t4- part b case study bvs fleet maintenance case march 2013 report docs/2010 syl… · ·...

©The Chartered Institute of Management Accountants

T4- Part B – Case Study

BVS – Fleet maintenance case – March 2013

REPORT To: BVS Board From: Management Accountant Date: 26 February 2013

Review of issues facing BVS Contents 1.0 Introduction 2.0 Terms of reference 3.0 Prioritisation of the issues facing BVS 4.0 Discussion of the issues facing BVS 5.0 Ethical issues and recommendations on ethical issues 6.0 Recommendations 7.0 Conclusions Appendices Appendix 1 SWOT analysis Appendix 2 PEST analysis Appendix 3 Evaluation of under-performing workshops Appendix 4 Evaluation of electric vehicle proposal Appendix 5 Evaluation of apprentice scheme proposal Appendix 6 Part (b) – Presentation on the 10 under-performing workshops and graph

showing utilisation levels 1.0 Introduction BVS is an unlisted company, which was formed following an MBO on 1 April 2010. The company has grown considerably since its formation and is currently responsible for servicing and maintaining its customers’ fleet vehicles, totalling over 82,000 vehicles. Its sales revenue has grown from €84.0 million in BVS’s first year of operation, following the MBO, to a forecast of €122.9 million in the current year ended 31 March 2013, growth of almost 45%. BVS follows the generic strategy of differentiation according to Porter. BVS is trying and succeeding to grow its business as well as meeting the demands of its customers in respect of the quality and range of services it offers. In the real world there are many fleet maintenance companies including BT plc, the UK’s main telecommunications provider. BT plc’s fleet maintenance subsidiary company has many large fleet maintenance contracts including one with the AA to service all of its roadside breakdown and recovery vehicles.

Note: This report is far more comprehensive than would be expected from a candidate in exam conditions. It is more detailed for teaching purposes.


There are two main issues facing BVS, which are to resolve the problem being caused by the 10 under-performing workshops and to make a decision on whether, or not, to widen the provision of servicing for electric vehicles. If both of these issues are not satisfactorily resolved, then this could severely impact on the achievement of the company’s 5-year plan. The nature of the fleet maintenance industry is constantly evolving. For example, by 2015 vehicle manufacturers will need to abide by the Euro V1 emissions standards and BVS cannot afford to stand still and needs to be pro-active towards change. 2.0 Terms of reference I am the Management Accountant appointed to write a report to the BVS Board which prioritises, analyses and evaluates the issues facing BVS and makes appropriate recommendations. I have also been asked to prepare a presentation on the 10 under-performing workshops. This is included in Appendix 6 to this report. 3.0 Prioritisation of the issues facing BVS 3.1 Top priority – Under-performing workshops The top priority is the under-performing workshops due to the poor quality of work and the impact this is having on BVS’s reputation together with the extra cost of outsourced workshops to service the vehicles which could, and should, be serviced by BVS’s owned workshops. The forecast utilisation in these 10 workshops is only 62% and they have received negative customer feedback which could impact on BVS’s overall reputation. This problem needs to be urgently addressed so as to save money being spent on outsourced workshop space for customers’ vehicles which could be serviced by BVS’s managed workshops. Alternatively these under-performing workshops could be closed. 3.2 Second priority – Electric vehicles This is considered to be the second priority as one of BVS’s customers, FAST, has indicated that it will terminate its contract with BVS unless the geographic coverage for servicing of electric vehicles is extended to cover all 3 countries. BVS has also received a proposal from E-car, to undertake electric vehicle servicing and to install re-charging points. Furthermore, BVS needs to be pro-active in the provision of services. Electric vehicles are becoming more widely used in fleets and it needs to be responsive to its customers’ needs. It would also give BVS an opportunity to become an industry leader in this field of vehicle servicing and a tie up with the electric vehicle manufacturer E-car would also add to BVS’s reputation and credibility with future potential customers which operate electric vehicles in their fleets. 3.3 Third priority – Apprentice scheme proposal The third priority is considered to be the apprentice scheme proposal as over 50 employees are within 5 years of retirement age and urgent action and budgets need to be agreed if this scheme is to be approved and established. BVS has direct fixed costs for managing its 120 workshops and these direct fixed costs will still be incurred even if there were to be a shortage of trained vehicle mechanics. Urgent action is required if an apprentices scheme is to be approved so that BVS does not find itself with a shortage of skilled mechanics. BVS has a growing business and should not allow itself to have a shortage of skilled mechanics. It either needs to run an apprentice scheme or recruit already trained mechanics, assuming sufficient availability of trained mechanics in the areas required in BVS’s home country.


3.4 Fourth priority – Inventory valuation The answers to the questions raised by workshop managers concerning the inventory valuation is considered to be the fourth priority issue as it is less urgent than the other issues prioritised above. A SWOT analysis summarising the strengths, weaknesses, opportunities and threats facing BVS is shown in Appendix 1. A PEST analysis is shown in Appendix 2. 4.0 Discussion of the issues facing BVS 4.1 Overview BVS has grown considerably since it was formed following the MBO in April 2010. It is clearly meeting the needs of its fleet customers as it has not lost any customers to date and has grown the number of vehicles it maintains from 47,500 to a forecast figure of 82,100 at end March 2013. However, it is necessary for businesses to be innovative to survive, such as the opportunity to expand the servicing of electric vehicles as well as to tackle underlying problems with workshop quality and utilisation levels. BVS’s management have perhaps been too focussed on growth and now is the time to consolidate its position to ensure that the company’s good reputation for quality and range of services is maintained or enhanced. 4.2 Under-performing workshops There are 10 under-performing workshops, out of BVS’s 120 managed workshops. These 10 under-performing workshops are only achieving a 62% utilisation level and furthermore are producing vehicle maintenance work of a poor quality with delays to customers’ vehicles. The impact of this problem is huge. It goes far beyond the extra outsourcing costs as this could have a significant impact on BVS’s reputation and could even lead to a loss of customers. Customer satisfaction is critical in the fleet maintenance industry with customers being able to move between servicing companies (using Porter’s 5 forces analysis, customers are a major force in the industry). If BVS wishes to achieve its ambitious 5-year growth plan then it cannot risk any more adverse publicity, and certainly not be seen to cause accidents through faulty workmanship. This problem must be addressed immediately. A real life company, Fleet Support Group Ltd in the UK, had been able to grow at around 18% for several years and it is currently achieving high utilisation levels at its managed workshops. The 3 alternatives that BVS is considering are:

(A) Closing down some, or all, of these 10 managed workshops and moving the work to outsourced workshops. All 10 workshops are leased at a cost of €48,000 per workshop each year, with a 2 month notice period. The lease costs are included in the direct fixed costs for each workshop. Employee termination costs are forecast at €30,000 per workshop.

