Halloran Metals Q.3) What economic risks are implicit in Halloran¶s logistics choices?
How has the firm endeavored to reduce these? How successful have they been?
Halloran¶s logistics strategy is to cater to small orders in the minimum amount of time i.e. one day. It is involved in Stage one processing which requires modest equipment. Intermediate processing needs large investments in equipment. Halloran operates from seven warehousing locations and carries excess inventory in all the locations at all times. This is a part of their logistics and marketing strategy of not turning down a single order or customer regardless of its size. Due to which it runs different economic risks in a market which is price competitive and growth-oriented at the same time. Moreover, in order to increase customer goodwill, it extends credit terms to their loyal customers beyond the usual 30 days period and results increasing the risk of recovering accounts receivable. Referring to Exhibit 1, the income statement section shows that the operating expenses are high-particularly the cost of warehousing which limit operating profit. Under liabilities section, it shows that the company is highly leveraged and is showing high accounts payable figures depicting high default and liquidity risks. If a company fails to perform well in future years, it can default in making payments to its creditors which will consequently affect overall operations and limit company¶s ability to borrow in future. It can also face problems in securing capital for capital expenditure and, thereby, running liquidity risk. To further emphasize on this point, we compare Halloran and Allied¶s quick ratios. Quick ratio is a measure of company¶s ability to meet its short-term obligations. Quick Ratio = (Current assets-Inventories)/Current liabilities Halloran (2001) = (51,438-30,980)/29,752 = 0.68 = (45,518-19,364)/22,710 =1.15
(Figures from Exhibit 6)
High quick ratio means that a company is more capable of meeting its short-term obligations and has strong financial condition. Quick ratio analysis shows that Allied is in a better position to cater to increased customer demand in future and to bring operational efficiency. Due to lower quick ratio, Halloran faces problems in bidding for bulk-buying and making large investments in equipment. It also faces certain difficulties in expanding its operations due to its highly leveraged and inventory-intensive nature. A complete analysis of ratios is given in Appendix1. Halloran has tried to reduce its risks by exploiting small investment opportunities. The company buys a small depot, strengthens its customer base, and builds a warehouse in that location to fulfill the demand arising from that area. It reduces both default and liquidity risk. It keeps Halloran in a position to make debt repayments and leaves it with
ample cash to meet its short-term obligations provided there is no hiccup in the overall supply chain system. And to account for the equipment need, it has developed in-house equipment but with time, the replacement cost is increasing which will be critical to meet the changes in industry. Industrial changes include technological innovation, latest equipment requirements and efficient supply chain system. So far, Halloran had been successful with this operational style. APPENDIX 1 Ratios YEAR 2001 HALLORAN Sales to Asset Debt to Equity Inventory Turnover Current Ratio Quick Ratio % of inventory in total asset % of fixed assets in total assets 2.39 1.11 5.7 1.73 0.68 43.8% 39% ALLIED 2.33 0.34 9.02 2.00 1.15 25.6% 27.1%