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Evaluate this new technology for your company

Case Study :

National Courier Company picks up and delivers packages across the country and, through its relationships with couriers in other countries, privdes international package delivery services. Each afternoon couriers pick up packages, The late afternoon, the packages are returned to the couriers's terminal, where they are placed in bins and shipped by air to National Courier Company's hub. In the hub, these bins are emptied. The packages are sorted and put into different bins according to their destination terminal. Early the next morningi the bins arrive at the various destination terminals, where they are sorted by route, put onto trucks, and delivered.

An operations study determined that about $2 million of employee time could be saved each year by using a scanning system. Each package's bill of lading would have a bar code that the courier would scan with a handheld scanner when teh package is picked up. The shipment would be scanned again as it reaches the terminal, when it leaves the terminal, when it reaches the hub, when it is placed into a bin at the hub, when it arrives at the destination terminal, when it is srted onto a courier's truck for delivery, and when it is delivered to the customer. Each scanning would eliminate the manual and less accurate completion of a for, thereby providing courier time savings.

The total cost of the scanning system is estimated to be $10 million. It is thought to have a life of 6 years, after which the equipment will be eplaced with new technology. The salvage value of the equipment in 6 years is estimated to be $500,000.

At the end of each shift, the information from all the scanners will be loaded into Natioanl Courier Company's main computer, providing the exact location of each shipment. This tracking information provides for increased security, a lower mis-sort rate, and improved service in tracing shipments that habe been mis-sorted. The reduced time spent tracing missing shipments accounts for the balance of the estimated employee time savings. The marketing manager believes that the increased security and service will result in an increased contribution margin of about $1 million per year if competitors do not adopt this technology and National Corier Company does. If competitors buy this technology and National Courier Company does not, it will lose $1 million contribution margin. If every one buys this technology, each competitor will maintain its current sales level. Assume all cash flows except the $10 million outflow occur at the end of the year.

Required:

Evaluate this new technology for your company. Would you adopt this new system or not ? If not, why ? Also, discuss the assesment of the effect of different assumptions about the uncertainty of technology adoption by the competitors.

Solution Preview

Please refer to the attached file for the response.

CASE ANALYSIS: NATIONAL COURIER COMPANY
PROBLEMS:
1. Should NCC adopt the new technology of making use of a scanning system in its operations?
2. What would be the implications of the following assumptions on the feasibility of utilizing the new technology?
a) That the contribution margin of $1M will only be attained if the competitors will not adopt the new technology.
b) That if the competitors adopt and NCC adopts, their current level of sales will be maintained.
AREAS OF CONSIDERATION
1. Cost
The cost of the new technology is estimated at $10 M and may be used for its intended purpose (economic life) for 6 years, beyond which it would have a salvage value of $500,000.
2. Savings
The savings out of the decrease in employee time was quantified and was estimated at $2M. This amount will be saved because of reduced time that will be utilized by the employees in tracing missing shipments.
3. Contribution margins
Contribution margin was estimated at $ 1 M, that is, if competitors do not adopt the new technology. Hence this estimated contribution will only be attained if the competitors will not buy the idea.

4. Reaction of competitors
They may also adopt the new technology. If competitors will adopt, in the same manner that NCC will adopt, all of them (the players in the industry) will maintain their current sales level.

According to NCC management, if they do not adopt but the competitors adopt the new technology, NCC will lose a $1 M contribution margin.

5. Impact on employees
The new technology was intended to reduce employee time of equivalent to $ 2M. This would imply that NCC management may decide to cut down or ...

Solution Summary

The expert evaluates the new technology for a company.

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