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Sugar Land Auto Max
Proposal to Outsource Distribution
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In response to the chief financial officer's challenge to find creative ways to make our business
more efficient, this proposal addresses the potential savings that could be achieved by
outsourcing our distribution services to a third party.
Currently, Sugar Land Auto Max manages its own fleet of 13 trucks, which are used for product
delivery across the country. Although the company would initially see increased expenses
directly related to outsourcing, these expenses would be offset by income generated from the
sale of the fleet. By the third year, however, Sugar Land Auto Max would see a 4% cost savings
in distribution services, and that savings is expected to continue into the future.
Before getting into any further details of the proposal, it is important to note that our drivers
are our top priority. To that end, Sugar Land Auto Max will be able to negotiate into its contract
the guaranteed placement of 100% of its existing employees with DTR Trucking Management,
Inc., the company that would assume all of our current distributions needs.
In 2009, Sugar Land Auto Maxis expected to incur $582,800 in distribution expenses, as shown
in the following chart:
The first step in this process is to immediately turn over the management of all day-to-day
activities to DTR. DTR will assume all costs detailed in the preceding list no later than February
6, at which time all drivers who wish to move to DTR will begin reporting for duty.
Step 2 will involve the sale of the current fleet of trucks: 10 small panel trucks used for
statewide deliveries and three 18-wheelers used for cross-country deliveries. All trucks are in
excellent condition and are projected to sell for a minimum of $853,000. (In fact DTR is putting
together a proposal to purchase our current fleet.) In addition, the company will save money in
driver replacement. With an average turnover cost of anywhere from $5,000 to $7,500, the
company would save an additional $20,650.
DTR has agreed to take on the management of our distribution services for the first three years
at a cost of $610,000, an increase of $27,200 over the 2009 budget. Many of our costs are
variable, however, and we expect these to increase in the future. As shown in the table below,
outsourcing will cost more during the first year, but by the second year, we will realize a savings
of $1,740. As the cost of fuel, benefits, insurance, and so on continue to rise, we will realize
even greater savings. By the third year, Sugar Land Auto Max will see another $26,559 in
savings.
Although it is possible that this proposal will be met with some resistance, over the long term, it
makes good financial sense. No one can predict the future. Fuel costs have been on the rise for
several years, and over time, toll costs will also increase. In addition, our fleet is getting older,
which will cause an increase in both maintenance and repair costs.
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As we transition into the new year, it is a perfect time to take advantage of this savings
opportunity.
REFERENCES
Woods, Betsy. “Your Shreveport Car Report.” Shreveport, Louisiana: West Publishing
Company, 2012
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