Overview There are three major franchised bus companies, their money using strategies are not that similar, we will look at this topic from an economic as well as engineering viewpoint. We will look at two different issues: –Money flow on buying new buses with respect to time. (When???) –Engineering choice on buying new buses. (Who???)
Case study: One bus worth $2.5 million Each have a life time of 15 year The maintenance cost for a bus is $50000+$10000*bus age, i.e. the maintenance cost increase with bus age. Salvage value: $7000 Assume that the MARR of the company is 5%, and the inflation rate is 3%. Click here or here to check the salvage value of a bus.here Money flow on buying new buses with respect to timeor When should you buy a new bus??
Consider there are two bus companies each of them have 1500 buses operating: –Company A dump 100 old buses each year and buy 100 new buses each year. (Similar to Kowloon Motor Buss strategy) –Company B buy 1500 new buses and use them for 15 years, then replace them together. (Similar to New World First Buss strategy) Which ones strategy is better?
Cash flow analysis---Company A P.W. = -$ M Negative value implies investment. (Weve ignored the income from the buses as new and old buses are earning the same.) -$451.8M -$444.3M -$467.5M -$459.5M -$572.4M -$583.8M
Cash flow analysis---Company B The above figures are for one bus only. The real figures are just multiply them by 1500 times. P.W. = -$ M -$50k-150k+7k -$2.5M -$50k -10k -$50k -20k -$50k -30k
Cash flow results Company As choice is better, less cost, more stable. There is a plenty of factors affecting the cash flow. Even though the total cash flow is similar, it may lead to different results, such as risks. We are not only considering the amount of cash flow, but its stability as well.
Engineering choice on buying new buses---or Who should you buy buses from?? From an ordinary persons aspect…… There are many producers capable of building double deckers for service. (eg: Dennis, Volvo, Man, Neoplan, Mercedes-Benz, Scania……) But why we cant see them all appearing in a large scale? Where do the preference come from?
Engineering choice on buying new buses---or Who should you buy buses from?? From an engineers aspect…… Every bus producers has buses of different quality. (reliability, capacity, performance…) Buying buses from more producers will decrease risk. But buying buses from more producers will also increase cost.(parts, training)
Risk analysis---balance between risk and money Suppose we are going to buy 600 buses, we have three plans. Plan Number of producers Buses bought (2.5M/bus) Parts needed ($0.5M/set) A *1 B230080*2 C320060*3 The number of parts needed is an incremental cost, i.e. a larger number of parts is needed for each single bus in a smaller batch of bus. Assume all buses and parts are of the same price.
Risk analysis---balance between risk and money Assume that the probability of breakdown is (1/2500)= Click here or here to see the reliability of a real bus.here PlanABC Cost for parts (million) Variance (risk)* Clearly choice A is cheapest, but with highest risk. Choice C is most expensive, but with lowest risk. What we have to do is to have a compromise between them.
A famous example about risk because of wrong choice (not on bus……) Airbus A330 –Produced by Airbus Industries, a high-tech state-of- the-art wide-bodied aircraft. –Majority aircraft of Hong Kong Dragon Airline –Played a supplementary role in Cathay Pacific Airways –Engine has design problems such that one of the bearings may overheat. –All of them had to put out of service immediately in order to have parts replaced.
Newspaper dated back on May and June, 1997 reporting the incident. (unfortunately in Chinese!!)
The A330 incident…… Dragonair:Airbus A320Airbus A330 Number of aircraft64 Capacity Total capacity6*156=9364*286=1144 Weighted %936/2080=45%1144/2080=55% Cathay Pacific:A330A340B B B No. of aircraft Capacity Total capacity Weighted %21.94%9.49%13.07%46.95%8.54%
Result of the A330 incident Dragonair is severely affected and they had to send their passengers to other airlines. (China airlines, Thai International, JAL……) The company lost its image due to the incident. Cathay Pacific is only slightly affected as they can deploy other aircrafts to serve the routes.
Another illustration …… The Chinese Kindergarten of Hong Kong (CKHK) has only one set of school uniform: Hong Kong Kindergarten of Science and Technology (HKKST) has two sets of school uniforms:
What do we learn from these examples… Dragonair can in fact buy (or hire) aircraft from a larger variety if producers and reduce the dominance of a single aircraft type. (Disadvantage---risks really happened) From the tailors and parents point of view, its better to have only one set of uniform, as it cost less to design and buy them. (Advantage---no risks concerned) What we have to do is not investigate on a particular kind of risk, but to strike a balance between risk and money.
Summary Time and plan is a great concern on investment, as it will change the cash flow. We have to consider money and risk SIMULTANEOUSLY in order to make sensible engineering choices. You may find more examples on these issues yourselves and think about their engineering choices, you may findmany good examples of wrong decisions!