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 2006 and 2007, 155
new locomotives were purchased and one of CBN’s repair shops was renovated. 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 complete an average of
160 overhauls per year.
The company has also been doing a poor job servicing customers (that is, providing
equipment). CBN has averaged only 87 to 88 percent equipment availability, compared to
other railroads with availability figures greater than 90 percent. Increased business in the rail
industry has been a reason for trying to reduce the time used for repairing the locomotives.
CBN’s mean time between failure rate is low—45 days—compared to other railroads 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 examining the
possibility of leasing 135 locomotives from several sources. The leases would run between
90 days to 5 years. In addition, the equipment sources would maintain the repairs on 469
locomotives currently in CBN’s fleet, but CBN’s employees would do the actual labor on the
locomotives. The lease arrangements, known as “power-by-themile” arrangements, call for
the manufacturers doing the repair work to charge only for maintenance on the actual number
of miles that a particular unit operates. The company expects the agreements to last an
average of 15 years. John Thomchick, the executive vice president, estimates that CBN
would save about $5 million annually because the company will not have to pay for certain
parts and materials. Problems with the locomotives exist throughout CBN’s whole system,
and delays to customers have been known to last up to five days. Spychalski and Thomchick
feel that the leasing arrangement will solve CBN’s problems. CASE QUESTIONS
1.
What are potential advantages and disadvantages of entering into these “powerbythe-mile” arrangements?
2.
What should be done if the problem with the locomotives continues even with the
agreements?
3.
Do you think that the decision to lease the locomotives was the best decision for
CBN? Explain your answer.
