rolling stores limited – november 2014 aca case study...

Introduction

1

© ACA Simplified 2014. No copying or reproduction permitted.

Rolling Stores Limited –

November 2014 ACA Case Study Mock Exams

Disclaimers

We have made every effort to use our professional experience and skill to write mock exams which

focus on scenarios which will be relevant to the actual requirements in the real examination. However,

we do not know what the examiner will ultimately decide to do – you must be able to react to whatever

comes up on the day and the primary aim of these papers is to help you improve your time management

and technique whilst also building up good knowledge of Rolling Stores Limited: the exams are not

intended to be ready-made pro forma answers to be copied out in the examination.

To ensure your best chance of passing, make sure you react to the specific question the examiner

has set and not the question which you hoped would come up. Accordingly, make sure you use

appropriate judgement if you “recycle” any of the points made in these mock exams into your final exam

paper because your points must always be relevant to the specific question set.

We have tried our best to create a document which is free from error but it is a challenge to produce a

50,000 word document in 7 working days. We have to strike a balance between perfection and ensuring

that students actually have enough time to sit 5 mock exams before exam day. We have tried our very

best to eliminate any typos and of course to ensure that the calculations are correct. If you believe you

have identified a problem (other than a typo) please contact us so we can try to assist. If we identify

any serious issues we will issue an errata sheet as necessary. We keep a log of all purchasers so

this will be sent automatically if it is required – please keep an eye on your “junk mail” folder through to

exam day in case any communications from us have been incorrectly treated as spam as we will have

to send communications as a large group email due to time constraints.

As some of our Appendix workings have been prepared using Microsoft Excel, there may be some

minor rounding differences due to using exact numbers in our Excel formulas.

ACA Simplified does not accept any liability whatsoever for your ultimate examination

performance as a result of using these papers.

Introduction

2


Instructions – please read in full before starting Mock 1!

Thank you for purchasing these mock exams. We hope that you will find them useful in allowing you to

practise your technique 5 times, whilst at the same time learning the only set of Advance Information

which really matters in your preparation – the real Advance Information on Rolling Stores Limited (RS).

This PDF file contains both question papers and answers, as described in the Table of Contents on

page 5. To extract maximum value from your papers, we strongly recommend that you do NOT look at

the answers until you have completed each paper under strict timed conditions. We include a Table

of Contents on page 5 so that you can print off the relevant answers without having to scroll through

this file – this allows you to avoid potentially seeing answers/hints for papers you have not yet

completed.

We provide full ICAEW-style marking grids for all 5 mock exams. When you have completed a paper,

we recommend that you carefully work through the relevant marking grid, marking your own work in an

honest manner. Please try to observe all patterns in the mark schemes – working out these patterns

is at least as important as developing your knowledge of the Advance Information.

Our ICAEW-style marking grids and Appendix workings provide page references to the Rolling Stores

Advance Information (e.g. “p7”) and references to mock exam paper “Exhibits” (e.g. “Exhibit 16” or “Ex

16”) purely for your reference – you would not be expected to include references in your report answer

and you should not do so. In our answers for Requirement 2 (Appendix 2) we provide some workings

in square brackets – you would not have to include these workings in your answer and they are purely

to ensure that you can understand how our numbers have been derived.

We also provide you with fully written out answers for all 5 mock exams to give you an idea of how to

structure your writing. Please note that our fully written out answers are slightly longer than you can

achieve in the time available as our answer aims to cover all points on the marking grid to give you the

maximum number of examples of the correct writing style: you would not need to make all the points in

the example answers to pass the exam … unless you would like to be our second Case Study prize

winner in a row!

If you have bought our book Cracking Case™ we recommend that you first read the book in full, then

do 2 of our mock exams and mark these, then have another read through our book, and then do further

mocks, trying to implement the lessons from the book. If you have not bought the book, now may be

the time to do so.

We have deliberately drafted these mock exams to be slightly harder than a real ICAEW paper

by including a little more information than you would normally have to deal with in a real exam and by

increasing the difficulty of the calculations in Requirement 2. We have done this consciously in order to

introduce a training effect – we believe that doing mock exams which are harder and more time

pressured than the real thing will allow you to hone your technique to a better standard than is ultimately

required – hopefully then the real exam should seem like something well within your capabilities.

Please see www.acasimplified.com for some free tips on Case. We have also set up a dedicated

Twitter feed at @adiefleet to provide some free hints and tips.

You will obtain maximum benefit from these mock exams if you try to sit them under strict exam

conditions using the same notes and planning grids which you expect to use on the day. Please try to

make everything as realistic as possible – you should download the sample ICAEW Case Answer pad

paper which is available at www.acasimplified.com/csdownloads to get used to the reduced writing

space available on the answer pad and you should also aim to work on a restricted desk space, just

like in the exam hall.

Introduction

3


The more you can make your mock practice like the real thing, the more comfortable you will

feel on exam day.

Best of luck with your preparation and do get in touch if we can help further.

All the best,

Rolling Stores Advance Information Q&A

Knowledge of the Advance Information (AI) is vital if you are to ensure success in the Case Study exam.

You need to know the AI “inside-out” and in such a way that you can instantly spot associations and

connections between the points in the exam paper and the AI. Given the significant time pressure in

the exam, you cannot afford to spend too long re-reading the AI – you need to have the information in

your head.

To help students improve their knowledge and recall of the AI, we will be releasing a Rolling Stores

Advance Information Q&A. Using the trademark Simplified Q&A style which we successfully deploy in

our Professional Level and Technical Integration materials, we will produce a set of 80-100 very short

form questions covering all aspects of the AI.

The thinking behind the Advance Information Q&A is that by giving you a range of very short questions

which you can repeat again and again, you will be able to actively engage with the AI in a way which is

not possible simply from reading. This should help improve your recall.

In addition, all our questions will be drafted based on our experience and knowledge of what tends to

be tested in the Case Study. We will therefore be creating Q&A questions which test various elements

of possible scenarios, thereby giving you more insight into how you should be interpreting and applying

the AI. This should again be more useful than simply reading and re-reading.

Our Q&A will be released at a price of £50 plus VAT (or £40 plus VAT for purchasers of Cracking Case).

The Q&A will be available as a watermarked (copy-protected) PDF file to ensure quick delivery.

Introduction

4


Exam Room Pack (ERP)

New for this sitting, and based on popular demand from students, we will be producing an Exam Room

Pack for the Rolling Stores Advance Information.

The ERP will provide approximately 15-20 pages of very quick reference notes designed to be taken

into the exam hall with you. Using our experience of tuition and writing mock exams, we will draw out

all the key points from the Rolling Stores Advance Information and we will transform this into a more

useable format for exam purposes.

For example, we will have one page for all Courier narrative points and one page for all Courier

numerical issues (together with page references back to the Advance Information in case you need to

check a fact). This will mean that all the relevant points, which are currently scattered throughout the

Advance Information, will be in one place and at your fingertips, ensuring that you do not forget any

important facts due to time pressure or failing to spot connections between different pages in the

Advance Information.

Our proposed page listing (subject to change depending on our experience of tutoring Rolling Stores in

the coming weeks) will be (as examples):

Market background

Haulage – numbers

Haulage – narrative

Warehousing – numbers

Warehousing – narrative

Courier – numbers

Courier – narrative

Possible R2 inputs

Press articles

Regulatory issues

Ethics issues

The material will be clearly set out on the page using boxes, abbreviations and other easy reference

tools rather than the longhand narrative used by the Advance Information. Everything will be designed

to make it easy to find the information that you need as quickly and as simply as possible.

The ERP will be available from mid-October at a price of £55 via our website. The ERP is provided as

a watermarked (copy-protected) PDF file for ease of delivery and to allow you to print the pages in any

order you wish.

Introduction

5


Rolling Stores Limited

Table of Contents

Please use this table of contents to ensure that you do not accidentally print or look at any

answers before attempting the relevant mock.

Exam Question starts

on page Answer starts

on page Mock 1 6 19 Mock 2 42 56 Mock 3 80 93 Mock 4 116 130 Mock 5 154 168

Note: To ensure maximum realism with the real ICAEW exam paper, print as one page per sheet but

double sided.

We also recommend that you prepare your planning grids in exactly the same way as if sitting a real

exam, including any additional reminder notes etc which you will rely on in the exam hall. This may

include the suggested planning sheets from our book Cracking Case™ or use of our ERP mentioned

on page 4 above.

In short, try to make everything as realistic as possible so that the real exam day feels familiar.

We provide fully written out model answers to all 5 mocks on the following pages:

Mock 1 Model Answer 30 Mock 2 Model Answer 68 Mock 3 Model Answer 105 Mock 4 Model Answer 142 Mock 5 Model Answer 181

Mock Exam 1

6




Mock Exam 1

Mock Exam 1

7


List of exhibits

[Exhibits 1 to 14, per Advance Information]

The following items are newly provided:

15 E-mail from Shiloh Piper explaining tasks required

16 E-mail from Adie Fleet requesting analysis of management accounts

17 Management accounts for the year ended 30 September 2014

18 Memo from Adie Fleet requesting financial modelling

19 E-mail from Adie Fleet concerning strategic opportunities

Mock Exam 1

8


EXHIBIT 15

From: Shiloh Piper

To: Ellis Codie

Subject: Rolling Stores Ltd – recent performance and future opportunities

Date: 5 November 2014

Ellis, Rolling Stores Limited (“RS”) has just completed another year of trading. I need your assistance in

assessing performance in the past year.

Please draft for my review a report addressed to the RS Board. The report should comprise:

1. A review of the results of RS for the year ended 30 September 2014, carefully following the

client request on the numbers required. Except where specifically requested, please ignore

the 2014 forecast figures provided to you earlier this year.

You should comment on RS’s overall revenue, gross profit and operating profit in comparison

with the same figures for the prior year (Exhibit 17). Please then analyse the same figures

with specific detailed reference to the Courier stream only. Finally you should prepare an

analysis to assist RS with its proposed bid for the Waitbury courier contract described in Adie

Fleet’s email (Exhibit 16).

2. An assessment of the cash flow impact of assisting Kentree Limited with its microwave oven

recall project (Exhibit 18).

Using the information provided, you should calculate the cash inflows and outflows which you

would expect to occur based on the rates of returns and other assumptions provided by (1)

Adie Fleet and (2) Kurtz Shah. Please then provide your views on the practical implications of

these 2 options. Finally, please provide some analysis of the wider impact of each option on

the development of RS over the longer term. As part of your analysis, you should review and

comment on the assumptions made in Exhibit 18.

3. An evaluation of how Rolling Stores can respond to 2 haulage opportunities (Exhibit 19).

You should respond to the request from Adie Fleet for advice on the possible risks and

benefits of the haulage opportunities involving Buildwell Limited or, alternatively, Effem

Limited. Please also provide your views on the impact of these opportunities on the other RS

revenue streams. Finally, please also explain any ethical issues which you consider to be

relevant.

I look forward to receiving your draft report.

Mock Exam 1

9


EXHIBIT 16

From: Adie Fleet

To: Shiloh Piper



Shiloh,

Please find attached the management accounts for the year ended 30 September 2014. Please

compare the 2014 performance of RS in terms of revenue, gross profit and operating profit with the

prior year figures. I am not really interested in margins here so please concentrate on absolute

changes so we can see the overall picture and the proportional contributions of each stream.

Please then analyse the same figures for the Courier revenue stream specifically. Here it would be

good to know gross profit and operating profit margin so please provide the necessary figures.

Overall a bit of a mixed year as you can see, with the UK economy gradually recovering and many of

our clients benefitting. We are hearing that customers continue to be interested in online shopping so

we are monitoring this carefully but some of the larger companies appear to be holding back on

expansion plans and retaining their cash whilst they wait for stronger growth to return. It is being

reported that cautious companies are running down stocks rather than investing in large amounts of

new production, due to the economic climate.

As you are aware, we started our Courier revenue stream during 2012 to service one of our bigger

haulage clients, Buildwell Limited, and we have been trying to develop and expand that revenue

stream for other customers since. Our gut feeling is that the efforts put in since 2012 have at last

started to pay off but we would be interested in your views on whether this is translating into our

financial results and helping us towards our longer term targets for this stream.

Looking forward, we’re considering the types of courier contracts we should be aiming to win now that

the stream is more established. Mike Riggs is keen to bid for a large contract with a new client, the

supermarket chain Waitbury (the UK’s largest supermarket in terms of online sales). I am not so keen

as I think that the volume of deliveries required to deliver a similar level of revenue to the existing

business would be too high and beyond our current capabilities.

To give you a bit more detail, we would expect the Waitbury contract to deliver revenues of

approximately 40% of our forecast 2014 Courier revenues. The proposed income for us under the

Waitbury contract would be £10 per delivery of fresh food and drink – assume our Courier business

makes deliveries 52 weeks per year. Using our forecast 2014 Courier revenues and weekly delivery

estimates, please confirm how many deliveries per week we would need to make for Waitbury in order

to achieve this target revenue figure. Please then also compare the £10 proposed fee with our

average Courier revenue per delivery implied by our 2014 forecasts. We desperately need an

independent view on this to settle the matter between Mike and me!

Once you have done your calculations, perhaps you could also let me have a few thoughts on the

strategic impact of RS bidding for the Waitbury contract.

The deadline for submitting bids is the end of this week so please could you let me have your answer

no later than tomorrow?

Thanks, Adie

Mock Exam 1

10


EXHIBIT 17

Rolling Stores Limited: Management accounts for the year ended 30 September 2014

Statement of profit or loss Note

Year ended 30 September 2014

£000s

Revenue 1 43,314

Cost of sales 2 (38,698)

Gross profit 4,616

Administrative expenses 3 (3,486)

Operating profit 1,130

Bank interest receivable 28

Interest payable and finance charges 4 (922)

Profit before taxation 236

Taxation (59)

Profit for the year 177

Statement of financial position Note

As at 30 September 2014

£000s

Non-current assets

Tangible assets 5 14,071

14,071

Current assets

Inventories 6 136

Trade and other receivables 7 9,002

Cash and cash equivalents 1,556

10,694

Total assets 24,765

Shareholders' equity

Ordinary share capital 100

Retained earnings 6,819

Total shareholders' equity 6,919

Non-current liabilities

Amounts due after more than one year 8 9,707

9,707

Current liabilities

Trade and other payables 9 8,139

Total current liabilities 8,139

Total equity and liabilities 24,765

Mock Exam 1

11


Statement of cash flows


£000s

Profit before tax 236

Adjustments for:

Depreciation & loss on disposals 2,513

Net finance expenses 894

3,643

Change in inventories 21

Change in trade and other receivables 730

Change in trade and other payables (216)

Cash generated from operations 4,178

Taxation paid (147)

Net finance expenses (894)

Net cash from operating activities 3,137

Investing activities

Purchase of tangible assets (518)

Proceeds from disposal of tangible assets 200

Net cash from/(used in) investing activities (318)

Financing activities

Bank loan -

Finance lease - repayments of capital (1,871)

Net cash used in financing activities (1,871)

Net change in cash and cash equivalents 948

Cash and cash equivalents at start of year 608

Cash and cash equivalents at end of year 1,556

Mock Exam 1

12


Notes to the management accounts

2014

£000s

Note 1 Revenue (all UK)

Haulage 36,822

Warehouse 2,984

Courier 3,508

43,314

Note 2 Cost of sales

RS labour 10,874

Agency and subcontract labour 2,056

Fuel 13,468

Hire of plant, machinery and vehicles 3,784

Other: insurance and driver expenses 3,105

Repairs and maintenance 2,943

Depreciation 2,327

Loss on disposal 141

38,698

Note 3 Administration expenses

Employment 1,953

Establishment 942

General administrative 546

Depreciation 45

3,486

Note 4 Interest payable and finance charges

Bank interest payable 308

Finance lease interest 614

922

Mock Exam 1

13


Note 5 Non-current assets

Tangible assets

Freehold,

Land and

Buildings

Plant, IT

and

Machinery Vehicles Total

£000s £000s £000s £000s

Cost

At 1 October 2013 5,166 9,224 10,341 24,731

Additions - 1,035 1,954 2,989

Disposals - (463) (513) (976)

At 30 September 2014 5,166 9,796 11,782 26,744

Depreciation

At 1 October 2013 228 5,434 5,274 10,936

On disposals - (274) (361) (635)

Charge for the year 45 1,019 1,308 2,372

At 30 September 2014 273 6,179 6,221 12,673

4,893 3,617 5,561 14,071

Carrying amount at 30

September 2014

Note 6 Inventories 2014

£000s

Fuel 136

136

Note 7 Trade and other receivables

Trade receivables 7,613

Prepayments 1,139

Other 250

9,002

Note 8 Amounts due after more than one year

Bank loans 3,500

Obligations under finance leases 6,207

9,707

Note 9 Trade and other payables

Trade payables 3,891


Taxes and social charges 1,504

Accruals 261

8,139

Mock Exam 1

14


Rolling Stores Limited: Statement of profit or loss for year ended 30 September 2014 split by

revenue stream

Haulage: statement of profit or loss


£000s

Haulage revenue 36,822

Cost of sales (32,990)

Gross profit 3,832

Administrative expenses (2,698)

Haulage operating profit 1,134

Warehouse: statement of profit or loss


£000s

Warehouse fees 2,984

Cost of sales

RS labour 1,512

Hire of plant, machinery & vehicles 164

Repairs and maintenance 279

Depreciation 297

Loss on disposal 62

Total cost of sales (2,314)

Gross profit 670

Administrative expenses (395)

Warehouse operating profit 275

Courier: statement of profit or loss


£000s

Courier fees 3,508

Cost of sales

RS labour 376

Subcontractors 1,794

Motor expenses 513

Hire of vehicles 543

Courier services 168


Gross profit (loss) 114


Courier operating profit (loss) (279)

Mock Exam 1

15


EXHIBIT 18

Email – 5 November 2014

Kentree product recall – our role and opportunity

Shiloh,

As you are aware, shortly before the year end, one of our clients Kentree released a public notice

regarding its Turbo Microwave Oven which has unfortunately had to be recalled due to a faulty wiring

circuit. We have been working hard with Kentree by moving shipments of returned goods between

their different Homeline Regional Distribution Centres (RDCs).

Kentree released its public notice in July 2014 and it has taken some time for customers to become

aware of the problem. We therefore believe that only 5% of the affected units have been fully dealt

with as of today’s date (5 November 2014). We have played a leading role in assisting Kentree

(Kentree are also working with A2A to get the problem cleared soon) but even our work to date has

placed stress on our resources and facilities, and that is with some additional short term support from

self-employed couriers.

The Board has convened with a view to deciding what to do next. We believe we have 2 options. I

have designed 1 policy and Kurtz Shah has gathered the data for the other policy. I was impressed to

see that Kurtz worked through the night to get his figures ready for today.

Please calculate the total cash flows expected under both options, based on the assumptions given.

Please do not worry about the monthly or quarterly timing of the cash flows and also ignore any tax

implications.

Please also advise us on any key practical considerations and also inform me about the potential

wider impact of these options on the RS business as whole. I have included some relevant press

reports in case these are helpful in this respect.

Adie

Option 1 Business as usual (Adie Fleet’s view)

Although our work for Kentree is quite demanding, personally I do not see any reason to alter the

pricing structure we have been using in respect of this problem and which is based on the following

assumptions.

Weekly sales will be as advised by Jane Riggs in June 2014 with 5% of ovens already returned in full

to Kentree as of today’s date. These ovens do not require any movement.

Pricing our trip cost based on (1) an assumed diesel price of £1 per litre (2) standard salary costs and

(3) project specific wear and tear allowance, we have estimated that our average trip costs are £45

per trip. We are also allowing for the fact that short term subcontractors will assist with 40% of the

total trips required and there will be additional related costs of £30 (on top of the £45) on these trips.

We have been moving the ovens between different RDCs in batches of 100 ovens per trip and we will

continue to do so. We will be paid £3 per oven moved and we have been requested to move each

oven only once.

RS is responsible for 75% of the returns activity with A2A taking up the balance.

Mock Exam 1

16


We will try as hard as possible to ensure that most trips are loaded by scheduling ahead so that we

can drop off ovens and then pick up another batch at each RDC but I am assuming that our empty trip

rate will be the industry standard of 25%. Please assume that a lorry is either full loaded or empty as

we are not going to do any partial batch deliveries.

We will need to purchase a further 2 HGV lorries at a price of £45,000 per lorry. We will purchase

these items in cash to avoid any complications regarding finance leases. These will be subject to our

standard depreciation policy.

Option 2 Capitalise on the opportunity (Kurtz Shah’s view)

Kurtz believes that we should capitalise on the weak position in which Kentree finds itself. The

additional contribution earned can then be put into acquiring fixed assets and improving processes to

create a longer term impact on the business (see below). Accordingly, Kurtz suggests that we ask for

a payment of £6 per oven collected, given that on his assumptions of a diesel price of £2 per litre our

trip costs will in fact be £55 per trip.

Kurtz suggests that we use some of the additional profit earned to invest in new IT equipment at a

cash outlay of £0.5m. As well as placing us in a good position if there is a recall of the Kentree Miracle

Mixer (see below), this will reduce our empty trips rate on the current Turbo Microwave Oven to just

3%. Using this technology, Kurtz believes that we can impress Kentree and therefore increase our

share of total returns on the current recall to 85%. We will be able to handle batches of 200 ovens per

trip using this technology.

Apart from the above, Kurtz thinks I am correct in my assumptions for Option 1.

Gastronomy Today End of a Miracle? 3 November 2014

Dedicated readers of Gastronomy Today will already know our views on the Kentree Miracle Mixer – a

miracle indeed in the world of mixing devices, due to its amazing set of features and options including

a popular fully automated chocolate cake setting. Since its launch, we estimate that 6 million units

have been sold, making the Miracle Mixer the highest selling mixing device in recent years.

Unfortunately, following the alleged discovery of a major wiring fault in its Turbo Microwave Oven,

Kentree is rumoured to be considering a similar product recall for the Miracle Mixer: both devices are

produced in the same Malaysian factory. According to our sources, 5% of Miracle Mixers are subject

to the fault and will need to be returned.

Ports Weekly Congestion at Felixstowe continues 2 November 2014

The Felixstowe Port Authority is considering the implementation of a freight levy under which

containers which have been sitting at the docks for more than 5 days will be subject to a daily charge.

The FPA have yet to confirm both the monetary value of the levy and the intended start date, although

sources suggest that implementation could be immediate subject to government approval. Shipments

bound for Asia will be the first items subject to any levy due to the extensive build up of returns on

electronic items.

Mock Exam 1

17


EXHIBIT 19

From: Adie Fleet

To: Shiloh Piper and Ellis Codie

Subject: Haulage opportunities


Shiloh, Ellis,

It was good to see you again last week. As discussed, we urgently require an evaluation of 2 haulage

opportunities which we can pursue over the next 2 years. I enclose full details below. I need you to

advise us on the risks and benefits of pursuing these opportunities as we can only select 1 project

due to constraints in terms of finance and management time.

After you have identified the benefits and risks please evaluate the impact of each proposal on our

other non-haulage revenue streams.

My brother Fred switched jobs earlier in the year and now works for Little Truckers Research Limited

(LTRL), a new consultancy which is going to specialise in research on the haulage and warehousing

market: as an introductory offer, I have managed to get a 25% discount via Fred on the research

report. I have included the report below.

All the best,

Adie

Opportunity 1 Buildwell Limited

William Wheel, the Managing Director of Buildwell, has approached us with a very interesting

proposal to provide further haulage services to Buildwell. In return for a 10% reduction in our current

charges on existing services provided to Buildwell we will be offered preferred bidder status on a new

contract.

Buildwell believes that it has identified a high margin opportunity in providing construction services in

some of the harder to reach areas of the UK such as the north of Scotland (including the Scottish

islands) and also in Wales and Cornwall (including the Scilly Isles). William has reminded us that in

the past an initial Buildwell contract led to further courier service opportunities and he strongly

believes that this will be the case again.

William has also told us that if we agree to the above terms, the entire RS management team will be

flown first class to stay at William’s exclusive cliff top villa in Santorini, Greece. As a further incentive,

Buildwell would allow us to purchase a surplus warehouse facility in Manchester, provided that we

agree to an independent valuation and pay fair value in cash. We believe that the purchase would

allow us to improve our working relationship with Big Sites LLP, a firm of property agents who

specialise in warehousing sales in the north of England.

Mock Exam 1

18


Opportunity 2 Effem Limited

We are considering making an approach to Effem Limited, a dynamic new company which

subcontracts the “hub and spoke” services increasingly in demand from major online retailers. Effem

ensures appropriate inventory monitoring and management using cutting edge IT technology,

ensuring that online retailers do not run out of inventory.

We believe we could very effectively integrate into this system by initially providing longer range

haulage services as part of the “spokes” of the Effem network. We also understand from press reports

that Effem is short of “hubs” in relevant locations. We believe that Effem would be interested in

further developing its leading edge inventory management software over the next few years and a

joint venture here could benefit us significantly.

Effem operates primarily in the north of England, including Manchester, but aims to expand rapidly

over the next few years. It has been rumoured that Effem has signed a new £900m contract based on

container supply from the ports of Southampton, Portsmouth and Newcastle.

Little Truckers Research Limited 16 March 2014

Haulage forecast: Construction sector

We believe that the construction sector will grow at a steady 4% over the next 12 months.

Whilst a lower margin activity (we forecast an overall market sector gross profit margin of 7%),

contracts tend to be multi year in nature and delivery schedules are regular and agreed well in

advance, due to the long term nature of construction contracts.

We continue to emphasise the market leading performance of Buildwell Limited, which has

maintained its strong record of securing lucrative contracts and which was recently awarded a Green

Building prize by the European Union.

Haulage forecast: Online hub and spoke services

We forecast growth of 17% in online hub and spoke services as a result of continued high demand for

online purchases from consumers.

Additionally, courier services are forecast to grow by an even higher 23% as a result of an increasing

requirement for speedy same day deliveries from consumers willing to pay a premium for quick

delivery. Provided that inventory management and related deliveries can be managed by trucking and

haulage companies, this represents a very strong growth area. Development of related IT

infrastructure and software will be essential if companies are to compete in this fast changing market.

A leading example in this market would be FastServe Ltd which has grown rapidly in the last 12

months. We would also note the performance of QuickPost Ltd which has matched FastServe in

some areas.

Data has been gathered from internet research conducted on 15 March 2014.

Urgent email marked HIGHLY CONFIDENTIAL received from Adie Fleet, 5 November 2014

An additional matter has just arisen – please can you advise as soon as possible? I have just been

informed by Pam that one of our new truck drivers has been incorrectly recording his timesheets –

apparently he was not told at his HR briefing that our timing system works on a decimal hours basis

so (as an example) he has been recording a drive time of 3 hours 50 minutes as 3.5 hours on our

system (it should obviously be recorded as 3.83 hours, being 3 hours plus 50/60). As the driver only

joined 2 months ago I am confident that there is an immaterial impact here and therefore we have no

disclosure requirements but please confirm your view of this matter.

Mock Exam 1 Answers

19




Mock Exam 1 Answers and mark scheme

Mock Exam 1 Answers

20


Appendix 1

Overall RS business:

Revenue 2014 2013 £'000s % 2014 2013

Haulage 36,822 33,983 2,839 8.4% 85.0% 85.4%

Warehouse 2,984 2,956 28 0.9% 6.9% 7.4%

Courier 3,508 2,852 656 23.0% 8.1% 7.2%

43,314 39,791 3,523 8.9%

Gross profit 2014 2013 £'000s % 2014 2013

Haulage 3,832 3,777 55 1.5% 83.0% 81.6%

Warehouse 670 811 (141) (17.4%) 14.5% 17.5%

Courier 114 42 72 171.4% 2.5% 0.9%

4,616 4,630 (14) (0.3%)

Operating profit 2014 2013 £'000s %

Haulage 1,134 1,288 (154) (12.0%)

Warehouse 275 454 (179) (39.4%)

Courier (279) (263) (16) (6.1%)

1,130 1,479 (349) (23.6%)

Courier revenue stream:

2014 2013 £'000s %

Revenue 3,508 2,852 656 23.0%

Cost of sales (3,394) (2,810) (584) 20.8%

Gross profit 114 42 72 171.4%

Gross profit margin 3.2% 1.5% 1.7%

Admin expenses (393) (305) (88) 28.9%

Operating profit (279) (263) (16) 6.1%

Operating profit margin (8.0%) (9.2%) 1.2%

Proposed Waitbury contract:

Forecast 2014 courier revenue £3,700,000 [Per AI page 31]

Estimated deliveries per week for 2014 forecast 3,000 [Per AI page 31, note 1]

Estimated deliveries per year 156,000 [3,000 x 52 weeks of year]

Forecast 2014 revenue per delivery £23.72 [£3.7m / 156,000]

Fee per delivery from Waitbury contract £10.00 [Per information in Exhibit 16]

Target total revenue from Waitbury contract £1,480,000 [40% x £3.7m, per Exhibit 16]

Number of deliveries required per year for Waitbury 148,000 [£1.48m / £10 fee per delivery]

Number of deliveries required per week for Waitbury 2,846 [148,000 / 52 weeks of year]

Actuals Movement

Movement Revenue mix

Movement Gross profit mix

Movement

Actuals

Actuals

Actuals

Mock Exam 1 Answers

21


Appendix 2 - Accounting profit or loss from Kentree returns

Kentree affected products

2,000 per week from April 2013 to the end of March 2014: 52 weeks x 2,000 products = 104,000 products

Percentage already cleared (per exam paper) 5% 5,200

Percentage to be cleared by RS and A2A (balance) 95% 98,800

104,000

Option 1 Adie Fleet

RS will service 75% of the balance to be cleared or 74,100 ovens [98,800 x 75%]

Collected in batches of 100 units will require 741 loaded trips

This represents 75% of all trips if 25% are empty trips so 988 trips are needed in total [741/0.75]

Additional subcontractor fees due on 40% of trips or 395 trips [40% x 988]

Cash flows

Revenue from ovens collected 222,300 [£3 x 74,100]

Total trip costs (own drivers) (44,460) [£45 x 988]

Additional subcontractor fees (11,850) [£30 x 395]

Purchase of lorries (90,000)

Net cash return from Option 1 75,990

Option 2 Kurtz Shah

RS will service 85% of the balance to be cleared or 83,980 ovens

Collected in batches of 200 units will require 420 loaded trips

This represents 97% of all trips if 3% are empty trips so 433 trips are needed in total

Additional subcontractor fees due on 40% of trips or 173 trips

Cash flows

Revenue from ovens collected 503,880 [£6 x 83,980]

Total trip costs (own drivers) (23,815) [£55 x 433]

Additional subcontractor fees (5,190) [£30 x 173]

Purchase of lorries (90,000)

Net cash return from Option 2 before IT costs 384,875

IT costs (500,000)

Net cash return from Option 2 (115,125)

Assumptions

1. Weekly sales as previously advised by Jane Riggs

2. 5% of ovens already returned in full to Kentree

3. RS to take 75% or 85% share of remaining ovens

4. Trip costs as advised by Adie Fleet and Kurtz Shah

5. Collection in batches of 100 or 200 units

6. Subcontractor costs of £30 per trip for 40% of total trips

7. Capex costs as advised

8. Income of £3 or £6 per oven collected

9. No other costs or revenues to consider

[Tutorial note - amounts shown in square brackets are to explain the calculations to you - you would not need to include this in your script]

Mock Exam 1 Answers

22


Executive Summary mark scheme

Financial analysis (Req 1) Financial modelling (Req 2)

E.1 Description E.3 Description

♦ RS comments on revenue with figures ♦ Revenue for both options (numbers)

♦ RS comments on GP and OP with figures ♦ Costs for both options (numbers)

♦ Courier comments on revenue with figures ♦ Total cash inflow/outlow for both options (numbers)

♦ Courier comments on GP and OP with figures ♦ Questions assumptions

♦ Comments on Waitbury opportunity ♦ Comment on wider context

E.2 Evaluation/Conclusions/Recommendations E.4 Evaluation/Conclusions/Recommendations

♦ RS strong revenue performance but poor profits ♦ Evaluates impact over longer term

♦ Courier key driver of GP growth but OP losses ♦ Evaluates assumptions/scepticism

♦ RS generating cash well ♦ Practical considerations

♦ Concludes on Waitbury opportunity ♦ Concludes which option to pick

♦ Commercial recommendations ♦ Commercial recommendations

Evaluation of Strategy (Req 3)

E.5 Description

♦ Description – Buildwell

♦ Description – Effem

♦ Benefits & risks

♦ Ethical issues

♦ Wider context: UK economy/construction/online

E.6 Evaluation/Conclusions/Recommendations

♦ Scepticism

♦ Wider implications for other streams

♦ Concludes which option to pursue

♦ Concludes on ethics

♦ Commercial recommendations

Mock Exam 1 Answers

23


Requirement 1 mark scheme – financial statement analysis

Assimilating & Using Information

1.1 Calculate key figures

♦ Overall revenue up £3,523k / 8.9%

♦ Overall GP down £14k / 0.3%

♦ Overall OP down £349k / 23.6%

♦ Courier revenue AND GP AND OP figures per Appendix 2 (must include margins)

♦ Uses Waitbury figures (own figures)

1.2 Business issues and own research

♦ UK from recession to mild growth

♦ Logistics is a “barometer” for the UK economy (p19)

♦ Strong growth for courier services led by online supermarket ordering (p7)

♦ Very competitive market: refers to competitor e.g.Royal Mail, A2A etc (p7, p34 etc)

♦ Courier is RS’s newest stream, quite dependent on Buildwell (p11, p30 65% of fees)

♦ High RS investment in IT in recent years (p11)

♦ Own research (free response)

Structuring Problems and Solutions

1.3 Narrative on issue one (revenue)

♦ Revenue up significantly by 8.9%

♦ Warehouse revenue flat and disappointing given recent growth pattern

♦ Reason for Warehouse performance – companies running down stocks (Exhibit 16)

♦ Courier growth very impressive at 23.0% with reason

♦ Haulage growth significant at 8.4% with reason

1.4 Narrative on issues two and three (GP and OP)

♦ GP performance disappointing – decline of 0.3% despite good revenue growth

♦ Cost of sales increases in almost all elements

♦ Haulage and Courier GP mix shares up to 83.0% and 2.5% respectively

♦ Operating profit significant declines in all streams by 12.0%, 39.4% and 6.1%

♦ Weak overhead control in all streams with reasons

♦ Admin expenses are not analysed by stream – employment costs key in RS totals

♦ Cash generation is strong, given the above points

1.5 Calculations for Waitbury opportunity

♦ Forecast courier revenue £3.7m (p31)

♦ Deliveries per year 3,000 x 52 = 156,000

♦ Forecast revenue 3.7m/156,000 = 23.72

♦ Total revenue from Waitbury contract £3.7m x 40% = £1.48m

♦ Deliveries required per week 1.48m / £10 / 52 = 2,846

♦ Per delivery Waitbury fee is 10/23.72 = 42.2% of 2014 forecast average (or own figure)

Mock Exam 1 Answers

24



Applying Judgement

1.6 Evaluation of revenue

♦ Good overall revenue growth in flat economy

♦ All streams have seen growth but Warehousing weak growth

♦ Main driver is Haulage then Courier/Courier quickest rate but Haulage more absolute

♦ Courier is a relatively new stream and maturing well

♦ Online sales a driver?/impact of RS IT investment in recent years

1.7 Evaluation of GP and OP

♦ Courier growth is high margin as GP margin increased

♦ Warehouse GP decline slightly outpaces Haulage and Courier increases

♦ Good control of RS labour costs in Cost of sales, given revenue increase

♦ Admin expenses are drain on Courier OP as increasing rapidly

♦ Courier again operating loss – unlikely to achieve target of profitability by Q4 2014 (p30)

1.8 Evaluation of Waitbury opportunity

♦ High resourcing requirement – almost double existing forecast 2014 weekly deliveries

♦ Pricing is significantly below general forecast at only £10 for high risk perishables

♦ Major client and could be follow on work/impact on RS reputation and prestige

♦ Capitalise on “exponential growth” area of supermarkets and online (p7)

♦ Delivery of perishables – requires high quality infrastructure – does RS have this?

