Ques-3 What economic risks are implicit in Halloran’s logistic choice?

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)/29,75 = 0.68
Allied (2001) = (45,518-19,364)/22,710
(Figuresfrom Exhibit 6) =1.15
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.

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, there placement
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.