Matching Supply with Demand: An Introduction to Operations Management 2nd Edition by Cachon Terwiesch

Exercise 1

(Crazy Cab) Crazy Cab is a small taxi cab company operating in a large metropolitan area. The company operates 20 cabs. Each cab is worth about $20k. The metropolitan area also requires that each cab carry a medallion (a type of license). Medallions are currently traded at $50k. Cab drivers make $8 per hour and are available for every time of the day. The average cab is used for 40 trips per day. The average trip is three miles in length. Passengers have to pay $2 as a fixed fee and $2 per mile they are transported. If the cab picks up a passenger (as opposed to being flagged on the street), there is no extra fee. Fuel and other costs, such as maintenance, are $0.20 per mile. The cab drives about 40 percent of the distance without a paying passenger in it (e.g. returning from a drop-off location, picking up a passenger, etc.)
a. Draw an ROIC tree for the cab company.
b. Populate the tree with numbers. Make assumptions to explore operational variables in as much detail as possible (e.g., assumptions about gas prices, gas consumption, etc.).
c. Which of the variables would you classify as operational value drivers?
d. Analyze the labor efficiency and the efficiency of using the fleet of cabs using productivity ratios.