(B) Replacing the managers and some of the employees at these 10 managed workshops.

(C) Promotional discounts for customers to try to persuade them to book their vehicles into these 10 BVS managed workshops.

These alternative actions will be discussed below.


Appendix 3 shows the financial impact on the operating profit for 2013/14 and utilisation levels of 3 different alternatives scenarios which are:

Alternative 1. If all 10 workshops were to achieve the planned utilisation level of 91.0%.

Alternative 2. If all 10 workshops were to be closed immediately.

Alternative 3. If an additional 2,000 hours of work were to be carried out at each workshop, in addition to the forecast level of 6,882 hours and the effect of this utilisation levels.

Alternative 1 Alternative 1, which is taking action to achieve a 91.0% utilisation level in each of these 10 workshops, shows that under-performing workshops are currently resulting in an extra 3,219 hours of extra outsourced workshop time, compared to the planned utilisation level of 91%. These 3,219 hours are costing BVS an extra €0.103 million per workshop. For 10 workshops, this is resulting in an extra annual cost, or reduced profit, due to extra outsourcing, of €1.030 million. An improvement in utilisation levels will therefore have a huge impact on both profitability and cash flows. However, is an average utilisation level of 91.0% realistic for 2013/14? Will this high utilisation level target de-motivate employees further as they may see it as unattainable? Alternative 2 If all 10 workshops were to be closed, then BVS would save the direct fixed costs for the 10 workshops, which would be €2.9 million (€290,000 x 10 workshops) but would incur higher costs for increased volumes of outsourced work. This also assumes that its outsourced workshops could cope with this sudden increase in demand. It is unlikely that the 5 outsourced partners could cope with this sudden increase of 6,882 hours for each of the 10 workshops, which totals almost 69,000 man hours of work within the next year. The outsourced partners would need time to be able to expand their manpower and facilities to take on this extra volume of work. Therefore immediate closure of the 10 workshops is commercially unrealistic. BVS would also incur the penalty of 2 months lease costs and employee termination costs. The increased cost if these 10 workshops were to be closed would be:

€2.2 million for additional outsourced work (6,882 hours x €32 x 10 workshops)

Lease costs of €80,000 (2 months at €48,000 per year per workshop)

Employee termination cost of €0.3 million (€30,000 per workshop x 10 workshops).

Therefore overall, if the 10 workshops were to be closed, the net saving would be fairly small at only €0.318 million in 2013/14. See Appendix 3. If these 10 workshops were to be closed then on-going savings (after 2013/14) would be a net figure of €698,000 each year, as shown in Appendix 3. Whilst closing these workshops makes BVS more flexible, it also makes it more dependent on its outsourced partners. Alternative 3 If action is taken to achieve Alternative 3, which is an extra 2,000 hours work being undertaken at each of these 10 workshops, then utilisation levels would increase from 62.0% to 80.0%. This is a more realistic and perhaps achievable utilisation level for 2013/14 rather than 91.0%.


However, the problem of how this 18% improvement in utilisation levels (i.e. 62% to 80%) can be achieved needs to be addressed as well as the quality of work. Whilst utilisation at 80% is still a lot lower than 91.0% in the plan, if this level of utilisation could be achieved it would generate savings in outsourcing of €0.640 million (based on 2,000 hours x €32 x 10 workshops). See Appendix 3. So now that the financial implications on the operating profit for 2013/14 have been considered, it is necessary to consider what actions could be taken to achieve Alternatives 1 or 3.

At a time where BVS is expanding the serious question to be asked is why should it close workshops? BVS should take urgent management action to change the working practices, management style and employee culture at these 10 workshops in order to make the workshops attractive for BVS’s customers to use for the vehicle maintenance. Increased use of these workshops will result in higher utilisation levels, reduced level of outsourcing, higher operating profits and most importantly satisfied customers. It is suggested that BVS should immediately identify 10 workshop managers from other well performing workshops who would be willing to be seconded to these 10 under-performing workshops in order to make changes and improvements and to better manage the operations at these workshops. These managers should be incentivised with a bonus payable after 6 months, or perhaps a year, based on the improved utilisation levels that they are able to achieve at each workshop. None of the employees at these 10 workshops should have their contracts of employment terminated until the new seconded workshop managers have had a chance to identify where the fault lies and which individual employees are to blame. Is it a lack of good management, general poor levels of skills or perhaps a lack of confidence by BVS’s customers who have chosen not to book their vehicle servicing at these workshops. The reasons for the low utilisation levels need to be investigated and the employees at all of these 10 workshops trained and supervised better in order to establish the cause, or most like the many causes, for the lower utilisation levels. With the expanding number of vehicles that BVS maintains and the planned expansion of work, it would seem to be a dangerous move to close workshops and rely more heavily on outsourced workshops. In the long run outsourcing is a higher cost. As shown in Appendix 3. Therefore BVS needs to take actions to improve the quality of work and also utilisation levels. However, as customers choose which workshop to have their vehicles serviced in, it is unlikely that they will choose these poorly performing workshops, especially if BVS’s customers have had a poor experience before with a badly maintained vehicle or a poor level of customer service.

