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EAST CENTRAL OHIO FREIGHT

By:
Aadish Bansal B16001
Anirudh Kudva B16009
Bhawna Manocha B16015 Pratik Agrawal B16034
Richa Gupta B16039

Background:
East Central Ohio Freight (ECOF), headquartered at Cambridge, Ohio, started off their business in the 40’s as a moving & storage business. However, the same was dropped shortly and the company moved to freight business focussing on less than truckload (LTL) hauling. In the 80’s it expanded to TL (full truckload) business which has been performing well. The LTL business, on the other hand had to be dropped owing to union contracts, health care amongst other union related issues which were becoming too costly in the face of increased competition in the deregulated market. Further, in the early 2000s, the business bought two agency companies which exposed it to the VLTL (volume less than truckload) hauling which it can further expand into in Cambridge. With this purchase, the company was now into four geographical markets - * Cambridge * Indianapolis * Cincinnati * Wheeling
Problem Statement:
The company’s business was drying down majorly at the headquarter city, and other areas primarily because of the following reasons: 1. Two of the largest TL Customers in Cambridge, closed operations or moved from the area. 2. Conditions in the freight industry had become increasingly difficult because of costs of fuel, insurance, maintenance, and new equipment were all increasing 3. The economy was shifting towards production and trade of lighter, higher value goods and more frequent shipment of smaller loads. 4. The increasing competition was leading to squeezed profits.
The company can either venture out into new states thereby generating stable customers and long hauls or consolidate and improve their niche within few states in hauls leading to better direct service for a larger number of customers. The expansion of VLTL in Cambridge needs to be given following considerations: 1. It would require capital expenditures of $250,000 and additions to the work force that would increase labour costs by a similar amount. With the economic slowdown in the industry, the business was not sure that the demand from the customers would support a new resource commitment. 2. Competition from LTL carriers which can prove to be more cost effective for shippers than VLTL.
Hence, the problem statement at hand is to analyse the new sources of revenue to tackle this situation of drying up profits, evaluate whether VLTL should be made operational in Cambridge or other options should be considered.

Situational Analysis: Factor | LTL | TL | No of competitors | Large and increasing. Carriers like Yellow and Conway, Fedex freight etc. | Increasing. Carriers like FEDEX Freight and American Roadways. | Relative strength of each competitor | Major players like Yellow exist in the market with sales of nearly $10 billion in 2006 and operated about 15,400 tractors and 61,400 trailers from 430 service centres. We stand at 170 tractors, 300 trailers and 14 straight trucks. Our business, however, has completely dropped the LTL business | Our business had been doing fairly well until the two major customers closed down their operations | Level of demand & supply | Ohio department of transportation sees the weight of goods and materials carried by freight trucks declining from 16.1 tons per truck to 15.9 tons per truck. The demand has been shrinking in the market as the economy is moving towards production and trading of lighter, higher value of goods and more frequent shipment of smaller loads. | Ease of entry into the market | Prior to 1981, the Interstate commerce commission regulated both the routes and rates for the trucking companies. This resulted in limited competition and higher shipping cost. The deregulation in 1981 removed the entry barriers and expanded pricing flexibility resulting in monopolistic competition with 20 suppliers and with varied services. |
Q1. What is the competitive structure of TL and LTL business?

Q2. What factors impact the primary demand? * Recession in Ohio manufacturing industry- Loss of 22% percent workforce since 2000; projected to continue with the downfall due to downsizing and plant closings in motor vehicle and parts industries. As a result, the demand for freight transport reduces. * Excess supply of trucks for diminishing amount of loads – though the freight-truck traffic will increase significantly (58% over the next 20 years), the weight carried is expected to decline from an average of 16.1 tons per truck to 15.9 tons per truck. (As per Ohio Department of Transportation (ODOT) study) * Rising costs of fuel, equipment and insurance may push the prices up * Large and increasing competition- entry of players like FEDEX and UPS

