ORNGE: Improving Service Levels Case Study Solution
Analysis of Option 2:
This option suggests to purchase its own new helicopters. It is required that there should be at least 12 helicopters, so that 8 helicopters can be ready to provide the quality services. The total cost of these 12 helicopters is around $250 million, and they would be depreciated in 10 years. The company would be getting $18 million ($1.5 million) from its salvage value after 10 years. The principle payment is accounted for 10% per year, and the interest rate would be charged as 6.5%.
Pros and Cons
The advantages are that it provides solution for the service problem. The service will be improved with these new 12 helicopters. The company can solve its long term and short term problem both. New helicopters would help in catering the increasing demand of the services. The disadvantages are that it requires significant outlay of payment. This payment makes around $250 million and the company would also be charged with an interest expense of 6.5% per year. The company’s financial health is not favoring this option if we analyze this option in terms of Net Present Value.
Analysis of Option 3:
This option is to ask an outsource operator to buy the new helicopters and sign a new contract. The cost of capital for outsource operator is 10%. The inflation rate is applicable as 3.5%. This option will also be the problem of the subcontractors. The flight crews will be attracted and retained because of these new helicopters.
Pros and Cons
Its advantages are that it improves the services of Ornge. It also reduces the maintenance costs for both outsource operators and Ornge. However, its disadvantage includes that the outsource operator might ask for more fee for their services.
Recommendations
Option 3 is recommended out of all these options, because it has more advantages as compared to the other options. This option resolves the company’s short term as well as the long term problems. Better services can be provided with these new helicopters, and also more patients can be served in an efficient way. It is recommended from NPV analysis that the company should ask the outsource operator to buy the new helicopters as Ornge cannot afford this heavy investment at this time if we take under consideration the financial situation of the company.............
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