Therefore, it is necessary to improve the quality of the work before promotional offers are given to customers to entice them back to use these workshops. If BVS were to offer customers’ discounts or incentives to use the workshops immediately and they then experienced poor quality of work, then the promotion would be wasted and customers would be even more unlikely to choose to use these workshops. Therefore it is necessary for new workshop managers to be appointed on a temporary basis and additional training put in place before customers are contacted. Existing workshop managers should be asked to work alongside the seconded managers on a trial basis to establish if the problems lie in poor management or a lack of training or a range of different problems. Therefore it is suggested that no employees are sacked at present but that all managers and employees at all 10 workshops are advised of the seriousness of the problems and that within 12 months, jobs will be lost if no improvements are made. This report will now consider each of the alternative proposals for change:


Alternative (A) Alternative (A) of closing down the workshops should be considered only as a last resort due to BVS’s large volume of vehicles to be serviced. It should not be contemplating closing 10 out of 120 workshops, when the fleet of vehicles that it maintains has grown from under 50,000 vehicles in April 2010 to over 82,000 by March 2013. Alternative (B) Alternative (B) of replacing the managers seems a sensible initial decision, as the manager at each workshop should be closely monitoring the employees, the level of customer service as well as the quality of work and the speed of all repair work. It is suggested that 10 managers from well managed workshops are offered 6 month secondments to these workshops. They should be incentivised to improve quality and utilisation levels. Additionally all employees should be provided with additional training and the importance of quality explained to them. They should also be advised that each workshop has a limited period to improve and that their jobs depend on a major change in employee behaviour. Alternative (C) Alternative (C) should only be approved and put in place only when the new managers are in these workshops and training has been completed. Offering incentives would not cure the core problem of the delays and poor quality work. These under-performing workshops should have new seconded managers appointed and all employees should be given more training, especially on quality issues and the importance of customer service. Only when this process has been undertaken, and the new managers are satisfied with the better quality of service being provided, should BVS contact the customers who have been using outsourced workshops in the local area. These customers should be contacted and offered incentives and discounts to their fleet maintenance contract if they would be prepared to try using the previous under-performing workshops on a regular basis, rather than the outsourced workshops. Customer surveys should be conducted and close monitoring of customer feedback to ensure performance improves or to identify which workshops, and indeed which employees, are still not delivering the standard of care and workmanship expected. Another real world example concerns Fleet Efficiency Ltd which offers its customers vehicle maintenance over a 3 year contract period for a fixed monthly fee. It also provides management information on all of the services it provides. There are a large number of outsourced companies supporting the main fleet maintenance companies and BVS needs to improve the quality of work at these 10 workshops urgently in order not to lose any of its customers to competitors. It should be noted that the current cost per hour for these 10 under-performing workshops is €42.14 (€290,000 / 6,882 hours) which is significantly higher than outsourcing the work at the outsourced rate of €32.00 per hour. At the planned utilisation level of 91% the cost per hour would reduce to €28.71. There is the additional problem that Jonas Kral has convinced the BVS management team to immediately close 2 of the 10 workshops. However it is apparent that the information on which particular workshops should be chosen may not be reliable. It is essential that before any closure decisions are taken that the closure of 2 workshops can be fully justified, otherwise BVS would leave itself open to unfair dismissal claims and it risks damaging its reputation in the industry.


The BVS Board may wish to re-visit its decision on closing 2 workshops in light of the potential savings in alternatives 1 to 3 discussed above. The ethical aspects concerning making an example of closing 2 workshops is discussed later in this report in Section 5 on Ethics. 4.3 - Electric vehicles Currently BVS offers servicing of electric vehicles only at 60 of its 120 managed workshops and at none of its outsourced workshops at 320 locations. Therefore electric vehicle servicing is only offered at 60 of the total of 440 locations i.e. at less than 14% of its total servicing locations. With the growth in electric vehicles due to lower running costs and carbon emission factors, it is necessary for BVS to continue to innovate and expand the coverage for the servicing of electric vehicles. If BVS does not expand its range of locations, it could be left behind its competitors and also lose customers which plan to change some of their fleet vehicles to electric vehicles. There are 2 further impacts that affect this proposal. Firstly, one of its customers, FAST, which has a fleet of 4,500 vehicles is planning to expand its fleet of electric vehicles to 1,000 vehicles and has stated that it will terminate its contract with BVS if BVS does not expand its geographical coverage of workshops equipped to service electric vehicles. FAST’s fleet of 4,500 represents over 5% of BVS’s forecast fleet of 82,100 vehicles at the end of March 2013. FAST could be classified as a “keep satisfied” stakeholder, according to Mendelow’s stakeholder analysis and BVS should be trying to retain FAST as a customer. To date, BVS has not lost any customers, and the loss of FAST would affect BVS’s reputation in the industry and may lead to the loss of other customers. Secondly, BVS currently has received a proposal from E-car, an electric car manufacturer to be appointed as one of its appointed servicing providers and also to provide locations where electric vehicles could be re-charged. This could provide BVS with an opportunity to raise its profile as a major provider of locations for electric vehicle re-charging points. Drivers and fleet managers of electric vehicles which use BVS for re-charging points may well decide to choose BVS for the servicing of these electric vehicles. Therefore this could provide BVS with an opportunity to attract new customers and establish an early market share in this new and growing market for electric vehicles. According to Ansoff, this is a type of market development. The principle of this proposal is whether BVS should expand the geographical coverage for the servicing of electric vehicles. This will cost money in investment and training for BVS’s remaining 60 workshops as well as 320 outsourced workshops. Furthermore, it is questioned whether BVS should be responsible for the investment in the outsourced workshops without any contribution or commitment from the 5 outsourced companies? BVS has generated a huge volume of new business for outsourced workshops and if BVS were to not proceed and subsequently lose customers, then this will impact on the volume of work generated for outsourced workshops. It is considered that all 5 outsourced companies should contribute towards the investment cost and also the capital cost of installing re-charging points. The proposal for re-charging points and the link to be E-car’s appointed electric car servicing provider is a great proposal and could generate much positive publicity. The number of electric vehicles in city centres will increase significantly over the next 5 years, as the price of fuel increases and as fleet managers appreciate the operational savings that can be achieved through the greater usage of electric vehicles for short distances.

With the current technology of electric vehicles, the biggest problems are the distance that can be covered on a fully charged vehicle together with the time taken to recharge the vehicles (as it often takes hours to re-charge compared to minutes to re-fill with usual fuel) and there is a lack of re-charging points available. The E-car proposal would give BVS much prominence and add credibility to the purchase and operations of electric vehicles for many fleet managers, especially for city centre distribution and courier companies. Therefore from a business viewpoint, as well as an ethical stance, the promotion to offer a wider geographical service as well as re-charging points for electric vehicles makes good business sense.