♦ Further details would be helpful e.g. cost side

Conclusions and recommendations

1.9 Draws conclusions under a heading

♦ Overall conclusion on the year

♦ Conclusion on revenue for RS and for Courier with figures and reasons

♦ Conclusion on GP for RS and Courier with figures and reasons

♦ Conclusion on OP for RS and Courier with figures and reasons

♦ Conclusion on Waitbury contract

1.10 Makes recommendations

♦ Investigate reasons for poor Warehouse performance

♦ Continue to capitalise on Courier growth

♦ Look for further Haulage opportunities to maintain growth

♦ Look to utilise improved cash position

♦ Negotiate a better price with Waitbury

♦ Market research on Waitbury opportunity and on alternatives

♦ Other recommendations (free response)

Mock Exam 1 Answers

25


Requirement 2 mark scheme – financial evaluation (Kentree product recall)


2.1 Uses relevant figures as inputs

♦ 104,000 faulty products AND 98,800 waiting return

♦ Applies 75% and 85% RS share

♦ Empty trip rates of 25% and 3%

♦ Trip costs and subcontractor costs per Appendix 2

♦ Ignores depreciation – not a project-specific cash flow

2.2 Identifies business issues and wider context

♦ A2A growing very strongly – strong IT and service offering (p34 and exam paper)

♦ Kentree 25% haulage revenue and 75% warehouse revenue in 2013 (p33)

♦ Kentree contract due for renewal in November 2014 (p26) – key client

♦ Empty trip “crime” mentioned in press articles (p42)

♦ RS makes extensive use of Felixstowe port (p9, p25, p26)



2.3 Calculation 1 – Adie Fleet’s figures

♦ Revenue as £3 x 74,100

♦ Trip costs as £45 x 988 total trips

♦ Subcontractor fees 40% x 988 x £30

♦ Lorry purchases £90,000

♦ Total trips 741/0.75 = 988

♦ Positive cash return £75,990 with low level of fixed asset investment (just 2 lorries)

2.4 Calculation 2 – Kurtz Shah’s figures

♦ Revenue as £6 x 83,980

♦ Trip costs as £55 x 433 total trips

♦ Subcontractor fees 40% x 433 x £30

♦ Lorry purchases and IT purchases £590,000

♦ Shows that return is positive ignoring IT/IT main driver of negative result

♦ Negative cash return (£115,125) improved IT obtained – alternative or cheaper options?

2.5 Critical comments on assumptions

♦ Calculation sensitive to 5% figure and RS v A2A split – basis?

♦ HGV lorry purchase costs of £45,000 appear relatively low (p22)

♦ Standard salary costs – valid for short term courier workers?

♦ 25% and 3% empty trip rates – p23 suggests RS rate may be around 10%

♦ Assumed Kentree figures are correct in all respects – may not be

♦ Both sets of diesel price assumptions are out of line with market view (p41)

♦ Kurtz Shah view – higher margin yet higher share of Kentree business?

Mock Exam 1 Answers

26


Requirement 2 mark scheme – financial evaluation (Kentree product recall)

Applying Judgement

2.6 Practical considerations

♦ Empty trips and load size are two very key variables affecting profitability

♦ Port delays especially re Asia (Kentree and Malaysia) – impact considered

♦ Staffing considerations – not just drivers but also head office – feasible?

♦ Can RS IT cope with the throughput?

♦ Need investment in PPE very soon – cash flows?/Worth it for relatively low return?

♦ High reliance on non-RS couriers – service, personal behaviour (p29)

2.7 Wider impact on RS business

♦ Would further develop Kentree relationship but also risk from poor service

♦ Winning work could prevent strong competitor A2A taking more work

♦ Adie approach likely to be more acceptable to Kentree but less future impact

♦ Kurtz approach could damage Kentree relationship by exploiting a problem

♦ Miracle Mixer – big opportunity, especially under Kurtz Shah approach

♦ Risk of neglect of other revenue streams/opportunity cost/management time

2.8 Scepticism

♦ Queries expertise of preparers (not haulage or logistics directors)

♦ Kurtz Shah figures prepared quickly

♦ Cash flow assumptions too simplistic given high PPE initial costs

♦ Press reports are unsubstantiated – Miracle Mixer recall uncertain

♦ May be additional costs such as port storage costs or HGV levies (p35)

♦ Unlikely that price can be increased to £6 if A2A is a ready alternative


2.9 Conclusions

♦ Overall statement – Adie option more stable but lower long term impact

♦ Concludes on calculations and differences

♦ Concludes on assumptions/information and scepticism

♦ Concludes on practical issues

♦ Concludes on correct option to pursue

2.10 Commercial recommendations

♦ Recruit staff immediately

♦ Negotiate with Kentree as soon as possible

♦ Obtain further market data including on Miracle Mixer

♦ Considers financing approach e.g. delay payments on PPE/finance leases

♦ Detailed competitor research on A2A

♦ Confirm cash flows in more detail to see if fixed asset purchase possible


Tutorial note – there is nothing in the Advance Information to suggest that A2A will be employed by Kentree to assist with the

returns, particularly as the Advance Information suggests that A2A is a Courier company (not a Haulage or Warehousing

company): we have assumed this as part of our answer to get you thinking about A2A as a strong competitor with RS. Hence it

is probably unrealistic to double the price charged to Kentree on Kurtz’s suggestion. Note that both the competitors described in

detail on page 34 of the Advance Information are Courier companies – does this imply something about the exam?

Mock Exam 1 Answers

27


Requirement 3 mark scheme – strategic evaluation (Buildwell v Effem)


3.1 Background

♦ RS has an opportunity to expand haulage service offering

♦ Opportunity involves 2 different clients

♦ Buildwell is key existing client

♦ Effem is a new client and quickly growing

♦ RS has “Sustained growth” re Buildwell (p33)


♦ UK recession and return to mild growth/future interest rate impact

♦ Haulage depends on complex software (p7)

♦ “Exponential growth” in courier services due to online sales (p7)

♦ Concerns over fuel prices (p41) OR empty trips (p42)

♦ Buildwell 10% of annual RS haulage revenue (p33)



3.3 Issue 1 – Risks & Benefits (Buildwell)

♦ Existing client so will strengthen relationship

♦ Known that construction sector is growing well for RS (p33) and 4% forecast

♦ Construction margins quite low at 7% in LTRL report v RS 10% (p23)

♦ Buildwell has approached us – strong position, definite Buildwell interest

♦ Buildwell requires 10% reduction on other contracts – significant RS impact

♦ Limited geographical fit with RS – could be expensive to set up

♦ (free response)

3.4 Issue 2 – Risks & Benefits (Effem)

♦ New client so diversifies client base

♦ Operates in Manchester so possible good fit with RS (p21)

♦ Lucrative £900m contract

♦ RS will act as subcontractor – reduced control and profits?

♦ New company and not a leader per LTRL – may not have track record

♦ High 17% and 23% growth rates of Effem’s sector (Exhibit 19)

♦ Poor geographic fit with RS based on ports mentioned

♦ (free response)

3.5 Ethics

♦ William Wheel offer is potential bribery by accepting a gift in return for favour

♦ Illegal and significant impact on RS reputation so must fully avoid

♦ Could endanger relationship with key client Kentree/Homeline (p37)

♦ RS must not associate itself with deliberate illegal time recording

♦ If more widespread could have very serious legal impact/regulations

♦ RS should check if widespread practice, retrain staff and inform regulators

Mock Exam 1 Answers

28


Requirement 3 mark scheme – strategic evaluation (Buildwell v Effem)

Applying Judgement

3.6 Impact on warehousing revenue stream

♦ Buildwell – limited direct sales to Buildwell according to information

♦ Buildwell – offer to sell old warehouse in RS desired location Manchester (p21)

♦ Buildwell – RS will be able to network with property agents Big Sites LLP

♦ Effem – possibility to provide hub services i.e. warehouses

♦ Effem – JV on IT software could benefit other RS warehouse clients

♦ (free response)

3.7 Impact on courier revenue stream

♦ Buildwell uses RS as main courier provider – good relationship/past projects

♦ Buildwell – courier services relate to niche not currently served – profitable?

♦ Buildwell – promote RS reputation for “going extra mile”, trying to serve all contracts (p21)

♦ Courier services integrate well with “hub and spoke” approach (p7)

♦ Effem works with online retailers who need courier services

♦ Effem leading edge IT technologies could be useful in courier services

♦ (free response)

3.8 Professional Scepticism

♦ LTRL – new consultancy and brother of Adie/not independent

♦ LTRL reports – one day of internet research and several months ago/dated

♦ Buildwell – info provided by Managing Director so in self-interest to up-sell

♦ Effem – no relationship or contract terms/no evidence of Effem interest

♦ No financial information e.g. revenues/costs/margins

♦ Driver ethical issue – overall impact not known, initial view re just 1 driver



♦ Overall statement on the opportunities

♦ Concludes on Buildwell opportunity

♦ Concludes on Effem opportunity


♦ Concludes on which project to pick


♦ Begin formal negotiations as soon as possible

♦ Begin recruitment of staff including drivers as soon as possible

♦ Consider alternative projects

♦ Do not neglect other existing clients such as Kentree or CFD (p33)

♦ Confirm status of any unknown ethical issues

♦ Obtain other market research information


Mock Exam 1 Answers

29


Overall paper mark scheme

Appendices – Req 1 Main report

♦ Tabulated and mix of £ and % ♦ Sufficient appropriate headings

♦ Figures are as required by question – figure 1 ♦ Appropriate use of paragraphs/sentences

♦ Figures are as required by question – figure 2 & 3 ♦ Legible

♦ Figures are as required by question – Waitbury ♦ Correctly numbered pages

Appendices – Req 2 Report – Style and language

♦ Logical approach and numbers clearly derived ♦ Needs disclaimer (external report)

♦ Well presented and labelled ♦ Suitable formal language

♦ Calculates all amounts needed ♦ Tactful/ethical comments

♦ Calculates empty trips and subcontractor trips ♦ Reasonable spelling/grammar

Mock Exam 1 Model Answer

30


Mock 1 Model Answer

Please note that this model answer is slightly longer than is possible in the time available in the exam:

this is so that we can provide an illustrative writeup of all points on our marking grid – you would not

need this many points to pass the exam.

As well as the specific points made, please look carefully at the section headings, sentence length and

general writing style: try to aim for as simple and “punchy” a style as possible so that you can make the

maximum number of points possible. This is important because it is impossible to be certain what points

will be rewarded on the mark scheme so the more points you make, the better your chances.

Executive Summary

Section 1 Financial Performance

The UK economic recovery should benefit the logistics sector as the sector is a barometer of

economic performance.

RS’ revenue increased impressively by £3,523k from £39,791k to £43,314k (8.9%) as a result of

strong Haulage and Courier growth.

Unfortunately, revenue growth is not translating into increased gross profit as gross profit fell by £14k

from £4,630k to £4,616k (0.3%) as a result of poor control of Warehousing cost of sales.

RS’ operating profit fell substantially by £349k from £1,479k to £1,130k (23.6%) suggesting poor

control of overhead costs.

Revenue growth in the Courier stream was impressive, increasing £656k from £2,852k to £3,508k

(23.0%) as a result of growth in the online sales market.

Gross profit performance in the Courier stream was also impressive, increasing £72k from £42k to

£114k and improving gross profit margin from 1.5% to 3.2%.

High overhead expenditure prevented the Courier stream making an operating profit as hoped by RS

(target of profitability by Q4 of 2014) and operating profit fell by £88k from £305k to £393k (28.9%).

The Courier stream is a key driver of growth in gross profit but the stream continues to generate

operating profit losses due to high administrative expenses.

RS has increased its cash balance impressively from £608k to £1,556k despite reduced operating

profit.

The Waitbury contract provides an exciting opportunity for RS to become involved in the fast growing

online supermarket sector.

The contract could generate revenue of £1.48m but would place a very high demand on RS’ courier

operations by almost doubling the number of deliveries required per week (compared to the 2014

forecast). The proposed fee of £10 per delivery is substantially below the £23.72 per delivery forecast

for 2014.


31


RS should accept the Waitbury opportunity provided that information on cost is obtained and proves

favourable1.

Commercial recommendations

RS should:

• investigate the reasons for poor gross profit and operating profit performance

• conduct further market research on opportunities for all 3 revenue streams

Section 2 Kentree recall

Kentree is facing its first ever recall at a time when RS is looking to ensure continuity of its existing 3

year warehousing contract which expires in November 2014.

Based on the figures provided, Adie Fleet’s suggestion would yield a positive cash return of £75,990

based on inflows of £222,300 and outflows of £146,310. Kurtz Shah’s suggestion would yield a

negative cash return of £115,525 based on inflows of £503,880 and outflows of £619,005.

Kurtz Shah’s suggestion involves £590,000 of investment in fixed assets which could benefit the

company over the longer term.

Both results are based on an uncertain rate of returns and unknown future demand from Kentree

which will depend on an assumed split of activity with A2A which could change. The information was

prepared quickly overnight by Kurtz Shah and should be confirmed.

Servicing the Kentree recall project will place severe demands on RS’ resources, which are already

stretched by the work undertaken to date and will require investment in new staff (including training)

and effective management of loads.

It is advised that RS should maintain its current pricing structure (Adie Fleet’s suggestion) to ensure

that it does not disrupt its relationship with Kentree2.


RS should:

Confirm all information which is important to the model estimation

• negotiate with Kentree as soon as possible

• recruit and train the necessary drivers as a priority matter

1 You would be awarded a mark for advising RS what to do irrespective of the option you pick: our choice here is merely for illustrative purposes. 2 You would be awarded a mark for advising RS what to do irrespective of the option you pick: our choice here is merely for illustrative purposes.


32


Section 3 Haulage opportunities

As the UK economy recovers from recession, the construction sector is enjoying sustained growth,

benefiting companies such as RS’ key client Buildwell.

The Buildwell opportunity to expand haulage services would diversify RS’ revenues and further

develop its relationship with a key client, but would involve investment into hard to reach areas which

may not be profitable.

The Effem opportunity to expand hub and spoke services could benefit the RS Warehousing and

Haulage streams through additional work on Effem’s potentially lucrative £900m container supply

contract. However, RS has no experience of working with Effem which is a relatively new company

without a track record of success.

No information on contractual terms or revenues/margins is available and some of the information has

been provided by a new consultancy which may lack experience and expertise.

William Wheel’s offer of luxury accommodation in return for favourable treatment of Buildwell’s offer

could constitute bribery, which is illegal. RS should politely decline this offer, providing a tactful

explanation of the reasons.

The under-recording of driver hours could constitute a breach of regulations and should be

investigated thoroughly to determine if the matter is isolated. If necessary, the authorities should be

informed as soon as possible.

RS should proceed with the Buildwell opportunity to strengthen its existing relationship with a known

partner company3.


RS should:

• discuss the opportunities with Buildwell/Effem in more detail

• implement better controls over the recording of time by drivers

799 words or 32 minutes of writing time

As noted, the example is longer than is required to pass the exam as we wanted to illustrate all available

mark scheme points.

3 You would be awarded a mark for advising RS what to do irrespective of the option you pick: our choice here is merely for illustrative purposes.


33


Section 1 Financial performance for the year to 30 September 2014

1.A Market background

The UK economy has moved from recession to mild growth with the IMF measuring 2014 UK economic

growth to date at 2.1%4. This is good for RS because logistics is a “barometer” of the broader UK

economy and so linked to general economic performance. The Courier market is particularly competitive

with companies such as Royal Mail and A2A performing well and investing in Sunday delivery services.

RS is currently heavily dependent on Buildwell for its Courier fees (around 65%) and has invested

heavily in IT in recent years to boost Courier (and other stream) competitiveness.

1.B Revenue (Appendix 1)

Overall, RS’ revenue grew significantly by £3,523k (8.9%) from £39,791k to £43,314k. This is good

overall performance in a relatively flat economy. All streams have seen some revenue growth in the

year.

Haulage growth was significant at £2,839k (8.4%), increasing from £33,983k to £36,822k. This is likely

due to improved economic growth and RS’ investment into new IT management systems over the last

2 years or so.

Warehouse revenue grew £28k (0.9%) from £2,956k to £2,984k. This is relatively flat performance and

is very disappointing given good growth rates in recent years. Companies appear to be running down

stocks rather than delivering new stock to warehousing companies as a result of economic uncertainty,

harming RS performance.

Courier revenue grew £656k (23.0%), increasing from £2,852k to £3,508k. This is a very impressive

and pleasing performance and may be due to RS’ investment in the stream in recent years, working

hard to achieve profitability by the end of 2014. Demand from online retailers for courier services is

growing exponentially and RS appears to have capitalised on this.

The main driver of RS’ revenue growth is Haulage (the largest stream: 85.0% mix share (85.4% prior

year)) and then Courier. The Courier stream is RS’ newest stream but it has already become RS’ second

largest stream: its revenue mix share has increased from 7.2% to 8.1%, overtaking Warehousing (6.9%

versus 7.4% prior year).

1.C Gross profit and operating profit (Appendix 1)

Overall, RS’ gross profit performance is disappointing with a marginal decline of £14k (0.3%) falling

from £4,630k to £4,616k. This is despite good overall revenue growth of 8.9%. Cost of sales has

increased in almost all cost categories, constraining the growth of gross profit5.

Courier revenue growth appears to be high margin growth as the Courier gross profit margin increased

significantly from 1.5% to 3.2% showing that RS’ growth is not based on heavy discounting and reflects

RS’ strategy of aiming for higher end delivery customers who require excellent service standards.

4 This figure is fictional and is for illustrative purposes only – please replace the figure with an accurate real world figure based on your own research. Alternatively include a different own research point on something other than economy growth if you have a different idea – the important thing is: ensure you include at least some own research. 5 Tutorial note: At this point in your answer you should normally analyse gross profit margin for RS as a whole and for any requested streams but in this question the client specifically asked for gross profit margin (and operating profit margin) in connection with the Courier stream only so always follow the question set. Similarly we have not discussed the operating profit margin of RS as whole but this is as an exception because of what the question asked on this occasion.


34


Operating profit performance has been particularly poor with a significant decline of £349k (23.6%) from

£1,479k to £1,130k. All 3 streams declined by 12.0%, 39.4% and 6.1%, respectively, suggesting weak

control of overheads in all streams.

It is not possible to analyse administrative expenses by stream but at the RS overall level it appears

that employment costs are the key cause of the problems here as these have increased significantly.

This may be partly caused by new driver regulations coming into force in September 2014 which may

have deterred drivers from the market.

Administrative expenses are a significant drain on Courier profitability as these increased rapidly by

£88k (28.9%) from £305k to £393k, cancelling out the gross profit gain. The Courier stream therefore

made an increased operating loss of £279k, a marginal increase of £16k or 6.1%. It is thus highly

unlikely that RS will achieve its target of Courier profitability by the end of 2014.

Overall, RS’ cash generation is strong, given reduced operating profit, as cash increased by £948k from

£608k to £1,556k. This suggests effective management of working capital. RS invested £518k in new

fixed assets which is in line with the prior year but relatively low compared to previous years so it is

hoped that this will not impact the competitiveness of the business.

1.D Waitbury (Appendix 1)

Waitbury is a large and prestigious client so servicing this contract would boost RS’ reputation. It would

also allow RS to benefit from the exponential growth in Courier services, driven by online retailing

(particularly supermarkets).

Based on the assumptions provided, the Waitbury contract would generate £1.48m revenue (40% of

forecast 2014 Courier revenue) and would require 156,000 deliveries per year.

The revenue of £10 per delivery is only 42% of the average of £23.72 per delivery implied by RS’ 2014

forecasts for the Courier stream: this appears low given that the items are likely to be perishable food,

requiring very quick delivery and possibly additional storage precautions.

The contract would require 2,846 deliveries per week which would require a lot of RS resources as it is

almost the same figure as forecast Courier deliveries for all clients in RS’ 2014 forecasts.

Given these requirements it would be helpful to have further information on the relevant costs before

reaching a decision on whether to proceed, particularly as the revenue appears to be relatively low.

1.E Conclusions

Overall RS has had a mixed year with impressive revenue growth marred by disappointing performance

at the gross profit and (particularly) operating profit levels.

RS revenue grew by 8.9% or £3,523k which is impressive in a slowly recovering economy. Growth was

driven by the Haulage and Courier streams.

RS gross profit fell by 0.3% or £14k which is disappointing and may reflect a change in customer mix

or increasing competition.

RS operating profit fell by 23.6% or £349k which is extremely disappointing and has led to lower profit

levels than the prior year despite good revenue growth. All streams experienced declines so there

appears to be a general problem of overhead/admin cost control.

Courier revenue grew by 23.0% or £656k which is excellent performance, driven by exponential growth

in online retail, which has continued. Courier gross profit increased by £72k or 171.4% which is similarly

outstanding performance based on an improvement in gross profit margins from 1.5% to 3.2% as a


35


result of capturing high margin contracts and avoiding price based competition. Unfortunately Courier

operating losses increased further by 6.1% to £279k so RS is unlikely to achieve its target of profitability

within 30 months of May 2012.

The Waitbury opportunity offers attractive revenue but will require very high activity levels which are

probably not possible for RS to service. It is also not possible to assess the profit impact as no cost

information is provided.

1.F Recommendations

RS should:

• investigate why Warehousing has performed poorly

• continue to capitalise on growth in the Courier stream

• look for new opportunities to maintain Haulage growth

• look for ways to use its improved cash position

• allocate management time to the Waitbury opportunity given the short timeframe

• perform market research on Waitbury and alternative projects

• [further idea]

1,261 words or 50 minutes of writing time


mark scheme points.


36


Section 2 Kentree recall


Kentree is a key client of RS, accounting for 25% of Haulage revenue and 75% of Warehouse revenue

in 2013. It is essential for RS to retain the Kentree contract, which is due for renewal in November 2014.

RS already has good experience of working with Kentree/Homeline Regional Distribution Centres

(RDCs) from its existing work and also makes extensive use of the port of Felixstowe. Kentree has been

working with A2A which is a rapidly growing company that is widely respected in the market. [Add own

research.]

2.B Results of financial model (Appendix 2)

Based on the assumptions provided, Adie Fleet’s approach would generate a net cash return of £75,990

based on revenue of £222,300. No high capital costs are required under this approach.

Based on the assumptions provided, Kurtz Shah’s approach would generate a negative net cash return

of £115,125 as a result of the £500,000 of IT costs required: excluding these, the cash return would be

a positive £384,875, which is significantly higher than the first calculation.

The main differences in the calculations are caused by the higher revenue and higher capital outlay

under Kurtz Shah’s approach.

2.C Evaluation of information

The calculation will be sensitive to the split of activity between RS and A2A and also the estimate of

how many ovens have already been dealt with (5%) so the basis of this information must be checked.

Lorry purchase costs of £45,000 appear low as these are towards the very bottom of RS’ normal

purchase prices.

Standard salary costs are built into the model even though short term couriers (presumably not salaried

employees) are in use so costs may be higher in reality.

RS believes that it has an empty trip rate of 10% so the assumptions of 25% and 3% are out of line with

this estimate and increasing and reducing costs below the true level, respectively.

The diesel price assumptions are out of line with the price of around £1.39 at December 2013 per The

Economic Reviewer.

Kurtz Shah is suggesting that RS significantly increases its pricing and margins but will also be able to

gain a higher proportion of the returns business (85% versus 75%) and this may not be plausible.

The information has been provided by individuals who are not the Directors of the Haulage or Logistics

streams so it would be advisable to confirm the information with the relevant Directors.

Kurtz Shah has prepared the information very quickly by working through the night so it would be

advisable to carry out a check of this information in case it has been prepared too quickly.

The cash flow assumptions in the model are too simplistic given the high demand for PPE set up costs

so it would make sense to forecast on a quarterly or even monthly basis rather than annually to

determine affordability.

It is possible that there are further costs such as HGV costs or port storage costs (as suggested by

Ports Weekly article) which have not been included in the model.


37


The Miracle Mixer returns issue is an opportunity but only an unconfirmed press report has been

provided.

The suggestion by Kurtz Shah to increase pricing to £6 appears unrealistic given that A2A is already

serving some of the demand and hence Kentree has a readily available competitor to switch to.

2.D Practical issues and wider impact on RS

Empty trips and load sizes are important variables which affect the number of trips and therefore the

resource requirements of the Kentree returns contract.

RS may experience port delays, especially regarding deliveries to Malaysia (Asia), which could impact

on costs and cause congestion within RS’ own infrastructure.

RS is likely to experience high requirements for drivers and other head office staff.

RS will need to invest significant sums in PPE at very short notice so it will be important to ensure that

cash or a cheap loan is in fact available.

Servicing the contract may require RS to place high reliance on third party Courier drivers which would

impact on perceptions of RS service standards and personal behaviour, particularly as RS has itself

experienced problems with its own Courier workforce in the recent past.

Servicing the returns contract could further develop RS’ key client relationship with Kentree but could

also damage the relationship if the high resource requirements result in poor service or delays.

Continuing with the contract would prevent a key competitor (A2A) developing further relationships with

RS’ key client Kentree.

The approach suggested by Adie Fleet is likely to be more acceptable to Kentree as it does not disrupt

a previously agreed arrangement but it leads to lower capital investment and therefore possibly a lower

long run benefit to RS.

The approach suggested by Kurtz Shah could damage the relationship with Kentree if Kentree

perceives that it is being taken advantage of when in a weak position.

The Miracle Mixer returns opportunity is a huge project that RS would benefit from and it is possible

that this can only happen if Kurtz Shah’s approach is followed, given the need to invest in PPE.

The Kentree returns project is a very resource-intensive project so it will be important to ensure that RS

management and staff time is not diverted from other important client work.

2.E Conclusions

Overall, the approach suggested by Adie Fleet is likely to promote (and not weaken) the relationship

with Kentree but it may make it harder to bid for work such as the Miracle Mixer returns.

Important assumptions such as the number of ovens to be returned and diesel prices are not yet

confirmed.

Information has been prepared quickly or is based on unconfirmed press reports which need to be

confirmed. There may also be additional costs/revenues which have not been considered.

The main practical issue is the high resource requirements, particularly given that many ports are

overloaded with goods at present.


38


Over the long term, ensuring that A2A does not take on further work or develop more of a relationship

with Kentree is important for RS.

Based on the above, it is advisable for RS to maintain the current pricing approach under Adie Fleet’s

approach6.

2.F Recommendations

RS should:

• recruit staff immediately


• obtain further market data including on the Miracle Mixer issue

• consider the financing approach including use of finance leases or delaying payment

• undertake detailed competitor research on A2A

• confirm cash flows in more detail to evaluate the impact of a large fixed asset purchase

• [further issue]



mark scheme points.



39


Section 3 Haulage opportunities


The UK economy is slowly returning to mild growth but with uncertainty over future interest rate

movements by the Bank of England. Haulage demand is linked to this growth but also depends on

complex software to achieve competitiveness and reduce empty loads, which have been publicly

criticised as environmentally damaging. There has recently been exponential growth in courier demand

due to high online sales. Concerns over fuel price rises/instability have also been voiced in the market.

[Add own research point.]

RS now has an interesting opportunity to expand its Haulage service offering and is considering 2

potential clients. Buildwell is an existing key client of RS accounting for 65% of Courier revenue and

10% of Haulage revenue in 2013 after RS has sustained growth efforts with this client. Effem is a new

client for RS and is reported to be growing very quickly.

3.B Buildwell Limited

Buildwell is an existing RS client so the opportunity will strengthen this key client relationship.

Buildwell operates in the construction market which has recently been a growth area for RS and the

market is forecast to grow further by a moderate 4%, benefitting RS demand and sales.

Buildwell has approached RS placing RS in a strong bargaining position and showing that Buildwell is

definitely interested in collaboration.

The margin of 7% suggested in the Little Truckers Research Limited (LTRL) report, however, is below

the RS target of 10% so the project may worsen RS’ margins.

Buildwell is suggesting expansion into new geographic parts of the UK which could lead to

diversification but this is currently (by definition) a poor fit with RS’ existing facilities and hence high set

up costs may be incurred.

Buildwell is also seeking a 10% reduction in its current contracts which risks a substantial loss of

profit/revenue given the importance of Buildwell to RS.

3.C Effem Limited

Effem is a new client for RS so the opportunity would diversify RS’ revenue base and reduce risk.

Effem operates in Manchester which may be a good fit for RS’ existing depot near Manchester (or it

may lead to duplication of facilities).

Effem may have signed a very large £900m contract which could be very beneficial to RS and suggests

that Effem is performing well in the market.

RS may have to act as a subcontractor to Effem which risks a loss of control and may lead to an

unfavourable profit share. RS may also be affected (positively or negatively) by any changes in Effem’s

perception in the market.

Effem is a relatively new company so this represents risk as it is less established in the market and it

may not have the experience of other partners such as Buildwell. Effem is not identified as a market

leader in the LTRL report (unlike Buildwell) so Effem may not have the best brand recognition/loyalty

just yet.

Based on the ports mentioned, Effem does not have a good fit with RS so this could require high set up

costs. At the same time, this could be viewed as diversification of RS’ logistics infrastructure.


40


3.D Evaluation of information

Information has been provided by LTRL, which is a new and therefore less experienced consultancy.

LTRL is connected with RS via the brother of Adie Fleet so it may be preferable to gain a fully

independent view. The LTRL information was produced on the basis of 1 day of internet research, which

is insufficient, and was produced several months ago and so may be out of date.

Information on Buildwell has been provided by its Managing Director who will have a natural inclination

to present information favourably, particularly as Buildwell is seeking a reduction in current RS charges.

RS has simply assumed that Effem would be interested in a deal with RS as there is no evidence of

any interest from Effem.

No financial information on key criteria such as revenues, costs and margins have been provided,

making it difficult to assess the financial impact.

3.E Impact on other RS revenue streams

Buildwell has offered to sell an old warehouse in RS’ desired location of Manchester, which could benefit

the RS Warehousing stream.

RS would also be able to make contact with Big Sites LLP, a specialist in warehousing sites, again

benefitting the future development of RS Warehousing.

However, the information does provide any further Warehouse-specific benefit in terms of sales.

Effem is reportedly interested in “hub” services which could be something the RS Warehousing stream

can assist with.

Buildwell currently uses RS as its main Courier provider and has had a very good relationship with RS

over several years, so assisting Buildwell in its Haulage project is very likely to have spillover effects

into Courier activities.

These would relate to a possible niche market which is underprovided at present and could be a good

Courier opportunity but perhaps competitors have not served these areas because only low margins

are available.

RS is known to “go the extra mile” in working with clients so working with Buildwell regarding difficult to

reach areas could promote this brand image.

Effem works with online retailers and this is a rapidly growing market for Courier services so this could

benefit the RS Courier stream considerably.

Effem’s reported joint venture on software could benefit RS Warehousing and RS Courier activities as

these streams are heavily dependent on effective software and IT.

3.F Ethics

The offer from William Wheel for accommodation in Santorini is potential bribery through the offer of an

incentive for RS to take a particular course of action. This would be illegal and would damage RS’ strong

reputation, including with its key client Kentree/Homeline, which has recently issued specific anti-bribery

reminders to its suppliers. The offer must be politely declined with a tactful explanation of the reasons.

RS must not associate itself with false time-recording (even if a genuine mistake) in view of key

regulatory guidelines designed to protect road users by ensuring that drivers respect driving hour limits.

It would also be dishonest to hide this from regulators, particularly if the practice is more widespread.

RS should confirm the extent of the problem as the present information is only based on an initial review


41


of 1 driver. RS should retrain affected staff and inform its regulators if any breaches of driving hour limits

are found.

3.G Conclusions

Both opportunities appear to have significant benefits on Haulage and the other RS revenue streams

but the financial impact is unknown.

The main benefit of working with Buildwell is the strengthening of an existing relationship and an

opportunity to purchase a new depot in RS’ desired location. However, the reduction of 10% in current

RS charges is a significant risk.

The main benefit of working with Effem is that it would diversify the RS client base but risks are caused

by the new and unknown nature of the client relationships and the requirement to serve as a

subcontractor only.

On balance, it is advised that RS renegotiate the reduction in fees requested by Buildwell and then

pursue the Haulage opportunity with this existing client7.

RS must avoid any association with bribery resulting from William Wheel’s offer of accommodation. RS

must also ensure accurate and honest reporting of driver time records to ensure compliance with

industry regulations.

3.H Recommendations

RS should:

• consider alternative projects in case there is a better option

• begin negotiations with the relevant parties as soon as possible

• begin recruitment of staff (especially drivers) as soon as possible

• ensure that existing clients are not neglected

• confirm any unknown information affecting the ethical issues

• obtain further independent market research

• [further idea]



mark scheme points.


Mock Exam 2

42




Mock Exam 2

Mock Exam 2

43


List of exhibits








Mock Exam 2

44


EXHIBIT 15

From: Shiloh Piper

To: Ellis Codie






1. A review of the results of RS for the year ended 30 September 2014.

You should compare the revenue, gross profit and operating profit of both RS as a whole and

the 3 RS revenue streams against (1) the results for the year ended 30 September 2013

(Exhibit 17) and (2) the previously provided forecasts for the year ended 30 September 2014

(i.e. the accounting year which has just ended). Please then assist Adie Fleet to determine

whether RS should engage in hedging of its forecast diesel purchases. (Exhibit 16).

2. A financial assessment of the opportunity to purchase a further depot facility (Exhibit 18).

Using the information provided, you should calculate the net cash flows receivable or payable

over the 3 accounting periods to 30 September 2017. Please then assist the RS Board to

understand how the acquisition of further buildings assets will affect the RS Statement of

Financial Position. You should review and comment on the assumptions made in Exhibit 18.

Please also discuss any further strategic and practical issues that RS should consider when

making its decision.

3. An evaluation of the opportunity for RS to merge its business with either Synergy Logistics

Limited (SLL) or Just In Time Courier Company (JITCC) (Exhibit 19).

You should respond to our client’s request for analysis of the risks and benefits of working

with each potential merger partner. Please then assist the client to understand the impact of

the opportunities on the other RS business lines. You should highlight any practical and

ethical or business trust issues raised by the opportunities.


Mock Exam 2

45


EXHIBIT 16

From: Adie Fleet

To: Shiloh Piper



Shiloh,

I attach the management accounts for the year ended 30 September 2014. We need your firm to

analyse how our performance compares both to the prior year and to the previously provided

forecasts for the year ended 30 September 2014. Please analyse revenue, gross profit and operating

profit for both RS as a whole and for our 3 business streams.

We were pleased to report that the Kentree recall issue which was announced to the public in July

2014 proved not to be as bad as expected – in particular, no other product ranges were affected.

We won a number of new Haulage clients during the year and had a much higher than anticipated

rate of success in this market. We have implemented a new pricing structure on our non-Kentree

Haulage work and we used this in our successful bids this year. Our existing client base also proved

remarkably loyal in an increasingly competitive market. We continue to face pressure from rail as an

alternative form of haulage. New driver regulations will also be enforced from September 2014 so it is

possible that the driver shortage caused may have affected our performance.

The UK economy has continued to grow slowly and there continue to be mixed views on the future.