Q3. Ansoff’s Matrix | Existing Products | New Products | Existing Markets | Market Penetration * Technological development to decrease time between loads and to allow easier shipment tracking * Increase the cold calls to increase sales conversion. * Increase advertisements and tie up with more agencies to enhance coverage and customer base. | Product Development * Introduce VLTL product in the Cambridge market. * Diversify in multi-modal transportation methods (rail, water and air) * Expand the service base by re-starting LTL. | New Markets | Market Development * Invest in agencies in different regions to add to the service portfolio (Like the two bought in Cincinnati and Indianapolis) * Join forces with other players to get better back haul deals, better coverage and more flexibility. | Diversification * Residential and commercial packers and movers service. * Rent out flat beds at new terminals outside of Ohio. |

Threat of New Market Entrants
1.Bigger players coming into market: FedEx & UPS
2. High barriers to entry (operational & logistical)
3. Low product differentiation

Competitive rivalry
1.320000 competitors having market size of $255 billion
2.Low level of product innovation
3.As per ODOT, short term economic conditions are weak, however long term outlook for freight is good.

Bargaining power of customers
1. High bargaining power due to high competition in the industry (320000 freight companies in US
2. Switching cost is low
3. Low service differentiation
4. Low new customer conversion rate

Bargaining power of suppliers
1.Low bargaining power due to slow economy and more trucks
2.30% per year turnover of owners/operators as compared to 100% industry average
3.Timely pay and fair treatment has resulted in loyal operator base

Threat of substitutes
1.Low- Other modes of transport (air, water) will have drastic increase in costs.
Commodities like Warehousing and Clay, Concrete, Glass, etc. are been taken care by only trucks as per the study by Ohio State Bureau of Labour

Threat of New Market Entrants
1.Bigger players coming into market: FedEx & UPS
2. High barriers to entry (operational & logistical)
3. Low product differentiation

Competitive rivalry
1.320000 competitors having market size of $255 billion
2.Low level of product innovation
3.As per ODOT, short term economic conditions are weak, however long term outlook for freight is good.

Bargaining power of customers
1. High bargaining power due to high competition in the industry (320000 freight companies in US
2. Switching cost is low
3. Low service differentiation
4. Low new customer conversion rate

Bargaining power of suppliers
1.Low bargaining power due to slow economy and more trucks
2.30% per year turnover of owners/operators as compared to 100% industry average
3.Timely pay and fair treatment has resulted in loyal operator base

Threat of substitutes
1.Low- Other modes of transport (air, water) will have drastic increase in costs.
Commodities like Warehousing and Clay, Concrete, Glass, etc. are been taken care by only trucks as per the study by Ohio State Bureau of Labour

Q4. Porter’s Five Forces

Q5. GE Matrix
Competitive Strength 1. Market Share – Shutdown of 2 of the top customers in TL near Cambridge. VLTL already has larger share of revenue in Cincinnati (70 %) and Indianapolis (60%). 2. Brand Recognition – Company is associated with the Trucking and Freight business in Ohio since a long time. 3. Technological Competency – Already established in the TL industry but Cambridge Depot even equipped for VLTL. Other 2 depots are already running VLTL. 4. Distribution Network - Regular LTL carriers like YRC are more cost efficient and higher volumes due to more spread out network to support many terminal location as compared to ECOF 5. Customer Loyalty - VLTL can cater to the needs of the diversified and established customer base in Cambridge catering to 80% of the business.

Market Attractiveness 1. Growth in Market – Whole Trucking Industry has hit stagnation due to higher supply than demand but ODOT indicates an increase in freight traffic. 2. Demand Trends – According to ODOT, the trend will be towards production of lighter goods leading to higher frequency of smaller loads thus leading to higher demand of VLTL than TL. 3. Intensity of Competition – In the LTL industry which is a direct competition to VLTL industry, YRC is the biggest player and FedEX Freight and Conway. 4. Profit Margins – VLTL has a higher profit margin as compared to TL (10 to 20%). 5. Customer/Supplier Relations – Clear indications of pricing power wielded by carriers is shifting in shipper’s favour.