The issue can be analysed using Johnson, Scholes and Whittington’s framework, as follows: Suitability: as stated above this would be a suitable initiative for BVS to undertake. It would increase the range of services that BVS currently provides across all its owned and outsourced workshops. There would appear to be an increasing demand for electric vehicle provision from customers, and in particular unless BVS moves ahead on this issue it will lose FAST as a customer. Feasibility: BVS appears to have the financial resources to undertake this investment. It is noted that the €1.1 million cost to BVS of installing electricity charging points across all workshops is matched by E-car’s own contribution. The investment in electric vehicles facilities would be of benefit to BVS because it enables the company to provide not only another service to customers, but also builds links with a specialist car manufacturer. It is feasible to ask BVS’s outsourced workshops to contribute to the capital costs. Acceptability: The proposed investment is evaluated in Appendix 4 of this report. It can be seen that as an investment in its own right it only pays back in discounted terms within Year 4 with an NPV at 12% over the 4-year period of only €17,000 without taking account of the margin generated by FAST or a contribution towards the capital costs by BVS’s outsourced companies. These figures are also based on what may be a fairly ambitious growth rate of 30% per annum. Is the proposal financially viable and acceptable to BVS’s shareholders, especially PIE? Jonas Kral, PIE’s representative on the BVS Board, has stated that the proposal needs to generate a positive NPV in 3 years. It does not do this without taking into account the lost margin on FAST’s 4,500 vehicles. Without taking account of FAST, the discounted payback time is 4 years. The NPV at the end of year 4 is €17,000 positive but at the end of year 3 is a negative €0.796 million. So this negative NPV at end year 3 does not meet PIE’s investment criterion. However, this NPV does not take account of the probable loss of customer FAST, which over the 3 year period would generate a positive NPV of €2.774 million. This is the opportunity cost of retaining FAST as a customer. See Appendix 4 for NPV calculations. This is based on losing customer FAST if the geographical expansion of electric vehicle servicing is not undertaken. This is based on losing the gross margin for normal vehicles of €310 per year and the lower margin of €70 for electric vehicles. Therefore, if the “bigger picture” is taken into account then, the proposal would be acceptable to both the BVS Board and to PIE, with a net positive NPV at the end of year 3 of €1.978 million (based on negative NPV of €0.796 million plus €2.774 million for the effect of the gross margin for customer FAST that would be retained and not terminated). Furthermore, the outsourced workshops are stating that they would not contribute towards the investment costs of €4,000 per workshop for electric vehicle servicing costs. If they were to contribute something towards these costs, then the payback period would be earlier. Perhaps a halfway point could be agreed with the outsourced workshops contributing €2,000 towards these set-up costs. This would increase BVS’s NPV by €0.640 million. If the outsourced workshops were to pay the whole cost of €4,000 per workshop, then the NPV would increase by €1.280 million. This would make the proposal positive, at €484 K, without considering the margin on FAST’s vehicles. In respect of the proposal for re-charging points, it is also unreasonable for the outsourced workshops to gain the profit from the re-charging points without contributing to the capital costs for the installation for them. Therefore, it is suggested that either the profit from the re-charging points should be shared or alternatively that the outsourced workshops should contribute some, or all, of the installation costs at €2,000 per workshop.


If the outsourced workshops were to pay for all of these installation costs, then the NPV would increase by €0.640 million (€2,000 x 320 workshops). Therefore, if the outsourced workshops were to contribute towards the capital costs for their 320 workshops in total the NPV for the proposal for BVS would be improved as follows:

€’000

NPV at end year 3 (as per Appendix 4)

- 796

Plus contribution from outsourced workshops: - for equipment and training at €4,000 per workshop

+1,280

- for capital cost of installation of re-charging points at €2,000 per workshop

+ 640

Total revised NPV at end Year 3

+1,124

Add in the NPV for FAST

+2,774

Possible revised NPV for the proposal at end Year 3

+3,898

The above table demonstrates how the NPV could be improved to make a total of €3.898 million by end of Year 3. This would obviously be acceptable to PIE. However, much would depend on how much could be negotiated with the 5 outsourced companies concerning their contribution to the capital expenditure for this proposal.

4.4 – Apprentice scheme proposal With an ageing employee profile, BVS needs to ensure that it has adequate manpower for its 120 workshops in its home country. BVS has the choice of 3 alternative actions:

Training its future employees itself through the proposed apprentice scheme

Recruiting skilled employees and training them to BVS standards. This may incur recruitment costs and probably higher employee pay and the case material states that there is a shortage of skilled vehicle mechanics in BVS’s home country.

Outsourcing more work and having lower levels of utilisation at BVS managed workshops.

With 50 of BVS’s employees in the over 60 age range, there is a danger of become short of staff as the retirement age is 65 in BVS’s home country. If the apprentice scheme is to be agreed, then a minimum of 10 apprentices would need to be trained each year for 5 years, assuming an even profile of the 50 employees retiring at the rate of 10 each year. An alternative is to undertake the apprentice scheme for a lower number of apprentices and to also recruit some already trained vehicle mechanics.

The cost of the apprentice scheme is shown in Appendix 5. It is forecast to cost €36,440 per apprentice for the 1 year of training. This includes salary costs and training net of the government subsidy as well as the additional cost of outsourcing for the lost hours as current workshop employees spend time training the apprentices. The proposed annual budget of €150,000 would only be adequate for training 4 apprentices each year. This would leave a shortfall of 6 workshop mechanics, assuming 10 retire each year over a 5 year period. Therefore 6 trained vehicle mechanics would need to be recruited if this budget were not to be increased.


The concept of an apprentice scheme has a number of benefits including the social one of providing employment for young people when in many European countries youth unemployment is often around 25%, and even over 50% in Spain and Greece. It would also enable BVS to mould the apprentices into the culture of the company, rather than having to change the mindset of an already qualified mechanic. Again, the use of apprentices would help provide a seamless transition to replace employees who are retiring, and should also improve some flexibility in workshops for sickness and holiday cover for other employees. Carmen Kemp should prepare an analysis by retirement age of the 50 employees, as it may not be equal per year. It is possible that more than 10 may be due to retire in some of the next 5 years. Additionally these older mechanics have a vast amount of experience which will be lost to BVS. In order to maintain its quality service to its customers, BVS must address this problem urgently. Although achieving high quality service is critical in the industry, BVS also needs to maintain its competitive position, to be amongst the cost leaders in any industry is a major source of

competitive advantage (and is one of Porter’s competitive strategies). Perhaps these older employees could be asked if they wish to continue to work past their official retirement age. This is allowed by law in the UK. It is suggested that Carmen Kemp be asked to discuss with these 50 employees what their wishes are likely to be and whether any of them would be willing to work beyond retirement age. Perhaps their skills could be used to train the new apprentices. BVS must not take a short-term view concerning its employee base. The BVS business has grown considerably over the last 3 years and much of the company’s success is down to the quality of its employees. With 50 employees due to retire, this is a key area where costs should not be cut. A longer-term view needs to be taken. 4.5 – Inventory valuation It is the Management Accountant’s role in an organisation to help line managers understand the importance of accurate financial data and to assist with their understanding of all aspects of inventory valuation. Inventory valuation is important to ensure that the Statement of Comprehensive Income accurately reflects the items used to generate the revenues i.e. the matching concept. It is also important that the inventory figure in the Statement of Financial Position reflects a realistic value at the financial year end. In answer to the 4 specific questions raised by the managers, the comments are as follows: Point 1 - Date of the inventory count

