Question

Frito-Lay
Outsourcing Decision Analysis
		Retain	Outsource
		In-House	to FMS	Difference
Annual leasing fee for software		$8,000	$ —	$8,000
Annual maintenance of trucks		145,500	—	145,500
Total annual salaries of five other
fleet management employees		150,000	—	150,000
Fleet Management Services’ annual fee		—	290,000	(290,000)
Total cost / cost savings		$303,500	$290,000	$13,500

Betsy Gonzalez manages a fleet of 200 delivery trucks for Frito−Lay. Gonzalez must decide if the company should outsource the fleet management function. If she outsources to Fleet Management​ Services, Fleet Management Services will be responsible for maintenance and scheduling activities. This alternative would require Gonzalez to lay off her five employees. ​ However, her own job would be​ secure; she would be Frito−Lay​'s liaison with Fleet Management Services. If she continues to manage the​ fleet, she will need​ fleet-management software. Fleet Management Services offers to manage this fleet for an annual fee of $290,000. Betsy performed the following​ analysis:

1. What qualitative factors should Gonzalez consider before making a final​ decision?

Gonzalez should consider the following qualitative factors before making a final decision whether to manage the fleet​ in-house or to outsource to Fleet Management Services​ (FMS

a. what is the organization structure of FMS?

b. what is the profitability of FMS?

c. what type of legal entity of FMS?

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Gonzalez ​may:

A.

Decide that it is worth $13,500 per year to avoid these potential problems. If​ so, she may decide to retain the fleet management function in house.

B.

Decide that any cost savings will make her look good to upper management and put her in line for a promotion.

C.

Decide that the cost savings should not have an impact on her decision.

D.

None of the above

Answer 1

1a. Following are the qualitative factors that Gonzalez should consider before making a final​ decision :

• Between the cost to own and operate a fleet
• Whether they can retain complete control of their supply chain and transportation operations by operating a private fleet.
• What will be the reduction in overheads if fleet is outsourced?

1b. Profitability of FMS:

• It would reduce overheads
• It will result in increased core business efficiency
• Most importantly it will result in risk reduction

1c. Fleet Management is a function which allows companies which rely on transportation in business to remove or minimize the risks associated with vehicle investment, improving efficiency, productivity and reducing their overall transportation and staff costs, providing 100% compliance with government legislation.

Gonzalez ​may: Decide that the cost savings should not have an impact on her decision.