We tracked the PMI (Purchasing Managers’ Index) through the accounting year and sentiment

appears to have gradually improved (albeit not massively) so it seems that manufacturing firms are a

little more confident about their inventory and restocking decisions.

The customer mix within our Courier stream changed significantly with more customers requiring

super quick delivery. To ensure that we retain this business we outsourced a greater amount of work

than in previous years. A2A, JITCC and other providers have continued to build their Sunday delivery

businesses: the word within the industry is that good Sunday delivery services can often lead to

further non-Sunday delivery work if customers are happy – something to look into soon.

Overall the Board is unable to conclude on whether RS has had a good year or not, due to the

complexities of our different revenue streams and the fact that we make comparisons both to the prior

year and our forecasts. Your firm’s assistance here will be invaluable.

There is another matter we would like you to help with. As you know, at the present time RS does not

hedge against the impact of fuel price rises (or any other of our main risks). We have previously

concluded that it was not worthwhile (both financially and in terms of management and accounting

time) for us to hedge but now that the market is becoming more competitive and given the ongoing

tensions in the Middle East we have decided to re-evaluate this decision. I have set out some of our

assumed diesel usage and costs and the Term Sheet of our bank’s proposed hedging instrument (an

Over The Counter option). Please let us know what we should do.

Kind regards,

Adie

Mock Exam 2

46


Evaluation of RS Hedging Policy

Diesel usage and pricing assumptions provided by Adie Fleet

We need you to estimate the diesel price at which it is sensible for us to take out an Over The Counter

call option on purchases of diesel in January 2015. Please assume that the diesel price today is £1.30

per litre.

To keep things simple, we tend to bulk purchase and store our diesel and we make our purchases

every 3 months or so. We have already purchased the diesel that we need for the next few months

but on 3 January 2015 we want to top up our tanks to their value at 1 October so we need to estimate

the amount of diesel we will be using in the next 3 months (i.e. Q4 of 2014) and then see whether the

cost saving from the option (if the price is higher) justifies the premium we need to pay regardless of

exercise.

Each HGV uses an average of 2,000 litres of diesel per week and we had 40 HGVs in place in

October. We will add 5 more HGVs each month for the rest of the year. In December we allow for

Christmas deliveries by first calculating the December figure under the above principles and then

adding an additional 25% to our usage estimate.

At the final stage of the calculation, we also allow for a further purchase of 10% of the month’s

forecast usage as a contingency in case of high demand.

I have provided the cost of the option below so once you have calculated the quantity that we need to

make subject to the call option you should be able to calculate the price at which it makes sense for

us to use hedging. Please ignore tax and any accounting issues under IAS 39 or IFRS 13. To keep

things simple, we work on the basis of 4 week months.

Hope this is clear?

Kind regards,

Adie

Term Sheet Received from Our Bankers

BarcWest plc is pleased to provide a Call Option over high quality HGV diesel, exercisable on 3

January 2015.

The premium per litre of diesel subject to option is £10,000 per 200,000 litres hedged. Please note

that BarcWest is willing to offer pro-rata hedging premium costs at the client’s request if the amount

hedged is not a perfect multiple of 200,000 litres. This offer is only available if at least 1 million litres

are hedged.

The premium is payable on inception of the contract and does not attract interest.

Mock Exam 2

47


EXHIBIT 17




£000s

Revenue 1 43,552


Gross profit 4,163


Operating profit 956


Interest payable and finance charges 4 (1,003)

Profit before taxation (24)

Taxation 6

Profit for the year (18)



£000s

Non-current assets


13,358

Current assets

Inventories 6 164


Cash and cash equivalents 2,852

12,576

Total assets 25,934







9,446

Current liabilities




Mock Exam 2

48




£000s

Profit before tax (24)

Adjustments for:



3,862

Change in inventories (7)

Change in trade and other receivables 172

Change in trade and other payables 1,840


Taxation paid (147)




Purchase of tangible assets (1,891)


Net cash from/(used in) investing activities (976)


Bank loan -



Net change in cash and cash equivalents 2,244


Cash and cash equivalents at end of year 2,852

Mock Exam 2

49



2014

£000s


Haulage 37,654

Warehouse 3,106

Courier 2,792

43,552


RS labour 11,230


Fuel 13,521




Depreciation 2,607


39,389


Employment 1,938

Establishment 762


Depreciation 31

3,207




1,003

Mock Exam 2

50



Tangible assets

Freehold,

Land and

Buildings

Plant, IT

and


£000s £000s £000s £000s

Cost

At 1 October 2013 5,166 9,224 10,341 24,731

Additions - 1,634 1,750 3,384

Disposals - (632) (551) (1,183)

At 30 September 2014 5,166 10,226 11,540 26,932

Depreciation

At 1 October 2013 228 5,434 5,274 10,936

On disposals - -


At 30 September 2014 259 6,467 6,848 13,574

4,907 3,759 4,692 13,358


September 2014


£000s

Fuel 164

164



Prepayments 1,118

Other 207

9,560


Bank loans 3,500


9,446





Accruals 249

9,764

Mock Exam 2

51



revenue stream



£000s



Gross profit 5,535





£000s


Cost of sales

RS labour 1,530



Depreciation 301

Loss on disposal 32


Gross profit 828





£000s

Courier fees 2,792

Cost of sales

RS labour 279


Motor expenses 340




Gross profit (loss) (2,200)


Courier operating profit (loss) (2,827)

Mock Exam 2

52


EXHIBIT 18

MEMO – 1 November 2014

Shiloh,

Possible acquisition of haulage depot(s)

I would be grateful if your team could help us with some financial modelling. To maintain greater

control over our haulage operations, we are considering a purchase of the depot which we currently

rent just north of Manchester (for simplicity, let’s just call this the “Manchester depot”).

Based on the assumptions provided below, please can you calculate the forecast net cash flows over

a 3 year period for this facility? I would like to keep things simple so please do not worry about

monkeying around with discount rates and NPVs – just calculate the cash flows for the 3 relevant

accounting year ends (30 September 2015, 30 September 2016 and 30 September 2017). Please

assume for these purposes that purchase occurs on 1 January 2015.

The Board also wants to understand how our Statement of Financial Position may be affected so

please indicate the carrying value of the building at each end and the annual charge on the buildings

element only, assuming that there is a full year of charge in the year of acquisition. Fixtures and

fittings will be immaterial so we are only interested in the building element.

If we purchase the Manchester site then I understand that the Riggs family will use their existing

connections with Top Properties LLP, an estate agency the family has used several times in the past.

I have provided some information which Top Properties has passed on regarding the local market.

Their fee is likely to be 10% of the sale price and knowing estate agents I am sure they will want to be

paid as soon as the deal goes through. Bill Braces of Top Properties LLP has told us that

“Manchester has to be the UK’s number 1 logistics location for the next 10 years” so the Board is

definitely considering this opportunity very carefully.

As an alternative, the Board is considering an acquisition of a similar depot just outside Birmingham

and which is well connected by road and rail with both Birmingham and East Midlands airports. The

purchase of the Birmingham site will require us to find a reliable estate agent: we are considering

approaching Kentree for some advice here as the site is close to several Kentree Regional

Distribution Centres. We do not have any detailed financial information on the Birmingham site so

there is no need to do any calculations. We do, however, urgently need your advice on the strategic

and practical implications of both site options.

Kind regards,

Adie

Option 1 Acquisition of Manchester site

Top Properties LLP have suggested that a bid of £4m would be acceptable to acquire the Manchester

site and all its relevant fixtures and fittings (accounting for 25% of the purchase price). Top Properties

LLP have stated that commercial property prices in the area are growing at 6% per year but properties

in the location of the Manchester depot are growing at 12% per year. The depot currently provides

offices, a truck workshop, secure parking, driver facilities, a canteen and monitored warehouse and

storage facilities.

The acquisition would be funded by a loan of £3.5m from our existing bank and £0.5m of cash. The

loan will be due for repayment in 2017 and in view of our existing relationship with the bank we will

Mock Exam 2

53


not be required to repay any capital or interest until the maturity date of the loan. The bank will take a

fixed charge over the site until the loan is repaid. The interest charge on the loan is 9% per annum

(compound basis).

Based on our historic experience we believe that we can achieve additional haulage revenues as

detailed in the table below – we will target a gross margin of 7%:

30 Sep 2015 30 Sep 2016 30 Sep 2017

8,000,000 10,000,000 12,000,000

We will also be able to achieve the following warehousing revenues at a gross profit margin of 20%:

30 Sep 2015 30 Sep 2016 30 Sep 2017

2,000,000 3,000,000 4,000,000

We will continue our usual policy of allowing other companies to use our facilities in return for a

premium fee. Our estimated revenue and expenses on this activity are as follows:

30 Sep 2015 30 Sep 2016 30 Sep 2017

Revenue 5,000,000 5,000,000 5,000,000

Costs (3,500,000) (4,000,000) (4,200,000)

Running costs will be £400,000 in year 1 and will increase 15% each year as usage of the depot

increases.

We will purchase 4 additional HGVs per year at an average price of £150,000 per lorry.

Option 2 Acquisition of Birmingham site

According to Kentree, an investment of £4m will be needed to acquire a site near Birmingham, the

UK’s second largest city. The new site will have offices, driver facilities and monitored warehouse and

storage facilities. The purchase will be funded by a £2m loan at an interest rate of 3% payable on a

monthly basis with the balance being payable in cash.

We understand that the Birmingham site is close to several major ongoing infrastructure projects and

should offer integrated rail services. We estimate that the Birmingham site will allow us to carry out

further warehousing for Kentree at a mark-up 5 percentage points higher than our standard mark-up.

Although we do already have nationwide facilities, the Birmingham facility will be our first major

investment into the Midlands area of the UK and so we do not have a full revenue and cost appraisal

available at this time.

Mock Exam 2

54


EXHIBIT 19

Confidential email from Adie Fleet to Shiloh Piper dated 4 November 2014

Shiloh,

As you will have seen, our Courier stream has been performing somewhat below expectations and we

are a little worried, having recently made so many efforts to set up this stream. We are waiting to hear

back on our tenders for a number of large contracts for new clients (the value of these is 65% of last

year’s Courier revenue) but if these do not materialise then we need an alternative plan.

We are therefore considering making an offer to merge our business with either Synergy Logistics

Limited (SLL) or Just In Time Courier Company (JITCC). We believe that this would give us the quick

growth route that we need to shake off our disappointment with recent performance. Please outline

the benefits and risks of each potential partner, based on your knowledge of RS and the information

provided here. Please also comment on any practical and ethical/business trust issues of which we

should be aware. Finally we need to understand how a merger could affect our Haulage and

Warehousing revenue streams.

We really want to get moving with this project and are targeting completion of a merger by the end of

the year so please provide your analysis as soon as possible.

Thanks so much for your ongoing support to our business,

Adie

From Strength to Strength: Synergy Logistics Limited 2 January 2014

Article in The Courier trade magazine

SLL continues to impress the market thanks to its combination of market leading technologies and

aggressive pricing. Year on year growth has continued at levels similar to A2A, the AIM-listed courier

company. Analysts have praised the levels of growth achieved, considering that SLL is primarily

based in just one part of the UK (the South East).

SLL’s growth has been based on a strategy of excellence in both customer service and IT

infrastructure. According to SLL’s Managing Director, Larry Logistics, service levels cannot be

maintained without good infrastructure as couriers are increasingly being asked to provide short

notice services such as same day deliveries.

Our sources inform us that one of SLL’s main targets for this year is Buildwell Limited, a large

construction company. SLL is also understood to be interested in further developing its warehousing

business and is specifically targeting Kentree Limited, a manufacturer of high-end household goods.

SLL is confident of success in these projects, according to Larry Logistics:

“By the end of this year we will have won 2 key contracts with Buildwell, further strengthening our

Courier line, and winning the Kentree contract will allow us to start to build our Haulage revenue

stream. At the same time, we understand the positive synergies of working with partners and we are

delighted to be involved in A2A’s exciting infrastructure plans through to 2016.”

Rival firms have alleged that SLL’s expansion techniques are “highly aggressive” and based on

“pushing the law to its limits”: SLL is known for its lavish rewards to suppliers and producers, including

its free annual holiday and spa events in Monaco and the Caribbean. SLL has declined to comment

on these allegations but in a statement Larry Logistics indicated that the views of rivals were

“unfounded” and “clearly motivated by jealousy”.

Mock Exam 2

55


Other commentators have highlighted SLL’s risky debt-based expansion strategy which has involved

a highly geared approach with many loans due in 2017. Larry Logistics has dismissed this as

“scaremongering” on the basis that “2017 is some time away and we have good relations with our

bankers so we will just roll over the loans as we have done every time in the past”.

In the Nick of Time: The JITCC Story 2 November 2014

Article from Logistics Today magazine

JITCC’s expansion continues to impress us all here at Logistics Today magazine. Growth in JITCC’s

business throughout the UK has been spectacular. The company’s innovative strategy of

concentrating on the courier market and one day delivery appears to be paying off well: the company

has avoided working with companies in relatively slow growth markets such as electronics and

construction and has instead concentrated on winning same day delivery contracts in the growing

online shopping market (including supermarkets).

Critics have pointed to JITCC’s allegedly poor treatment of staff and self-employed couriers. However,

Sam Spoke, the Managing Director of JITCC, has contested the earlier bad press. “If our record were

so bad, why would leading companies such as Apex (a customer that demands the very best

professional service at all times) continue to use our services? In fact, we are negotiating with Apex

regarding a move into the haulage services market, purely on the basis of our strong customer service

feedback. If our drivers are unhappy, then I would like our competitors to explain to me precisely why

it is that our pool of drivers is expected to grow by 35% over the next 6 months?”

Commentators are divided on the benefits of working with Apex: some analysts have noted the retail

giant’s large size and requirement not only for courier services but also for fully integrated

warehousing and haulage services; others argue that Apex’s size will continue to put pressure on

JITCC’s resources, eventually resulting a fall in service below the high standards expected by Apex.

According to this second view, only with an agile and well equipped partner can JITCC continue to

keep this key client.

Our sources also suggest that JITCC couriers continue to be frustrated and disappointed by the

company’s approach, suggesting that treatment is unfair given the fixed costs that drivers must bear.

One group of drivers, representing couriers from Ruritania, a country which recently joined the

European Union, suggests that treatment of this group is particularly bad. Laszlo Zizek, a spokesman

for Ruritanians working for JITCC, gave us the following insights:

“Although I was born in the UK and speak English as my first language, many of my fellow Ruritanians

have recently entered the UK and they struggle with understanding all of JITCC’s complicated rules.

They have been asked to invest in fixed cost items such as tracking devices and a fleece top with no

guarantee of work, despite promises of “market-leading fee income” made during JITCC’s flashy

“onboarding” workshops and presentations. We cannot look for alternative work as JITCC contracts

state that we cannot perform any other courier business so we are stuck and very disappointed.”

Confidential email from Adie Fleet to Shiloh Piper dated 4 November 2014

Hi again Shiloh,

Sorry to bother you again but in terms of financing this expansion I have been able to get a verbal

agreement from Ron Lender at our bank regarding a 2.5 year loan of £5m, effective from 1 January

2015. Ron has offered a low interest rate of 2% provided that we agree a covenant based on a

specific interest coverage multiple (to be agreed) and allow the bank a fixed charge over some of our

PPE. This should remove any financial obstacles to a merger.

Mock Exam 2 Answers

56





Mock Exam 2 Answers

57


Appendix 1 Review of management accounts

Comparison of 2014 with 2013

Revenue 2014 2013 £'000s % 2014 2013

Haulage 37,654 33,983 3,671 10.8% 86.5% 85.4%

Warehouse 3,106 2,956 150 5.1% 7.1% 7.4%

Courier 2,792 2,852 (60) (2.1%) 6.4% 7.2%

43,552 39,791 3,761 9.5%

Gross profit 2014 2013 £'000s % 2014 2013 2014 2013

Haulage 5,535 3,777 1,758 46.5% 14.7% 11.1% 133.0% 81.6%

Warehouse 828 811 17 2.1% 26.7% 27.4% 19.9% 17.5%

Courier (2,200) 42 (2,242) (5338.1%) (78.8%) 1.5% (52.8%) 0.9%

4,163 4,630 (467) (10.1%) 9.6% 11.6%

Operating profit 2014 2013 £'000s % 2014 2013

Haulage 3,349 1,288 2,061 160.0% 8.9% 3.8%

Warehouse 434 454 (20) (4.4%) 14.0% 15.4%

Courier (2,827) (263) (2,564) 974.9% (101.3%) (9.2%)

956 1,479 (523) (35.4%) 2.2% 3.7%

Comparison of 2014 with 2014 forecast

Revenue 2014 A 2014 F £'000s % 2014 A 2014 F

Haulage 37,654 37,000 654 1.8% 86.5% 84.3%

Warehouse 3,106 3,200 (94) (2.9%) 7.1% 7.3%

Courier 2,792 3,700 (908) (24.5%) 6.4% 8.4%

43,552 43,900 (348) (0.8%)

Gross profit 2014 A 2014 F £'000s % 2014 A 2014 F 2014 A 2014 F

Haulage 5,535 4,000 1,535 38.4% 14.7% 10.8% 133.0% 72.5%

Warehouse 828 1,040 (212) (20.4%) 26.7% 32.5% 19.9% 18.8%

Courier (2,200) 480 (2,680) (558.3%) (78.8%) 13.0% (52.8%) 8.7%

4,163 5,520 (1,357) (24.6%) 9.6% 12.6%

Operating profit 2014 A 2014 F £'000s % 2014 A 2014 F

Haulage 3,349 1,500 1,849 123.3% 8.9% 4.1%

Warehouse 434 640 (206) (32.2%) 14.0% 20.0%

Courier (2,827) 180 (3,007) (1670.6%) (101.3%) 4.9%

956 2,320 (1,364) (58.8%) 2.2% 5.3%

GP mix

Actuals Movement OP margin %

Actuals Movement Revenue mix

Actuals Movement GP margin %

Actuals Movement OP margin %


Actuals Movement GP mixGP margin %

Mock Exam 2 Answers

58


Appendix 1 continued

Evaluation of hedging

Oct-14 Nov-14 Dec-14 Total

HGV lorries in place 40 45 50

Weekly usage in litres 2,000 2,000 2,000

Weekly usage 80,000 90,000 100,000

x 4 to calculate monthly usage 320,000 360,000 400,000

x 1.25 December only 500,000

x 1.10 contingency 352,000 396,000 550,000 1,298,000

Cost of option (£10,000 x multiples of 200k litres) £64,900.00

This is equivalent to £0.05 per litre insured

Therefore the diesel price would have to rise by more than 5 pence for hedging to be worthwhile.

This would be an increase on the current price of 3.85%

[Check for tutorial purposes only - not required in your answer]

Start price of 1.3

Additional cost to RS at

1.31 £12,980.00

1.32 £25,960.00

1.33 £38,940.00

1.34 £51,920.00

1.35 £64,900.00 Equals premium

1.36 £77,880.00

1.37 £90,860.00

Mock Exam 2 Answers

59


Appendix 2 - Potential purchase of Manchester site

Option 1 - Purchase of Manchester facility

Cash flows £000 £000 £000 £000

30-Sep-15 30-Sep-16 30-Sep-17 Total

Sales contribution - haulage 560 700 840 2,100 [7% x table Exhibit 18]

Sales contribution - warehousing 400 600 800 1,800 [20% x table Exhibit 18]

Sales contribution - other companies 1,500 1,000 800 3,300 [Net of table Exhibit 18]

Purchase of site - cash element (500) (500) [Per Exhibit 18]

Purchase of site - loan element (4,533) (4,533) [3,500 x 1.09 3̂]

Running costs (400) (460) (529) (1,389) [15% annual increase]

Lorry purchases (600) (600) (600) (1,800) [4 x 150 per year]

Estate agency fee (400) (400) [10% x 4,000]

Net cash flow 560 1,240 (3,222) (1,422)

Building carrying amount

Purchase price 4,000

Building element 3,000

Straight line depreciation at 4% 120 per year

End of year 1 carrying amount 2,880



Examples of breakeven/sensitivity testing [See tutorial note at the bottom of the page]

Net cash outflow to be covered to achieve a break even position (1,422)

Haulage sales contribution would need to be 67.7% higher

Warehousing sales contribution would need to be 79.0% higher

Contribution from rental to other companies would need to be 43.1% higher

If cash funded then total interest of 1033 would be saved.

This is 72.6% of the cash saving needed to break even

Assuming standard target haulage GPM of at least 10% (p23), haulage would earn 3,000 k

in contribution or 900k more than under the model assumptions - does not cover loss.

Assuming warehousing GPM of 32.5% (p27 forecast) warehousing would earn 2,925 k

in contribution or 1,125k more than under the model assumptions - does not quite cover loss.

Assumptions

1. Purchase price and split between buildings and fixtures element as advised

2. Funded by £0.5m cash and £3.5m loan repayable in one amount in 2017

3. Interest of 9% compounded annually but payable in 2017

4. Haulage revenues as advised at gross profit margin of 7%

5. Warehousing revenues as advised at gross profit margin of 20%

6. Revenues from services provided to other companies as advised

7. Running costs of £400k increasing 15% per year

8. 4% depreciation on building element per standard RS depreciation policy (p11)

9. Purchase of 4 HGV lorries per year at £150k per lorry

[Tutorial note

As you are not provided with the information necessary to calculate the returns/costs on the Birmingham

facility, the next step should be sensitivity/break even analysis re Manchester - as there are various ways of

correctly performing this analysis the mark scheme would move to an "open" approach i.e. you would

not be required to arrive at a particular number as there will be many valid approaches. We have provided

some example calculations but do not worry about arriving at the right answer for this aspect. We have

used the target GPMs implied by the Advance Information but it would be equally valid to refer back to the

margins obtained from R1, given that the marking will have to be "open" in nature for sensitivity testing.]

Mock Exam 2 Answers

60





♦ Overall revenue (comments and numbers) ♦ Revenue and costs with figures

♦ Overall GP (comments and numbers) ♦ Break even figure 1

♦ Operating profit (comments and numbers) ♦ Break even figure 2

♦ Comment on hedging possibility ♦ Questions assumptions

♦ Comment on wider context ♦ Comment on wider context


♦ Revenue and gross profit strong but for Courier ♦ Evaluates strategic implications

♦ Courier outsourcing/customer mix issues ♦ Evaluates assumptions/scepticism

♦ Evaluates hedging calculation ♦ Evaluates practical considerations

♦ Evaluates impact on cash ♦ Concludes whether to proceed/correct option

♦ Makes commercial recommendations ♦ Commercial recommendations


E.5 Description

♦ Benefits and risks SLL

♦ Benefits and risks JITCC

♦ Evaluates stream impact

♦ Ethical issues

♦ Comment on wider context


♦ Evaluates scepticism

♦ Practical implications

♦ Concludes on way forward



Mock Exam 2 Answers

61




1.1 Calculates key figures

♦ RS revenue up v 2013 by £3,761k (9.5%) AND down v 2014 F by £348k (0.8%)

♦ RS GP down v 2013 by £467k (10.1%) AND down v 2014 F by £1,357k (24.6%)

♦ RS OP down v 2013 by £523k (35.4%) AND down v 2014 F by £1,364k (58.8%)

♦ Stream revenue and GP movements x 3 per Appendix 1

♦ Uses hedging figures supplied by Adie Fleet (Exhibit 16)


♦ Mild economic growth after recession in the UK

♦ Logistics is a “barometer” of the economy/linked to general UK growth (p19)

♦ Kentree – major client (with revenue data) (e.g. p21, p23 or similar)

♦ RS aiming for profitability of the Courier stream by Q4 2014 (p30)

♦ UK rail subsidies supporting a competitor for road haulage (p24)

♦ Market very competitive/courier competition such as A2A and JITCC



1.3 Narrative on issue 1 (revenue)

♦ RS increase v 2013 due to Haulage strong performance (£3,671k or 10.8%)

♦ Warehousing up by a reasonable amount v 2013 (£150k or 5.1%)

♦ Courier down marginally v 2013 (£60k or 2.1%)

♦ RS decrease v 2014 F due to Courier very weak performance (£908k or 24.5%)

♦ Courier down significantly v 2014 F (£908k or 24.5%)

♦ Mix relatively unchanged but Courier is not second biggest unlike in 2014 F

1.4 Narrative on issue 2 (gross profit)

♦ RS decline v 2013 due to Courier – without this, RS would increase

♦ Haulage very impressive GP growth (£1,758k or 46.5%) outpacing revenue growth

♦ Haulage comment re forecasts with figures

♦ Warehouse GPM down marginally (26.7% v 27.4%)

♦ Courier GP and GPM down by hugely disappointing amounts with figures

♦ Courier and warehousing comments re forecasts with figures

1.5 Narrative on issue 3 (operating profit)

♦ RS decrease v 2013 due to Courier weak performance (£908k or 24.5%)

♦ Haulage OP up impressively v 2013 (£2,061k or 160.0%) with higher OP margin

♦ Warehousing down marginally v 2013 (£20k or 4.4%) v positive GP performance/ PY comment

♦ Courier OP extremely weak with significant increase in loss (£2,827k v £2,564k)

♦ OP margins for Warehousing and Courier with figures – CoS/admin issues?

♦ Comments re forecasts of at least 2 streams, with figures

Mock Exam 2 Answers

62



Applying Judgement


♦ Haulage and Warehousing good versus 2013 – Courier is a significant problem

♦ Kentree problem relatively minor supporting Haulage and Warehousing performance

♦ New haulage clients in the year support growth

♦ Warehouse growth more moderate at 5.1% -- improving PMI sentiment

♦ Courier appears to be affected by strong competition

♦ Courier change in customer mix – RS struggling to match new demand?

1.7 Evaluation of gross profit and operating profit

♦ GP margins in Haulage are up versus 2013 and versus 2014 F – new pricing structure

♦ Haulage driver issues in September 2014 – appears too soon to show in margins

♦ Courier GP decline due to impact of subcontractor costs

♦ Courier GP/GPM has turned negative in 2014 v 2013 – very worrying

♦ Warehousing minimal movements in GP/OP AND in GPM and OPM

♦ Cash up significantly despite problems due to good working capital management

1.8 Hedging calculation including narrative evaluation

♦ Litres to be hedged 1,298,000

♦ Cost of option £64,900

♦ Break even diesel price +£0.05 or £1.35 per litre

♦ Queries figures/comments that figures need confirming

♦ Does not help with potentially bigger problems to tackle e.g. Courier performance

♦ Contract is only for HGV diesel – what about other fuel costs or other costs/risks?



♦ Conclusion on revenue with figure and reason (must compare to forecast)

♦ Conclusion on gross profit with figure and reason (must compare to forecast)

♦ Conclusion on operating profit with figure and reason (must compare to forecast)

♦ Overall conclusion RS for the year v 2013 and v 2014 F, with figures

♦ Conclusion on hedging additional calculation


♦ Urgently review performance of Courier stream and implement necessary changes

♦ Continue to manage working capital well to support the business

♦ Find alternative to subcontractor costs which are destroying Courier GP

♦ Consider exiting Courier market as targets far from being achieved/competition

♦ Look at alternative unhedged risks mentioned by Adie Fleet in Exhibit 16

♦ Reassess figures used in hedging estimate


The PMI or Purchasing Managers’ Index referred to in this question is a real world and important dataset which we would advise

you to research briefly as part of your “own research” on RS. The information on the direction of movement of the PMI contained

in this question is, however, fictional so please confirm the real picture against real world data.

Mock Exam 2 Answers

63


Requirement 2 mark scheme – financial evaluation (purchase of Manchester depot)



♦ Sales contribution for streams AND rental to other companies per Exhibit 18

♦ Purchase price of £4m AND cash £0.5m AND loan £3.5m

♦ Running cost of £400k year 1 AND uprated 15% per year

♦ Lorry purchases 4 x 150k AND estate agency fee 10%

♦ Depreciation rate of 4% per p11

♦ Ignores information on depreciation policies in cash flow estimate


♦ Rail industry subsidies are pushing customers towards rail transport (p24)

♦ UK haulage companies continuing to drop prices to win business (p24)

♦ Kentree – 25% of haulage revenue and 75% of warehousing (p33)

♦ A2A – leading company locating near to new facility in Birmingham (p34)

♦ Per R1, RS cash position is strong

♦ Kentree returns issue in 2014 (p39)



2.3 Calculation 1 – Manchester

♦ Total sales contribution from haulage per App 2

♦ Total sales contribution from warehousing per App 2

♦ Total sales from services provided to other companies per App 2

♦ £500k upfront purchase in cash AND £4,533 redemption of capital and rolled up interest

♦ Running costs £1,389k in total (15% annual increase) AND estate agency fee £400k

♦ Net cash flow 560k/1,240k/(3,222k) AND total of (1,422k)

♦ Annual depreciation of 120k per year AND carrying amounts of 2,880k/2,760k/£2,640k

2.4 Calculation 2 – Breakeven/sensitivity re Manchester

♦ Tests contribution from different revenue streams – warehousing needs to increase most

♦ Calculates breakeven gross margins needed

♦ Notes that paying cash for whole site would save interest near to the net loss

♦ Tests running costs

♦ Tests lorry costs AND does not test estate agent fee (as change cannot cover loss)

♦ Candidate prioritises certain variables in calculation and indicates why prioritised


♦ Target haulage GPM of 7% is below RS target of at least 10% (p23)

♦ Contribution from rental to other companies higher than project forecast for haulage and warehousing

♦ HGV lorry prices appear high – well above standard range (p22)

♦ Warehousing revenues appear high relates to 2014 forecast for RS as a whole (p27)

♦ Warehousing GPM of 20% appears low v 2014 forecast (p27)

♦ Interest rate of 9% appears high – negotiation possible?

♦ Annual running cost 15% increase appears high – better control possible?

Tutorial note

If the estate agent fee at 10% is less than the net loss then there is no point testing for a different estate agency fee as even a

nil fee would not cover the loss. Also we think that the other variables are more important to the model and hence we would not

change the estate agency fee as part of the sensitivity testing.

Mock Exam 2 Answers

64


Requirement 2 mark scheme – financial evaluation (purchase of Manchester depot)

Applying Judgement

2.6 Practical implications

♦ Manchester – RS already operating here so understands operations

♦ Manchester – financing attractive for cash flows but high flow in 2017 when RS loans due (p11)

♦ Birmingham – offers integration with rail network (which is increasingly popular, p24)

♦ Birmingham – near to airport which has agreed not to impose storage fees (v p44 fees)

♦ Birmingham – facility list less than Manch./not inline with RS normal (p21)/cheaper running costs?

♦ Both options – purchase appears quite soon (1 January)

♦ Both options – loans repayable in 2017 with other RS loans (p11), cash impact

2.7 Strategic implications

♦ Both options – gives RS more control over its network compared to renting

♦ Manchester – increased relationship with Top Properties possible (p11)

♦ Manchester – possibility of capital growth if Top Properties LLP figures correct

♦ Manchester – could hedge against loss of Kentree contract Nov 2014 (p26)

♦ Birmingham – increased relationship with Kentree and contract renewal Nov 2014 (p26)

♦ Birmingham – higher rate of usage from competitors – RS gains info but also helps competitors

2.8 Scepticism

♦ No information on current rental costs at Manchester depot (key cost saving)

♦ Forecasting over 3 years – inherently risky

♦ Birmingham – site cost prepared by Kentree and not by expert estate agent

♦ Top Properties LLP have an incentive to “upsell” Manchester to earn fee

♦ May be other costs not included e.g. training, running costs, driver salaries, legals

♦ No consideration of impact on Courier stream


2.9 Conclusions

♦ Concludes on Manchester depot including figures and sensitivity

♦ Concludes on Birmingham depot (narrative conclusions)

♦ Concludes on assumptions and scepticism

♦ Concludes on strategic and practical benefits

♦ Concludes on whether to proceed with purchase(s)


♦ Negotiate loans and financing with bank and other providers

♦ Consider alternative uses of money/alternative locations

♦ Consider paying more cash to reduce interest cost

♦ Market research on likely throughput and usage, especially for Birmingham option

♦ Engage legal team as soon as possible

♦ Inform staff as soon as possible


Mock Exam 2 Answers

65


Requirement 3 mark scheme – strategic evaluation (SLL and JITCC)


3.1 Background

♦ RS is keen to make an immediate merger move and has 2 options

♦ Both SLL and JITCC are new partners/unknown to RS

♦ RS courier business has been loss making/aimed at profit by Q4 2014 (p30)

♦ Kentree and Buildwell are key RS clients (with figures per p33)

♦ Kentree warehousing contract renewal in November 2014 (p26)


♦ Moderate growth in UK economy and logistics a “barometer” (p19)

♦ Courier growth being driven by supermarket online orders particularly (p7)

♦ Courier sector heavily dependent on IT and infrastructure (p7, p11, p31)

♦ Apex – very large company and believes in fair working practices (p43)

♦ JITCC criticised in past for working practices (p43)

♦ Courier performance is weak per Requirement 1/Appendix 1



3.3 Issue 1 – SLL benefits and risks

♦ Leading technologies and software

♦ High growth – at A2A rate of around 20% (p34)

♦ Commitment to customer service and understands importance of IT

♦ Potential for low margin work – risk of poor returns on “aggressive” pricing?

♦ High gearing and loans, due in 2017 which is tricky time for RS (p11)

♦ May help protect against loss of Kentree/Buildwell revenues

♦ Geographically concentrated – specialist but less diversification

♦ (free response)

3.4 Issue 2 – JITCC benefits and risks

♦ JITCC forecasting strong growth with good pool of courier drivers

♦ JITCC operates throughout UK (p34) – diversification good

♦ Not targeting existing RS clients (construction, electronics) so new business

♦ Key client is Apex – risk if loss but big client (p43)

♦ JITCC specialises in online products (p34), a big growth market (p7)

♦ Negative press and treatment but Sam Spoke suggests improvements

♦ (free response)

3.5 Ethics

♦ Allegations could indicate SLL bribery via inducement payments but unproven

♦ RS should not associate itself with illegal activity/harm to reputation

♦ May endanger key client relationship (Homeline/Kentree p37-38)

♦ Allegations persisting on JITCC treatment of workers (p43 and exam paper)

♦ Possible legal and reputational impact on RS if JITCC has acted unfairly

♦ Some evidence that position improving per Sam Spoke but need to confirm

Mock Exam 2 Answers

66


Requirement 3 mark scheme – strategic evaluation (SLL and JITCC)

Applying Judgement

3.6 Evaluation of impact on other revenue streams

♦ SLL already has a Warehousing business, possible synergies

♦ SLL working with A2A, possibility to share infrastructure/Birmingham (p34)

♦ JITCC proposal to increase haulage but not in progress yet

♦ JITCC possible impact via Apex interest in warehousing and haulage

♦ SLL leading technologies – impact on other streams could be beneficial

♦ SLL bidding for Buildwell & Kentree work – may just replace existing RS business

3.7 Practical issues

♦ How will partners share clients, income, costs and technologies?

♦ RS loan offer from bank matures in 2017 when other RS loans due (p11)

♦ Completion by end of the year practical? Impact on management time

♦ Considers impact on capacity such as staffing/RS IT/RS fleet

♦ RS problems with rapid courier expansion in past (bad debts, personnel) (p29)

♦ Loan covenant for new RS loan – more bank control

♦ Integration costs including IT v benefit of possible synergies


♦ Most information is provided by MDs of each company – potential bias?

♦ Article in The Courier was written some time ago in January 2014 – too old?