Inventory valuation should take place on the last working day of the accounting period. At year end, due to preparing published accounts, it is important that the value should reflect the last day. In principle, inventory could be counted earlier in the week, as suggested by the workshop managers, but deliveries and parts used would also have to be counted so that the net figure reflects the true year end figure. Additionally care would have to be taken to also adjust the count for any subsequent damaged parts, or any inventory items returned to suppliers. Would the company feel confident that this process had been done accurately at the workshops? What if the company’s auditors wished to attend the inventory count – how could this be facilitated? The workshop managers’ request to count inventory during the week is an understandable one, since it is a time consuming and disruptive process.


However, it would seem that the more reliable route would be to count inventory on Sunday 31 March 2013. Point 2 - How to value parts Parts should be valued at the lower of cost or net realisable value. If the parts are rarely used or are obsolete, then they should be valued at zero and the inventory value should be reduced. If parts are bought in bulk and the cost has gone down, then all parts, irrespective of when they were purchased should reflect the lowest cost. If the cost of the parts has increased, then the older parts should NOT be increased in value, but should be valued at their original cost price and more recent purchases should be valued at their current higher cost value. However, a further question is why additional newer parts were ordered if there is already an inventory of this item. Point 3 – Slow moving items

If some parts are hardly ever used, then they should not be valued in inventory at all, and a provision should be established to offset their cost. Assuming the value is small, it would be acceptable for these specific items not to be counted at all and instead a provision set up to write-down the value held in BVS’s accounts for these items. Additionally, controls should be established so that no further orders are placed by any workshop for these parts, and any demand should be satisfied by moving these parts from a workshop which holds them. BVS should really look to dispose of them since they will be taking up valuable storage space. In this case their realistic sales value may well be below the cost price paid, and the inventory would have to be down valued accordingly. Point 4 – Specialised tyres

These 140 specialised tyres that are still in inventory, as the customer whose vehicles needed these specialised tyres has disposed of the vehicles, should be written down to a zero value as BVS has no use for them. BVS should attempt to offer them at a discounted price to other BVS workshops or outsourced workshops. If they are not required at all then BVS should attempt to sell them at a discounted price. However, in the interim the full inventory value should be written off.

Additionally, tighter controls on parts purchase should occur to ensure that high volumes of specialised parts or tyres are not purchased when the demand is not known for certainty. 5.0 Ethical issues and recommendations on ethical issues 5.1 Range of ethical issues facing BVS There are a range of ethical issues that will be discussed and recommendations made, including the following:

1. Immediate closure of two of the under-performing workshops 2. BVS management know that poor quality work is being undertaken resulting in a vehicle

accident

3. Replacement of vehicle parts before the end of useful life to generate revenues


5.2 – Immediate closure of two of the under-performing workshops 5.2.1 Why this is an ethical issue This is an ethical issue because, as BVS’s Management Accountant, I have been asked to name which 2 workshops should be closed. This should not be a decision that is taken lightly to “show the power” of the BVS management team. It is unethical not to consult, or warn the manager and the employees, at these under-performing workshops before a decision to close the workshops is taken. I have been put in a difficult situation where employees’ jobs rest on data which I have, which may not be up to date or incorrect, and this could result in an unfair decision being made. It is not good practice to “make an example” by closing 2 under-performing workshops without taking management action to improve them. Whilst BVS is having some operational problems with the ten workshops, in the first instance BVS should try and resolve both the utilisation and customer satisfaction issues.

5.2.2 Recommendations for this ethical issue It is unfair to close any workshops immediately and this management decision to make an example of 2 workshops should be reversed. It is recommended that the 2 under-performing workshops are not closed at the moment but that the management and employees at all 10 workshops are informed that unless the quality of the work improves, and customers are giving good feedback over an agreed time period (say, 3 to 6 months) then closure will occur. It is unfair to close any workshops immediately. It is also recommended that as BVS’s Management Accountant, I must act with fairness and objectivity, which are within CIMA’s fundamental principles under its code of ethics. The Management Accountant cannot allow Jonas Kral’s demand for information to influence this decision. Therefore it is recommended that as BVS’s Management Accountant, I must discuss the lack of reliable information with Annika Larsen, the Finance Director, with a view to having a meeting with Jonas Kral to persuade him to defer the closure of any workshops until management action has been taken. 5.3 – BVS management know that poor quality work is being undertaken resulting in a vehicle accident 5.3.1 Why this is an ethical issue The managers at the under-performing workshops as well as the senior BVS management team know that the quality of work is not up to the standard expected and indeed may even be illegal. It is known that one vehicle was involved in an accident due to faulty workmanship. This is not acceptable and demonstrates that BVS is not offering its customers the professional care that they expect. The TV programme “Watchdog” investigated Kwik-Fit for charging for un-necessary work, and this caused widespread damage to the company’s reputation, as it was seen to be deceiving customers into paying for products and services that were not required. 5.3.2 Recommendations for this ethical issue