Coordinate Calculation Market Attractiveness | | Weightage | Rank (on a scale of 1 to 10) for TL Market | Rank (on a scale of 1 to 10) for VLTL Market | Coordinate for TL Market | Coordinate for VLTL Market | Growth | 0.25 | 6 | 8 | 1.5 | 2 | Demand Trends | 0.2 | 6 | 9 | 1.2 | 1.8 | Intensity of Competition | 0.2 | 8 | 6 | 1.6 | 1.2 | Profit Margins | 0.25 | 6 | 9 | 1.5 | 2.25 | Customer/Supply relations | 0.1 | 1 | 5 | 0.1 | 0.5 | Total | 1 | | | 5.9 | 7.75 | | | | | | | Competitive Strength | | Weightage | Rank (on a scale of 1 to 10) for TL Market | Rank (on a scale of 1 to 10) for VLTL Market | Coordinate for TL Market | Coordinate for VLTL Market | Market Share | 0.3 | 6 | 7 | 1.8 | 2.1 | Brand Recognition | 0.15 | 7 | 5 | 1.05 | 0.75 | Technological Competency | 0.2 | 6 | 6 | 1.2 | 1.2 | Customer Loyalty | 0.15 | 5 | 5 | 0.75 | 0.75 | Distribution Networks | 0.2 | 6 | 4 | 1.2 | 0.8 | Total | 1 | | | 6 | 5.6 |

Final Matrix | | COMPETITIVE STRENGTH | | | HIGH | MEDIUM | LOW | MARKET ATTRACTIVENESS | HIGH | Protect Position | VllLT
VllLT
Invest to Build | Analyze | | MEDIUM | Build Selectively | TL
TL
Manage selectively for earnings | Harvest | | LOW | Protect & Re-focus | Manage for Earnings | Divest |

Recommendation:
Basis the GE matrix and the below financial analysis, the team recommends the business to go ahead with VLTL expansion.
The analysis shows that the variable costs can be recovered from the profits earned and hence VLTL is a feasible and profitable option. The analysis is based on the following assumptions: 1. Shorter distances will attract more loads, therefore giving them more weightage 2. Average resource utilization time for the additional 8 hires is 26 weeks 3. Out of the per week total load of 600, 40% is assumed to be from VLTL 4. Back-haul will not be generating any profit as specified in the case. 5. Revenue is calculated by multiplying weighted average miles x Estimated yearly load x total charges per mile. 6. Under the conservative approach, the profit % is 8%, while for aggressive it is 10%

Capital Expenditure | 250,000 | Variable Expenditure for Year 1: | | Immediate Hiring of 4 People | 166,400 | Hiring other 8 People | 166,400 | Benefits @ 40% | 133,120 | Total Variable Cost | 465,920 | Current Load Per Week | 500 | Increase @ 10% | 100 | Total Estimated Load | 600 | Load From VLTL estimated @ 40% | 240 | Load from Front Haul @ 50% | 120 | Estimated Yearly Load from VLTL | 6,240 |

Distance in Miles from Cambridge to: | Miles | Weightage | Weighted Avg. | Columbus | 79 | 0.2 | 15.8 | Indianapolis | 255 | 0.25 | 63.75 | Cincinnati | 181 | 0.25 | 45.25 | Los Angeles | 2325 | 0.1 | 232.5 | New York | 459 | 0.1 | 45.9 | New Orleans | 991 | 0.1 | 99.1 | | | Weighted Avg. Miles | 502.3 |

| Conservative | Aggressive | Charge per Mile on East Coast | 1.4 | 1.6 | Fuel Charges per Mile | 0.5 | 0.6 | Estimated Revenue | 5,955,268 | 6,895,574 | Estimated Profit | 476,421 | 689,557 |

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