♦ No independent evidence for allegations re SLL in The Courier magazine

♦ Verbal assurance from RS bank – not a contract, could change

♦ No financials such as margins or costs involved

♦ No contract terms – no evidence that partners are interested

Conclusions and Recommendations


♦ Overall conclusion e.g. RS should not give up on own Courier stream just yet

♦ SLL growing fast but legal/bribery issues and JITCC potentially poor PR etc

♦ Concludes on practical and inter-stream issues


♦ Concludes on best approach for RS to take


♦ Consider delaying until result of existing RS Courier tenders are known

♦ Engage legal team as soon as possible

♦ Commercial and market due diligence as soon as possible

♦ Identify alternative partners

♦ Consider funding requirements – RS loan issues

♦ Discussion with Kentree and Buildwell to ensure not lost to SLL


Note – the names of the Managing Directors of Synergy Logistics Limited and JITCC have been created by us and are not

stated in the Advance Information. We have created these characters to get you thinking about the reliability or potential bias

(intentional or otherwise) of information provided by individuals with a clear interest in presenting their companies in a particular

light. We have invented further information on JITCC in this mock – please confirm your understanding of exactly what the

Advance Information does and does not say by checking back to page 43 of the Advance Information.

Mock Exam 2 Answers

67







♦ Figures are as required by question – hedging ♦ Correctly numbered pages




♦ Calculates all amounts needed ♦ Tactful/ethical comments

♦ Calculates sensitivity/break even ♦ Reasonable spelling/grammar


68


Mock 2 Model Answer








Executive Summary


The logistics sector, which is a barometer of UK economic performance, is recovering as the UK

returns to growth.

RS revenue increased by £3,761k (9.5%) from £39,791k to £43,552k following very strong Haulage

revenue growth due to implementation of a new pricing structure. RS revenue narrowly missed

forecast by 0.8% or £348k.

RS gross profit fell by £467k (10.1%) from £4,630k to £4,163k despite impressive Haulage growth as

the Courier stream experienced a significant decline due to increased subcontractor costs. RS missed

its forecast gross profit target by 24.6% or £1,357k.

RS operating profit fell by £523k (35.4%) from £1,479k to £956k as a result of the drain on profits

caused by very weak Courier performance.

RS improved its cash position significantly, given the poor profit performance, from £608k to £2,852k

following good management of working capital.

RS should implement hedging but ensure that other significant issues such as Courier performance

are also addressed8.


RS should:

• investigate the reasons for very poor performance of the Courier Stream

• continue to manage working capital well to support the business



69


Section 2 Depot purchase

RS is facing increasing competitive pressure from subsidised rail haulage and competitors such as

A2A which is building market-leading infrastructure.

The Manchester depot would realise cash flows of £560k, £1,240k and (£3,222k) in 2015, 2016 and

2017 leading to a net outflow of £1,422k.

If RS paid cash consideration then £1,033k or 72.6% of the loss would be eliminated, significantly

improving the return from the project.

The Haulage sales contribution would have to be significantly higher (67.7%) to break even.

The model omits the rental costs saved from purchase (one of the primary reasons to undertake the

deal) and the gross profit margins assumed are low, pushing down the estimated returns.

RS already operates at the Manchester site so understands the practical considerations and

throughput but opening a depot in Birmingham could strengthen the Kentree relationship, a key client.

RS should proceed with the Manchester purchase as it is familiar with the site and expected

revenues/costs9.


RS should:

• confirm all information which is important to the model estimation

• negotiate loans and financing with its bank

Section 3 Merger opportunities

RS’ Courier stream continues to struggle despite exponential growth in demand for courier services

from online retailers such as supermarkets.

Working with SLL may provide access to leading technologies and a relationship with a company

which is growing at market leading rates. However, SLL is geographically focused in the South East

of the UK and is highly geared.

Working with JITCC may provide access to a strong pool of courier drivers and provide diversification

throughout the UK, but JITCC has suffered from negative press regarding treatment of drivers and

could be dependent on one client (Apex).

The SLL opportunity could benefit the RS Warehousing stream through synergies and the connection

with A2A whilst the JITCC opportunity could promote Haulage (if JITCC implements its proposals) and

the relationship with Apex could benefit RS Warehousing and Haulage business streams.

It will be important to decide how to share revenues and costs and to ensure that financing issues do

not clash with RS’ loans due in 2017.



70


The information provided comes from the Managing Directors of the potential partners and so is not

independent. Other information is sourced from unconfirmed press reports.

The position is not clear but SLL may be involved in bribery and RS should not associate itself with

such a partner.

JITCC may be improving its treatment of courier drivers but it has been alleged that JITCC is

exploiting non-native English speakers and RS should not condone such practices.

RS should not undertake a joint venture with these partners due to the high risks involved10.


RS should:

• delay merger plans until the results of current RS courier tenders are known

• consider alternative partners for any joint venture



mark scheme points.



71




The UK is returning to mild economic growth after a recession, benefitting logistics which is a barometer

of the UK economy. RS is facing significant competition from subsidised rail logistics and companies

such as A2A and JITCC which provide competitive courier services. The RS Courier stream is aiming

for an operating profit in Q4 of 2014. (Add own research.)


RS’ revenue increased impressively by £3,761k (9.5%) from £39,791k to £43,552k but was marginally

below RS’ forecast by £348k (0.8%).

Significant growth in Haulage revenue of £3,671k (10.8%) from £33,983k to £37,654k was the main

driver of RS’ improved performance, suggesting a minimal impact from the Kentree recall (Kentree

accounts for 25% of RS Haulage revenue). New Haulage clients gained during the year also supported

growth.

Warehousing revenue increased by a reasonable amount of £150k (5.1%) from £2,956k to £3,106k as

a result of improving PMI sentiment and increased restocking, again indicating a lack of impact from

the Kentree recall (Kentree accounts for 75% of RS Warehousing revenue).

Courier revenue was down marginally by £60k (2.1%) from £2,852k to £2,792k, being the only revenue

stream to experience a decline in revenue as a result of strong competition and an unfavourable change

in customer mix.

Courier performance against forecast was very poor at £908k (24.5%) below forecast, preventing RS

achieving its overall revenue target.

As a result of poor Courier performance the revenue mix is unchanged: contrary to forecast, Courier

has not become the second most important stream.


RS’ gross profit fell disappointingly by £467k (10.1%) from £4,630k to £4,163k and was £1,357k (24.6%)

below forecast.

Haulage gross profit margins have increased impressively, showing that the new pricing structure allows

access to high margin work, leading to an increase in gross profit of £1,758k (46.5%) from £3,777k to

£5,535k, outpacing revenue growth and beating forecast by £654k (1.8%)

Given this increase, it appears to be too soon for the anticipated impact of new rules on Haulage drivers

(from September) to be reflected in gross margins.

Warehousing has seen very minimal movements in gross profit, operating profit and related margins

(gross profit margin being 26.7% versus 27.4%).

Courier gross profit performance has been hugely disappointing with a decline of £2,242k (5,338.1%)

as RS has been unable to react to the competitive pressures and changing customer mix.

Without the decline in Courier gross profit, RS would have experienced an increase on the prior year

showing a significant impact from Courier subcontractor costs and a very worrying transformation of

Courier gross profit margin from positive to negative.

RS operating profit declined £523k (35.4%) from £1,479k to £956k and missed forecast by £1,364k

(58.8%) as a result of weak Courier performance in revenue.


72


However, Haulage operating profit increased impressively by £2,061k (160.0%) and operating margin

increased from 3.8% to 8.9%.

Warehousing operating profit was down marginally by £20k (4.4%) despite recording a positive gross

profit, indicating a relatively high increase in administrative expenses.

Courier operating profit performance was extremely weak with an increase in operating losses from

£263k to £2,827k, a movement of £2,564k (974.9%). RS will not achieve its target of operating profits

for this stream.

Warehousing and Courier both missed their operating profit targets by £206k and £3,007k respectively

as a result of a decline in margins: Warehousing declined from 20.0% to 14.0% and Courier turned

negative from 4.9% to (101.3%). These streams appear to have both cost of sales and administrative

expense problems.

RS increased its cash balance impressively from £608k to £2,852k, despite problems in generating

profits, as a result of effective working capital management.

1.D Hedging (Appendix 1)

RS would need to hedge 1,298,000 litres at an option premium of £64,900, implying that hedging would

be beneficial if the diesel price hits £1.35 per litre.

RS should confirm all figures and particularly the £1.30 per litre assumed starting point as this appears

low (compared to £1.39 at the end of December 2013).

Consideration of hedging should not distract the RS management team from the fundamental problem:

the Courier stream.

RS may also wish to consider the hedging of alternative risks and fuels other than HGV diesel.

1.E Conclusions

Overall RS has had a mixed year with impressive revenue growth marred by disappointing performance

at the gross profit and (particularly) operating profit levels. Revenue, gross profit and operating profit

were below forecast, and by increasing distances of 0.8%, 24.6% and 58.8%, respectively.

RS revenue grew by 9.5% or £3,761k primarily as a result of very strong Haulage growth due to new

pricing and clients.

RS gross profit fell by 10.1% or £467k primarily as a result of very weak Courier performance due to

the inability of RS to adapt to a new customer mix and related requirements.

RS operating profit fell £523k or 35.4% driven by a decline in Courier profit performance.

Hedging would be relatively inexpensive at £64,900 and would protect against rises in price above

£1.35 per litre, but RS should ensure that more important risks such as the Courier stream are dealt

with11.



73


1.F Recommendations

RS should:

• urgently review the Courier stream and implement improvements

• continue to manage working capital well to support the business

• try to reduce the high subcontractor costs which are harming the Courier stream

• consider exiting the Courier market

• consider risk reduction against risks other than the diesel price

• reassess the figures used in the hedging estimate

• [further idea]



mark scheme points.


74


Section 2 Depot purchase


RS is increasingly competing against subsidised rail for haulage business and other haulage

businesses are dropping their prices to win business. A2A, a market-leading courier company, is

currently setting up a new state of the art facility in Birmingham to boost its competitiveness. RS is in a

strong cash position (£2,852k) for any purchase of assets but its key client Kentree (75% of

Warehousing and 25% of Haulage revenue) is facing uncertainty due to a product recall. [Add own

research.]


Based on the assumptions provided, the purchase of the Manchester facility would result in cash flows

of £560k, £1,240k and (£3,222k) in 2015, 2016 and 2017, respectively, leading to a total negative cash

flow of £1,422k overall.

The carrying amount of the building element of the facility would be £2,880k, £2,760k and £2,640k in

2015, 2016 and 2017, respectively.

Haulage sales contribution would have to increase by 67.7% to break even. Warehousing sales

contribution would need to be 79.0% higher to break even. Contribution from services provided to other

companies would need to increase by 43.1% to break even.

If RS funded the deal fully by cash, then interest of £1,033k would be saved, or 72.6% of the saving

needed to break even.

Application of the 2014 forecast Haulage and Warehousing gross profit margins would not be sufficient

to break even.


The quoted Haulage gross profit margin of 7% is below RS’ target of at least 10%, reducing the forecast

inflows.

The contribution from rental to other companies appears to be implausibly high as it exceeds RS’ main

business of Warehousing and Haulage services.

The quoted HGV prices appear high as they are outside RS’ standard price range.

Forecast revenues from project-specific Warehousing appear high when compared to the 2014 RS

forecast for the business as a whole.

The assumed Warehousing gross profit margin of 20% appears low compared to the 2014 forecast.

An interest rate of 9% appears high (albeit that the interest is rolled up and paid on maturity), so a lower

rate may be possible via negotiation.

The annual running cost increase of 15% appears high and well in excess of UK inflation so better

control could reduce this and boost forecasted returns.

No information on the rental cost saved by purchasing the facility (presumably one of the main reasons

to purchase the site) is provided, reducing the forecasted returns.

The forecast is projected over 3 years and many variables could change in this time.


75


The Birmingham site cost has been prepared by Kentree rather than an expert and independent estate

agent or valuer.

Top Properties LLP will have a self-interest in upselling the benefits of operating in the Manchester area

as the partnership will earn a 10% fee on all sales.

The model may omit important further costs such as training, running costs or legal fees.

The model does not consider the revenue impact on the RS Courier stream even though RS’ streams

have historically been closely linked.

2.D Practical and strategic issues

RS is already operating at the Manchester site so will be familiar with operations and possible

revenues/costs.

RS’ bank is offering an attractive loan with rolled up cash flows to purchase the Manchester facility.

However, a large cash flow will be required in 2017 when 2 other RS loans are due.

The Birmingham depot offers integration with the rail network, which is increasingly competing with road

as a haulage method, thereby diversifying RS’ operations.

The Birmingham depot is near to a major airport and one which has agreed not to impose storage fees.

The Birmingham depot has fewer facilities than Manchester and fewer facilities than is standard for RS.

This could, however, reduce running costs.

RS is planning to purchase a site by 1 January 2015 which could be too soon to arrange an appropriate

deal.

Both options would allow RS to have more control over its fixed assets than when renting a depot.

The Manchester option would lead to an increased relationship with RS’ IT provider VG, with benefits

for RS as logistics is heavily dependent on IT.

The Manchester facility would permit high capital growth if the Top Properties LLP forecasts for the

Manchester market are correct.

The Manchester facility could open up new business to hedge against any possible loss of the Kentree

contract.

The Birmingham depot would lead to an increased relationship with Kentree and could perhaps improve

the chances of winning a renewal of the contract in November 2014.

The Birmingham depot would be used to a greater extent by RS competitors, which could give RS

access to important data and observations but could also assist its competitors.

2.E Conclusions

The Manchester facility offers negative cash flow returns but rental cost savings, a key cash inflow,

have not been considered in the model.

The Birmingham facility would offer access to rail and airport infrastructure and deepen the Kentree

relationship, but no financial information is available for evaluation.


76


The model contains relatively low gross profit margin estimates and assumes high running costs. The

model excludes rental costs saved (a key reason to purchase a rented site) and some information has

been provided by a partnership with a vested interest in promoting the Manchester area.

The Birmingham depot would allow RS to avoid additional fees and would give access to important

infrastructure. The Manchester depot would promote high capital growth and could allow RS to diversify

away from dependence on Kentree.

RS should proceed with the Manchester purchase due to greater familiarity with the site and likely

benefits to the company12.

2.F Recommendations

RS should:

• negotiate loans/financing with its bank and other providers

• consider alternative locations for the depot

• consider paying more consideration in cash to reduce the interest cost

• conduct market research on likely throughput and utilisation

• engage a legal team as soon as possible

• inform staff of plans as soon as possible

• [further issue]



mark scheme points.



77




RS is keen to consider an immediate merger of its Courier stream and has opportunities with 2 potential

partners which RS has not worked with before: Synergy Logistics Limited (SLL) and Just In Time Courier

Company (JITCC).

The RS Courier has been loss making for several years and continues to show weak performance after

aiming to achieve operating profit by Q4 of 2014.

RS’ Warehousing contract with Kentree is due for renewal in November 2014. JITCC works for Apex,

a giant UK retailer which strongly believes in fair working practices, despite contrary allegations against

JITCC.

There has been moderate UK economic growth benefitting logistics as a barometer of the economy.

The courier sector has been growing due to high demand from online suppliers such as supermarkets.

This sector is heavily dependent on IT and related infrastructure.

(Add own research.)

3.B SLL

Working with SLL may give RS access to leading technologies and software.

SLL has been growing strongly, in line with the 20% achieved by A2A, a market-leading courier

company.

SLL is targeting 2 of RS’ most important clients (Buildwell, Kentree) so a partnership may prevent the

loss of this business.

SLL’s business is concentrated in the South East of the UK so it is a specialist in a booming UK area.

However, this overlaps with some of RS’ operations (e.g. its head office) so may not diversify operations.

SLL states that is has a commitment to customer service and understands the importance of IT.

SLL applies an “aggressive” approach to pricing so margins may be low.

SLL is highly geared and its loans are due in 2017, which is the year that RS’ loans are also due.

3.C JITCC

JITCC is expecting to grow strongly and the company has a good pool of courier drivers.

JITCC operates throughout the UK, allowing RS to access a number of growth areas and ensuring

better diversification than SLL.

JITCC does not appear to be targeting existing RS clients so a merger would lead to further business

overall.

JITCC’s key client is Apex, a giant UK retailer, offering high demand but creating risks if the client were

to be lost.

JITCC specialises in the online sales market, which is experiencing exponential growth.


78


JITCC has experienced negative press regarding driver treatment, although this appears to be

improving according to Sam Spoke.


Most of the information has been provided by the Managing Directors of SLL and JITCC – the MD’s

may have presented the information in a favourable manner.

The press article in The Courier was written some time ago in January 2014 and so may be out of date.

There is no independent basis for the allegations made.

RS’ bank has merely offered a verbal assurance rather than a contract so it could change its stance.

No financial information on margins or costs has been provided.

No formal contract has been offered and there is no evidence that the potential partners are interested

in working with RS.

3.E Impact on other RS revenue streams and practical issues

SLL already has a warehousing revenue stream so there could be synergies from working together.

SLL works with A2A, a leading firm with excellent infrastructure including its new Birmingham facility.

SLL is known for its leading technologies which could boost RS’ revenue streams as logistics is

dependent on high quality IT and infrastructure.

SLL is bidding for Buildwell and Kentree business which could serve simply to replace business lost by

RS and hence the joint venture may not benefit on a net basis.

JITCC has a proposal to develop haulage business which could benefit RS’ Haulage stream. However,

this project is not in progress yet.

JITCC’s large client Apex may have an interest in warehousing and haulage activities.

3.F Ethics

Allegations that SLL competes by offering lavish rewards to suppliers and producers could indicate

bribery. RS should not associate itself with this illegal activity. RS would risk its relationship with its key

client Homeline through any such association. However, the allegations are unproven to date.

JITCC continues to be affected by allegations of unfair treatment of its workers (particularly non-native

speakers of English), although the situation is improving if the information provided by Sam Spoke is

accurate. RS should not associate itself with any unfair or exploitative practices and doing so would

damage the reputation of RS.

3.G Conclusions

It may be too early for RS to give up on running its own Courier stream and there are risks associated

with each potential partner.

SLL has been growing fast but may be associated with bribery and JITCC has a poor reputation for

treatment of staff.

The main practical consideration is financing as RS loans are due in 2017 and it also seems implausible

to complete the deal before the year end as suggested.


79


SLL would offer more benefits to the RS Warehousing stream due to its existing operations whilst

JITCC’s impact on the other RS streams is uncertain at this time.

SLL could be involved in potential bribery which must be avoided by RS in itself and because it could

endanger the key RS relationship with Homeline. JITCC continues to be associated with poor treatment

of workers, which would damage RS’ relationship and its attempts to treat people properly.

RS should not pursue either partner opportunity due to the risks13.

3.H Recommendations

RS should:

• consider delaying until the result of existing RS Courier tenders is known

• engage a legal team as soon as possible

• undertake commercial and market due diligence

• identify alternative partners

• consider funding requirements given RS’ loan commitments in 2017

• negotiate with Kentree and Buildwell to ensure that clients are not lost to SLL

• [further idea]



mark scheme points.


Mock Exam 3

80




Mock Exam 3

Mock Exam 3

81


List of exhibits








Mock Exam 3

82


EXHIBIT 15

From: Shiloh Piper

To: Ellis Codie







You should compare the revenue and gross profit performance of RS and each of its 3

revenue streams for the year ended 30 September 2014 (Exhibit 17) with the equivalent

figures for the prior year. Please also analyse the main movements in the Statement of Cash

Flows for the year. Please then assist RS with the further detailed analysis of the Haulage

revenue stream requested by Adie Fleet (Exhibit 16).

2. A financial assessment of 2 methods of entering the market for Sunday Courier deliveries

(Exhibit 18).

Using the information provided, you should calculate the accounting profit or loss which would

be achieved over a 12 month period under each option. You should review and comment on

the assumptions made in Exhibit 18. Please then discuss the key practical and strategic

issues that RS should consider.

3. An evaluation of whether Rolling Stores should implement Project Full Load (Exhibit 19).

You should respond to the client’s request for identification of the strategic and operational

benefits and risks of Project Full Load. Please then evaluate these benefits and risks and

explain the main practical implications of the project. Please also comment on any ethical and

business trust issues which you consider to be relevant, drawing on Kurtz Shah’s internal risk

review document (Exhibit 19).


Mock Exam 3

83


EXHIBIT 16

From: Adie Fleet To: Shiloh Piper Subject: Rolling Stores Ltd – recent performance and future opportunities Date: 4 November 2014

Shiloh,

We need you to compare our management accounts for the year ended 30 September 2014 with the

prior year. Please concentrate on revenue and gross profit for our 3 revenue streams and also look at

the main movements in our Statement of Cash Flows, compared to the prior year.

As you will see, we have had a very difficult year and we are very anxious to find out the reasons why.

We have continued to win a large number of smaller contracts in the Courier revenue stream and we

have received very good feedback on our driver reliability, presentation and personal skills. Our driver

loyalty rate has improved significantly with very few drivers leaving to join competitors and even fewer

letting us down in terms of prompt deliveries. Our gut feeling is that this is helping us to win higher

value contracts whilst also resisting pressures from lower priced competitors who have lower service

standards. Hopefully the management accounts will bear this out.

One problematic event in the year was our relationship with Kentree/Homeline. Following the

announcement of Kentree’s first ever product recall in the middle of the year, a number of other

Kentree/Homeline products were affected. We have tried our best to help Kentree/Homeline by

transporting faulty products back to their Regional Distribution Centres (RDCs) and we have seen a

significant increase in volume of work from this activity. However, Kentree/Homeline lost a significant

amount of customer goodwill as news reached the market and both companies suffered from a lack of

demand. The Board has not had time to analyse whether the increase in activity servicing the returns

has outweighed the loss of activity in general distribution and restocking of Kentree/Homeline

products that have not been affected by the returns issue (70% of Kentree’s products by value).

Whilst the Board has not had time to analyse the details of the business, we know that our primary

revenue stream is struggling to generate cash: we need to understand why. To date, RS has not

routinely analysed the cost of sales of this revenue stream because it has always performed well and

has been the backbone of our business. However, we believe that we now have a reason to

reconsider this. Please assist us with this process by creating a clear analysis of our Haulage cost of

sales and gross profit margins and please suggest some reasons for the changes that you have

identified. For simplicity please treat the motor expenses line for the Courier stream as part of the Fuel

line in the overall RS cost of sales. You may also wish to treat the courier services entry as part of

subcontracting costs. At this stage we do not require comparisons with the prior year – please just

comment on the 4 principal components of Haulage cost of sales and suggest why they may have

increased. We will then investigate further next week.

As a closing matter, our market research for the last year shows that clients in the electronics,

construction, supermarket and food sectors have responded very well to the UK’s return to growth.

Sectors such as tourism and financial services are doing less well. Something for us to bear in mind

as we plan the next year and work on renewing our major contracts in the coming weeks.

Thanks,

Adie

Mock Exam 3

84


EXHIBIT 17




£000s

Revenue 1 33,881


Gross profit 471


Operating profit (2,402)



Profit before taxation (3,251)

Taxation 813

Profit for the year (2,438)



£000s

Non-current assets


13,869

Current assets

Inventories 6 99


Cash and cash equivalents (336)

6,843

Total assets 20,712







8,534

Current liabilities




Mock Exam 3

85




£000s

Profit before tax (3,251)

Adjustments for:



267

Change in inventories 58

Change in trade and other receivables 2,652

Change in trade and other payables 830


Taxation paid (147)






Net cash from/(used in) investing activities (2,743)


Bank loan -



Net change in cash and cash equivalents (944)


Cash and cash equivalents at end of year (336)

Mock Exam 3

86



2014

£000s


Haulage 27,681

Warehouse 1,493

Courier 4,707

33,881


RS labour 9,351


Fuel 11,684




Depreciation 2,625

Loss on disposal 15

33,410


Employment 1,608

Establishment 761


Depreciation 29

2,873




854

Mock Exam 3

87



Tangible assets

Freehold,

Land and

Buildings

Plant, IT

and


£000s £000s £000s £000s

Cost

At 1 October 2013 5,166 9,224 10,341 24,731

Additions - 761 2,038 2,799

Disposals - (241) (184) (425)

At 30 September 2014 5,166 9,744 12,195 27,105

Depreciation

At 1 October 2013 228 5,434 5,274 10,936

On disposals - (199) (155) (354)


At 30 September 2014 257 6,438 6,541 13,236

4,909 3,306 5,654 13,869


September 2014


£000s

Fuel 99

99



Prepayments 847

Other 191

7,080


Bank loans 3,500


8,534





Accruals 237

7,874

Mock Exam 3

88



revenue stream



£000s



Gross profit 159


Haulage operating profit (2,170)



£000s


Cost of sales

RS labour 945



Depreciation 306

Loss on disposal 8


Gross profit (176)


Warehouse operating profit (555)



£000s

Courier fees 4,707

Cost of sales

RS labour 1,028


Motor expenses 699


Courier services 76




Courier operating profit (loss) 323

Mock Exam 3

89


EXHIBIT 18


Shiloh,

As you know, we launched our Courier stream in 2012 and since that time we have continually

searched for ways to grow our revenues and achieve our targets. We have just received the details of

an exciting opportunity to become involved in the potentially lucrative Sunday courier delivery market.

Under either option, we will launch the service on 1 December in order to capitalise on Christmas

sales (which have already been included in the financial information provided below). This will also

help the business hedge against any possible loss of our Kentree contract which as you know is due

for renewal in November 2014. Please evaluate (to the extent possible based on the information

available) the accounting profit possible under both proposals below over a 12 month period, starting

on 1 December 2014. For simplicity assume that a quarter is 12 weeks: we are aware that this is

imperfect so please do not raise this in your report. Please then explain the main practical and

strategic implications of each option.

Option 1 Joint venture with Just In Time Courier Company (JITCC)

As you may have read in the press earlier this year, JITCC have announced plans to start delivering

on Sundays. We have been approached to form a joint venture with JITCC allowing us to enter the

Sunday courier delivery market with no set up costs and a minimal time lag.

JITCC has continued to work with Apex and according to Tom Trucker, one of JITCC’s marketing

managers, the contract is due to be renewed for a further 3 years early next year, based primarily on

JITCC’s commitment to Sunday deliveries.

If we work with JITCC then I think we will have capacity to serve some of the major supermarket

chains, particularly if we draw on JITCC’s bank of self-employed drivers initially and then add to this

as we recruit further couriers in the coming months. To make things simpler, we will move our drivers

across to JITCC’s self-employed courier contracts and related payment structure.

Tom Trucker has provided us with some confidential estimates of throughput and costs (see below).

Under this option, we will receive income of £6 for each parcel delivered. We will also receive income

from self-employed couriers for rental of key equipment and clothing, as described below. We need to

take into account the fact that some deliveries will not be successful at the first attempt due to

customers not being at home at the correct time or due to other unforeseen circumstances. The

relevant statistics are set out below.

On the cost side, at the start of each day each courier will travel to one of the joint venture’s

distribution hubs: the courier will be responsible for all costs incurred in travelling to the hub at the

start of the day to pick up a batch of parcels for delivery. The courier will then deliver the batch of

parcels to multiple addresses – based on the average mileage travelled and other costs we believe

that the average cost of making an attempt to deliver a parcel (including movement to/from the hub

and/or another customer destination) will be £3 per attempted delivery. At the end of the day, the

courier will return to the hub and bring back any undelivered parcels before returning home: the trip

back to the hub and then back to the courier’s home address will not incur any costs for us.

As part of this arrangement, we are going to insist that self-employed couriers are paid per attempted

delivery rather than on JITCC’s existing basis. Our forecast throughput and driver requirements are as

follows:

Mock Exam 3

90


Q1 Dec-Feb

Q2 Mar-May

Q3 June-Aug

Q4 Sep-Nov

Deliveries per week 1,000 800 700 600

Drivers required per quarter 500 300 300 200

In addition to the above, we will receive income of £15 per week for trackers rented to self-employed

couriers. We will also receive £3 per week for providing branded clothing. Drivers will receive a £2

bonus for first time deliveries – hence a 70% first time delivery rate will be achieved. If the parcel is

not delivered first time then obviously we will have to try again, after the driver has returned to base.

At the second attempt 75% of parcels will be delivered. All parcels will be delivered at the third

attempt.

Option 2 Launch own Sunday delivery service

As an alternative to working with JITCC, we may be able to launch our own Sunday delivery service

and avoid any of the complications that arise from working with other companies.

Proceeding on this basis, and with the same trip payment model as above, will require the following

throughput and driver resourcing requirements, based on an average trip cost of £5:

Q1 Dec-Feb

Q2 Mar-May

Q3 June-Aug

Q4 Sep-Nov

Deliveries per week 400 400 500 600

Drivers required per quarter 50 60 70 80

In addition to the above, we will receive £3 per week for providing branded clothing and £1 per week

for use of our fuel card, which will be necessary under our contract with the drivers. We will not charge

for tracker hire, as a goodwill gesture. We will receive £12 per successful delivery under this model.

As we will be able to run everything via our own systems, we expect better rates of first time delivery –

95% will be achievable (making a bonus for first time deliveries unnecessary) and 90% of deliveries

will succeed at the second attempt with the balance being delivered by the third attempt.

CorpTel Market Report Online courier delivery market November 2014

Our research (based on interviews with the Managing Directors of 3 FTSE-listed logistics companies

conducted in May 2014) indicates that quarterly growth rates of 5% will continue in this market for the

foreseeable future due to high online sales, particularly from supermarkets. Customers are

increasingly asking for weekend deliveries in order to be present to sign for goods and also to have

the opportunity to inspect (and possibly reject) goods before formally signing for delivery. Service

standards will become increasingly important as the market matures but at the present time price

competition is so fierce that many companies are reportedly cutting corners to ensure that low prices

can be maintained.

Email to Mike Riggs sent by Will Wagon (Managing Director, A2A)

I thought I should just let you know about the rumours I have heard regarding JITCC. Apparently in

order to earn their bonuses for first time deliveries, certain self-employed couriers working for JITCC

have been signing for deliveries where the customer is not present. The couriers then leave the parcel

in an obvious location on the customer’s property. This has come to light after a large number of

customers demanded to see copies of signature slips that they purportedly signed for (but could not

possibly have signed due to being away from home). I believe that you would find that working with

A2A is a world away from this kind of unethical behaviour.

All the best, Will

Mock Exam 3

91


EXHIBIT 19


HIGHLY CONFIDENTIAL – PROJECT FULL LOAD

Shiloh,

Please can you and your team urgently assist us with analysing our new proposal, Project Full Load?

We need help to identify the strategic and operational benefits and risks of Project Full Load. Please

then provide your evaluation of these benefits and risks. Finally, I will need assistance in

understanding the practical implications of this project.

As you may be aware, our industry has increasingly been criticised by certain environmental pressure

groups as a result of the environmental impact of partial and empty loads. We have received a

research report from Green Products UK Limited (GPUK) which suggests that we could achieve a

“first mover” advantage by being one of the first UK logistics firms to almost eliminate these practices:

according to GPUK, customers are increasingly interested in supporting companies which show due

concern for the environment (see GPUK report below). As a result, provided that we offer a new fixed

charge over half of our HGV lorries, our existing bankers are happy to provide an interest free loan

expiring in 2017: the bank believes that the initiative is so innovative that their support will reflect well

on the bank’s own reputation and will help the bank to gain an advantage over its rivals.

Most of the Board are fully behind this initiative but I should mention that Charles Riggs believes there

are alternative methods of achieving a “greener” approach. This is not really my area – are you aware

of what he means? If so, please include a couple of points on this in your report.

We have been approached by Logistics Software Limited, a fierce rival of our existing provider (VG),

to provide the necessary logistics software and training to our staff. We estimate that we will need to

borrow £5m to invest in bespoke software designed by LSL – this is such a new area that we cannot

simply buy a product off the shelf and I am personally thrilled to think that RS could be at the

technological forefront here. The new software (codename Project X) will provide real time linkages

between warehouses and drivers to enable effective inventory monitoring and to update drivers’

schedules on a minute by minute basis to reduce empty loads. It will take some time to develop the

software so we are proposing to launch the initiative towards the end of 2015.

I also need your advice on the results of the internal risk review which have just been provided to me

by Kurtz Shah. We asked Kurtz to review some of the potential legal and ethical risks facing RS.

Adie

Project Proposal Documentation (prepared by Logistics Software Limited)

We have been asked to detail the main benefits of our proposed bespoke inventory management

system (codename Project X). Our system uses barcode technology and hand held signature capture

devices to dramatically improve the real time reporting of product movements. Together with the

construction of “mini hubs” which reduce the distance that products are transported, Project X will

ensure that empty loads are kept to a minimum: whilst we stress that we will design our software

entirely for your needs, in recent months we have succeeded in reducing the empty load rates of our

other clients to 3% and partial load rates have also fallen.

Mock Exam 3

92


To: Board of Directors, Rolling Stores Limited

I attach my findings from my internal risk review, which I have carried out following an introductory

course in Internal Audit Processes and Procedures which I attended at ICAEW last month.

All best wishes, Kurtz

Euro 6 Certification

I have been unable to locate the Euro 6 Certificates for 15% of our new HGV lorries (purchased

during 2014). I have enquired with Susie Secretary, who is solely responsible for managing our

certification processes, and I was informed that the certificates were sent to our offsite document

storage facility and may have been lost in transit. Susie has offered to create replacement certificates

by scanning and amending the certificates which we still have on record.

Contractual processes

I have noticed that our internal procedures manual does not contain any anti-bribery rules for our

staff. Following a review of our “Other and Sundry” account code I have observed a 25% year on year

increase in client entertaining expenses, including gifts and restaurant meals.

Customer complaints

Overall our complaint rate is low: just 18% of customers made a complaint over the last 12 months.

The most common complaint concerns our Courier drivers who have been leaving certain items with

neighbours contrary to customer instructions. I have seen some allegations that certain couriers have

been signing for items on the customer’s behalf and then leaving the item in an easy to spot location

(unfortunately it appears that thieves are also having no problems finding the packages …).

Incorrect treatment of WEEE

We are increasingly being asked to help customers manage their obligations under the Waste

Electrical and Electronic Equipment (WEEE) directive. Next month I am travelling up to Manchester to

speak to 2 clients who have been fined after it was discovered that some of their WEEE had been

dumped at the roadside rather than being transported as arranged. I assume that the couriers did this

to ensure that they could meet their deadlines and timetabling arrangements, rather than carrying out

a proper job. I understand that RS is one of three courier companies who assist the clients.

Green Products UK Limited (GPUK) Research Report on “Green” Logistics Operations

26 October 2014

According to our recent survey of GPUK readers, the crime of empty loads on the UK’s roads is the

second most significant environmental problem (after traffic jams) caused by our dependence on

fossil-fuel based logistics operations. Amongst our readers, 95% of respondents stated that they

would re-evaluate their logistics supplier based on empty load rates and of these, 92% would be

willing to pay a price premium of between 10 and 25% to work with companies who had eliminated

empty loads via effective IT infrastructure and careful planning of deliveries. These results are, in our

view, representative of the broader market. We estimate that the industry as a whole could save more

than £1bn through implementation of more effective systems.

Are you a leading UK logistics company with an empty load problem?

GPUK Consultancy, our subsidiary advisory company, will be pleased to provide a confidential and no

obligation quotation to help improve your energy and fuel efficiency. Simply contact us using the

secure web form available on our website to obtain further information.

Mock Exam 3 Answers

93





Mock Exam 3 Answers

94


Note

In commenting on the cash flows regarding purchase of tangible assets, we mean that the situation

has come “worse” purely from the point of view of cash flows – of course, the purchase of tangible

assets may provide a benefit to RS: our evaluation here is purely in terms of cash in or cash out.