It is recommended that the manager and employee who had worked on the vehicle involved in the accident are disciplined. It is recommended that additional training is provided to ensure that the importance of vehicle safety is fully understood. It is recommended that the Operations Director contacts all workshops and all employees and additionally outsourced workshops, to explain the importance of safety and quality of work and that any further incidents resulting in a vehicle accident will result in disciplinary action or even the termination of the contract with the specific outsourced workshop. 5.4 – Replacement of vehicle parts before the end of useful life to generate revenues 5.4.1 Why this is an ethical issue It is unfair to BVS’s customers, who trust BVS to undertake a professional job with vehicle maintenance and to act with integrity. It is unacceptable for individual workshop managers to allow and even boast about that additional revenues could be generated by un-necessary vehicle repairs. Whilst of course BVS workshops need to be profitable, they must never be seen by customers to be creating income by doing work unnecessarily. In this respect BVS has an ethical duty to behave with professional competence and due care to its customers (one of CIMA’s fundamental principles). The workshop manager dealing with JP has failed to understand this ethical point. 5.4.2 Recommendations for this ethical issue It is recommended that the Operations Director contacts all workshops, owned and outsourced, to further emphasise the company’s policy on maintenance and replacement of parts. Parts should only be replaced as necessary for safety or preventative maintenance purposes and should not be replaced to simply generate more work or additional revenues. BVS’s reputation could be severely damaged by the poor attitude demonstrated by the workshop manager when questioned about the early replacement of these parts. Additionally, it is recommended that both Leo Willems and Carmen Kemp have a meeting with the workshop manager in order to explain the company’s expectations as to how customers should be treated when balancing the needs for profitability with high customer care. It is further recommended that guidance be provided to all workshop managers, for both BVS managed and outsourced workshops, on the need to act in a professional manner with customers at all times. The rationale is that having the right culture in the company will help to achieve the longer term growth goals of the company. 6.0 Recommendations 6.1 – Under-performing workshops 6.1.1 Recommendation It is recommended that the 10 under-performing workshops are NOT closed. It is recommended that BVS should give the managers and all employees at these 10 workshops notice that BVS’s management team will be closely monitoring them for 6 months. This notification should state that unless the quality of work significantly improves, then employees will be dismissed. Clear and reasonable targets of quality of work must be set, monitored and communicated to all employees at these 10 workshops.


It is also recommended that new workshop managers are appointed to each of these 10 workshops, by seconding existing high quality managers from other workshops. BVS should offer these new temporary managers a financial incentive to improve both the quality of work and utilisation levels. It is further recommended to provide training for all existing employees at all 10 workshops. Any employees that are not delivering the required quality of work or level of customer service should be disciplined and given formal written warnings. The newly appointed workshop managers will need to work closely with Human Resources to ensure that the correct procedures are followed in any disciplinary actions. Only after new managers are in place and training has been undertaken by all employees, is it recommended to contact BVS’s customers who book their vehicles into outsourced workshops which are located near to each of the 10 under-performing workshops and to incentivise them to get their vehicles serviced at these 10 workshops. It is also recommended to work closely with these customers and to monitor their feedback so that the customers are happy to use these 10 workshops again. It is recommended that Alternative 3 is accepted, i.e. a target to gain an extra 2,000 hours of work for each workshop in the next year is set, so as to achieve an 80% utilisation level for each workshop in 2013/14.

6.1.2 Justification BVS’s business is growing and the problem at these workshops needs to be addressed rather than simply closing the workshops. It is probable that the outsourced workshops in the local areas to the 10 managed workshops, may not be able to cope with the extra 68,820 hours of work (6,882 x 10 workshops) if they were to be suddenly closed. Long-term, the closure of the 10 workshops will reduce BVS’s costs by €698,000 each year, but make BVS much more dependent on its outsourced partners. With growing volumes of business this is not a commercially sensible move. This on-going saving is shown in Appendix 3. The rationale for recommending Alternative 3, targeting an extra 2,000 hours of work at each workshop, is that this option seems to be the most feasible in the short term, and if this can be achieved utilisation would improve to 80% saving €640,000 in outsourcing costs over the coming year. It is fairer to employees for them to be trained and better managed so that they can better deliver the required quality of workmanship which BVS customers require. With the appointment of temporary new managers at these 10 workshops, it will be possible for the new managers to identify whether the problems have occurred due to poor management, poor procedures at these workshops or inadequate training. If individual mechanics are at fault then disciplinary action can be taken against these individuals rather than close the entire workshop. 6.1.3 Actions to be taken 1. In order to satisfactorily implement the recommendation to achieve an extra 2,000 hours

work at each workshop, it is essential that service quality is quickly improved. 2. As an interim measure existing successful workshop managers should be seconded to

these 10 under-performing workshops to review their operations, and to report back to Leo Willems within 30 days with their provisional findings.


3. It is very likely that some of the existing 10 workshop managers and their employees may need to be replaced. Therefore, Carmen Kemp (HR Manager) and Leo Willems would then need to work through this in a fair and professional manner.

4. BVS’s account mangers will also need to appraise customer fleet managers of the reasons

why the changes are being made and to encourage them to start using these 10 workshops again for their vehicle maintenance.

6.2 – Electric vehicles 6.2.1 Recommendation It is recommended that the proposal to extend electric vehicle servicing is accepted for all 440 workshops (owned and outsourced) covering the 3 countries in which BVS operates, subject to negotiations with outsourced companies on their contribution to capital expenditure costs. It is also recommended that BVS accepts the proposal from E-car to be a recommended service company for fleets of electric vehicles and also to provide electric vehicle re-charging points at all 440 workshops. It is also recommended that BVS tries to convince the outsourced workshop companies to either contribute to the cost of installing the re-charging points or alternatively for them to share the profits generated from these re-charging points. It is unfair for BVS to pay the capital investment costs and the outsourced companies to gain all of the on-going benefits. When the proposal has formally been approved by the BVS Board it is recommended that FAST is informed of the decision and that BVS tries to retain it as a customer. 6.2.2 Justification Electric vehicles will become an increasingly important vehicle type in company fleets and BVS must continue to innovate and accept new opportunities if it is to grow. If it does not accept the proposal it will lose customer FAST and possibly other customers. The proposal from E-car will generate good publicity for BVS and may help BVS to attract new customers which operate electric vehicles as well as normal fuel vehicles. If BVS is able to negotiate with the 5 outsourced companies for them to contribute some or all of the capital expenditure costs, the NPV becomes positive by end Year 3 even if the operating profit on FAST is not considered. The proposal, including the opportunity cost of retaining FAST, generates a positive NPV and should be acceptable to the BVS Board as well as to PIE. 6.2.3 Actions to be taken 1. Accept E-car proposal. 2. Negotiate investment costs with outsourced workshop companies to get them to contribute

all or some of the €4,000 per workshop equipment and training costs and the €2,000 per workshop capital cost of installing re-charging points.

