Luotang in Standard Format 2
I. Executive Summary:
The electric supply industry in China is a highly competitive industry. Luotang Power must be able to provide high quality output while maintaining a strong hold on internal controls, controlling costs including coal. Tan must obtain coal at the lowest possible price and must use it as effectively as possible – while maintaining or increasing the quality of the output. If coal is purchased at prices that are too high or more coal is used than is really necessary, higher costs and lower net profits will result. The key issue, highlighted in this case, is for Tan to analyze his cost variances to explain Luotang Power’s financial performance.
After conducting a cost and variance analysis for Luotang, the team uncovered issues in Tan’s contract with his suppliers and customers. We recommend that Tan negotiate a lower price in exchange for a guaranteed level of spot power sales, a move that would substantially increase Luotang’s profit. Additionally, we recommend that Tan negotiate protective clauses into their contract, such as a minimum additional volume and term.
II. Statement of the problem:
Luotang Power’s plant availability and fuel economy had improved over the previous year, but they are showing sluggish profit numbers. The long term issue facing Luotang is that they face limited opportunity to sell energy above the contractual minimum to HPPC or others. In addition, the case outlines two significant short term issues. First, Tan knew how critical fuel price management was to HT Power’s success but wasn’t completely sure how well the team had managed this aspect of the business during the year. Additionally, Tan felt HPPC had been negotiating harder than in previous years with respect to excess energy sales, and demand for electricity from Luotang had fallen dramatically over the past 12 months. Tan needs to dig into quantity variance, price variance, and fuel efficiency variance to understand what is driving the poor
The electric supply industry in China is a highly competitive industry. Luotang Power must be able to provide high quality output while maintaining a strong hold on internal controls, controlling costs including coal. Tan must obtain coal at the lowest possible price and must use it as effectively as possible – while maintaining or increasing the quality of the output. If coal is purchased at prices that are too high or more coal is used than is really necessary, higher costs and lower net profits will result. The key issue, highlighted in this case, is for Tan to analyze his cost variances to explain Luotang Power’s financial performance.
After conducting a cost and variance analysis for Luotang, the team uncovered issues in Tan’s contract with his suppliers and customers. We recommend that Tan negotiate a lower price in exchange for a guaranteed level of spot power sales, a move that would substantially increase Luotang’s profit. Additionally, we recommend that Tan negotiate protective clauses into their contract, such as a minimum additional volume and term.
II. Statement of the problem:
Luotang Power’s plant availability and fuel economy had improved over the previous year, but they are showing sluggish profit numbers. The long term issue facing Luotang is that they face limited opportunity to sell energy above the contractual minimum to HPPC or others. In addition, the case outlines two significant short term issues. First, Tan knew how critical fuel price management was to HT Power’s success but wasn’t completely sure how well the team had managed this aspect of the business during the year. Additionally, Tan felt HPPC had been negotiating harder than in previous years with respect to excess energy sales, and demand for electricity from Luotang had fallen dramatically over the past 12 months. Tan needs to dig into quantity variance, price variance, and fuel efficiency variance to understand what is driving the poor