Revenue 2014 2013 £'000s % 2014 2013

Haulage 27,681 33,983 (6,302) (18.5%) 81.7% 85.4%

Warehouse 1,493 2,956 (1,463) (49.5%) 4.4% 7.4%

Courier 4,707 2,852 1,855 65.0% 13.9% 7.2%

33,881 39,791 (5,910) (14.9%)

Gross profit 2014 2013 £'000s % 2014 2013 2014 2013

Haulage 159 3,777 (3,618) (95.8%) 0.6% 11.1% 33.8% 81.6%

Warehouse (176) 811 (987) (121.7%) (11.8%) 27.4% (37.4%) 17.5%

Courier 488 42 446 1061.9% 10.4% 1.5% 103.6% 0.9%

471 4,630 (4,159) (89.8%) 1.4% 11.6%


Actuals Movement GP margin % GP mix


Main changes in Statement of cash flows

2014 2013 £'000s Impact on RS

Profit before tax (3,251) 588 (3,839) From good to bad

Change in trade and other receivables 2,652 (2,424) 5,076 From bad to good

Purchase of tangible assets (2,799) (206) (2,593) From bad to worse

Detailed review of Haulage cost of sales (year ended 30 September 2014)

RS Warehouse Courier Haulage

(balance)

RS labour 9,351 945 1,028 7,378

Agency and subcontract 2,118 2,089 29

Fuel 11,684 699 10,985

Hire 2,476 113 403 1,960

Other:insurance and driver expenses 3,025 3,025

Repairs and maintenance 2,116 297 1,819

Depreciation 2,625 306 2,319

Loss on disposal 15 8 7

33,410 1,669 4,219 27,522

Mock Exam 3 Answers

95


Appendix 2 - Sunday deliveries

Option 1 - Work with JITCC

Q1 Q2 Q3 Q4

Dec-Feb Mar-May June-Aug Sep-Nov Total

Total parcels delivered 12,000 9,600 8,400 7,200 37,200

x delivery fee 6 6 6 6

Delivery fees 72,000 57,600 50,400 43,200 223,200

Tracker hire income 90,000 54,000 54,000 36,000 234,000

Clothing hire income 18,000 10,800 10,800 7,200 46,800

Trip costs (49,500) (39,600) (34,650) (29,700) (153,450)

First time bonuses (16,800) (13,440) (11,760) (10,080) (52,080)

Net income 113,700 69,360 68,790 46,620 298,470

Option 1 workings

Q1 Q2 Q3 Q4

Dec-Feb Mar-May June-Aug Sep-Nov

Parcels per week 1,000 800 700 600

Quarterly (12 weeks) 12,000 9,600 8,400 7,200

Delivered first time 8,400 6,720 5,880 5,040 A 70% x total

Balance to be delivered 3,600 2,880 2,520 2,160

12,000 9,600 8,400 7,200

Delivered second time 2,700 2,160 1,890 1,620 B 75% x balance

Delivered first or second time 11,100 8,880 7,770 6,660

Balance to be delivered 900 720 630 540 C Remaining balance

Trips for first time delivery 8,400 6,720 5,880 5,040 A x 1

Trips for second time delivery 5,400 4,320 3,780 3,240 B x 2

Trips for third time delivery 2,700 2,160 1,890 1,620 C x 3

Total trips required 16,500 13,200 11,550 9,900

Total trip costs 49,500 39,600 34,650 29,700 Trips x £3

First time delivery bonus 16,800 13,440 11,760 10,080 A x £2

Self-employed drivers 500 300 300 200

Tracker income per Q (x £15 x 12) 90,000 54,000 54,000 36,000

Clothing income per Q (x £3 x 12) 18,000 10,800 10,800 7,200

Mock Exam 3 Answers

96


Option 2 - RS own service

Q1 Q2 Q3 Q4

Dec-Feb Mar-May June-Aug Sep-Nov Total

Total parcels delivered 4,800 4,800 6,000 7,200 22,800

x delivery fee 12 12 12 12

Delivery fees 57,600 57,600 72,000 86,400 273,600

Clothing hire income 1,800 2,160 2,520 2,880 9,360

Fuel card income 600 720 840 960 3,120

Trip costs (25,320) (25,320) (31,650) (37,980) (120,270)

Net income 34,680 35,160 43,710 52,260 165,810

Option 2 workings

Q1 Q2 Q3 Q4

Dec-Feb Mar-May June-Aug Sep-Nov

Parcels per week 400 400 500 600

Quarterly (12 weeks) 4,800 4,800 6,000 7,200

Delivered first time 4,560 4,560 5,700 6,840 A 95% x total

Balance to be delivered 240 240 300 360

4,800 4,800 6,000 7,200

Delivered second time 216 216 270 324 B 90% x balance

Delivered first or second time 4,776 4,776 5,970 7,164

Balance to be delivered 24 24 30 36 C Remaining balance

Trips for first time delivery 4,560 4,560 5,700 6,840 A x 1

Trips for second time delivery 432 432 540 648 B x 2

Trips for third time delivery 72 72 90 108 C x 3

Total trips required 5,064 5,064 6,330 7,596

Total trip costs 25,320 25,320 31,650 37,980 Trips x £5

Self-employed drivers 50 60 70 80

Clothing income per Q (x £3 x 12) 1,800 2,160 2,520 2,880

Fuel card income per Q (x £1 x 12) 600 720 840 960

Assumptions

1. Income of £6 or £12 per successful delivery

2. No payment for trips at start and end of the day

3. Trip cost of £3 or £5

4. Deliveries and driver requirements as per forecasts

5. Delivery rates of 70%/75% and 90%/95% as advised

6. No other costs or revenues to consider

7. Income from rental of trackers, clothing and fuel cards as advised

8. First time bonuses payable under JITCC contract but not under RS contract

Mock Exam 3 Answers

97





♦ Overall revenue (comments and numbers) ♦ Calculation for JITCC with numbers

♦ GP changes (comments and numbers) ♦ Calculation for RS own service with numbers

♦ Cash changes (comments and numbers) ♦ Comment on numerical differences

♦ Haulage GP analysis (comments and numbers) ♦ Questions assumptions



♦ Courier stream target (p30) achieved – profitable ♦ Strategic considerations

♦ Evaluates changes in streams with numbers ♦ Evaluates assumptions/scepticism

♦ Evaluates Haulage GP analysis ♦ Practical considerations

♦ Evaluates impact on cash ♦ Concludes whether to proceed/correct option



E.5 Description

♦ Main benefit

♦ Main risk

♦ Additional benefit AND risk

♦ Scepticism

♦ Comment on wider context (e.g. empty load “crime”)


♦ Concludes whether to proceed

♦ Concludes on Euro 6 ethical issue

♦ Concludes on contractual & customer issues

♦ Concludes on WEEE


Mock Exam 3 Answers

98





♦ RS revenue down £5,910k (14.9%)

♦ RS GP down £4,159k (89.8%)

♦ Revenue changes x 3 streams AND GP changes x 3 streams per Appendix 2

♦ RS cash down from £608k to (£336k)

♦ Extracts components of Haulage cost of sales per Appendix 2


♦ Mild economic growth after recession in the UK

♦ Logistics is a “barometer” of the economy/linked to general UK growth (p19)

♦ Kentree – major client with revenue data (e.g. p21, p23 or similar)

♦ RS aiming for profitability of the Courier stream by Q4 2014 (p30)

♦ Kentree – product recall issues in mid 2014 (p39)

♦ RS problems with Courier staff in the past (p29)/JITCC methods and Couriers (p43)



1.3 Narrative on issue one (revenue GP)

♦ RS revenue down a significant and disappointing £5,910k or 14.9%

♦ Haulage down a significant and disappointing £6,302k or 18.5%

♦ Warehousing experienced a huge decline of £1,463k or 49.5%

♦ Courier up spectacularly by £1,855k or 65.0%

♦ Mix moving heavily towards C v both Haulage and Warehousing with figure

♦ Comment with figure on RS revenue OR stream revenues x3 v 2014 F

1.4 Narrative on issues two and three (gross profit and cash)

♦ Haulage margin and GP absolute figures down significantly with figures

♦ Courier significant GP increase and now more than Haulage with figures

♦ Warehousing moved into negative contribution after very good PY margins

♦ Courier only stream to improve GPM % from 1.5% to 10.4%/significant change

♦ Cash position primarily affected by drop in PBT and purchase of assets

♦ Change in trade & other receivables significant positive impact/£2,652 cash

1.5 Calculations for Haulage cost of sales (principal 4 components)

♦ RS labour £7,378k balance

♦ Fuel £10,985k balance

♦ Other: insurance and driver expenses £3,025k

♦ Depreciation £2,319k

♦ Other RS cost of sales rows per App 1

♦ Allocates Courier £699k motor expenses into RS Fuel cost of sales category

Mock Exam 3 Answers

99



Applying Judgement


♦ H & W hit very badly by Kentree issue (25% Haulage p23 & 75% W rev p25)

♦ Overall additional work on returns has not compensated for Kentree’s lost demand

♦ Revenue growth well below forecast except Courier – Buildwell performance

♦ Courier only stream to increase due to quality and driver improvements/mix comment

♦ Courier has become second largest revenue stream as forecast

♦ RS growth rate clearly declines from prior year as now negative v 22.4% growth PY*

1.7 Evaluation of gross profit and cash

♦ Significant decline in Haulage – Kentree drop in trade outweighs RS returns assistance

♦ Warehousing suffered worst percentage decline – Kentree 75% Warehousing rev p25

♦ Courier contracts based on quality/high value work so GP margin up significantly

♦ Major loss of control over costs, significantly worsens impact of decline in revenue

♦ Courier stream relationship to Buildwell – construction doing well per Exhibit 16

♦ Cash movement driven by PBT, receivables and purchase of assets with figures

1.8 Evaluation of Haulage cost of sales

♦ RS labour – could be start of driver shortage re HGV training? (p24)

♦ Fuel – rising diesel prices? (p41)

♦ Other – provides valid reason e.g. road user levy for HGVs? (p35)

♦ Depreciation – RS has invested heavily in PPE in y/e 30 September 2014

♦ Valid comment with reason re other categories

♦ Indicates that year on year changes should be analysed, not just balances



♦ Overall conclusion on RS for the year with figure

♦ Conclusion on revenue with figure

♦ Conclusion on gross profit with figure

♦ Conclusion on cash with figure

♦ Conclusion on Haulage cost of sales analysis with figure

♦ Comment that RS has achieved target of a profitable Courier stream


♦ Diversify away from Kentree/Homeline as soon as possible

♦ Consider temporary pause in fixed asset investment to preserve cash

♦ Implement extremely urgent measures to manage cash position

♦ Negotiate with Kentree/Homeline re contract renewal

♦ Continue to drive Courier stream forward to support business

♦ Review Haulage GP year on year changes/review of one off balances is too simple

♦ Inform staff of need to improve margins and cash generation in H & W


* calculated as 39,791/32,519 (p13)

Mock Exam 3 Answers

100


Requirement 2 mark scheme – financial evaluation (Sunday deliveries)



♦ Income of £6 or £12 per parcel

♦ Costs per attempted delivery including inter-destination trips £3 or £5 per trip

♦ Income from rental of trackers and fuel cards etc per Exhibit 18

♦ Deliveries per Exhibit 18

♦ Driver requirements per Exhibit 18 AND first time delivery bonus for JITCC only

♦ Delivery rates per Exhibit 18


♦ Exponential growth in courier due to online purchases, especially with supermarkets

♦ Many large providers already have plans to enter the market (p45)

♦ Royal Mail entering with parcel deliveries AND Parcelforce express (p45)

♦ Very intense price competition/undercutting Royal Mail (p45)

♦ RS has aimed to achieve Courier profitability Q4 2014 (p30)

♦ JITCC criticised for treatment of couriers but has huge client Apex (p45)



2.3 Calculation 1 – Joint venture with JITCC

♦ Delivery fees per Appendix 2

♦ Tracker hire per Appendix 2

♦ Clothing hire per Appendix 2

♦ Trip costs per Appendix 2

♦ First time delivery bonuses per Appendix 2

♦ Net income per Appendix 2

2.4 Calculation 2 – RS own service

♦ Delivery fees per Appendix 2

♦ Clothing hire per Appendix 2

♦ Fuel card fees per Appendix 2

♦ Trip costs per Appendix 2

♦ No first time delivery bonuses AND no tracker fees calculated

♦ Comment on how calculation 1 compares to calculation 2 with reasons


♦ RS own option sales growth significantly exceeds CorpTel 5% benchmark

♦ Stated that financial data allows for Christmas impact but not reflected in Option 2

♦ Delivery fees – basis? Own service attracts double fee

♦ Driver forecasts appear not to reflect Christmas demand issues

♦ JITCC rental fees to drivers not split based on JV i.e. same figures as per p43 for JITCC alone

♦ Basis of first time delivery rates AND significant divergence between options – basis?

♦ RS own service first time delivery rate (key variable) quite high (compare v p31)

♦ No fuel card fee under JITCC option – basis?

Mock Exam 3 Answers

101


Requirement 2 mark scheme – financial evaluation (Sunday deliveries)

Applying Judgement

2.6 Practical Issues

♦ Timeframe is quite short if starting on 1 December

♦ Impact on RS staff morale if move to JITCC payment methods/rules

♦ RS has struggled to recruit good couriers in the past (p29)

♦ Uses management time/Kentree contract renewal at same time (Nov 2014)

♦ Financing issues – considers existing RS loan structure (expiring 2017) (p11)

♦ Income heavily dependent on income from drivers – need to ensure practical

♦ Sharing of information/methods with JITCC – RS will need to protect itself

2.7 Strategic Issues

♦ If competing via price against JITCC, impact on RS service quality

♦ Own service – more control

♦ Own service – not aiming at most dynamic segment (supermarkets)

♦ Consider remarks of A2A MD Will Wagon – A2A interested in partnering with RS?

♦ JITCC – may have large Apex deal in place to support Sunday deliveries

♦ JITCC – aiming at dynamic sector (supermarkets)

♦ JITCC – joint venue issues (loss of control, share profits, admin complexity)

2.8 Scepticism

♦ Apex contract – information from Tom Trucker/JITCC, not independent

♦ Press reports only on Sunday deliveries – no independent info

♦ No firm contract offer/working with JITCC, just an initial approach

♦ May be further costs e.g when products are returned after inspection (Ex 18)

♦ Info from Will Wagon – A2A is a competitor, could be upselling A2A

♦ CorpTel report – out of date (May 2014) ♦ CorpTel report – views of FTSE MDs may not be relevant to RS and JITCC Conclusions and recommendations

2.9 Conclusions

♦ Comment on opportunity and impact on Courier stream

♦ Concludes on JITCC with figures

♦ Concludes on assumptions and caution

♦ Concludes on RS own service with figures

♦ Concludes on whether to proceed and correct option for RS


♦ Market research on Sunday deliveries including margins

♦ Due diligence on JITCC

♦ Recruit staff as soon as possible

♦ Ensure that couriers reflect RS values

♦ Consider alternative partners such as A2A (Will Wagon email shows interest)

♦ Discuss funding with bank


Tutorial note

We have again invented information regarding A2A (including the name of A2A’s Managing Director) for the purposes of

drafting this question. Please confirm your understanding of what the Advance Information does and does not say regarding

A2A by checking back to p34 of the Advance Information.

Mock Exam 3 Answers

102


Requirement 3 mark scheme – strategic evaluation (Project Full Load)


3.1 Background

♦ RS has an opportunity for innovative new “green” initiative

♦ Opportunity to work with software firm LSL – new IT relationship

♦ Companies such as A2A are competing on software/IT basis (p34)

♦ Empty load rates can be as high as 25% in the market (10% RS) (p23)

♦ RS has undertaken a thorough risk review, identifying several key issues


♦ Reports on “crime” of empty and partial loads (p42)

♦ Fuel costs rising/unstable (p41)

♦ RS is understood to have a relatively low empty load rate (p23)

♦ Importance of IT to activities of RS (e.g. p7, p11)

♦ RS cash position very weak per R1 – may be hard to finance investment

♦ Haulage and Warehousing struggling per R1 – may need a boost



3.3 Strategic and operational benefits – identification

♦ Per GPUK, major consumer interest in reduced CO2 and green efficiency

♦ Interest free loan and enhances relationship with large bank

♦ Price premium/high margins possible for “green” approach

♦ IT improvements could benefit other aspects of the business

♦ Fuel savings may be possible – fuel prices are rising/unstable (p41)

♦ Technology is similar to A2A’s approach which has paid off very well (p34)

♦ (free response)

3.4 Strategic and operational risks – identification

♦ First mover advantage so no proof of concept has occurred yet

♦ High capital and set up costs for uncertain return (IT and mini hubs needed)

♦ £5m loan would be due in 2017 with other RS loans (p11)

♦ RS already has a low rate of empty loads (p23) so may be hard to reduce

♦ Risk of damage to relationship with VG if uses LSL – key provider (p11)

♦ Never worked with LSL before OR software is new and untested/bespoke

♦ (free response)

3.5 Ethics – identification of issues

♦ Euro 6 – fraudulent to falsify certificates – trucks must be certificated (p35)

♦ Contractual – possible bribery is illegal/Kentree/Homeline impact (p37-8)

♦ Customer complaints – 18% appears high – unethical to ignore customer requests

♦ WEEE – dumping by the roadside harms environment and dishonest

♦ Queries Kurtz Shah’s credentials to perform internal audit work

Mock Exam 3 Answers

103


Requirement 3 mark scheme – strategic evaluation (Project Full Load)

Applying Judgement

3.6 Further evaluation of risks and rewards

♦ First mover advantage – could provide benefits but unknown by definition

♦ May be easier/cheaper “green” methods (p42 tyres, p46 driver training)

♦ No information on other capex expenditure that will be required

♦ GPUK report may be biased – scope for consultancy/sampling own readers

♦ Trading as “green” increases reputational risks if criticisms made e.g. Euro 6 issue

♦ No contract on offer – many uncertain aspects and need to know terms

3.7 Practical implications

♦ Who will own rights to software?/disputes/complications

♦ Empty load rates of 3% would be very low – cost savings but realistic?

♦ May need to construct “mini hubs” on top of software (Exhibit 19)

♦ 2015 launch – not being rushed by RS but lose first mover advantage?

♦ Lack of financial information to fully evaluate/LSL proposal is very basic

♦ Bank would acquire fixed charge over significant asset base – risky

♦ Impact on relationship with existing IT supplier VG

3.8 Ethics – mitigation and evaluation

♦ Euro 6 – investigate location of certificates and implement better process

♦ Contractual processes – investigate account codes further to confirm

♦ Customer complaints – investigate/confirm, retrain staff, compensate customers

♦ WEEE – investigate if RS is responsible – discipline/retrain staff if needed

♦ Statement that several issues are unproven to date



♦ Good opportunity to gain first mover advantage but many unknowns

♦ Concludes on main benefits

♦ Concludes on main risks


♦ Concludes on whether to proceed


♦ Obtain quotation from existing provider VG for necessary services

♦ Independent market research – do “green” initiatives influence customers?

♦ Consider alternative strategies

♦ Implement easier methods of being efficient (p42)

♦ Due diligence over LSL/negotiate with LSL soon

♦ Negotiate better terms with bank, based on CSR* advantages to the bank


Note – in this mark scheme we have allocated 2 Boxes for ethics, following the examples of the LuvLox (July 2012) and Zoo-

Med (July 2014) exams: in these Case Studies there were a large number of ethical issues to consider and more than is

generally the case in the exam. As a result, the professional scepticism points normally found in Box 3.8 have been mixed into

Boxes 3.6 and 3.7.

*CSR = Commercial and Social Responsibility. Exhibit 19 (exam paper) indicates that the bank will obtain reputational benefits

from an association with Project Full Load so we are suggesting that RS uses this to achieve a better deal.

Mock Exam 3 Answers

104







♦ Figures are as required by question – H analysis ♦ Correctly numbered pages




♦ First calculation is clear ♦ Tactful/ethical comments

♦ Second calculation is clear ♦ Reasonable spelling/grammar


105


Mock 3 Model Answer








Executive Summary


Overall RS has had a disappointing year despite the UK economic recovery benefitting the logistic

market.

RS’ revenue decreased significantly by £5,910k (14.9%) from £39,791k to £33,881k, which is

disappointing given 2013 growth of 22.4% and is well below forecast revenue of £37,000k.

There has been a significant decline in Haulage revenue of £6,302k (18.5%) from £33,983k to £27,681k

due to the impact from the Kentree recall (Kentree accounts for 25% of RS Haulage revenue). The

additional work from returns has not compensated for the loss of demand for Kentree’s products.

Warehousing revenue experienced a huge decline of £1,463k (49.5%) from £2,956k to £1,493k, again

due to the impact from the Kentree recall (Kentree accounts for 75% of RS Warehousing revenue).

Courier revenue was up spectacularly by £1,855k (65%) from £2,852k to £4,707k, being the only

revenue stream to experience an increase in revenue leading to the target of profitability being

achieved.

RS’ gross profit fell significantly by £4,159k (89.8%) from £4,630k to £471k, which exceeds the fall in

revenue due to poor cost control.

RS decreased its cash balance from £608k to £336k, due to the decline in profits and the purchase of

fixed assets (£3,811k) outweighing the positive cash inflow from receivables (£2,652k). Further

deterioration of the cash position could severely impact the liquidity of the business.

Haulage gross profit margins fell significantly, due to the fall in demand for Kentree’s products

outweighing additional returns revenue, leading to a decrease in gross profit of £3,618k (95.8%) from

£3,777k to £159k with a margin decline from 11.1% to 0.6%.

Haulage cost of sales have declined by £2,684 (8.8%) from £30,206 to £27,522 which is lower than the

fall in revenue and has had a dramatic impact on the profitability of RS, showing the need to analyse

each expense14.



106



RS should:

• Diversify activity away from Kentree as soon as possible

• Consider a temporary pause in fixed asset investment to preserve cash

Section 2 Financial modelling

Overall, both options present the opportunity to capitalise on the fast growing, yet highly competitive,

courier market and diversify away from Haulage.

The joint venture with JITCC would result in an accounting profit of £298,470.

RS’ own delivery service would result in an accounting profit of £165,810.

The incremental difference of £133k is caused by the higher charges made on staff by JITCC.

Important assumptions such as sales forecast inputs including delivery fees appear optimistic and

require further investigation.

Information has been based on unconfirmed press reports which need to be verified. There may also

be additional costs/revenues which have not been considered.

The main practical issue is staff management, particularly given JITCC’s reputation for poor treatment

of staff.

Strategically, it is crucial that RS retains its reputation for delivery high quality service which in turn

depends on a highly motivated workforce.

Based on the above, it is advisable for RS to expand independently to retain control over operations,

particularly staffing practices15.


RS should:

• Perform market research on Sunday deliveries and verify margins

• Conduct due diligence on JITCC


RS should proceed with Project Full Load16 as it offers the opportunity to obtain a first mover advantage

and compete against technological competitors such as A2A whilst reducing the empty loads ‘crime’

which has featured in the press.

15 You would be awarded a mark for advising RS what to do irrespective of the option you pick: our choice here is merely for illustrative purposes. 16 You would be awarded a mark for advising RS what to do irrespective of the option you pick: our choice here is merely for illustrative purposes.


107


The project offers potential fuel saving and the development of a ‘green’ image.

However, RS already has significant debt due for repayment in 2017 and empty load rates are already

well below the industry average so benefits may be limited.

The value attributed by customers to ‘green’ initiatives stated in the GPUK report has not been

confirmed.

RS needs to ensure that it complies with EU regulations regarding Euro 6 trucks as this could result in

fines / withdrawal of HGV licenses.

Customer complaint rates of 18% are excessively high and it is unprofessional to ignore customer

feedback. RS should retrain courier staff and ensure all complaints are dealt with immediately.

Any dumping of electrical goods breaches the WEEE directive and damages the environment. Staff

should be retrained in accordance with the directive and customers should be compensated for any

loss.


RS should:

• Obtain a quote from VG for similar software

• Conduct market research to determine if customers value ‘green’ initiatives



mark scheme points.


108





of the UK economy. Kentree, a major client, has experienced product recall issues in the year. The RS

Courier stream is aiming for an operating profit in Q4 of 2014. Courier staff are more transient and tend

to have a less committed attitude to work with rival firms such a JITCC imposing charges on courier

staff. (Add own research.)



disappointing given 2013 growth of 22.4% and is well below forecast revenue of £37,000.

RS experienced a significant decline in Haulage revenue of £6,302k (18.5%) from £33,983k to £27,681k

due to the impact from the Kentree recall (Kentree accounts for 25% of RS Haulage revenue). The

additional work from returns has not compensated for the loss of demand for Kentree’s products.

Warehousing revenue experienced a huge decline of £1,463k (49.5%) from £2,956k to £1,493k again

due to the impact from the Kentree recall (Kentree accounts for 75% of RS Warehousing revenue).

Courier revenue was up spectacularly by £1,855k (65%) from £2,852k to £4,707k, being the only

revenue stream to experience an increase in revenue as a result of quality and driver improvements.

In line with forecast, Courier has now become the second most important stream with 13.9% of revenue,

compared with 81.7% for Haulage and 4.4% for Warehouse.

1.C Gross profit and cash (Appendix 1)



Haulage gross profit margins fell significantly, due to the fall in demand for Kentree’s products

outweighing additional returns revenue, leading to a decrease in gross profit of £3,618k (95.8%) from

£3,777k to £159k with a decline in the gross profit margin from 11.1% to 0.6%.

Warehousing has now moved into negative contribution of (£176k) from a gross profit of £811k,

representing a negative margin of (11.8%), compared with a strong margin of 27.4% in 2013.

Warehouse suffered the worse percentage decline of any stream due to the Kentree product recall

reducing revenue needed to cover fixed costs.

Courier gross profit performance has been extremely impressive with an increase of £446k (1,062%) to

£488k resulting from continued growth in the construction sector benefiting key clients e.g. Buildwell.

Courier now contributes more gross profit than Haulage.

Courier is the only steam which has increased margins, from 1.5% to 10.4%, due to contracts based

on high quality / high value work.

RS saw a decline in its cash balance from £608k to £336k, due to the decline in profits and the purchase

of fixed assets (£3,811k) outweighing the positive cash inflow from receivables of £2,652k.

1.D Haulage (Appendix 1)

Haulage cost of sales declined by £2,684 (8.8%) from £30,206 to £27,522 which is lower than the fall

in revenue and has had a dramatic impact on the profitability of RS, showing the need to analyse each

expense.


109


Haulage labour is now £7,378k and could be due to new driving training standards which came into

force in September 2014.

The increase in fuel expenses to £10,985k is likely to be due to fuel price rises and the decision not to

hedge prices.

The rise in driver expenses to £3,025k may have been caused by the new road user levy.

Depreciation increased by £2,319k as a result of increased expenditure on fixed assets during the year.

Repairs and maintenance increased due to new Euro 6 trucks requiring more frequent servicing.

1.E Conclusions

Overall RS has had a disappointing year with the revenue decline exacerbated by falling gross profit

margins. Courier is the only stream which has performed well, leading to the target of profitability being

achieved.


disappointing given 2013 growth of 22.4% and is well below forecast revenue of £37,000k.



RS experienced a decline in its cash balance from £608k to £336k, due to the decline in profits and the

purchase of fixed assets (£3,811k) outweighing the positive cash inflow from receivables £2,652k.

Haulage cost of sales declined by £2,684 (8.8%) from £30,206k to £27,522k which is lower than the fall

in revenue and has had a dramatic impact on the profitability of RS, showing the need to analyse each

expense.

1.F Recommendations

RS should:

• Diversify activity away from Kentree as soon as possible

• Consider a temporary pause in fixed asset investment to preserve cash

• Implement urgent measures to manage its cash position

• Negotiate with Kentree re contract renewal

• Continue to assist the Courier stream to support the overall business

• Review Haulage GP year on year changes

• Inform staff of need to improve margins and cash generation in H & W

• [further idea]



mark scheme points.


110


Section 2 Sunday deliveries


Exponential growth in the courier market is attracting new large players into the market, with Royal

Mail introducing Sunday deliveries, resulting in price competition amongst the large players. Other

providers, such as JITCC who serve Apex, have been criticised in the press for their treatment of

employees. RS has the stated goal to achieve profitability from its courier operations in 2014. (Add

own research point.)


Based on the assumptions provided, the joint venture with JITCC would result in an accounting profit

of £298,470.




The RS sales growth figure appears optimistic given the 5% CorpTel benchmark.

The Christmas impact appears to have only be incorporated into the JITCC option reducing

comparability between the options.

The basis for charging £12 for the RS service is unclear and appears unrealistic given that the JITCC

fee is £6.

The JITCC rental fees to drivers are not split between RS and JITCC as would be the case in a JV

arrangement.

There is significant variation between the first time delivery rates under both options and the reasons

for this are not clear.

Under the RS option, the rate of first time deliveries is a key variable in the forecast and appears high

compared with the current rate of 70%.

Seasonal Christmas demand is not reflected in the driver forecasts.

The information has been provided by Tom Trucker, a member of JITCC staff, and so it is possible that

he may have some self-interest in the matter.

The information on increasing Sunday deliveries by companies such as Royal Mail is sourced from a

press article and has not been independently verified.

The proposal is at a preliminary stage and no formal contractual offer has been made.

There may be further costs which have not been factored into either model.

Information regarding A2A has been provided by Will Wagon who may be trying to upsell A2A.

The CorpTel report is based on research conducted during May 2014 which may be out of date and the

opinion of FTSE100 MD’s may not be relevant to smaller companies such as RS or JITCC.


111


2.D Practical and strategic issues

The intention to start work on 1 December 2014 leaves little time for preparation.

Staff are likely to become demotivated if JITCC’s harsh employment practices are implemented.

Courier staff are often less motivated and RS has previously had difficulty recruiting appropriate

couriers.

Any new business activity will consume significant management time, especially as management will

already be committing significant time to the Kentree contract renewal in November 2014.

An increase in profits and operations will favour RS during any loan refinancing proposals in 2017.

The proposal with JITCC relies heavily on income derived from staff which appears risky given the high

staff turnover and low wages in the courier industry.

Legal advice will need to be obtained before entering into any arrangement with JITCC.

RS has built its reputation on providing a high quality of service so competing with JITCC on price could

erode its competitive advantage.

By operating independently, RS will have more control over operations. Although current plans do not

focus on the fastest growth segment, supermarkets.

There is a potential opportunity to work with A2A and benefit from their technological edge.

Working with JITCC allows RS to benefit from the large Apex contract and the rapidly growing

supermarket sector.

However, the generic risks of operating a JV such as loss of control and profit sharing apply.

2.E Conclusions

Overall, both options present the opportunity to capitalise on the fast growing courier market and to

diversify away from Haulage.

The joint venture with JITCC would result in an accounting profit of £298,470.



Important assumptions such as sales forecast inputs including delivery fees appear simplistic.

Information has been based on unconfirmed press reports which need to be confirmed. There may also

be additional costs/revenues which have not been considered.

The main practical issue is staff management, particularly given JITCC’s reputation for poor treatment

of staff.

Strategically, it is crucial that RS retains its reputation for delivering high quality service which in turn

depends on a highly motivated workforce.


112


Based on the above, it is advisable for RS to expand independently to retain control over operations,

particularly staffing practices17.

2.F Recommendations

RS should:

• Perform market research on Sunday deliveries and verify margins

• Conduct due diligence on JITCC

• Recruit staff immediately and consult existing staff on changes

• Ensure that all couriers reflect RS values

• Investigate potential for alternative partners, e.g. A2A

• Discuss funding options with the bank

• [further issue]



mark scheme points.



113


Section 3 Evaluation of strategy


RS has been approached by software firm LSL, offering the chance to obtain bespoke IT software which

will rival that of competitors such as A2A and will reduce RS’ 10% empty load rate even further below

the 25% market average.

RS has conducted a risk review which has highlighted several issues.

Recent press reports have criticised haulage firms for driving with empty loads, although RS is well

below the industry average (10% v 25%).

IT forms a critical part of each stream and ‘Project Full Load’ could give a timely boost to Haulage and

Warehousing.

Fuel prices are volatile and Project Full Load should reduce fuel costs.

Funding from the bank is essential given RS’ weak cash position.

(Add own research.)

3.B Benefits

Customers are becoming increasingly aware of CO2 emissions caused by logistics firms.

Option for low cost finance along with the chance to build a relationship with large bank.

A price premium may be justified due to the unique ‘green’ service.

IT synergies across the business may materialise.

Project Full Load should reduce fuel costs.

Financial reward may be high as has been the case for A2A when deploying technological based

operations.

3.C Risks

The technology has not been proven to deliver expected benefits.

There would be high capital and set up costs without any guaranteed return.

RS’ existing loans are repayable in 2017 so additional financing which matures in 2017 would put

pressure on cash and liquidity in the near future.

RS already has a low rate of empty trips so advantages may be limited.

LSL is a fierce rival of VG so RS risks damaging its strong and valued relationship by working with LSL.

Little is known about LSL so the uncertainty causes risk.


There is no information on other capital costs of the project.

The report by GPUK may not be objective and a survey of GPUK’s own readership is unlikely to

represent the views of a wider sample.


114


The opportunity is at a preliminary stage with no agreed terms in place.

There is a lack of financial information to evaluate the proposal.

3.E Evaluation of project / practical considerations

RS has the opportunity to obtain first mover advantage, although the precise benefits are unclear.

There may be cheaper alternatives to being ‘greener’ e.g. HGV driver training.

If RS doesn’t maintain its green image in every respect e.g. by failing to ensure that trucks are Euro 6

standard, any reputational benefits will diminish.

Legal disputes over ownership of the software may arise.

Empty load rates of 3% appear extremely optimistic given the nature of delivery routes.

Additional hubs will be required to facilitate load utilisation.

The planned introduction by 2015 may mean other technology based firms such as A2A develop similar

software before then.

The bank would have a fixed charge over the software which would be exercised in case of a default.

The strong relationship with VG is likely to be damaged by any collaboration with LSL.

3.F Ethics

Falsely certifying trucks as Euro 6 is in breach of EU regulations. RS must ensure that the certificates

are located and better controls are put in place.

Some forms of entertaining could be construed as bribery, breaching the Bibery Act as well Homeline’s

policy, which could not only lead to legal action but also impact the relationship with Kentree. RS should

investigate the records fully in order to verify any instances of bibery.

Customer complaint rates of 18% appear to be unacceptably high and it is unethical to ignore customer

feedback. RS should retrain courier staff and ensure all complaints are dealt with immediately.

Any dumping of electrical goods breaches the WEEE directive and damages the environment. If RS

staff have been involved, then they should be retrained in accordance with the directive and customers

should be compensated for any loss.

Kurtz Shah is the finance director and is not sufficiently objective to perform internal audit work.

None of the above issues have been verified and need to be investigated fully before any action is

taken.

3.G Conclusions

RS should proceed with Project Full Load18 as it offers the opportunity to obtain a first mover advantage

and compete against technological competitors such as A2A.



115


However, the benefits are uncertain and may not materialise as planned.

The project offers potential fuel saving and the development of a ‘green’ image.

However, RS already has significant debt due for repayment in 2017 and empty load rates are already

well below the industry average so benefits may be limited.

RS needs to ensure that it complies fully with the Bribery Act which will also reduce the risk of any

damage to the essential relationship with Kentree / Homeline.

RS should also reduce customer complaints and respect WEEE guidelines if RS staff are shown to be

involved in unacceptable practices.

