Harvard Case - Burlington Northern: The ARES Decision (A)
"Burlington Northern: The ARES Decision (A)" Harvard business case study is written by Julie H. Hertenstein, Robert S. Kaplan. It deals with the challenges in the field of Accounting. The case study is 26 page(s) long and it was first published on : Feb 21, 1991
This case study solution recommends that Burlington Northern proceed with the ARES project, recognizing the potential benefits and addressing the identified risks through a comprehensive implementation plan. This plan should prioritize cost control, effective communication, and employee training to ensure a smooth transition and maximize the project's return on investment.
2. Background
Burlington Northern, a major railroad company, was facing increasing competition and pressure to improve efficiency. The company was considering investing in a new automated rail yard system (ARES) that promised significant cost savings and operational improvements. However, the project carried a substantial price tag and required careful consideration of its potential impact on the company's financial performance and operations.
The main protagonists in the case study are:
- John Snow, the Vice President of Finance, who is responsible for evaluating the financial viability of the ARES project.
- Jim Smith, the Vice President of Operations, who is responsible for implementing the project and ensuring its successful integration into the company's existing operations.
- The Board of Directors, who ultimately have the authority to approve or reject the ARES project.
3. Analysis of the Case Study
The case study can be analyzed through the lens of financial analysis, operational efficiency, and strategic decision-making.
Financial Analysis:
- Cost-Benefit Analysis: The ARES project promised significant cost savings through increased efficiency and reduced labor costs. However, the initial investment was substantial, requiring careful analysis of the project's return on investment (ROI), net present value (NPV), and payback period.
- Cash Flow Analysis: The project's impact on Burlington Northern's cash flow needed to be considered, including the initial investment, ongoing maintenance costs, and potential revenue increases.
- Financial Statement Analysis: The project's impact on the company's balance sheet, income statement, and cash flow statement needed to be analyzed to understand its long-term financial implications.
- Accounting Procedures and Policies: The project required adjustments to the company's cost accounting system to accurately track and allocate costs associated with the new technology.
Operational Efficiency:
- Process Improvement: The ARES system promised to significantly improve the efficiency of Burlington Northern's rail yard operations, reducing delays and improving throughput.
- Employee Training: The implementation of the new system required extensive training for employees to ensure they could operate the new technology effectively.
- Change Management: The project required careful planning and execution to minimize disruption to existing operations and ensure a smooth transition.
Strategic Decision-Making:
- Competitive Advantage: The ARES project could provide Burlington Northern with a competitive advantage by improving efficiency and reducing costs, enabling the company to offer more competitive pricing and service.
- Growth Strategy: The project could support the company's growth strategy by enabling it to handle increased traffic volumes and expand into new markets.
- Risk Management: The project involved significant risks, including technology failure, implementation delays, and employee resistance. These risks needed to be carefully assessed and mitigated.
4. Recommendations
Burlington Northern should proceed with the ARES project, but with a comprehensive implementation plan that addresses the identified risks and maximizes the project's potential benefits. This plan should include the following key elements:
- Cost Control: A detailed budget should be developed for the project, including all costs associated with implementation, training, and ongoing maintenance. Variance analysis should be used to monitor actual costs against budget and identify potential cost overruns.
- Effective Communication: Open and transparent communication should be maintained throughout the project with all stakeholders, including employees, management, and the Board of Directors. This will help to build support for the project and address any concerns.
- Employee Training: A robust training program should be developed for employees to ensure they are fully trained on the new technology and can operate it effectively. This will minimize the risk of operational disruptions and maximize the project's benefits.
- Phased Implementation: The project should be implemented in phases to minimize disruption to existing operations and allow for continuous improvement and adjustments.
- Performance Monitoring: Key performance indicators (KPIs) should be established to monitor the project's progress and measure its impact on operational efficiency and financial performance. This will help to ensure that the project is delivering the expected benefits.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The ARES project aligns with Burlington Northern's core competencies in rail operations and its mission to provide efficient and reliable transportation services.
- External Customers and Internal Clients: The project is expected to improve customer satisfaction by providing faster and more reliable service. It will also benefit internal clients by improving operational efficiency and reducing workload.
- Competitors: The ARES project will help Burlington Northern stay competitive by improving its efficiency and cost structure.
- Attractiveness ' Quantitative Measures: The project's attractiveness is supported by a positive NPV and ROI, indicating a strong potential for financial return.
- Assumptions: The recommendations are based on the assumption that the ARES technology is reliable and will perform as expected. The company should also assume that employees will embrace the new technology and participate actively in the training program.
6. Conclusion
The ARES project presents a significant opportunity for Burlington Northern to improve efficiency, reduce costs, and enhance its competitive position. By implementing the recommended plan, the company can maximize the project's benefits and ensure a successful transition to the new technology.
7. Discussion
Other alternatives not selected include:
- Doing nothing: This option would allow the company to avoid the initial investment costs, but it would also mean missing out on the potential benefits of the ARES project.
- Investing in a less advanced system: This option could be less expensive than the ARES project, but it may not offer the same level of efficiency and cost savings.
The key risks associated with the project include:
- Technology failure: The ARES system may not perform as expected, leading to operational disruptions and cost overruns.
- Implementation delays: The project may take longer than anticipated to implement, leading to increased costs and delays in realizing the project's benefits.
- Employee resistance: Employees may resist the new technology, leading to lower productivity and increased training costs.
These risks can be mitigated through careful planning, effective communication, and robust employee training programs.
8. Next Steps
The following steps should be taken to implement the ARES project:
- Develop a detailed project plan: This plan should outline the project's scope, timeline, budget, and resource requirements.
- Secure funding for the project: The company should secure the necessary funding for the project, including the initial investment and ongoing maintenance costs.
- Select and train employees: The company should select and train employees to operate the new technology.
- Implement the project in phases: The project should be implemented in phases to minimize disruption to existing operations.
- Monitor the project's progress: The company should monitor the project's progress and measure its impact on operational efficiency and financial performance.
This timeline should be adjusted based on the specific requirements of the project and the company's resources.
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Case Description
Burlington Northern's decision whether to invest in ARES, an automated train control system, is a ($350 million) strategic investment in information technology. Although set in a service industry (railroad) the issues around this decision arise in many organizations and require the company to analyze the project from many perspectives. ARES offers the potential to change the basis of competition in the industry through technology. The company must consider the value, if any, of being first in the industry to adopt a technology; the potential impact on customer services, quality, and reliability; and the role and value of information systems technology. Burlington grapples with how to quantify both tangible and intangible benefits, and deliberates whether investments that yield improvement in hard-to-quantify factors such as reduced delivery time and improved service reliability can be subjected to the same financial scrutiny as equipment replacement decisions such as new locomotives. Demonstrates thoughtful, creative approaches to measuring hard-to-quantify benefits.
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