CASE 6-1CBN Railway CompanyCEO John Spychalski is concerned about a problem that has existed at CBN railroad foralmost 20 years now. The continuous problem has been that the locomotives used by thecompany are not very reliable. Even with prior decisions to resolve the problem, therestill has not been a change in the reliability of these locomotives. Between 2013 and2014, 155 new locomotives were purchased and one of CBN's repair shops was reno-vated. The renovated shop has been very inefficient. Spychalski estimated that the shopwould complete 300 overhauls on a yearly basis, but instead it has only managed to com-plete an average of 160 overhauls per year.The company has also been doing a poor job servicing customers (that is, providingequipment). CBN has averaged only 87 to 88 percent equipment availability, comparedto other railroads with availability figures greater than 90 percent. Increased business inthe rail industry has been a reason for trying to reduce the time used for repairing thelocomotives. CBN's mean time between failure rate is low-45 days-compared to otherrailroads whose mean time between failure rates is higher than 75 days. This factor,Spychalski feels, has contributed to CBN's poor service record.CBN is considering a new approach to the equipment problem: Spychalski is exam-ining the possibility of leasing 135 locomotives from several sources. The leases wouldrun between 90 days to 5 years. In addition, the equipment sources would maintain therepairs on 469 locomotives currently in CBN's fleet, but CBN's employees would do theactual labor on the locomotives. The lease arrangements, known as "power-by-the-mile"arrangements, call for the manufacturers doing the repair work to charge only for main-tenance on the actual number of miles that a particular unit operates. The companyexpects the agreements to last an average of 15 years. John Thomchick, the executivevice president, estimates that CBN would save about $5 million annually because thecompany will not have to pay for certain parts and materials. Problems with the locomo-tives exist throughout CBN's whole system, and delays to customers have been known tolast up to five days. Spychalski and Thomchick feel that the leasing arrangement willsolve CBN's problems.CASE QUESTIONS1. What are potential advantages and disadvantages of entering into these "power-by-the-mile" arrangements?2. What should be done if the problem with the locomotives continues even with theagreements?3. Do you think that the decision to lease the locomotives was the best decision forCBN? Explain your answer.

1. Power–by–a mile is actually a kind of lease game plan during which the producers involved in any…

CASE 6-1 CBN Railway Company CEO John Spychalski is concerned about a problem that has existed at CBN railroad for almost 20 years now. The continuous problem has been that the locomotives used by the company are not very reliable. Even with prior decisions to resolve the problem, there still has not been a change in the reliability of these locomotives. Between 2013 and 2014, 155 new locomotives were purchased and one of CBN's repair shops was reno- vated. The renovated shop has been very inefficient. Spychalski estimated that the shop would complete 300 overhauls on a yearly basis, but instead it has only managed to com- plete an average of 160 overhauls per year.

CASE 6-1 CBN Railway Company CEO John Spychalski is concerned about a problem that has existed at CBN railroad for almost 20 years now. The continuous problem has been that the locomotives used by the company are not very reliable. Even with prior decisions to resolve the problem, there still has not been a change in the reliability of these locomotives. Between 2013 and 2014, 155 new locomotives were purchased and one of CBN's repair shops was reno- vated. The renovated shop has been very inefficient. Spychalski estimated that the shop would complete 300 overhauls on a yearly basis, but instead it has only managed to com- plete an average of 160 overhauls per year.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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