3.H Recommendations

RS should:

• Obtain a quote from VG for a similar software service

• Conduct market research to determine if customers value ‘green’ initiatives

• Consider alternative strategies

• Implement driver training to reduce fuel consumption

• Undertake due diligence on LSL

• Negotiate better terms with the bank based on the CSR benefits to the bank

• [further idea]



mark scheme points.

Mock Exam 4

116




Mock Exam 4

Mock Exam 4

117


List of exhibits








Mock Exam 4

118


EXHIBIT 15

From: Shiloh Piper

To: Ellis Codie







You should compare RS’s revenue and gross profit (Exhibit 17) against the revenue and

gross profit forecasts for the year ended 30 September 2014 (previously provided). Please

analyse both RS as a whole and the 3 RS revenue streams. Please ignore the prior year

actual results for the purposes of this analysis. Please then also provide some brief analysis

of the Statement of Cash Flows. You should then assist Adie Fleet with the requested

reanalysis of RS’ cost of sales for the year ended 30 September 2014 (Exhibit 16).

2. A financial assessment of the minimum tender price that RS should submit when retendering

for the Kentree warehousing contract (Exhibit 18).

Basing your calculation on accounting profit and modelling a 3 year contract period, please

determine the minimum tender price that RS should submit based on the 2 sets of

assumptions explained in Exhibit 18. As far as is permitted by the information previously

provided to you, and by the new information provided in Exhibit 18, please describe how

Kentree is likely to react to the competitor’s alternative bid. You should review and comment

on the assumptions made in Exhibit 18. Please note any further practical matters that RS

should consider.

3. An evaluation of the strengths of 2 of RS’ key competitors combined with an analysis of any

similarities or differences between these competitors and RS (Exhibit 19).

Using the information provided in Exhibit 19, and drawing on any information previously

provided, please review the strengths of JITCC and A2A, 2 of RS’ key competitors. Please

then evaluate any similarities or differences between these 2 competitors and RS and also

consider whether these similarities or differences leave RS in a more or less competitive

position against the respective competitor. Please also comment on any ethical issues which

you consider to be relevant.


Mock Exam 4

119


EXHIBIT 16


Shiloh,

I am instructing your firm to help the Board understand how both the RS business as a whole and its

constituent businesses have performed compared to the forecasts previously provided, concentrating

on revenue and gross profit as the key metrics. Please do not compare performance with the prior

year – the past is the past – instead we need to understand how to drive the business forward. Please

briefly comment on the main drivers of the Statement of Cash Flows.

The economy appears to be recovering relatively well, and certainly better than some of our European

neighbour countries: UK growth forecasts are in the region of 1.2% to 1.8% for 2014 which is certainly

better than the 2008 period for our business. We understand that the online sector is continuing to

grow very well. However, with confidence not yet restored in the housing market the UK government

has relaxed planning restrictions to try to encourage more building: our sources suggest that this

incentive is not really working.

In order to ensure that we are well placed to bid for the renewal of the Kentree contract, we decided

not to force the issue and so we offered any Warehouse services in connection with the Kentree

product recall at the previously agreed mark up rate: although this has led to some absorption of

additional costs due to high demand, we have significantly increased the volume of our work for

Kentree – we have been involved in transporting and storing recalled products and also in new

Kentree sales which the company has continued to make despite its problems. Kentree has reacted

favourably to our decision not to request an increased mark up and our discounting of Haulage fees

was also very well received. The Board is certain that we are building a strong long term relationship

here.

Kentree has in fact managed to improve its reputation in the market due to the quality of its product

recall service and its ability to treat customers honestly and openly, offering a full refund and apology

– we are delighted to see this synergy with our own philosophy of customer service and it is a relief to

see this potentially worrying situation turn out so positively for our client.

During the year we recruited a new Courier marketing team after successfully managing to attract a

number of talented individuals away from A2A. The team has advised us to avoid competition with

companies such as JITCC and instead we now understand the way that companies like A2A operate.

The team has managed to win contracts with several supermarkets: we are not yet in a position to

service all of the activity of these clients but we are determined to build on this success.

As things seem to be going well, we have taken this opportunity review our management accounting

processes. As you should already be aware, at the moment we calculate the cost of sales of our

Haulage revenue stream by first calculating the equivalent figures for the Warehouse and Courier

streams: the Haulage cost of sales figures are then the balancing amount. Pam Riggs has suggested

that this method is not appropriate, given that Haulage is our largest revenue stream: as such, Pam

believes it should therefore be analysed in more detail. Jane Riggs strongly disagrees with this

approach. We need to resolve the matter so please can you use the data and method suggested by

Pam (see below). We need to see what the gross profit and gross profit margin of the different

revenue streams would have looked like (compared to the actual 2014 results) under both

approaches.

Mock Exam 4

120


Please do not go into huge amounts of detail here – we are not asking for a forensic audit! Please just

crunch the numbers using Pam’s suggested methodology and then report on how gross profit margins

would be affected by the suggested change. I do not think you will have time to compare against both

actuals and forecasts so please just briefly compare the actual 2014 gross profit and margin with the

same figures under Pam’s suggested reallocation method. Given the strength of disagreement at

Board level I am actually quite pleased to be able to pass this work on to an independent third party –

families, eh?

Thanks so much for your ongoing support to our business – we think that you will see this is paying

off for RS.

Adie

Proposed alternative calculation of gross profit for the 3 RS revenue streams (Pam Riggs)

To date, Rolling Stores has calculated the cost of sales of the Haulage revenue stream using a

balancing item approach – we undertake a detailed analysis of Warehouse and Courier cost of sales

but then simply treat the remaining unanalysed balance as the Haulage element of our costs.

In my view this is incorrect for 3 reasons:

1. As Haulage is our largest business stream it would benefit the business to be able to analyse the

determinants of our gross profit on a more granular and evidential basis.

2. Calculation of the true Haulage cost of sales could provide valuable information on the other

streams due to the time spent analysing and retrieving information.

3. Calculation of the Haulage stream cost of sales on a more thorough basis would act as a further

check on possible errors – using a balancing item to reconcile to the total cost of sales means that

any such errors in the other streams could remain hidden.

As an example of my approach, my team has made a start on gathering the necessary information on

what we believe to be the correct allocation of cost of sales across the streams in the accounts for the

year ended 30 September 2014. Whilst we work to confirm all the figures as calculated under our new

account coding method, my proposal is to reallocate any missing values pro rata to the actual 2014

revenue of the relevant streams so please proceed on this basis for now.

Proposed cost matrix as at 5 November 2014 (£’000s)

Type of cost Haulage Warehousing Courier Bal to reallocate

RS labour 10,003 TBA TBA 1,482

Agency & subcontract 1,003 TBA TBA 253

Fuel 12,745 TBA TBA 740

Hire TBA 1,564 TBA 3,301

Other: insurance and driver TBA TBA 1,453 1,798

Repairs and maintenance 3,543 TBA TBA 231

Depreciation 2,784 TBA TBA 249

Loss on disposal 25 TBA TBA 0

Note

TBA = “to be allocated” – please split the balance to reallocate on a pro rata basis to the revenue shares of the 2 remaining

streams based on the revenue achieved in the year ended 30 September 2014 by those streams.

Mock Exam 4

121


EXHIBIT 17




£000s

Revenue 1 46,422


Gross profit 5,248




Interest payable and finance charges 4 (1,034)

Profit before taxation 658

Taxation (165)




£000s

Non-current assets


14,598

Current assets

Inventories 6 174


Cash and cash equivalents (1,020)

11,905

Total assets 26,503







9,791

Current liabilities




Mock Exam 4

122




£000s

Profit before tax 658

Adjustments for:


Net finance expenses 1,016

4,707


Change in trade and other receivables (3,018)



Taxation paid (147)

Net finance expenses (1,016)







Bank loan -



Net change in cash and cash equivalents (1,628)


Cash and cash equivalents at end of year (1,020)

Mock Exam 4

123



2014

£000s


Haulage 38,792

Warehouse 3,413

Courier 4,217

46,422


RS labour 11,202


Fuel 14,141




Depreciation 2,887


41,174


Employment 2,012

Establishment 997


Depreciation 42

3,574




1,034

Mock Exam 4

124



Tangible assets

Freehold,

Land and

Buildings

Plant, IT

and


£000s £000s £000s £000s

Cost

At 1 October 2013 5,166 9,224 10,341 24,731

Additions - 1,774 2,133 3,907

Disposals - (513) (421) (934)

At 30 September 2014 5,166 10,485 12,053 27,704

Depreciation

At 1 October 2013 228 5,434 5,274 10,936

On disposals - (372) (387) (759)


At 30 September 2014 270 6,270 6,566 13,106

4,896 4,215 5,487 14,598


September 2014


£000s

Fuel 174

174



Prepayments 1,522

Other 375

12,750


Bank loans 3,500


9,791





Accruals 290

9,476

Mock Exam 4

125




£000s



Gross profit 3,410


Haulage operating profit 547



£000s


Cost of sales

RS labour 1,695



Depreciation 291

Loss on disposal 10


Gross profit 937





£000s

Courier fees 4,217

Cost of sales

RS labour 305


Motor expenses 712






Courier operating profit (loss) 584

Mock Exam 4

126


EXHIBIT 18

Shiloh,

Please can you get someone from your team to help us with some financial modelling?

As you may be aware, our warehousing contract with Kentree is due for renewal this month.

We need you to calculate the tender price we should submit for the renewed Kentree warehousing

work, based on our expected cost of sales marked up by an appropriate percentage and working on

an accounting profit basis over the 3 years specified. Please then amend the calculation as far as you

can to reflect the information that we know about A2A’s apparent offer, using the press information

provided below. If there is anything that A2A is doing that could give them an edge then we would

need to match this like for like (in addition to anything we have already budgeted for on our own) so

assume that we can purchase an equivalent strategic resource for the same price as A2A. If you do

not have the equivalent A2A information for a cost category then leave it as assumed in our model. If

you need to calculate depreciation then keep things simple by assuming a full year of depreciation in

the year of acquisition.

We then need you to comment on some of the practical issues implied by the 2 different ways of

structuring our future work with Kentree (i.e. submitting our preferred bid or, alternatively, trying our

best to guess A2A’s bid price by building on our own model methodology in the absence of any

clearer way of proceeding).

Finally (and we realise that this is going to be difficult for you to judge) please indicate how Kentree

may react to the A2A bid. I have included some press information on A2A’s bid to help with this

assessment. You will have to “stand in someone else’s shoes” a little here but please try your best –

this may well have been a part of your training anyway.

Please get back to us soon as the deadline is not far away at all.

Thanks again,

Adie

Model 1 RS bid

We will provide the following services for Kentree as part of our contract:

• Collection of goods from the port of Felixstowe and delivery to the most appropriate RS

warehouse

• Opening and checking of quality and quantity

• Recording, barcoding and labelling of all items

• Organisation onto pallets for distribution to Homeline RDCs

Year 1 (i.e. the year to 30 September 2015) RS labour should be based on apportioning our 2014

forecast labour using the traditional proportion of warehouse revenue accounted for by our work for

Kentree. We then expect activity to grow by 15% in years 2 and 3. However, in line with our forecasts,

hire of plant and equipment will remain constant and will be the full figure forecast for the Warehouse

stream in the 2014 forecasts. We will undertake substantial fixed asset investment as detailed on the

Capex Schedule detailed below so there will be no need to hire more equipment. We would expect

repairs and maintenance to be £600,000 per year. Depreciation will have to be estimated taking into

Mock Exam 4

127


account the Capex Schedule. Losses on disposal can be ignored as these are immaterial. Taxation

can also be ignored for the present purposes.

We will then apply a mark-up of 20% to the total cost of sales to calculate our tender price.

RS Capex Schedule Model 1

IT equipment Cost £600,000, depreciation 20% straight line

HGVs Cost £1,000,000, depreciation 10% reducing balance

Warehouse buildings Cost £2,000,000, deprecation 4% straight line

Warehouse plant and machinery Cost £500,000, depreciation 15% reducing balance

A2A: Astonishment2Amazement? Transport Tribune, 1 November 2014

A2A, the AIM-listed Courier company, has astonished the market twice in 2 days: on Thursday the

company announced that it would be bidding for permanent warehousing logistics work with Kentree,

the leading electronics company. Then yesterday, its Marketing Director Rail Gib publically

announced some of the key financial data and assumptions behind its tender document – despite the

fact that some competitors will not yet have formally submitted their “sealed bid” tenders as the

closing deadline for submissions is not until 6 November 2014.

According to Rail Gib, A2A has proposed their standard mark up of 10%, commenting that this rate is

well-known (and feared) throughout the market. “We have double the workforce of competitors such

as Rolling Stores and we would expect to allocate £4m of labour per year to the Kentree contract. As

our business is so cash rich, we know that Kentree will love our offer to bill them only twice per year –

much simpler for everyone.”

Gib continued: “Recent A2A infrastructure development has left us with first class facilities and we are

therefore very well placed to handle Kentree business through our nationwide resources. In fact, we

began construction of our current major infrastructure project with half an eye on the Kentree contract

and 10% of the facility will be dedicated to the Kentree contract when we win the deal in a few days’

time: this part of the facility will be ready for use at just the right time.”

Market analysts are astonished and amazed by these bold pronouncements but considering A2A’s

stunning track record of winning major client business perhaps the bravado is justified. Critics, of

course, point out that “pride often comes before a fall”. Whichever way, and naturally speaking in

relative terms, it is indeed a thrilling time to be involved in the logistics market.

Mock Exam 4

128


EXHIBIT 19

From: Adie Fleet

To: Shiloh Piper

Subject: Rolling Stores – competitor analysis


Shiloh,

As discussed at our last meeting, we are concerned that our notes on our competitors are somewhat

out of date as we have been simply too busy to keep up with the changing markets. As previously

advised, we believe that we have 2 main groups of competitors: (1) large companies such as Eddie

Stobart, Royal Mail, DHL and Fedex and (2) smaller companies such as A2A and JITCC. For the

purposes of this analysis, please concentrate on the second group of companies (A2A and JITCC).

First I need you to clearly explain to me the strengths of these 2 competitors: what do they emphasise

to remain competitive in this market? Once you have done this, please evaluate how A2A and JITCC

differ (if at all) from RS: the Board will use this information to design a marketing approach based on a

strategy of “focused differentiation”.

Please also evaluate whether these differences are likely to leave RS in a more or less competitive

position than the competitor: put another way, are the differences you have identified a positive or

negative thing from our point of view?

Your report needs to combine the information previously provided with the new information that I have

provided below, based on a couple of hours of internet research – sorry that it is a bit disorganised but

I guess that is where your firm comes in! Remember that Mike and other members of the board are

extremely busy with RS activities and do not have time to learn about competitors so do not forget to

repeat the basics as background, using the information previously provided.

Please also report on any key ethical threats, assuming that we were to operate in a similar manner to

A2A and JITCC (or if we were to enter into any kind of strategic alliance with these companies).

Please conclude the report with your view on which is the stronger competitor for us to worry about – I

can refer this view to the Board so that we can target our efforts appropriately in the coming months.

Thanks again for all your support to our business.

Adie

From A to £80m: The Success of the A2A Business Model

CourierWatch Magazine 3 November 2014

We are delighted to have the opportunity to question Herbert Spoke-Hub, dynamic founder of A2A, on

the secrets to his success and his path to running a stock-market listed company with revenues of

over £80m.

“Our company motto is ‘Never break a promise’ and I think that sums up the philosophy we have

instilled in all our courier staff, who continue to win industry awards for service,” states Spoke-Hub. It

is rumoured that all new employee CVs are personally vetted by Mr Spoke-Hub and the famous “HSH

Treatment” is what awaits a courier who fails to meet A2A’s high standards. When asked about this

Mock Exam 4

129


aspect of recruitment, Spoke-Hub remained characteristically guarded and refused to confirm or deny

his exact role in the process. Still, the fact that the rumours sound plausible at all reflects the service

standards for which A2A has become deservedly famous.

“It is pretty simple to see why we have been successful,” continued Spoke-Hub. “Service plus IT is a

pretty easy way of succeeding in this industry: but service plus IT multiplied by infrastructure is a

formula which will elevate a good company into something like A2A. People note our revenue but our

balance sheet is just as strong with over £750m in cutting edge IT and trucks and there is no other

company of our size with the same set of technology and fixed assets. Our current infrastructure

project is further evidence of this commitment to outcompete our competition via technology and

investment.” A2A is also well respected for its efficient use of hedging instruments, which have

removed certain risks from its business model at a low cost.

Critics contend that there is a good reason why Mr Spoke-Hub does not comment in detail on

recruitment issues: A2A is rumoured to be under investigation in connection with a failure to provide

accurate driver tachograph records when recently requested by the UK Office of Fair Trading (OFT).

A2A questioned the OFT’s jurisdiction to request such information, arguing that a properly authorised

warrant is required to take possession of business confidential information of this kind. Mr Spoke-Hub

stated that his company’s refusal to hand over the records was “a point of principle – we have

absolutely nothing to hide but at the same time we are a private company and not a library: we don’t

just hand out our records to anyone who comes calling.” Competitors and some drivers’ groups have

of course taken a contrary view of the matter.

A Nice Niche: The JITCC Success Story

Marketing Monthly 2 November 2014

JITCC, one of the UK’s fastest growing companies, has gone from strength to strength over the past

few months, achieving growth rates only equalled by leading companies such as A2A. Commentators

argue that that is where the similarities end, however, with a growing body of evidence that JITCC

takes an aggressive approach to pricing and treatment of its courier drivers. For its part, JITCC

argues that its success is due to its innovative products, which offer market-leading collection and

delivery times. JITCC will also be entering the Sunday delivery market along with A2A in the near

future and we have no reason to doubt JITCC’s ability to succeed in this new niche market.

Fleeced: The Reality of Working for JITCC

Internet forum posting by A N Onymous, ex-JITCC self-employed courier driver

Last month JITCC terminated my contract with them by sending a text message – thanks guys! Not

that I ever did much work for them anyway – £15 a week for a tracker device a further £3 for an ugly

fleece top (yellow and green!!!) and £1 for the privilege of paying for fuel (out of my own earnings

anyway!!!!!!) with no guarantee of income!!!! … but a guarantee that I could not work for anyone else.

Plus then they just take the top dogs from companies like Apex out for a slap up dinner or free holiday

in Monaco and surprise surprise – “Apex is delighted with the professional behaviour of all JITCC

couriers and warmly thanks the company for its ongoing support to the Apex business”. Advice to all

honest courier drivers – stay well away from JITCC: they will fleece you in more than one way.

Mock Exam 4 Answers

130





Mock Exam 4 Answers

131




Revenue 2014 A 2014 F £'000s % 2014 A 2014 F

Haulage 38,792 37,000 1,792 4.8% 83.6% 84.3%

Warehouse 3,413 3,200 213 6.7% 7.4% 7.3%

Courier 4,217 3,700 517 14.0% 9.1% 8.4%

46,422 43,900 2,522 5.7%


Haulage 3,410 4,000 (590) (14.8%) 8.8% 10.8% 65.0% 72.5%

Warehouse 937 1,040 (103) (9.9%) 27.5% 32.5% 17.9% 18.8%

Courier 901 480 421 87.7% 21.4% 13.0% 17.2% 8.7%

5,248 5,520 (272) (4.9%) 11.3% 12.6%

Comparison of movements in Statements of cash flows (main items only)

2014 2013 Change

£'000s £'000s £'000s

Profit before tax 658 588 70

Adjustments for:

Depreciation & loss on disposals 3,033 2,484 549

Change in trade and other receivables (3,018) (2,424) (594)

Change in trade and other payables 776 883 (107)

Purchase of tangible assets (1,350) (206) (1,144)

Memo item

Gross profit margin on Kentree warehouse work (30% mark up on cost) Revenue 130

CoS 100

GP 30

GPM % 23.1%

Actuals Difference Revenue mix

Actuals Difference GP margin % GP mix

Mock Exam 4 Answers

132



Reanalysis of cost of sales in the management accounts

Haulage Warehouse Courier To allocate Total

Stream revenue per 2014 management accounts 38,792 3,413 4,217 46,422

Pam Riggs' cost matrix (note) RS labour 10,003 663 819 1,482 11,485

Agency & subcontract 1,003 113 140 253 1,256

Fuel 12,745 331 409 740 13,485

Hire 2,977 1,564 324 3,301 4,865

Other 1,653 145 1,453 1,798 3,251

Repairs and maintenance 3,543 103 128 231 3,774

Depreciation 2,784 111 138 249 3,033

Loss on disposal 25 0 0 0 25

Total CoS 34,733 3,031 3,410 41,174

Recalculation of GP and GPM % using Pam Riggs' approach

Haulage Warehouse Courier Total

Revenue (unchanged) 38,792 3,413 4,217 46,422

New cost of sales (34,733) (3,031) (3,410) (41,174)

New GP 4,059 382 807 5,248

Old GP 3,410 937 901 5,248

New GPM % 10.5% 11.2% 19.1%

Old GPM % 8.8% 27.5% 21.4%

Note

Figures in bold were already provided by Pam Riggs in Exhibit 16.

The remaining figures are a pro rata share of the revenue of the 2 streams marked as "TBA" in Exhibit 16

Figures may be subject to minor rounding differences

Mock Exam 4 Answers

133


Appendix 2 - Accounting return under 2 Kentree contract tenders

Model 1 RS bid ignoring A2A data

£'000s £'000s £'000s £'000s


RS labour (workings) (1,050) (1,208) (1,389) (3,646)

Hire (150) (150) (150) (450)

Repairs (600) (600) (600) (1,800)

Depreciation (workings) (375) (354) (335) (1,064)

Total costs (2,175) (2,311) (2,474) (6,960)

x 1.20 markup = revenue 2,610 2,774 2,969 8,352 Tender price

Model 1 workings

Year 1 RS labour 75% x 1,400 (p27) 1050 Then grown by 1.15 per year (and rounded)

Depreciation calculations Wareh. Wareh.

IT HGVs buildings P&M Total

Cost 600 1,000 2,000 500

Depreciation Year 1 (120) (100) (80) (75) (375) Year 1

Carrying amount (if reducing balance) 900 425


Carrying amount (if reducing balance) 810 361


Model 2 RS bid incorporating A2A data as far as possible

£'000s £'000s £'000s £'000s


A2A labour (increase up to £4m per A2A) (4,000) (4,000) (4,000) (12,000)

Hire (150) (150) (150) (450)

Repairs (600) (600) (600) (1,800)

Depreciation (workings) (375) (354) (335) (1,064)

Additional Bham facility depreciation (working) (480) (480) (480) (1,440)

Total costs (5,605) (5,584) (5,565) (16,754)

x 1.10 markup = revenue 6,166 6,142 6,122 18,429 Tender price

Model 2 workings

Birmingham depreciation working

Cost (per p34) 120,000

10% dedicated and ready for Kentree work (Exhibit 18) 12,000

4% straight line (no other info so apply RS approach) 480

Assumptions

1. RS labour at 75% of 2014 forecast

2. Repairs and maintenance as provided

3. Depreciation based on policies in Exhibit 18 (despite inconsistency with RS policy)

4. Mark up of 20% or 10%

5. Amendments as required by A2A information in Exhibit 18

6. If A2A data is silent on an issue then do not amend RS calculation

7. No other costs or revenue to consider

Note

We have rounded all workings to the nearest £1,000

There may be some rounding errors in the calculations

Assumed that RS would have to implement an equivalent facility to A2A's Birmingham facility under

the instruction for RS to match the competition as much as possible.

Mock Exam 4 Answers

134





♦ Overall revenue (comments and numbers with F) ♦ RS own model figures for all years

♦ GP (comments and numbers with F) ♦ Amended model (A2A) figures for all years

♦ Cash issues (comments and numbers) ♦ Comparison with margin of safety

♦ Comments on new cost of sales methodology ♦ Questions assumptions



♦ Revenue strong v forecasts ♦ Evaluate likely Kentree response to A2A

♦ Gross profit weak v forecast except Courier ♦ Evaluates assumptions/scepticism

♦ Evaluates new cost of sales methodology ♦ Practical considerations

♦ Evaluates impact on cash ♦ Concludes on correct methodology/option



E.5 Description

♦ Many entrants into Sunday delivery market

♦ Identifies strengths of JITCC

♦ Identifies strengths of A2A

♦ Ethical issues



♦ Scepticism

♦ Evaluates similarities and differences to RS

♦ Concludes on best approach for RS



F = forecast

Mock Exam 4 Answers

135





♦ RS revenue v forecast higher by £2,522k (5.7%)

♦ RS gross profit v forecast lower by £272k (4.9%)

♦ Stream revenue comparisons v forecasts x3 per Appendix 1

♦ Stream gross profit comparisons v forecasts with margins x3 per Appendix 1

♦ Main changes in flows in SCF: depreciation AND receivables AND PPE with numbers

♦ Uses Pam Riggs cost reallocation figures


♦ UK economy from recession to mild growth/good growth forecasts (Exhibit 16)

♦ Logistics is “barometer” of the economy (p19)

♦ Kentree Warehousing mark up of 30% equivalent to 23.1% GPM % (Appendix 1)

♦ Kentree product recall issues (p39) but contract due for renewal soon (p30)

♦ Online retail exponential growth via supermarkets (p7)

♦ Courier market competition – e.g. A2A and JITCC (p45, p34)




♦ RS overall revenue moderately outperforms forecast by £2,522k or 5.7%

♦ Haulage outperforms forecast moderately by £1,792k or 4.8%

♦ Warehouse outperforms forecast moderately by £213k or 6.7%

♦ Courier outperforms forecast impressively by £517k or 14.0%

♦ Revenue mix in line with forecast with figures

♦ Courier increase is approx double that of Warehouse – growing v maturing stream

1.4 Narrative on issues two and three (GP and cash)

♦ RS gross profit substantially below forecast by £272k or 4.9%

♦ Haulage substantially below forecast by £590k or 14.8%

♦ Warehouse substantially below forecast by £103k or 9.9%

♦ Courier very high outperformance of forecast by £421k or 87.7%

♦ GP mix – Courier contributing more than double expected share with figures

♦ Receivables outflow worsens further – £594k higher outflow – increased revenue

♦ Substantial purchase of fixed assets after low 2013 purchases – £1,144k higher

1.5 Calculations for new cost of sales methodology (see note)

♦ Calculates 2 missing Haulage values as £2,977k and £1,653k

♦ Calculates missing Warehouse values per Appendix 2

♦ Calculates missing Courier values per Appendix 2

♦ GP for Haulage increases to £4,059k v £3,410k

♦ GPM under new method 10.5%/11.2%/19.1%

♦ Identifies that RS GP and GPM are unchanged under new method

Note

We have produced our Appendix 1 using Excel and therefore the figures are exact within formulae, which may cause minor

rounding differences from your results – rounding based on calculation using a calculator would be acceptable in the exam (or

the examiner would pick numbers which avoided any rounding issues).

Mock Exam 4 Answers

136



Applying Judgement


♦ All streams outperform forecasts significantly by 4.8% to 14.0%

♦ Forecast RS growth was 10% (43,900/39,791) but beaten this by further 5.7pp

♦ Haulage > target – overcome construction problems (Ex16) OR Kentree growth reflected (Ex 16)

♦ Courier highest growth – impact on online or marketing team/A2A knowledge?

♦ Courier has become second biggest element of mix as forecast (9.1% v 8.4%)

♦ RS largest stream has lowest growth – Kentree fee discounting (Exhibit 16)

1.7 Evaluation of GP / Cash

♦ Gross profit decline very disappointing given revenue increase

♦ Main driver of decline is Haulage at £590k v £272k overall decline/without H, would be positive GP

♦ Kentree standard Warehouse mark up equals 23.1% GPM so overall GPM % fall

♦ Courier only stream to beat margin target, and by significant amount (21.4% v 13.0%)

♦ Courier almost doubled GP absolute and GPM % – exceptional performance

♦ Courier capitalising on opportunities identified by marketing team as high margin

♦ Overdraft position but not too bad given increase in fixed asset purchases

1.8 Evaluation of new cost of sales methodology

♦ RS has had a good year so perhaps a good time to review

♦ Queries incentives of Pam Riggs (Haulage boss) and Jane Riggs (Warehouse boss)

♦ Ensure that do not expend too much time on this internal accounting issue

♦ Haulage revenue increases significantly by GPM 1.5pp – only increase in GPM

♦ Warehouse dramatic reduction probably due to Hire costs allocation

♦ Courier relatively unchanged so still a good increase



♦ Overall conclusion on RS – strong performance versus forecast



♦ Conclusion on cash with figure

♦ Conclusion on reallocation of costs with figure


♦ Continue to negotiate with Kentree to retain contract given discounting/mark up held

♦ Ensure that Haulage and Warehouse streams are competitive

♦ Spread best practice from Courier marketing team

♦ Reward Courier marketing team and incentivise to propel RS further forward

♦ Complete cost review to determine true impact on margins

♦ Resolve Board differences on cost methodology as soon as possible


Mock Exam 4 Answers

137


Requirement 2 mark scheme – financial evaluation (Kentree contract renewal)



♦ Identifies 75% Kentree share of RS revenue (p27)

♦ Identifies £1,400k RS labour per p27

♦ Hire, repairs and depreciation policies correctly identified per Exhibit 18

♦ Correct identifies different mark up factors for each calculation

♦ A2A data correctly extracted from Exhibit 17 and p34

♦ Birmingham facility x 10% using p34 as RS needs to match all A2A strategic resources


♦ RS warehousing “critically dependent on work performed for Kentree” (p28)

♦ Kentree recall issue in mid-2014 – first recall ever/RS role here?

♦ Kentree 75% of warehouse revenue (75%)

♦ RS has worked very closely with Kentree since at least 2008 (p25)

♦ Per R1, comments on cash with figure



2.3 Contract 1 – RS bid

♦ RS labour total £3,646k

♦ Hire total £450k AND repairs total £1,800k

♦ Depreciation per Appendix 2

♦ Applies markup of 1.20

♦ Total tender price min of £8,352k (and presents related annual amounts in main report)

2.4 Contract 2 – RS bid adapted to A2A data

♦ Labour total £12,000k

♦ Hire total £450k AND repairs total £1,800k (i.e. recognises no changes)

♦ Depreciation per Appendix 2

♦ Applies markup of 1.10

♦ Total tender price min of £18,429k (and presents related annual amounts in main report)


♦ Year 1 RS labour based on forecast – why not on actual?

♦ 75% share for Kentree – confirmed as still valid?/R1 shows RS revenue changing

♦ 15% growth in activity appears high (RS had forecast 8% from all sources p27)

♦ A2A labour 4x higher than RS seems excessive

♦ All depreciation rates are at 15% or below – policy is min 15% (p11)

♦ IT equipment straight line depreciation is inconsistent with RS policy per p11

♦ Assumed that RS can purchase identical facility (Birmingham) – not realistic

♦ Queries A2A data e.g. viability of 10% markup OR size of fixed asset investment

Mock Exam 4 Answers

138


Requirement 2 mark scheme – financial evaluation (Kentree contract renewal)

Applying Judgement

2.6 Practical Considerations

♦ Calculations are accounting profit – ignores cash flows e.g. PPE peak cash demand?

♦ Contract will be awarded soon – need to recruit resources very soon

♦ Mark up is lower so less headroom for cash/profit/lower margin

♦ Staffing and management time OR consideration of general capacity

♦ Need for investment in PPE and IT – considers financing issues for RS

♦ May need to match A2A invoicing twice per year – feasible?

2.7 Likely Kentree reaction to A2A bid

♦ Per p25 Kentree outsourced “whole” of its operations – costs of switching?

♦ Kentree may like bi-annual invoicing for cash flow but leads to uncertainty

♦ Kentree likely to find A2A markup good value

♦ A2A recent investment into very large Birmingham site (p34)

♦ A2A has impressive IT and proposing substantial investment

♦ A2A growing extremely well per p34 – has many technology “firsts”

2.8 Scepticism

♦ Replacing only some parts of calc 1 with A2A data is very unsatisfactory

♦ Are we certain that RS does not include admin in its marked up costs? (p26)

♦ RS bid does not include all standard Kentree services on p26

♦ RS bid based on forecast figure – why not actual data for y/e 30 Sep 2014?

♦ A2A article – press reports and not independently verified

♦ A2A article – data from Marketing Director/may be deliberately misleading

♦ A2A actions very unusual for market – reasons? Forcing RS into high bid?


2.9 Conclusions

♦ A2A major threat to key RS client – RS must act quickly but correctly

♦ Conclusions re first calculation with figures

♦ Conclusions re second calculation with figures

♦ Assumptions/scepticism AND comment that A2A may deliberately inflate info

♦ Concludes on how to proceed


♦ Confirm position of A2A as soon as possible/guard against inflated info

♦ Market research on bid and possibly also alternatives

♦ Negotiate with Kentree as much as possible, within tender rules

♦ Try to convince Kentree on basis of past experience with RS

♦ Discuss funding with bank and consider finance leases

♦ Consider alternatives if A2A bid too strong


Note

We have assumed that some of the A2A data may be “inflated” to ensure that competitors react by submitting a bid that is far

too high (and well above A2A’s true bid). Please confirm what the Advance Information does and does not say regarding A2A

by checking to p34 of the Advance Information.

Mock Exam 4 Answers

139


Requirement 3 mark scheme – strategic evaluation (A2A and JITCC)


3.1 Background

♦ RS requires an evaluation of competitor strengths

♦ A2A is an AIM-listed competitor with revenues more than double RS

♦ JITCC is a small courier-only competitor

♦ RS is not currently evaluating its larger competitors (e.g. Royal Mail)

♦ Increasingly competitive market driven by IT and service innovation

♦ RS is proposing to compete against strong competitor/differentiate


♦ Logistics is a “barometer” of the economy/connected to wider growth (p19)

♦ Technology and IT is essential to compete in logistics (p7)

♦ Problems in courier worker market for RS (p29) and JITCC (p43)

♦ Royal Mail entering Sunday delivery market against A2A and JITCC (p43)

♦ Per R2, A2A expansion plans and strong characteristics

♦ Courier market driven by online/”exponential growth” (p7)



3.3 Issue 1 – Strengths of A2A

♦ Very large national firm

♦ Annual growth of 20% which is “unprecedented” (p34)

♦ Very high quality and market-leading technology (p34)

♦ Investing in large Birmingham site (p34)

♦ Customer service standards are very high/prizes won

♦ Strong balance sheet with good quality fixed assets in place

♦ (free response)

3.4 Issue 2 – Strengths of JITCC

♦ National reach (p34) so matches RS (p31 – 90% coverage)

♦ Growing rapidly (p34) and this is continuing (Exhibit 19)

♦ Competes in the online market, which is growing very well (p7, p34)

♦ Access to one of the largest pools of drivers (and flexible workforce) (p34)

♦ Leading collection and quick delivery options (p34)

♦ Expected to perform well in Sunday delivery market (Exhibit 19)

♦ (free response)

3.5 Ethics

♦ Tachograph records are used to ensure compliance on driver hours

♦ Would be serious breach of law/unfair to drivers to break rules

♦ A2A refusing to co-operate – could be legitimate but RS better off avoiding

♦ Unfair to ask drivers to pay for no guarantee of work but could be nature of market (p43)

♦ Some payments to clients can be bribery and illegal/Kentree impact (p37)

♦ RS should avoid damage to reputation and possible bribery issues

Mock Exam 4 Answers

140


Requirement 3 mark scheme – strategic evaluation (A2A and JITCC)

Applying Judgement

3.6 A2A – Evaluation of differences and similarities to RS

♦ AIM-listed with prestige implications – RS does not have these benefits

♦ High service standards like RS and possibly better courier standards (v p29)

♦ High investment rate which RS may struggle to meet

♦ Edge over RS in terms of new facilities (much higher than RS fixed asset base)

♦ Hedged against fuel price rises whereas RS is not (p41)

♦ Overall differences create a strong competitor for RS (few weaknesses)

♦ (free response)

3.7 JITCC – Evaluation of differences and similarities to RS

♦ Negative press and treatment of workers (p43) is different to RS

♦ Has large clients like Apex (“giant UK retailer” p43) – may be larger than RS

equivalent ♦ Experienced problems with courier driver loyalty like RS (p29)

♦ Courier line growing rapidly and online clients (p34) – similar to RS

♦ Low end pricing which differs from RS

♦ Overall a less strong competitor for RS (worker treatment and low pricing)

♦ (free response)


♦ No information from inside the companies – the reality “on the ground”

♦ JITCC treatment of couriers is contested in original article (p43)

♦ JITCC criticisms are from a courier who was removed – may have a grudge

♦ A2A info is from the Founder of A2A so may upsell own achievements

♦ Rumour re A2A recruitment quality and “HSH Treatment” unproven

♦ Adie Fleet’s work is based on a couple of hours of internet work

♦ Limited financial information provided



♦ Concludes on A2A

♦ Concludes on JITCC

♦ Concludes on differences of A2A and JITCC to RS strategy


♦ Concludes on stronger competitor to RS


♦ Also consider strengths/weaknesses of the larger companies

♦ Consider alternative courier payment structures/impact on morale

♦ Consult with staff on RS strengths/weaknesses/philosophy and improve

♦ Begin marketing strategy soon as very strong competitors

♦ Legal advice on tachograph records to avoid A2A situation

♦ Undertake analysis on what is considered “fair treatment” of couriers


Tutorial note

We have again invented information regarding A2A and JITCC for the purposes of drafting this question. Please confirm your

understanding of what the Advance Information does and does not say regarding A2A and JITCC by checking back to p34 (and

also p43 for JITCC) of the Advance Information.

