CBN Railway Company CEO John Spychalski is concerned about a problem that has existed at CBN…

CBN Railway Company

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CEO John Spychalski is concerned about a problem that has
existed at CBN railroad for almost 20 years now. The continuous problem has
been that the locomotives used by the company are not very reliable. Even with
prior decisions to resolve the problem, there still has not been a change in
the reliability of these locomotives. Between 2015 and 2016, 155 new
locomotives were purchased and one of CBN’s repair shops was renovated. The
renovated shop has been very inefficient. Spychalski estimated that the shop
would complete 300 overhauls on a yearly basis, but instead it has only managed
to complete an average of 160 overhauls per year.

The company has also been doing a poor job servicing
customers (that is, providing equipment). CBN has averaged only 87–88 percent
equipment availability, compared to other railroads with availability figures
greater than 90 percent. Increased business in the rail industry has been a
reason for trying to reduce the time used for repairing the locomotives. CBN’s
mean time between failure rate is low—45 days—compared to other railroads whose
mean time between failure rates is higher than 75 days. This factor, Spychalski
feels, has contributed to CBN’s poor service record.

CBN is considering a new approach to the equipment problem:
Spychalski is examining the possibility of leasing 135 locomotives from several
sources. The leases would run between 90 days to 5 years. In addition, the
equipment sources would maintain the repairs on 469 locomotives currently in
CBN’s fleet, but CBN’s employees would do the actual labor on the locomotives.
The lease arrangements, known as “power-by-the-mile” arrangements, call for the
manufacturers doing the repair work to charge only for maintenance on the
actual number of miles that a particular unit operates. The company expects the
agreements to last an average of 15 years. John Thomchick, the executive vice
president, estimates that CBN would save about $5 million annually because the
company will not have to pay for certain parts and materials. Problems with the
locomotives exist throughout CBN’s whole system, and delays to customers have
been known to last up to five days. Spychalski and Thomchick feel that the
leasing arrangement will solve CBN’s problems.

CASE QUESTIONS

1. What are potential advantages and disadvantages of
entering into these “power-by-themile” arrangements?

2. What should be done if the problem with the locomotives
continues even with the agreements?

3. Do you think that the decision to lease the locomotives
was the best decision for CBN? Explain your answer.

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