3. It is suggested that Annika Larsen, Finance Director, has a pre-Board meeting with Jonas

Kral to discuss the financial consequences of losing FAST as a customer.


4. Prepare updated NPV to help Jonas Kral understand the acceptability of the proposal following negotiations with the outsourced companies and what contribution they will make towards capital expenditure costs.

5. Contact FAST to re-assure it that BVS will be expanding its coverage of electric vehicles. 6. Arrange site planning meetings regarding the siting of the installation of electric re-charging

points. 6.3 – Apprentice scheme proposal 6.3.1 Recommendation It is recommended that the apprentice scheme is accepted. It is also recommended that an age profile of the 50 employees over 60 years old is established to identify exactly the age profile of how many employees are expected to retire over each of the next 5 years. It is also recommended that a higher budget of €218,640 is approved, which is based on training 6 apprentices each year. The remaining shortfall of employees due to retire should be filled where possible with already trained vehicle mechanics. The proposed budget of €218,640 is 46% higher than proposed but this does utilise the government training subsidy that is available. 6.3.2 Justification BVS has a high volume of vehicle work to undertake and if it loses some employees due to retirement, this will result in higher levels of outsourcing and lower utilisation levels unless additional employees are either recruited or trained through an apprentice scheme. It is the responsible action of a growing company to invest in its workforce. 6.3.3 Actions to be taken 1. The location of which workshops apprentices are required for should be established. 2. A budget should be agreed for each workshop to cover apprentice training costs. 3. The external subsidy of €4,000 for each apprentice should be applied for to cover external

training costs. 4. To discuss with employees over 60 whether they were considering retiring at 65 or whether

they would wish to work full-time or even part-time beyond the retirement age. 5. Suitable apprentices should be recruited. 6.4 – Inventory valuation 6.4.1 Recommendations on the 4 points are as follows: Point 1 - Date of the inventory count - it is recommended that workshops count their inventory on Sunday 31 March 2013.


Point 2 - How to value parts – it is a requirement that parts must be valued at the lower of cost or net realisable value. If the parts are rarely used or are obsolete, then they should be valued at zero and the inventory value should be reduced. Point 3 – Slow moving items – it is recommended that they are written down to zero. Additionally it is recommended that controls should be established so that no further orders are placed by any workshop for these parts, and any demand should be satisfied by moving these parts from a workshop which holds them. It is also recommended that BVS should dispose of them. Point 4 – Specialised tyres – it is recommended that the value is written off entirely in the 2012/13 accounts and that BVS should attempt to sell them at a discounted price. Additionally, it is recommended that tighter controls on parts purchase should occur to ensure that high volumes of specialised parts or tyres are not purchased in future. 6.4.2 Justification Point 1 - Date of the inventory count - It is recommended that workshops count their inventory on Sunday 31 March 2013. The rationale is that the company requires an accurate physical count for its statutory accounts, and that the company’s external auditors are likely to want to attend the inventory count at some of the workshops in order to ensure the accuracy of the company’s records. The company should explain to its workshop managers the reason and importance for this timing. Point 2 - How to value parts – it is important that parts are not over-valued in the Statement of Financial Position. Point 3 – Slow moving items – it is recommended that they are written down to zero so the inventory for these slow moving items is not included in the Statement of Financial Position at the end of March 2013. It is also recommended that BVS should dispose of them to try to gain some revenue and to have them removed from workshop premises. Point 4 – Specialised tyres – these should be written off and disposed of as they have no further value for the BVS business. 6.4.3 Actions to be taken 1. Inform workshop managers to conduct the inventory count on Sunday 31 March 2013. 2. Parts should be values at the lower of cost or net realisable value and therefore each part

should have the value reviewed. 3. Slow moving items should be written down. No further orders for these items should be

placed and any demand should be satisfied from the inventory held by whichever BVS workshop holds the specific item required.

4. Specialised tyres to be sold or disposed of.


7.0 Conclusions BVS is a growing business and needs to continue to meet or exceed the agreed 5-year business plan to keep the private equity investor, PIE, satisfied. It needs to take tough, but fair, action on the under-performing workshops and to manage the problem better than it has in the past. It is important that BVS continues to innovate and meet its customers’ expectations and therefore the electric vehicle proposal should be approved in order to expand the geographical coverage of this growing number of customers’ electric vehicles. The future looks promising for BVS but improved management information and management action is required to ensure that all managed workshops perform better and meet required quality standards.


Appendix 1 SWOT analysis

Strengths

Experienced and motivated senior management team following the MBO

High growth experienced

No loss of customers to date

Profitable company

Reputation for high quality of work

Use of PRP to incentivise employees

PIE equity investor and experience it brings to BVS

5-year maintenance agreement for JAR’s fleet

Good support from BVS’s 5 outsourced suppliers

Weaknesses

10 under-performing workshops with low utilisation levels

Poor quality of work at these under-performing workshops

Limited geographical coverage at present for electric vehicles

Employees nearing retirement and loss of their experience

Workshop managers replacing parts un-necessarily demonstrates poor control

Inventory control with slow moving items still held in inventory at workshops

No dividends paid to date

Opportunities

Increased profitability if utilisation levels at 10 under-performing workshops can be improved

Expansion of electric vehicle servicing

E-Car proposal for re-charging points

Apprentice scheme proposal

Threats

Possible closure of under-performing workshops

Loss of customers if BVS do not expand the geographical coverage for electric vehicle servicing

Competitors action and loss of customers

Dependent on outsourced workshops – they could “steal” BVS’s customers

Outsourced workshops' quality of work could affect BVS’s reputation

Note: The above SWOT analysis is detailed for teaching purposes. However, in exam conditions a SWOT containing fewer bullet points, which cover the main issues from the case and the unseen material, is expected.