Mock Exam 4 Answers

141







♦ Figures are as required by question – CoS analysis ♦ Correctly numbered pages







142


Mock 4 Model Answer








Executive Summary


The logistics sector, which is a barometer of UK economic performance, is recovering as the UK

returns to growth.

RS’ revenue outperformed forecast by £2,522k (5.7%) increasing from £43,900k to £46,422k with all

streams outperforming forecast by between 4.8pp to 14.0pp. Overall growth was strong, exceeding the

10% forecast by a further 5.7pp.

RS’ gross profit was substantially below forecast by £272k (4.9%) decreasing from £5,520k to £5,248k

which is disappointing given the strong revenue performance.

However, Courier spectacularly exceeded forecast, almost doubling gross profit with a £421k (87.7%)

increase from £480k to £901k, and with a gross profit margin of 21.4% compared with a forecast of

13.0%, due to RS capitalising on the high margin opportunities identified by the marketing team.

RS worryingly decreased its cash balance to (£1,020) from £608k primarily due to the increase in

receivables outflow (£594k) as a result of rising sales and the increased purchase of non-current assets

(£1,444k). Despite this, underlying cash generated from operations remains strong at £2,448k.

Using Pam Riggs’ revised allocation method, gross profit for Haulage will increase to £4,059k from

£3,410k, with a revised margin of 10.5% compared to 8.8% under the existing method, making it the

only stream to have more favourable margins under the new approach.

The reallocation has no impact on RS’ gross profit or margins overall so any time spent on detailed

analysis may not be adding significant value to the business19.


RS should:

• Negotiate with Kentree regarding mark up on costs in new contract

• Ensure Warehouse and Haulage streams are competitive



143


Section 2 Kentree bid

RS’ key customer Kentree is fulfilling its first ever recall of equipment and is coming to the end of its

contract with RS.

Under the RS method, revenue of £2,610k, £2,774k and £2,969k would be earned across the 3

contract years, implying a total tender price of £8,352k.

Under the A2A method, revenue of £6,166k, £6,142k and £6,122k would be earned, implying a total

tender price of £18,429k.

RS could therefore increase its bid by up to £10m before exceeding the A2A tender price.

RS is assuming that its 75% figure relating to Kentree services is still accurate and that there will be a

15% increase in activity per year despite prior lower forecasts.

Information is provided in unverified press reports which cite A2A’s Managing Director who has an

incentive to mislead competing bidders.

Kentree is likely to respond favourably to A2A’s lower mark up and excellent IT but Kentree may be

reluctant to switch from its sole provider RS.

Servicing the contract will require RS to invest in staff and equipment very soon.

RS should revisit its own bid but be wary of A2A’s unusual public announcements when formulating

an amended approach.20


RS should:

• negotiate with Kentree to try to retain its key customer

• conduct market research regarding both bid methodologies

Section 3 Competitor evaluation

There is increasing competition in the Sunday delivery market following the entry of major players into

price-based competition.

JITCC offers a wide pool of courier drivers and very quick delivery times.

A2A offers market-leading technologies and major investment in a very large Birmingham site.

A2A is similar to RS in stressing service levels whilst JITCC is similar in not being AIM-listed. A2A

differs in terms of its technologies and fixed asset base whilst JITCC differs in its approach to

treatment of staff.

Information on A2A is provided by its founder who could have an incentive to boost his own legacy

and success. Adie Fleet’s analysis has been based on a couple of hours of internet research which is

insufficient.



144


Tachograph records should always be disclosed openly and honestly to regulators. Some forms of

payments to clients could be considered bribery, which RS should avoid to prevent damage to its

reputation. Asking drivers to pay fixed costs without a guarantee of work may be unfair if based on

false promises but JITCC is a business and if drivers have entered into voluntary contracts then it may

not be wrong to act in this way.

RS should continue to monitor these competitors but should consider A2A to be its more dangerous

competitor in quality-based services21.


RS should:

• review the strengths of other competitors

• consult with staff to understand how RS can improve its performance



mark scheme points.



145





of the UK economy.

RS’ key client Kentree has recently been involved in a product recall issue and the warehousing contract

is due for renewal in November 2014 with prices currently charged at a 30% mark up on cost.

The Courier sector has seen exponential growth due to online buying although RS is facing significant

competition from subsidised rail logistics and companies such as A2A and JITCC which provide

competitive courier services. (Add own research.)


RS’ revenue moderately outperformed forecast by £2,522k (5.7%) increasing from £43,900k to

£46,422k with all streams outperforming forecast by between 4.8pp-14.0pp. Overall growth exceeded

the 10% forecast by a further 5.7pp.

Haulage revenue outperformed forecast moderately by £1,792k (4.8%) increasing from £37,000k to

£38,792k due to the impact from rising Kentree sales (Kentree accounts for 25% of RS Haulage

revenue). However, RS’ primary business line was the stream with the weakest growth.

Warehousing revenue outperformed forecast moderately by £1,792k (4.8%) increasing from £3,200k to

£3,413k.

Courier revenue outperformed forecast impressively by £517k (14.0%) increasing from £3,700k to

£4,217k due to the introduction of the new marketing team and has led to Courier becoming the fastest

growing stream with growth over double that of Warehousing.

In line with forecast, Courier has now become the second most important stream with 9.1% of total RS

revenue (forecast: 8.4%). Haulage continues to be the dominant steam with 83.6% of revenue (forecast:

84.3%) and Warehouse is now the smallest stream with 7.4% (forecast: 7.3%).

1.C Gross profit and cash (Appendix 1)

RS’ gross profit was substantially below forecast by £272k (4.9%) falling from £5,520k to £5,248k and

is disappointing given the strong revenue performance.

Haulage gross profit was also substantially below forecast by £590k (14.8%) falling from £4,000k to

£3,410k and is the ultimate cause of gross profit decline for RS due to a margin decline to 8.8%

compared with a forecast 10.8%.

Warehousing gross profit was again substantially below forecast by £103k (9.9%) declining from

£1,040k to £937k due to the margin on the Kentree contract (23.1%) being below the average for

Warehousing contracts (27.5%).

Courier spectacularly exceeded forecast, almost doubling gross profit with a £421k (87.7%) increase

from £480k to £901k, as well as an increase in margins of 21.4% compared with a forecast of 13.0%,

due to RS capitalising on the high margin opportunities identified by the marketing team.

Courier is the only stream to beat forecast and is now contributing 17.2% of gross profit compared with

8.7% as forecast.


146





1.D Cost of sales (Appendix 1)

In light of the strong current year performance, it is probably a good time to review cost allocation.



only stream to have favourable margins under the new approach.

Warehouse will decline significantly to 11.2% from 27.5% due to reallocation of hire costs.

Courier margins will slightly decline to 19.1% from 21.4% which still represents strong performance

against forecast.

As expected, the reallocation has no impact on RS’ gross profit or margins overall so any time spent on

detailed analysis does not add value to the business and time spent here should be minimised.

Pam Riggs is the Haulage Director and is probably in favour of the reallocation as it causes a dramatic

improvement to Haulage, whilst Jane Riggs’ opposition is likely to be based on the fact the reallocation

adversely impacts her department, Warehousing.

1.E Conclusions

Overall RS has had a good year with impressive revenue growth exceeding forecast, although this is

slightly tainted by disappointing performance at the gross profit level.

RS’ revenue moderately outperformed forecast by £2,522k (5.7%) from £43,900k to £46,422k with all

streams outperforming forecast by between 4.8pp-14.0pp. Overall growth exceeded the 10% forecast

by a further 5.7pp.

RS’ gross profit was substantially below forecast by £272k (4.9%) falling from £5,520k to £5,248k and

is disappointing given the strong revenue performance.






only stream to have favourable margins under the new approach.

1.F Recommendations

RS should:

• Negotiate with Kentree regarding mark up on costs in new contract

• Ensure Warehouse and Haulage streams are competitive

• Spread best practice from Courier marketing

• Reward Courier marketing team and incentivise to propel RS further forward

• Complete cost review to determine true impact on margins

• Resolve Board differences on cost methodology as soon as possible

• [further idea]


147




mark scheme points.


148


Section 2 Kentree contract renewal


The RS warehousing stream is “critically dependent on work performed for Kentree” so Kentree’s first

ever recall is potentially a concern but also an opportunity for RS to help a client which it has worked

with since 2008 and which accounts for 75% of warehouse revenue. RS’s cash position is relatively

weak so RS will need to generate cash from the recall without expending too much cash on costs and

capital spending. [Add own research.]


Under RS’ approach to the bid, a tender price of £8,352k should be submitted, based on revenue of

£2,610k, £2,774k and £2,969k across the 3 forecast years.

If RS attempts to match A2A’s bid based on A2A’s declared data a tender price of £18,429k should be

submitted, based on revenue of £6,166k, £6,142k and £6,122k across the 3 forecast years. Additional

labour costs and higher depreciation on a larger facility explain the reasons for the higher tender price.


It is unclear why RS is using forecast data rather than actual data in its method.

The assumed 75% share regarding Kentree needs to be confirmed as still valid, especially given the

changes in RS’ revenue mix.

The 15% growth in activity appears high as RS had previously forecast a rate of 8% from all sources.

A2A’s assertion that it will allocate 4 times the labour to the project appears very high for the same

activity and could be deliberately inflated to cause RS to overstate its tender price.

The depreciation rates are 15% or lower but RS’ standard policies do not envisage such low rates.

Depreciating IT equipment on a straight line basis is inconsistent with RS policy.

It is not realistic to assume that RS can purchase a facility identical to 10% of the Birmingham facility

as buildings are not divisible in this way and each location/site has unique characteristics.

The stated A2A fixed asset investment appears extremely high whilst its 10% markup is well below RS’

current agreement and could be unviable.

Using a hybrid approach based on RS’ bid amended for certain elements of data from A2A’s public

announcement is not a standard method of working.

RS may include other costs such as administration costs in its markup rate but these have not been

considered here.

The RS bid does not include all standard Kentree services in its existing contract so may not be

acceptable to Kentree.

Information on A2A has been derived from press reports and has not been independently verified.

Information on A2A has been provided by its Managing Director and may be deliberately misleading to

force RS into submitting too high a bid.

Announcing confidential information in this way is highly unusual and A2A’s motives for this action

should be considered carefully.


149


2.D Practical issues and Kentree reaction

RS will need to consider the precise timing of cash outflows to determine the viability of peak flows and

demand.

The contract will be awarded soon meaning that resources will need to be recruited very soon.

The mark up suggested by RS is less favourable than the existing contract so leaves less scope for

cost overruns and offers a lower margin.

The project will take up significant amounts of staff and management time and will place strain on RS

resources.

RS will need to consider how to finance investment in PPE and IT to fulfil the contract to a good

standard.

Invoicing Kentree only twice per year could cause problems for RS as it has traditionally invoiced

Kentree more frequently, reducing cash flow issues.

Kentree may not wish to switch its operations from RS as currently all Kentree operations are handled

by RS so there would be considerable switching costs and inconvenience.

Being invoiced only twice per year would preserve Kentree’s cash position but could lead to uncertainty

on what charges are going to arise.

Kentree is likely to find the lower A2A mark up of 10% more attractive than RS’ existing 30%.

A2A could be attractive to Kentree given A2A’s impressive investment into the very large Birmingham

site, its impressive IT and its ability to provide many technology “firsts”.

2.E Conclusions

A2A represents a major threat so RS must act quickly via an appropriate tender price to retain this key

client.

On its own method, RS should submit a bid of £8,352k whereas following a hybrid approach it should

submit a bid of £18,429k.

Assuming a 75% share regarding Kentree and that A2A will use 4 times the labour employed by RS

may not be advisable and could lead to an incorrect bid price being submitted.

Information is provided via unconfirmed press reports which include information from A2A’s Managing

Director who could be deliberating inflating A2A’s announced cost basis to force RS into an

inappropriate bid.

RS should not submit a bid until information has been confirmed but must act quickly given the

approaching deadline22.

2.F Recommendations

RS should:

• confirm the truth of A2A’s announced information as soon as possible



150


• conduct market research to support its bid

• negotiate with Kentree to retain this existing key client

• ensure that Kentree is aware of RS’ excellent past service for the company

• discuss funding with its bank and consider finance leasing

• consider alternative projects if the A2A bid is too competitive

• [further issue]



mark scheme points.


151




The logistics sector is growing as the UK returns to growth which should benefit RS since logistics is a

barometer of the broader economy. The Courier market is growing exponentially due to high demand

for online services but the market is highly competitive and requires investment in IT and technology.

Royal Mail has recently entered the Sunday delivery market, competing against companies such as

A2A and JITCC. RS and JITCC have recently experienced problems in hiring loyal Courier drivers. A2A

has recently announced very ambitious infrastructure plans. (Add own research.)

RS requires an evaluation of the competitor strengths of A2A and JITCC (but not Royal Mail and other

large competitors). A2A is an AIM-listed company with double the revenue of RS. JITCC is a smaller

courier competitor. Both companies are competing based on IT and service innovation and RS

proposes to find a way to differentiate itself.

(Add own research.)

3.B A2A

A2A is a very large national firm which has enjoyed unprecedented growth of 20% per year.

A2A has used this growth to invest in very high quality, market-leading technology and is undertaking

a huge investment in Birmingham.

A2A has high service standards and has won prizes for service.

A2A reportedly has a very strong balance sheet with a large fixed asset base in place.

3.C JITCC

JITCC has a national reach due to a large pool of drivers (one of the largest in the UK).

JITCC has grown rapidly and is reportedly continuing these high growth rates.

JITCC specialises in the online market which is growing extremely quickly.

JITCC has a market-leading collection and delivery policy (collection within 1 hour and delivery within

24 hours).

According to reports, JITCC is expected to perform well in the Sunday delivery market.


No information on the way the competitors operate in reality is provided so RS does not know the reality

of the strategy and approach of A2A and JITCC.

JITCC has been criticised for driver treatment but its large client Apex was reportedly happy with its

methods.

JITCC has been further criticised by an ex-driver who could bear a grudge.

Information on A2A has been provided by its founder who is likely to present the company in a

favourable light.

A2A appears to have very high standards in recruitment and services (enforced by its founder) but this

information is contained within rumours, which could be inaccurate.


152


Adie Fleet has provided information based on a couple of hours of internet research: it would be

advisable to further substantiate the findings.

Limited financial information is available making it hard to understand possible revenues and costs for

RS.

3.E Similarities and Differences to RS

A2A is an AIM-listed company and so will enjoy prestige and corporate governance benefits which RS

does not.

A2A has high service standards just like RS.

A2A has sustained a high investment rate which RS may struggle to compete with.

A2A is likely to have an edge over RS in terms of facilities as it has a larger asset base.

A2A hedges against fuel price rises and hence is protected in a way that RS is not.

Overall, these differences mean that A2A has several key competitive advantages over RS.

JITCC appears to treat its courier workforce in a less positive manner than RS, if press reports are true.

JITCC’s key client Apex is a “giant retailer” and therefore probably larger than any RS client.

Like RS, JITCC has experienced significant problems in courier loyalty and has a high turnover rate.

JITCC uses low-end pricing which differs from the RS approach on quality and premium prices.

Overall, JITCC appears to be a less strong competitor than A2A as JITCC has weaknesses in terms of

worker treatment and uses low-end pricing.

3.F Ethics

Tachograph records are used to ensure that drivers comply with legal rules on driving hours and safety.

It would be a serious matter for drivers to break these rules and it would show a lack of integrity and

honesty for A2A to attempt to hide this. A2A is refusing to hand over records which could imply guilt but

could also be a legitimate attempt to ensure other rules are respected by the OFT. If RS found itself in

this position it should investigate internally and disclose breaches voluntarily and in good faith.

JITCC may have provided Courier drivers with unrealistic expectations regarding possible levels of

income when signing contracts. At the same time, JITCC is a business and Courier drivers entered into

agreements voluntarily, in the knowledge that work is not guaranteed. If RS found itself in this position

it should ensure that no false promises were made to drivers.

Some payments can be considered illegal bribes if they induce improper performance. If RS found itself

in this position it would endanger its relationship with Homeline/Kentree as Homeline has issued a strict

anti-bribery policy. RS would be advised to avoid any similar issues by carefully approving payments

and gifts and ensuring staff understand legal rules.

3.G Conclusions

A2A is a very strong competitor due to its efficient technology, asset base and ability to invest.

JITCC is a less close competitor as it follows a different price-based strategy and has received criticism

on worker treatment.


153


A2A follows a similar quality-based strategy to RS whereas JITCC may be following a different strategy

based on price competition and urgent deliveries.

Tachograph records are important for health and safety reasons and it would show a lack of due care

and honesty to hide any problems from regulators so if RS found itself in A2A’s position it would be

advisable to disclose breaches voluntarily.

Some aspects of JITCC’s approach could be unfair and dishonest if there have been clearly false

promises regarding the possible returns from working on JITCC contracts so, RS should avoid any

similar activities itself.

Overall, A2A is the stronger competitor for RS based on its similar strategy but greater resources23.

3.H Recommendations

RS should:

• consider the strengths and weaknesses of other competitors

• consider alternative Courier payment structures to improve morale

• consult with staff to understand how RS can improve and differentiate itself

• begin a marketing strategy as soon as possible

• take legal advice on any issues similar to A2A’s legal predicament

• undertake analysis of consumer views on what constitutes fair treatment of Couriers

• [further idea]



mark scheme points.

23 You would be awarded a mark irrespective of the option you pick: our choice here is merely for illustrative purposes.

Mock Exam 5

154




Mock Exam 5

Mock Exam 5

155


List of exhibits








Mock Exam 5

156


EXHIBIT 15

From: Shiloh Piper

To: Ellis Codie







Please analyse the revenue and gross profit performance of both RS as a whole and its 3

constituent revenue streams (Exhibit 17) against the results for the prior year. Please then

carry out a similar analysis, comparing the same financial figures against the forecasts for the

year ended 30 September 2014 previously provided to you. Please then assist the RS Board

with a further highly confidential matter. (Exhibit 16).

2. A financial assessment of the possible acquisition of IT software and hardware (Exhibit 18).

Using the information provided, please calculate the additional contribution which could be

earned from the software and IT products currently available from (1) VG Limited and (2) Elite

Software Limited. You should review and comment on the assumptions made in Exhibit 18.

Please provide the Board’s requested “refresher” on the importance of IT to RS as a logistics

company and also comment on any strategic benefits of the 2 opportunities.

3. An evaluation of the operational and strategic implications of Project Retain (Exhibit 19).

As requested by the client, please analyse the possible operational strengths and

weaknesses of the 3 RS revenue streams as they relate to the new contract being offered by

Kentree. Please then provide an evaluation of which of RS’ competitors is best placed to

compete against RS for the contract. Finally, please discuss the strategic implications of RS

bidding for the new Kentree contract. Please also comment on any practical and ethical

issues which you consider to be relevant.


Mock Exam 5

157


EXHIBIT 16


Shiloh

I have pleasure in attaching the RS management accounts for the year ended 30 September 2014.

Please compare the revenue and gross profit performance of both RS and its constituent revenue

streams with the equivalent figures for the prior year. Please then repeat the process comparing these

management accounts with the 2014 forecasts previously provided to you.

As is often the case, there have been some good and some bad developments for us during the year.

In this accounting period we implemented a major new IT infrastructure initiative with VG, our trusted

and usual supplier. We were able to upgrade our systems to market leading standards. We have also

refreshed and updated our HGVs to comply with new government regulations for 2014 – during the

process, we took the opportunity to purchase larger HGVs with a longer wheelbase and the capacity

to carry large containers of pallets. Our empty load rate in Haulage was therefore 8% this year.

Kentree managed its expected product recall well and we have enjoyed a successful partnership,

particularly in terms of transport goods. Ultimately Kentree decided not to use RS for any warehousing

activity and it was perhaps a disappointment to see this activity awarded to A2A. We had been

assuming that we would get the Kentree work so it left something of a hole in our activities as we had

not really been prepared for the spare capacity involved. Hence we had to take on lots of smaller

warehousing activities which involved quite a lot of set up costs as well as steep learning curves for

our staff.

FMI, one of the world’s leading financial thinktanks, has found that the economy grew 2.6% in the final

2 quarters of our accounting period, driven primarily by growth in the online, electronics and

supermarket sectors. The Purchasing Managers’ Index with the construction sector remains stable

and if anything confidence has dropped at little due to increasing uncertainty of the timing of the

expected increase in the Bank of England base rate.

The continued boom in online sales created something of a dilemma for us – revenue is always good

and something we have to take on whenever we can to preserve our market share, but we had to

draft in extensive amounts of help from third parties at the last minute, and often at unsociable hours

making it hard to find the necessary resources at an optimum price. Fortunately we were able to

maintain our own prices at our normal levels.

There is another matter which we require your help with. In light of the situation we are not willing to

put the matter in writing so please be available to take a telephone call from the Board. This

information is highly confidential and we expect you to implement the relevant procedures to make

sure that the information is not leaked. You will understand when we call.

We had hoped to hear back from Kentree on our recent submission to them by now but we have been

told that this will take a few more weeks.

Hope to hear from you soon,

Adie

Mock Exam 5

158


File note – Highly confidential

Ellis,

I have just come off the phone with the RS Board. They need some urgent help.

It has not been an issue in the past but apparently one of the terms of RS’ overdraft is that the

overdraft must not exceed 5% of the Equity value of the company. Please can you confirm for the

Board whether this is currently a problem?

If there is a problem, Mike Riggs has a “Plan B”– RS is currently very confident of winning a bid for

some new courier work (details below). RS are refusing to disclose any further details and they are

just terming this “Project X”.

For the purposes of this calculation please ignore taxation as RS believe that this will have an

immaterial effect. Please also assume that all cash flows arise at the relevant month end. None of the

RS Directors is willing to put any more money into the business at the moment and in any case the

bank may treat share acquisitions at this point of time as an artificial boosting of the Equity balance.

If there is currently a problem under this covenant, please indicate the month end by which RS is

likely to fall back below the 5% threshold – it will be crucial for Mike to be able to use this information

in negotiations with the bank. Obviously RS will be undertaking many other activities in the coming

months but Mike’s thinking is that if he can demonstrate that this new project will resolve the situation

itself then that will be a powerful argument to take to the bankers.

This is an important calculation as the bank has a fixed charge over the RS Colchester head office

and is the first ranking creditor regarding that property.

Please get back to me as soon as you can.

Shiloh

Mike Rigg’s forecast courier profits from Project X (all figures are quoted in £k)

Dec 2014 Jan 2015 Feb 2015 March 2015

Revenue 1,650 1,800 2,000 2,500

Cost of sales 1,450 1,650 1,600 1,700

Admin expenses 500 200 50 100

Mock Exam 5

159


EXHIBIT 17




£000s

Revenue 1 44,093


Gross profit 5,569





Profit before taxation 1,226

Taxation (307)




£000s

Non-current assets


16,813

Current assets

Inventories 6 164


Cash and cash equivalents (1,091)

9,698

Total assets 26,511







9,521

Current liabilities




Mock Exam 5

160




£000s

Profit before tax 1,226

Adjustments for:



5,326


Change in trade and other receivables (892)



Taxation paid (147)





Proceeds from disposal of tangible assets (220)



Bank loan -



Net change in cash and cash equivalents (1,699)


Cash and cash equivalents at end of year (1,091)

Mock Exam 5

161



2014

£000s


Haulage 38,109

Warehouse 2,874

Courier 3,110

44,093


RS labour 11,028


Fuel 13,994




Depreciation 2,608


38,524


Employment 1,933

Establishment 890


Depreciation 66

3,405




942

Mock Exam 5

162



Tangible assets

Freehold,

Land and

Buildings

Plant, IT

and


£000s £000s £000s £000s

Cost

At 1 October 2013 5,166 9,224 10,341 24,731

Additions 1,500 1,903 2,557 5,960

Disposals - (563) (884) (1,447)

At 30 September 2014 6,666 10,564 12,014 29,244

Depreciation

At 1 October 2013 228 5,434 5,274 10,936

On disposals - (422) (757) (1,179)


At 30 September 2014 294 6,046 6,091 12,431

6,372 4,518 5,923 16,813


September 2014


£000s

Fuel 164

164



Prepayments 1,451

Other 266

10,624


Bank loans 3,500


9,521





Accruals 290

9,328

Mock Exam 5

163




£000s



Gross profit 6,566





£000s


Cost of sales

RS labour 1,555



Depreciation 301



Gross profit 379


Warehouse operating profit (43)



£000s

Courier fees 3,110

Cost of sales

RS labour 188


Motor expenses 275




Gross profit (loss) (1,376)


Courier operating profit (loss) (1,807)

Mock Exam 5

164


EXHIBIT 18


IT expansion cost/benefit analysis

Shiloh,

We need your team to help us decide whether to purchase some further IT equipment and software.

We have been reviewing the specialist press on some new IT and software releases made available

from VG Limited (“VGL”) and Elite Software Limited (“ESL”).

Please calculate the additional contribution we should expect to earn under the solutions set out

below. Please assume a 12 month forecasting period. You will also need most of the figures in our RS

datasheets for elements on your calculation so the relevant data is provided below.

Although we are constantly investing in new IT equipment as a company, the members of the Board

have better things to do than read about processors, server stacks and watercooled overclocking so

we also need to include a gentle “refresher” on the importance of IT to the RS business, drawing on

the information already provided and anything you think is relevant in the specialist press reports

which I have attached below.

Please then comment on any strategic benefits which you consider to be important when deciding

whether to use the VGL and/or ESL IT solutions.

Thanks for your assistance,

Adie

Extracts from RS datasheets

RS uses the following assumptions in all cost/benefit analysis:

Average vehicle consumption 5 miles per litre

Total vehicles 150 vehicles

Empty trip rate 20%

Average miles per trip (loaded or empty) 10

Average revenue per loaded trip £6

Loaded trips per vehicle per day 60

Standard gross margin 7%

Diesel price assumption £1.10 per litre

Mobile data charge £8 per 1,024 MB used

Average data used per mile 1.5 MB

Admin employees 25

Average admin salary £35,000

Mock Exam 5

165


VG is Very Good Tech Today Magazine, 25 October 2014

VG Limited is Tech Today’s software company of the week. VG impressed our panel with the technical

sophistication and cost savings made possible by its inventory and route planning IT solution.

The company’s innovative Trucker Tracker software engine has the capability to record the movement of up to

2,000 vehicles in real time. All vehicles must be equipped with GPS software which is locked to VG’s network

infrastructure, in order to ensure that the data throughput is fast enough to maintain real time updates. Trucker

Tracker server racks cost around £10,000 per 50 vehicles monitored. Each truck must then also carry a Trucker

Tracker GPS device at a cost of £40 per month. On average, due to optimisation of VG’s code, network traffic

amounts to 0.1MB per mile tracked per vehicle, potentially saving companies thousands on their mobile data

bills. VG promises a 5% empty trip rate.

VG wowed the audience at a recent Geeks Speak event in London when it was revealed that Trucker Tracker is

based on a now declassified piece of routing mathematics originally used by the US military to manage its

extensive fleet of vehicles during the second Gulf War: VG has marketed its software as “Battleground Proven”

as a result. The routing technique has moved back into the black with top secret alterations reportedly

implemented by mathematicians at VG’s Cambridge research laboratory. However, the hacker community has

widely posted information indicating that the secrets of VG’s technique (which it has used to justify its high prices)

are about to be “reverse engineered” by several other leading IT firms. VG has not commented on the rumours.

The Clue Is In The Name: Elite Software Limited Tech Today Magazine, 18 October 2014

In the view of Tech Today Magazine, there could not be a more apt name for our “green” software company of

the week (and sponsor of this issue), Elite Software Limited. The company continues to impress the market with

innovative new releases.

As an example, ESL’s Trucker Trainer is unique to the market. The software analyses the characteristics of the

drivers of HGVs and other logistics vehicles to determine if the optimal acceleration and braking techniques are

being used. On average, ESL promises a 20% reduction in litres of fuel consumed through use of this software.

Logistics drivers can even compete for the most fuel economy in a weekly “Petrol Preservers” league table which

is widely featured on several “green websites” and which was recently cited by the UK Green Party’s sole

Member of Parliament during a parliamentary debate.

Other benefits include a reduction in repairs due to better treatment of vehicles by drivers and reductions in

insurance premium costs due to reduced numbers of accidents: according to ESL, drivers trained with Trucker

Trainer will experience 30% fewer accidents over their career.

Via the combination of reduced repair expenditure and fewer accidents, ESL promises that the average vehicle

will spend 10 fewer days per year off the road following adoption of the principles of Trucker Trainer.

Trucker Trainer is priced quite simply – a yearly cost of £50,000 for businesses with turnover below £30m and

£150,000 for all other companies.

Tech Today Magazine would like to take this opportunity to thank ESL for sharing the source code to its

classic 1997 release “Grand Theft Truck”. In this game, players can enjoy the thrill of stealing and driving

away an HGV of their choice, battling to outrun the police by making their way through the truck’s 8

gears. Please see the final pages of this magazine for the full C# source code.

Mock Exam 5

166


EXHIBIT 19

HIGHLY CONFIDENTIAL – PROJECT RETAIN

Shiloh,

Please can your team urgently assist with the following advisory work? We need your report in the

next few hours please.

As you know, we renewed our contract with Kentree for 3 years in November 2011. The contract

therefore expires soon and we need assistance in preparation of a tender to renew the contract for a

further term (see Kentree’s request for tenders attached below).

We need you to undertake several forms of analysis here.

Firstly, please set out the operational strengths and weaknesses of our 3 revenue streams as they

apply to the work which Kentree is offering, based on the information previously provided and the

information newly provided below.

We then need you to assess which of our competitors (listed in the previously provided information

pack) are likely to be best placed to compete with us for the tender, using all the information you have

available.

Finally, please evaluate the strategic implications for RS in submitting a tender under these new

terms.

We have received some helpful press information from Louisa-Isabel Amersham-Roberts, the ex-

Managing Director of A2A who is retiring next month. As Louisa-Isabel is leaving A2A very soon I am

confident that her advice will be impartial and she is on very good terms with my partner Hilary, a

wealth adviser in the City who has been returning the favour with some free advice regarding Louisa-

Isabel’s share options in A2A.

Thanks,

Adie

Kentree Tender Documentation Received 25 October 2014

Kentree is pleased to invite tenders for an 18 month logistics contract for domestic and international

freight, transport, warehousing and courier services.

The successful applicant will provide services to Kentree Limited, Homeline plc (which holds the

exclusive right to UK distribution of Kentree’s market-leading electronics) and Tescburys (a leading

UK supermarket chain with whom Kentree has recently formed an exciting but confidential joint

venture*).

Outline requirements will be as follows:

Haulage – transport from major UK ports to and from Homeline Regional Distribution Centres (RDCs).

Most containers will arrive at Tilbury docks and Aberdeen harbour. In compliance with our

commitment to green logistics, preference will be given to suppliers with a demonstrable record of

empty load rates below 10%.

Mock Exam 5

167


Warehousing – preference will be given to suppliers with expertise in warehousing of electronic

products. We offer payments at a 25% mark up on cost (subject to prearranged account limits).

Homeline requires real time reporting of all inventory as well as secure monitored storage at a facility

near to Birmingham and East Midlands airports. Tasks will include collection of goods, checking of

quantity and quality, recording and barcoding, organising products onto pallets and ensuring security

of products at warehouses. Cutting edge software and hardware is considered a requirement.

Courier services – we have ambitious plans to expand our home delivery network, using our market-

leading online sales platform Mercury. We are particularly interested to hear from courier companies

with expertise in short term delivery of small packages. Preference will be given to companies who

can demonstrate that they primarily use their own employees rather than external companies as in

Kentree’s experience suppliers’ own staff tend to be more reliable. We would expect the winning

supplier to have more than 80% UK coverage. Pricing and terms to be agreed.

Decision criteria – Kentree will select the winning tender based on a confidential scoring algorithm

incorporating the following elements (amongst other factors):

• Pricing

• Quality of customer service

• Commitment to equal opportunities and the support of underrepresented groups

• Cash position

• Management philosophy and commitment to clients

• Experience of management team

Candidate companies must provide full 5 year management and statutory accounts and CVs for all

Board members. Kentree reserves the right to interview sales staff and customers on a “mystery

buyer” basis to obtain an impartial view of the services provided.

Kentree is an equal opportunities employer and expects candidate companies to reflect a similar

stance. We believe in fair treatment of our employees and contractors.

This document is governed by the law of England & Wales and all tender applicants submit to the

exclusive jurisdiction of the courts of England & Wales. This tender document is not a formal

contractual offer.

All bids must be received in a sealed envelope and should be sent by secure courier service using our

recommended courier service Rolling Stores Limited. Information will be securely held at Rolling

Stores facilities before being transmitted to our appointed lawyers, E S Crow LLP.

* The successful applicant will receive a full revenue and cost breakdown, as well as strategic documentation, regarding the

joint venture, subject to signature of a Non-Disclosure Agreement.

That’s the Way to Do It: The Kentree Recall Customer Service Magazine (3 Nov 2014)

Kentree has emerged from the other side of its potentially damaging oven recall initiative with its

reputation preserved and sales enhanced.

Kentree is rumoured to favour suppliers who are willing to accept lower price levels, given the

challenging economic climate. Our sources suggest that the giant electronics firm is becoming more

concerned with pricing and margins and, despite what its tender documents and PR machine may

claim, is no longer as interested in service standards as a number one priority. The company is also

understood to be about to close some of the operations near to its import base in Aberdeen in order to

concentrate on imports via London. Kentree has neither confirmed nor denied the rumours.

