation and the possible solutions
Propose your solution, identifying its pros and cons (your proposal may be one of thesolutions suggested in this presentation, or one that you have come up with yourselves)
Identify the next best alternative to this solution
Explain why your solution is better than the identified alternative Solve a mini-case: what impact would this solution have on the company, as compared
to the base case (doing nothing)?
You must use the template provided. Please see further instructions on the front sheet of thetemplate.
You will be evaluated based on these criteria: How clear and to-the-point your proposed solution is
Argumentation of your proposal: well identified merits and drawbacks
Choice and argumentation of the next best alternative
Arguments to prove that your proposal is better than the next best alternative
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Supplementary information
The following slides contain additional details for the case.
You are advised to use this information for your solution,
where relevant
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Investment activities in Peakland and around: competition
overviewThe CEO of FixIt, Mark Waterplumber, has been pressured to explain why FixIt can only carry out investment projects at such high
costs compared to the competitors. He insists that investment projects require higher competences and more elaborate
equipment than the regular maintenance work. Thus, according to Mark, FixIt is perfectly efficient in the usual maintenance
tasks, even if it cannot carry out the investment projects at the moment. Reluctant to believe him, you have collected whateverdata you could get about the companies which PeakWater has contracted over the past year for investment projects.
52%
5%
28%
16%
0%
10%
20%
30%
40%
50%
60%
0
200
400
600
800
1,000
1,200
Company A Company B Company C Other companies
Revenues from investment projects (millions of currency units), 2010; Market share in
Peakland investment projects (%)
In Peakland In neighboring countries "Market share in Peakland"
0
10
20
30
Company A Company B Company C Other companies
Average revenue per project in Peakland, millions ofcurrency units, 2010
0
20
40
60
Company A Company B Company C Other companies
Number of projects in Peakland
Note: although most investment projects are carried out by PeakWater (since it is the only water supply company in the country), there are
occasional projects of a similar profile carried out by private industrial companies for their own needs.
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Background information: P&L for PeakWater
Revenues 997.319 956.171 966.274 1,007.393 1,009.223 1,010.883
OPEX 426.797 428.799 430.136 399.220 400.964 402.882
Payroll* 194.410 194.682 194.935 195.734 195.957 196.545
Maintenance* 214.855 215.851 216.378 184.040 184.865 185.700
Other 17.532 18.265 18.823 19.446 20.142 20.638
EBITDA 570.522 527.372 536.139 608.174 608.260 608.001
Depreciation 714.667 694.167 673.667 653.167 632.667 612.167
Profit/Loss -144.145 -166.794 -137.528 -44.993 -24.407 -4.166
CAPEX 571.135 561.620 550.111 548.034 533.289 519.112
186185184216216215
519533548550562
571
-3%
-15%
201020092008200720062005
CAPEX
Maintenance
*Maintenance for 2005-2007 includes payroll of maintenance function staff
Note: all figures are in millions of currency units
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Background information: P&L for FixIt
2008 2009 2010
Revenues 184.040 184.865 185.700
OPEX 176.567 184.270 185.793
Payroll 85.423 84.062 85.313
Equipment 13.532 16.851 16.432
Material cost 23.546 27.34 26.865
Transportation 3.643 3.954 3.842
Other 50.423 52.063 53.341
EBITDA 7.473 0.595 -0.093
Depreciation 2.393 2.393 2.393
Profit/Loss 5.080 -1.798 -2.486
Income tax 0.762 0.000 0.000
Net profit 4.318 -1.798 -2.486
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Water pump maintenance in neighboring countries
Organization of the
maintenance business
Service downtime,
2010
Material cost
(maintenance, % of
the maintenance
companys revenues)
Maintenance services
Profit margin
Danura In-house engineering units
in 3 largest residential areas
600 min 8% 30%
Norevaea Dedicated companysubsidiary
5518 min 20% 5%
Cesabya Strategic alliance with
district heating companies
joint multifunctional
venture
1400 min N/A
(Cesabyas water
supplier pays a yearly
250 million service fee
to the strategic
partner.)
15%
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Background information - Peakland
Population
Indicator Peakland Norevaea Danura Cesabya
Area 79k sq. km. 154k sq. km. 241k sq. km 530k sq. km.
Population 4.05m 11.32m 19.93m 31.53m
GDP 106bn USD 231bn USD 374bn USD 893bn USD
Unemployment rate 10.1% 13.5% 8% 11%
Inflation rate (CPI) 3.2% 7.6% 2.2% 3.1%
Main economic indicators for Peakland and neighboring countries
Millmore
Lower Centerburg
Mount Painesport
Old Ogdenburg
Mansshire Ridge
Kenthunt
Westlawn
GDP per capita, USDRegions
19,880
20,874
21,850
28,740
33,774
25,030
20,197
8.3
15.3
16.2
11.0
11.3
9.2
8.3
Unemployment rate, %
Lower Centerburg 299235
Mount Painesport 337243
Mansshire Ridge 638554
Millmore 730604
Old Ogdenburg 1,5981,293
Kenthunt 227174
Westlawn 225193
DANURA
NOREVAEA
CESABYA
City
Suburbs