Appendix 2 PEST analysis

Political/Legal

Increased government legislation on vehicle safety features

Increased pressure on BVS’s customers to reduce carbon emissions for their fleets

Increased political pressure or possible government subsides to increase the use of electric vehicles

Economic

Current economic environment putting all companies under pressure to reduce costs

BVS’s customers try to lower their fleet operating costs

Need to control wage rates with pressure to keep fixed price servicing costs down

Increased cost of fuel requiring vehicles to perform their best to maximise fuel consumption

Need to gain greater utilisation levels in BVS’s workshops to improve profitability. Social

Increased awareness of environmental damage by vehicles and pressure on fleet mangers to reduce carbon emissions

Employees managing to cope with the expansion of BVS and the number of vehicles that it maintains

Technological

Use of new technology to help BVS’s customers manage their fleet operating costs (FLIS IT system)

Use of telematic devices to improve driving performance and reduce fleet running costs

Use of new technology for fault diagnosis

©The Chartered Institute of Management Accountants Page No: 21

Appendix 3

Evaluation of under-performing workshops Alternative 1: Effect on forecast operating profit for 2013/14 if utilisation level were to be 91%:

Per workshop

Hours

Utilisation

%

Outsourced cost saving

€’000

Forecast hours chargeable to customers

6,882

62.0%

Hours not charged to customers 4,218 38.0% Total hours available 11,100 100.0%

If 91.0% utilisation level achieved 10,101 91.0% Difference in hours 3,219

Saving in outsourced cost at €32.00 / hour 3,219 103

Total saving for 10 workshops

32,190

1,030

Alternative 2: Effect on operating profit for 2013/14 if all 10 workshops were to be closed:

Per workshop

€’000

Number of Workshops

Total saving in 2013/14

€’000

Saving from closure: Direct fixed costs of workshops

290.0

10

2,900 Less additional costs:

Extra cost of outsourced work: 6,882 hours per workshop @ €32 per hour

(220.2) 10 (2,202)

Cost of 2 months lease based on €48,000 per year

(8.0) 10 (80)

Employee termination costs at €30,000 per workshop

(30.0) 10 (300)

Total net saving in 2013/14

31.8

318

Alternative 3: Effect on operating profit if an extra 2,000 hours were carried out at these 10 workshops:

If an extra 2,000 hours completed by workshops the utilisation =

6,882 11,100 62.0%

2,000 11,100 18.0%

8,882 11,100 80.0%

Saving in outsourced costs for 2,000 hours at €32 / hour

€’000

64.0

Total net savings in 2013/14 for 10 workshops

640


Appendix 3 continued Evaluation of under-performing workshops

Alternative 2: On-going full year effect on operating profit (for years after 2013/14) if all 10 workshops were to be closed:

On-going full year effect of closing workshops

Per workshop

€’000

Number of Workshops

Total on-going saving €’000

Saving from closure: Direct fixed costs of workshops (including lease costs – per page 21 of unseen material)

290.0

10

2,900

Less additional costs:

Extra cost of outsourced work: 6,882 hours per workshop @ €32 per hour

(220.2) 10 (2,202)

Total on-going full year net saving

69.8

698


Appendix 4 Evaluation of electric vehicle proposal

Year 0 Year 1 Year 2 Year 3 Year 4

Number of electric vehicles – average (based on 30% growth) 1,800 2,340 3,042 3,955

NPV for proposal Number of Per Per

Workshops workshop vehicle € '000 € '000 € '000 € '000 € '000

Investment cost for equipment and training 380 4,000 -1,520

Capital cost of re-charging points 440 2,500 -1,100

Revenue 450 810 1,053 1,369 1,780

Operating profit from re-charging points 120 2,000 240 312 406 527 Variable operating costs (BVS manpower and charges from outsourced workshops) 260 -468 -608 -791 -1,028

Total cash flows -2,620 582 757 984 1,279

Cost of capital at 12.0% 1.000 0.893 0.797 0.712 0.636

Discounted cash flows -2,620 520 603 701 813

End Year 3 End Year 4

NPV -796 +17

Payback period 4 years

Forecast NPV for FAST Number of vehicles

Margin per vehicle € € '000 € '000 € '000

If FAST contract with BVS is retained Non-electric vehicles 3,500 310 1,085 1,085 1,085

Electric vehicles 1,000 70* 70 70 70

Net cash flows 1,155 1,155 1,155

DCF 1,031 921 822

NPV end Year 3 +2,774

Net benefit of electric vehicle proposal at end Year 3 including the margin from Fast

+1,978

*Note: Margin for FAST’s electric vehicles is €70 per vehicle is based on current margin of €120 less the planned revenue reduction of €50 per vehicle.


Appendix 5

Evaluation of apprentice scheme proposal

Hours €

Per apprentice cost of outsourcing 32.0 420 13,440

Salary & associated costs 22,000 22,000

Training costs (net of subsidy) 5,000 – 4,000 1,000

Total cost per apprentice 36,440

But 50 employees are due to retire within 5 years

50

5 years

10

Apprentices per year

Budget required for 10 apprentices each year = €36,440 10 364,400

Proposed budget 150,000 = Only 4 apprentices each year

Recommended budget for the apprentice scheme: €

6 apprentices per year 218,640

Remaining shortfall should be filled by recruiting already trained vehicle mechanics.


Appendix 6

Part (b) – Presentation on the 10 under-performing workshops and graph showing utilisation levels

The additional annual cost of each under-performing workshop at 62% rather than the planned level of 91% is €103 K, resulting in an additional cost for all 10 under-performing workshops of €1.030 million (based on 3,219 extra outsourced hours at the outsourced cost of €32 per hour for each workshop)

The saving if these workshops were to be closed would be €0.318 million (based on saving 10 workshops at €290,000 each less additional outsourced work based on 6,882 extra hours at €32 for 10 workshops and lease and employee termination costs).

If 2,000 extra hours of work were to be undertaken at each of the under-performing workshops, then utilisation levels would increase to 80%, saving €0.640 million (based on 2,000 hours of outsourced at €32 x 10 workshops)

The current cost per hour of the under-performing workshops is €42.14 (€290,000 / 6,882 hours) which is significantly higher than outsourcing the work. At the planned utilisation level of 91% the cost per hour would reduce to €28.71, which is lower than outsourcing.

Recommendation: Appointment of seconded workshop managers to each of the 10 under-performing workshops, additional training for employees to improve the quality of work and when quality levels are considered to be acceptable, then BVS should run promotions with customers to try to convince them to book their vehicles into these workshops.

64.0% 62.0%

91.0% 80.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Uti

lis

ati

on

lev

els

2012/13

Actual

2013/14

Forecast

2013/14

Plan

2013/14

With extra

2,000

hours

Utilisation levels for 10 underperforming

workshops

End of answer

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