Mock Exam 5 Answers

168





Mock Exam 5 Answers

169




Revenue 2014 2013 £'000s % 2014 2013

Haulage 38,109 33,983 4,126 12.1% 86.4% 85.4%

Warehouse 2,874 2,956 (82) (2.8%) 6.5% 7.4%

Courier 3,110 2,852 258 9.0% 7.1% 7.2%

44,093 39,791 4,302 10.8%

Gross profit 2014 2013 £'000s % 2014 2013 2014 2013

Haulage 6,566 3,777 2,789 73.8% 17.2% 11.1% 117.9% 81.6%

Warehouse 379 811 (432) (53.3%) 13.2% 27.4% 6.8% 17.5%

Courier (1,376) 42 (1,418) (3376.2%) (44.2%) 1.5% (24.7%) 0.9%

5,569 4,630 939 20.3% 12.6% 11.6%


Revenue 2014 A 2014 F £'000s % 2014 A 2014 F

Haulage 38,109 37,000 1,109 3.0% 86.4% 84.3%

Warehouse 2,874 3,200 (326) (10.2%) 6.5% 7.3%

Courier 3,110 3,700 (590) (15.9%) 7.1% 8.4%

44,093 43,900 193 0.4%


Haulage 6,566 4,000 2,566 64.2% 17.2% 10.8% 117.9% 72.5%

Warehouse 379 1,040 (661) (63.6%) 13.2% 32.5% 6.8% 18.8%

Courier (1,376) 480 (1,856) (386.7%) (44.2%) 13.0% (24.7%) 8.7%

5,569 5,520 49 0.9% 12.6% 12.6%





Mock Exam 5 Answers

170



Impact of Project X on bank covenant

Current position

Equity 7,662

Overdraft 1,091 (Per SFP in Exhibit 17]

Overdraft as % of Equity 14.2% This is higher than 5% so RS is currently in breach of the covenant

Cash forecast from Project X

Dec-14 Jan-15 Feb-15 Mar-15

Revenue 1,650 1,800 2,000 2,500

Cost of sales (1,450) (1,650) (1,600) (1,700)

Admin (500) (200) (50) (100)

Net change in cash and retained profit (300) (50) 350 700 Ignore taxation

Overdraft now stands at 1,391 1,441 1,091 391

Equity now stands at 7,362 7,312 7,662 8,362

Overdraft as % of Equity 18.9% 19.7% 14.2% 4.7%

Breach? Yes Yes Yes No

GP margin % for month 12.1% 8.3% 20.0% 32.0%

Mock Exam 5 Answers

171


Appendix 2 - Evaluation of VGL and ESL IT solutions

Option 1 - VGL

Fuel cost saved using VGL Trucker Tracker 1,426,382 W1

Cost savings on mobile data 70,914 W2

Cost of server racks (30,000) [150 vehicles / 50 rack capacity x 10,000 per rack]

Cost of Trucker Tracker GPS units (72,000) [£40 x 12 months x 150 vehicles]

Net benefit of VGL Trucker Tracker 1,395,296

Workings for VGL

W1 - Fuel cost savings

Total trips - loaded 3,285,000 [365 days x 60 loaded trips/day x 150 vehicles]

Total trips - at 20% empty rate 4,106,250 [Loaded trips (above) grossed up by 0.80]

Total trips - at 5% empty rate (3,457,895) [Loaded trips (above) grossed up by 0.95]

Trips saved using VGL Trucker Tracker 648,355

x miles per trip (10) = total miles saved 6,483,553

/ standard miles per litre 1,296,711 litres saved [5 miles per litre]

x diesel price 1,426,382 diesel costs saved [Assumed £1.10 per litre price]

W2 - Mobile data savings

Miles saved 6,483,553 W1

Data saved per mile (1.5 MB - 0.1MB) 1.4

Total data saved (MB) 9,076,974

Cost per 1,024 MB 8

Cost savings on mobile data 70,914 [(Total data saved in MB / 1,024MB) x £8 per MB]

Mock Exam 5 Answers

172


Appendix 2 - Evaluation of VGL and ESL IT solutions

Option 2 - ESL

Fuel cost saved using ESL Trucker Trainer 1,806,750 W3

Additional contribution from extra on the road days 37,800 W4

Annual cost (>£30m turnover company) (150,000) [Per Exhibit 18]

Net benefit of ESL Trucker Trainer software 1,694,550

Workings for ESL

W3 - Fuel cost savings

Apply 20% empty rate as assumed that not also using VGL Trucker Trainer (i.e. separate evaluation of software)

Total trips (W1) 4,106,250

Total miles (x10) 41,062,500

Litres required at 5 miles per litre 8,212,500 [Total miles / 5 miles per litre]

Litres saved (20%) 1,642,500

x diesel price 1,806,750 diesel costs saved [Assumed £1.10 per litre price]

W4 - Additional contribution on days trucks are not off the road

Days saved per year per vehicle 10

Vehicles 150

Total days saved = additional days on the road 1,500

Revenue per vehicle per day 360 [£6 x 60 trips per day]

Total additional revenue attainable 540,000 [Additional days on road x daily revenue]

x standard GP margin of 7% 37,800 additional contribution

Assumptions

1. All days saved can be fully utilised to generate revenue at standard margin

2. Server rack and GPS device costs as advised

3. Fuel consumption as advised

4. Benefits of VGL and ESL devices/software is as advertised in Tech Today Magazine articles

5. No other costs and revenues

6. 150 vehicles which are used 365 days per year

7. All other data per RS cost/benefit datasheet

8. Admin costs ignored as no indication in articles of any admin savings from software

Mock Exam 5 Answers

173





♦ Overall revenue (comments and numbers) ♦ VGL option comment and numbers

♦ Overall GP (comments and numbers) ♦ ESL option comment and numbers

♦ Stream analysis (comments and numbers) ♦ Comment on differences in numerical results

♦ Comment on Project X ♦ Questions assumptions



♦ Revenue good performance ♦ Refresher points for Board on importance of IT

♦ Gross profit mixed with poor Courier performance ♦ Evaluates assumptions/scepticism

♦ Evaluates Project X ♦ Strategy considerations

♦ Evaluates impact on cash ♦ Concludes whether to proceed



E.5 Description

♦ Identifies possible ops strengths of RS

♦ Identifies possible ops weaknesses of RS

♦ Evaluates competitor analysis

♦ Ethical issues



♦ Scepticism

♦ Strategic implications

♦ Concludes on how RS should proceed



Mock Exam 5 Answers

174





♦ RS revenue up £4,302k (10.8%)

♦ RS GP up £939k (20.3%)

♦ RS streams revenue x 3 streams per Appendix 1 (actuals AND v forecasts)

♦ RS streams GP AND GPM% x 3 streams per Appendix 1 (actuals AND v forecasts)

♦ Identifies that RS is in a significant overdraft position with figure (change from PY)

♦ Uses new courier contract figures (Project X)


♦ UK moving from recession to mild growth/recovering

♦ Logistics as a “barometer” of the UK economy (p19)

♦ Exhibit 16 – FMI data indicating strong UK growth – impact on Haulage

♦ IT as very important element of managing logistics (p19)

♦ Supermarket and online demand very high (p7)

♦ RS has target of Courier profitability by Q4 2014 (p30)




♦ RS revenue up impressively and inline with forecast (beats forecast by 0.4%)

♦ Haulage revenue up impressively and exceeds forecast by 3.0%

♦ Warehouse revenue down by disappointing 2.8% and 10.2% below forecast

♦ Courier revenue up well by 9.0% but 15.9 pp below forecast

♦ Courier forecast growth was ambitious (3,700/2,852 or 29.7%)

♦ Without Haulage exceptional growth, 2014 forecasts would not have been achieved

1.4 Narrative on issue two (gross profit)

♦ RS GP up very impressively and inline with forecast (beats forecast by 0.9%)

♦ Haulage GP up significantly – high margin increase from 11.1% to 17.2%/beats F

♦ Warehouse GP down disappointing £432k (53.3%)/margin more than halved

♦ Courier GP collapsed disastrously from £42k to (£1,376k)

♦ Without Haulage exceptional growth, RS would make a negative GP

♦ Haulage GP margin defies forecast of decline v 2013 (10.8% F v 11.1% 2013 A)

1.5 Calculations for new courier contract

♦ December 2014 cash flow net (£300k)

♦ January 2015 cash flow net (£50k)

♦ February 2015 cash flow net £350k

♦ March 2015 cash flow net £700k

♦ Equity balance at month end £7,362k/£7,312k/£7,662k/£8,362k

♦ Overdraft at month end £1,391k/£1,441k/£1,091k/£391k

♦ Calculates that RS breaches covenant until March 2015

Mock Exam 5 Answers

175



Applying Judgement


♦ RS mix relatively unchanged/Courier now second largest stream or comment on F

♦ Warehouse only stream with revenue decline OR Haulage only stream to beat F

♦ Haulage responding well to new IT infrastructure and HGV purchases

♦ Warehousing – impact of Kentree AND Buildwell (Ex 16 re construction sector)

♦ Courier revenue growth due to RS taking on all work that it could (Ex 16)

♦ Further comment on revenue with figures

1.7 Evaluation of gross profit

♦ GP mix substantially changed due to significant Courier and Warehouse problems

♦ Courier only stream to achieve negative GPM – impact of subcontractor costs

♦ Warehouse gross profit – no Kentree as expected AND smaller jobs impact on GPM

♦ Move to negative GP is not going to help Courier achieve Q4 2014 target of +ve OP

♦ Haulage GP boosted by new technology and lower 8% empty load rate (v 10% p23)

♦ Haulage is sustaining the RS GP – business will struggle based on W and C trade

1.8 Evaluation of new courier contract

♦ Queries figures – may be an incentive to present positive spin given bank position

♦ Project worsens overdraft until end of January 2015 AND comment on bank response

♦ Overdraft as percentage of Equity significantly worse for first 2 months with figure

♦ Margin appears higher than Courier forecast (and obviously higher than actual)

♦ Main cause of problems is Admin in December and January – savings possible?

♦ Comment on whether to proceed or not with numbers AND reason



♦ Overall conclusion – strong revenue growth led by Haulage but Courier a concern



♦ Conclusion on cash with figure and comment on position re bank covenant

♦ Conclusion on new courier contract with figure


♦ Rectify Courier problems as soon as possible

♦ Review cash position urgently (negative cash due to fixed asset purchase)

♦ Negotiate with Kentree urgently to avoid further losses to A2A (Kentree renewal, p26)

♦ Negotiate with RS bank as soon as possible

♦ Reconfirm Project X figures and compare to alternatives

♦ Only implement Project X if admin costs can be saved as worsens position

♦ (free response)

FMI is a fictional economics consultancy company and so is the data on economic growth and drivers – you are advised to

obtain some real world data of a similar nature.

pp = percentage points. This is the technically correct way of comparing 2 sets of percentage figures.

Mock Exam 5 Answers

176


Requirement 2 mark scheme – financial evaluation (IT upgrades)



♦ 150 vehicles

♦ £1.10 diesel cost

♦ 150 / 50 = 3 server racks for VGL needed

♦ £40 Trucker Trackers AND 20% mileage improvement possible with ESL

♦ Uses empty load rate of 20% and then 5%

♦ Identifies that RS has spent at least £1.4m since year ended 30 September 2012 (p11)


♦ IT referred to in at least 5 strategic risks in RS Haulage (p22-23)

♦ Rising diesel prices (p41)

♦ Crime of empty loads (p42) – risk of negative reputation for RS

♦ RS has worked with VG on several projects

♦ RS has heavily invested in IT recently (p11)

♦ Per R1 RS cash position is weak with figure



2.3 Calculation 1 – VG

♦ Fuel cost saving £1,426,382

♦ Cost savings on mobile data £70,914

♦ Cost of server racks £30,000

♦ Cost of Trucker Tracker GPS units £72,000

♦ Net benefit of VGL solution £1,395,296

2.4 Calculation 2 – ESL

♦ Fuel cost saving £1,806,750

♦ Additional contribution from extra days on the road £37,800

♦ Chooses £150,000 cost of software with figure and justification based on RS revenue

♦ Diesel cost at 5 miles per litre £8,212,500

♦ Diesel cost saved £1,642,500

♦ Net benefit £1,694,550 AND statement that higher than VGL but higher set up costs


♦ Empty trip rate per datasheet of 20% appears high v RS 10% (p23)

♦ Empty trip rate of 5% appears low v industry/realistic? (p23)

♦ Standard gross margin of 7% is below overall forecast (p20) OR compares to R1

♦ Queries diesel price as too low v p41

♦ Trucker Tracker device at £40 appears cheap v JITCC device £15 per week (£60/month)

♦ Identifies that many assumptions are averages – could lead to estimation errors

♦ Revenue per day seems low (£6 x 60 x 150 x 365 days = c £19m, well below RS revenue)

Mock Exam 5 Answers

177


Requirement 2 mark scheme – financial evaluation (IT upgrades)

Applying Judgement

2.6 Evaluation of strategic benefits of the VGL and ESL opportunities

♦ RS has relationship with VG for years/ESL new – with reasoned comment

♦ Trucker Tracker – cheaper but lower impact on RS?

♦ Trucker Tracker – others may be about to implement same maths method

♦ Trucker Tracker – reputational impact from reduced empty loads (p42)

♦ Trucker Trainer – reputational impact from Petrol Preservers

♦ Trucker Trainer – increase quality/reliability as key selling point of RS

♦ Trucker Trainer – high fixed cost – VGL solution more scalable?

2.7 Evaluation of importance of IT to RS as a logistics company

♦ Information management and control important to industry (p7)

♦ Often companies will model and optimise via software (p7)

♦ RS invested in y/e 30 Sep 2012 for mapping and planning software (p11)

♦ Per Adie Fleet, RS heavily dependent on IT for ops and customers (p19)

♦ RS Haulage tracker system not completely effective (p22)

♦ Driver skills need to be analysed re the green zone (p22)

♦ Need for monitoring breakdowns and weather (p23)

2.8 Scepticism

♦ RS datasheet appears heavily weighted to Haulage data

♦ May be other cost and revenue implications not considered with example

♦ Only “rumours” that Trucker Tracker routing maths about to be broken

♦ No formal contract or specifics – models are priced off reports

♦ Data is all from the same source – need to corroborate

♦ Press articles (albeit “specialist) – query quality/need to confirm

♦ 18 Oct 2014 Tech Today issue has ESL coding/sponsorship – impact/bias?


2.9 Conclusions

♦ Conclusion on importance of IT to RS

♦ Concludes on VG calculation with figures

♦ Concludes on ESL calculation with figures

♦ Concludes on assumptions and scepticism

♦ Concludes on how to proceed (one option, both, neither) with reason


♦ Negotiate better deal with both companies as soon as possible

♦ Confirm details with further (fully independent) sources

♦ Consider alternative IT or alternative projects

♦ Consult widely on affected staff to assess real benefits

♦ Consider financing/discuss with bank

♦ Consider trialling software before purchasing in full/request demo versions


Mock Exam 5 Answers

178


Requirement 3 mark scheme – strategic evaluation (Kentree contract)


3.1 Background

♦ RS considering a tender for renewed work with Kentree

♦ Kentree has been an existing client for many years

♦ Kentree 75% of warehousing and 25% haulage revenue

♦ RS main competitors are Eddie Stobart, large courier organisations, A2A, JITCC

♦ RS has been asked to courier confidential documents for Kentree


♦ Logistics market is a “barometer” of the UK economy (p19)/growing slowly

♦ Online sales driving Courier growth (p7)

♦ Courier market highly competitive (p31)/Sunday deliveries (p45)/no. of competitors (p34)

♦ Kentree oven recall – first in history (p39) but handled well (Exhibit 19)

♦ Rail is increasingly competing with road haulage/subsidies (p24)

♦ Per R1, A2A relationship with Kentree growing



3.3 Issue 1 – Operational strengths of the RS streams

♦ Haulage – good fit with established RS operations at Tilbury docks

♦ Haulage – RS recruits large numbers of female drivers (p22) – fits with Kentree view

♦ Warehousing – RS skilled in warehousing of electronic products

♦ Warehousing – RS has been involved in many of the activities required (p26)

♦ Courier – RS had been bringing down external providers (p29)

♦ Courier – RS can cover 90% of the UK well at present (p31)

♦ (free response)

3.4 Issue 2 – Operational weaknesses of the RS streams

♦ Haulage – RS may not have necessary empty trip rate (p23)

♦ Haulage – no capacity at Aberdeen harbour/long distance from RS main ops base

♦ Warehousing – Kentree expects “cutting edge” reporting – does RS have?

♦ Warehousing – Kentree expects Aberdeen facility which RS does not have?

♦ Courier – Kentree specifies that requires express delivery – can RS provide?

♦ Courier – Kentree specifies small packages - RS set up for larger (Buildwell p29)

♦ (free response)

3.5 Ethics

♦ Louise-Isabel Amersham Roberts – risk of using confidential information

♦ Ensure that no information not in the public domain is passed on due to familiarity

♦ Breach of confidentiality could impact on RS – legal/reputational issues

♦ RS will be transporting tender documents – self-interest threat and risks

♦ Risk of breach of confidentiality including accidentally

♦ Must ensure that information is not tampered with and seen to be independent

Mock Exam 5 Answers

179


Requirement 3 mark scheme – strategic evaluation (Kentree contract)

Applying Judgement

3.6 RS competitor analysis

♦ Eddie Stobart – primarily a Haulage firm so hard to compete in Warehouse & Courier

♦ Eddie Stobart – “always competitor” (p34) on Haulage tenders/size/price

♦ A2A – has infrastructure in Kentree’s preferred location of Midlands

♦ A2A – very strong courier infrastructure but not other streams (p34)

♦ JITCC – primarily a courier BUT experience in quick small parcel delivery

♦ JITCC – potentially dubious worker treatment/incompatible with Kentree

♦ Large courier – very competitive but RS competes on service & they are Courier only

3.7 Strategic implications of RS bidding for new contract

♦ Kentree importance to RS (75% Warehouse, 25% Haulage)

♦ RS may maximise its full service offering v mainly courier competition (p34)

♦ RS needs to diversify away from large clients (e.g. also Buildwell issue)

♦ Aspects of Kentree tender are less favourable – only 18 months AND low 25% mark up

♦ International aspects – good opportunity but is RS equipped?

♦ Kentree emphasis on excellent customer service and treatment fits with RS

♦ Per R1, Kentree increasingly working with A2A


♦ No detailed financial information

♦ No info on competitor approaches so hard to design strategy

♦ Louisa-Isabel Amersham-Roberts – may have loyalty to A2A due to share options

♦ Information on Tescburys opportunity cannot be evaluated

♦ Courier services information very vague on terms and requirements

♦ Magazine article not confirmed – deliberately misleading per Louisa-Isabel?



♦ Concludes on RS stream operational strengths and weaknesses

♦ Concludes on strategic implications of RS bidding for the work

♦ Concludes on competitors to RS


♦ Concludes on how to proceed


♦ Urgent legal advice re ethical issues

♦ Negotiate with Kentree as soon as possible – RS has advantages of incumbency

♦ Market research on Kentree

♦ Commission detailed competitor analysis

♦ Consult with RS staff on best approach

♦ Continue recruiting staff following equal opportunities approach


Mock Exam 5 Answers

180







♦ Figures are as required by question – covenant ♦ Correctly numbered pages







181


Mock 5 Model Answer








Executive Summary


The logistics sector, which is a barometer of UK economic performance, is recovering as the UK returns

to growth.

Overall, RS’ has had a good year, with revenue increasing impressively by £4,302k (10.8%) from

£39,791k to £44,093k as a result of significant growth in Haulage revenue but Courier revenue was well

below forecast.

Significant growth in Haulage revenue of £4,216k (12.1%) from £33,983k to £38,109k has been

achieved due to new IT infrastructure and HGV purchases, which resulted in Haulage being the only

stream to beat forecast, by a notable 3 pp.

Warehousing revenue was down disappointingly by £82k (2.8%) from £2,956k to £2,874k, 10.2% below

forecasts, indicating falling confidence in the construction sector.

Courier revenue performed well, increasing by £258k (9.0%) from £2,852k to £3,110k due to RS

capitalising on the online sales boom. However, this was 15.9% below the ambitious 29.7% forecasted

increase.

RS’ gross profit increased impressively by £939k (20.3%) from £4,630k to £5,569k and was £49k (0.9%)

above forecast.

The overall gross profit improvement of RS can be attributed to the strong performance of Haulage,

which accounts for 117.9% of gross profit. This has been countered by weaker performance in

Warehousing and Courier.

RS is currently in a weak cash position with an overdraft of £1,091k. This could potentially lead to the

bank exercising its fixed charge as the covenant has been broken.

Given the overall profitability of £700k, RS should proceed with Project X to give Courier a timely

boost24.


RS should:



182


• Improve performance of the Courier stream

• Review cash position urgently

Section 2 IT upgrades

RS is heavily dependent on IT for efficiency and competitiveness and needs to avoid any harm to

reputation from the alleged “crime” of empty Haulage loads.

RS has used IT for many years to manage information flows and optimise routings and transport of

parcels.

The VGL option would offer a net benefit of £1,395,296.

The ESL option would offer a net benefit of £1,694.550.

The difference is caused by a higher fuel saving under the ESL option which more than compensates

for the higher set up costs.

Information has been provided by a magazine which may have an interest in promoting ESL products

due to a product/coding offer and this is the only source of information so further confirmation should

be sought.

The ESL option would allow RS to associate itself with prestigious green activities and initiatives,

boosting the profile of RS with the wider public.

RS should proceed with the ESL option as it offers a higher net return and improved green

credentials.25


RS should:

• negotiate a better offer from both companies as soon as possible

• consider alternative uses of its funds

Section 3 Kentree contract

RS is facing intense competition in the Haulage market from subsidised rail and in the Courier market

from a range of strong competitors.

RS has strengths in Haulage via its female drivers and operations at Tilbury docks and also in

Warehousing via experience of electronic products.

RS is weaker in terms of its empty trip rate and potential lack of cutting-edge reporting tools.

RS faces very strong competition from A2A and larger courier services as the competitors have

excellent infrastructure, but less strong competition from JITCC as this competitor does not stress

quality.



183


Information has been provided by Louisa-Isabel Amersham-Roberts who is connected with a

competitor and certain aspects of the tender documents are very vague and unhelpful to RS’s

evaluation.

RS faces 2 potential breaches of confidentiality due to transmission of information by Louisa-Isabel

Amersham-Roberts and RS’ provision of courier services for confidential documents to Kentree. RS

should ensure that precautions are used to ensure that it does not use or have sight of confidential

information as this would show a lack of integrity and expose the company to penalties.

RS should bid for the tender and emphasise its existing experience with Kentree to support its bid26.


RS should:


• commission detailed competitor analysis



mark scheme points.



184





of the UK economy and in particular, Haulage, which depends on economy-wide demand.

RS is heavily dependent on a fully integrated and overlapping IT system for managing operations.

The Courier sector has seen exponential growth due to online buying and the RS Courier stream is

aiming for an operating profit in Q4 of 2014. (Add own research.)


RS’ revenue increased impressively by £4,302k (10.8%) from £39,791k to £44,093k and was in line

with RS’ forecast, marginally beating it by 0.4%.

Significant growth in Haulage revenue of £4,216k (12.1%) from £33,983k to £38,109k has been

achieved due to the new IT infrastructure and HGV purchases, which resulted in Haulage being the

only stream to beat forecast by a notable 3.0%.

Without the strong performance of Haulage, RS would not have met its overall forecast.

Warehousing revenue was down disappointingly by £82k (2.8%) from £2,956k to £2,874k, 10.2% below

forecasts, indicating the falling confidence in the construction sector affecting Buildwell and Kentree

(Kentree accounts for 75% of RS Warehousing revenue).

Courier revenue performed well, increasing by £258k (9.0%) from £2,852k to £3,110k due to RS

capitalising on the online sales boom. However, this was 15.9pp below the ambitious 29.7% forecasted

increase.

In line with forecast, Courier has now become the second most important stream, accounting for 7.1%

of revenue compared with 7.2% in 2013. Warehouse now only accounts for 6.5% of revenue (2013:

7.4%) with Haulage maintaining its dominance with 86.4% (2013: 85.4%).



above forecast.

Haulage gross profit margins have increased impressively, due to the introduction of new IT

infrastructure and reduced empty load rate (8% compared with 10% in 2013), leading to an increase in

gross profit of £2,789k (73.8%) from £3,777k to £6,566k, beating forecast by £2,566k (64.2%).

Therefore, the overall gross profit improvement of RS can be attributed to the strong performance of

Haulage, which accounts for 117.9% of gross profit. This has been countered by weaker performance

in Warehousing and Courier.

Without the exceptional performance of Haulage, RS would have made a gross loss.

Warehousing gross profit decreased disappointingly by £432k (53.3%) from £811k to £379k, with

margins falling by over half to 13.2% from 27.4%, as a result of the Kentree warehousing work being

awarded to A2A and the compensatory smaller jobs requiring more set up costs thereby eroding

margins.


185


Courier gross profit performance has been hugely disappointing with a decline of £1,418k (3,376%)

from a profit of £42k to a loss of (£1,376k) as RS was forced to use excessive amounts of sub-contracted

drivers to meet demand resulting in Courier being the only stream to deliver a negative margin.

This means that Courier is unlikely to reach its profitability target by October 2014.

1.D New courier contract (Appendix 1)

Based on the Project X forecasts, the bank covenant will be breached until March 2015.

The figures may be formulated in an optimistic manner in a bid to convince the bank not to exercise

their fixed charge creditor rights.

The bank is likely to look unfavourably on the fact that the overdraft position worsens until January

2015.

The overdraft to equity ratio deteriorates significantly to 18.9% and 19.7% in the first two months, well

above the 5% requirement.

The gross margin on Project X is above forecast and appears highly optimistic given the current year

gross loss.

Closer consideration should be made as to whether admin costs can be reduced as they are the cause

of the negative return in the first 2 months.

Given the overall profitability of £700k, RS should proceed with Project X to give Courier a timely boost.

1.E Conclusions

Overall, RS’ has had a good year, with revenue increasing impressively by £4,302k (10.8%) from

£39,791k to £44,093k as a result of significant growth in Haulage revenue, but Courier revenue was

well below forecast.


above forecast

RS is currently in a weak cash position with an overdraft of £1,091k. This could potentially lead to the

bank exercising its fixed charge as the covenant has been broken.

Given the overall profitability of £700k, RS should proceed with Project X to give Courier a timely

boost27.

1.F Recommendations

RS should:

• Improve performance in the Courier stream

• Review its cash position urgently

• Negotiate a contract renewal with Kentree to prevent further loss of work to A2A

• Negotiate with the bank as soon as possible

• Reconfirm Project X figures and compare with alternatives

• Implement Project X if admin costs can be saved



186


• [further idea]


187


Section 2 Kentree contract renewal


IT is vital to RS and is referred to in several of RS’ strategic risks regarding the Haulage stream. RS

has worked with VG on several projects and has undertaken heavy investment in IT recently. RS

currently has a weak cash position of £1,091k overdrawn. Fuel prices have risen during some periods

and this does not help RS withstand criticisms from environmental groups in relation to the “crime” of

running empty loads. [Add own research.]


The VGL solution would provide a net benefit of £1,395,296 and the ESL solution would provide a net

benefit of £1,694,550. The ESL solution potentially provides higher benefits than VGL but involves

higher set up costs beforehand. The ESL solution provides higher total fuel and diesel cost savings but

the higher set up costs reduce its net benefit advantage over the VGL solution.


An empty trip rate of 20% appears high compare to RS’ standard 10% rate.

An empty trip rate of 5% would be very low compared to the industry and perhaps not achievable in

practice.

The standard gross margin of 7% is below RS’ expectations for 2014.

The diesel price assumed appears rather low compared to market benchmarks in December 2013, for

example.

The Trucker Tracker device appears expensive at £40 compared to the JITCC device at £15.

The model applies various average values which can lead to estimation errors if the average is not

representative of different real scenarios.

The stated revenue per day appears low as it equates to around £19m per year, which is well below

the RS overall revenue.

The information provided largely concerns the Haulage stream so it may omit costs and benefits to the

other RS streams.

There may be other costs and revenues to consider such as IT support and installation costs, or

increased revenue if RS benefits from the potential improvement in demand as a more environmentally-

conscious company.

It may be inadvisable to invest in the Trucker Tracker if it is soon to lose its unique mathematical model,

but there are only rumours that this will happen.

No formal contract or specifics have been provided and the model is based on reports, not offers.

The data is provided from a single source and should be corroborated more widely.

The articles are from a specialist press which should have accurate information but this should still be

confirmed as they are press articles only.

Tech Today may have an incentive to boost the value of ESL IT services/software due to the coding

offer/sponsorship provided by the company.


188


2.D VGL, ESL and importance of IT to RS

RS has had a relationship with VG for several years and has invested over £1m with VG. ESL is

unknown to RS at this time.

The Trucker Tracker appears to be cheaper but is likely to lead to a lower beneficial impact on RS.

The Trucker Tracker may be about to lose its unique mathematical model.

The Trucker Tracker could boost RS’ reputation as a company which has taken action to avoid the

“crime” of empty loads.

The Trucker Trainer could boost RS’ green credentials via the Petrol Preservers initiative.

The Trucker Trainer would improve RS’ quality and reliability and hence allow RS to increase its

attractiveness to clients.

The Trucker Trainer involves a high fixed cost which cannot be scaled down if usage is small whereas

the VGL may be more scalable and granular, allowing a more tailored purchase.

Information management and control is vital to the logistics industry and often companies will use

specialised IT software to model and optimise information and product flows.

RS invested heavily in the year ended 30 September 2012 to improve its mapping and planning

software.

RS is heavily dependent on IT for operations and customers, according to Adie Fleet’s information.

RS currently has an imperfect Haulage tracker system, reducing efficiencies.

RS needs IT to analyse driver skills and behaviour to maximise time in the efficient Green Zone.

RS also needs to monitor breakdowns and the impact of the weather using IT methods.

2.E Conclusions

IT is extremely important to many aspects of RS’ business, including monitoring, control and

optimisation.

The VGL solution would provide a net benefit of £1,395,296 whilst the ESL solution would provide a net

benefit of £1,694,550 as a result of higher fuel cost savings but does involve higher set up costs.

The assumed empty trip rates appear either too high or too low compared to benchmarks and diesel

prices used appear low given market rates.

The datasheet provided is light on details for streams other than Haulage whilst the reported removal

of the unique selling point of the Trucker Tracker is only rumoured and not confirmed.

RS should proceed with the Trucker Trainer as this will boost reliability and improve brand recognition

of RS as a relatively green logistics company28.



189


2.F Recommendations

RS should:

• negotiate a better deal with both companies as soon as possible

• confirms details with further independent sources

• consider alternative IT projects

• consult with staff to assess the real benefits

• consider financing and discuss with the bank

• consider trialling software before purchasing in full

• [further issue]



mark scheme points.


190


Section 3 Kentree contract


The logistics market is a barometer of the UK economy, which is growing slowly after a recession.

Online sales are driving Courier growth which remains highly competitive with many competitors

entering the market, including for Sunday deliveries. The rail network, which is subsidised, is

increasingly competing with road haulage. Kentree is undertaking its first recall which is being handled

well and A2A is building a relationship with Kentree.

RS is considering a tender for the renewal of its work with Kentree, an existing client of many years and

which accounts for 75% of RS’ warehousing and 25% of RS’ haulage revenue. RS’ main competitors

are Eddie Stobart, large courier organisations, A2A and JITCC. RS has been tasked with couriering

confidential documents for Kentree. (Add own research.)

3.B Operational strengths

The Haulage opportunity would fit with RS’ established operations at Tilbury docks.

RS recruits large numbers of female HGV drivers, fitting with Kentree’s view.

RS is already skilled in warehousing of electronic products from its existing work for Kentree and it has

further experience in many of the specific activities required.

RS has been reducing its external services rates for some time and can cover 90% of the UK well at

present, fitting well with the requirements.

3.C Operational weaknesses

RS may not have the required empty trip rate in Haulage and it may not have capacity at the Aberdeen

harbour, nor Warehousing facilities in Aberdeen.

RS may not have the cutting edge reporting systems demanded by Kentree.

RS may not be able to provide the express delivery which Kentree requires.

RS’ experience in Courier work for Buildwell has involved larger packages whereas Kentree is asking

for delivery of smaller packages.


No detailed financial information is available.

No information on competitor approaches has been provided making it hard to design a strategy.

The information provided by Louisa-Isabel Amersham-Roberts could be based on her wish to boost the

position of A2A to benefit from an increase in the value of her share options.

Information on the Tescbury’s opportunity cannot be evaluated.

The information on Courier services is very vague as to terms and requirements.

The information in the magazine article is not confirmed and could again be deliberately misleading as

it has been provided by Louisa-Isabel Amersham-Roberts who has connections to A2A.


191


3.E Competitor analysis and strategic implications

Eddie Stobart is primarily a Haulage firm so probably cannot compete in Warehousing and Courier

services but is likely always to be a competitor in Haulage tenders.

A2A has infrastructure in Kentree’s preferred location of the Midlands and offers very strong

infrastructure for the Courier stream.

JITCC is primarily a Courier competitor and has strong experience in quick parcel delivery. JITCC has

engaged in dubious worker treatment which is likely to be incompatible with Kentree’s requirements.

RS’ other large courier competitors are very competitive on price but only provide Courier services and

may not be able to compete on quality with RS.

Kentree is of crucial importance to RS, accounting for 75% of Warehouse and 25% of Haulage

revenues.

RS has a full service offering whereas its competitors are primiarily Courier only companies.

RS needs to diversify away from large clients such as Buildwell.

Aspects of the Kentree tender are less favourable to RS than previously with only an 18 month contract

period and a low 25% mark up compared to the previous 30%.

The international aspects of the contract appear attractive but RS has no experience of this kind of

activity.

Kentree’s emphasis on excellent customer service and treatment would fit with RS’ approach.

Kentree is increasingly working with A2A so RS must act quickly and appropriately to prevent loss of

this client.

3.F Ethics

Using information from Louisa-Isabel Amersham Roberts could involve a breach of confidentiality so

RS should ensure that only publicly-available information is used. Any breach could lead to fines,

criminal penalties and damage to RS’ reputation.

RS will be transporting confidential and sealed tender documents, creating a self-interest threat and

risks if the documents were to be read, including accidentally. This would be a breach of confidentiality

and integrity. RS must ensure that documents are treated very carefully and that its independence (and

perceived independence) is beyond reproach.

3.G Conclusions

RS has significant strengths for the tender as its offers a full service offering and has many years of

experience in working with Kentree.

RS must ensure that it retains Kentree as a client given the importance of this client to RS’s Haulage

and Warehousing streams.

RS faces Haulage competition from Eddie Stobbart and Courier competition from its other competitors,

but its Warehousing stream appears to be unchallenged.

RS must ensure that it does not use any confidential information provided by Louisa-Isabel Amersham-

Roberts or other sensitive information in its hands on behalf of competitor information being couriered


192


to Kentree by RS. Using information in either case would show a lack of honesty and integrity, damaging

RS’s reputation and potentially resulting in criminal liability.

RS should proceed with its tender after ensuring secure treatment of documents and stressing its full

service offering and existing excellent service to Kentree29.

3.H Recommendations

RS should:

• seek urgent legal advice on ethical issues

• negotiate with Kentree as soon as possible to maximise the benefits of being Kentree’s existing

supplier

• conduct market research on Kentree

• commission detailed competitor analysis

• consult with RS staff on the best approach the tender

• continue recruiting staff following an equal opportunities approach

• [further idea]



mark scheme points.

29 You would be awarded a mark irrespective of the option you pick: our choice here is merely for illustrative purposes.

193


rolling stores limited – november 2014 aca case study...

Documents