Being recently hired as the Dir of Finance for Hotel M, the General Manager of the hotel approaches you with concern from hotel ownership that the hotel’s laundry operation is inefficient. Being new to the operation you took the opportunity to review financial statements and ask questions to discipline experts in operations and engineering (class discussion). The results of your questions yielded the information below. With the information you gathered, please prepare a recommendation to the General Manager to improve the financial results of his laundry operation and solve ownership’s concerns. Some additional questions that you may find useful include: What should the hotel do? What are the risks/strengths of your recommendation and analysis? What qualitative concerns do you have? What are potential weaknesses in your quantitative approach? Notes on current/historical Operations of the launder department as was requested in class are noted below: Department generates $80K per year in dry-cleaning revenue (would likely not change if the department were outsourced) Currently wash 1m pounds of laundry per year, no material changes year over year, or in future year expectations Current Laundry operation is in-house, meaning staff noted below work for hotel and complete all necessary laundry functions. Department leadership consists of: 1 Manager at $75K, 1 Supervisor at $23/hr, and half of the Engineer’s time at $20/hour. Hourly Staff has 12 Employees with tenure, averaging $10/hr (washer/handler/etc); hotel is currently at wage parity with the market Hourly Staff, Supervisor, and Engineer work an average of 40 hours per week Benefits costs are 30% of wages on average for all staff Utilities cost $40K/year Controllable Expense $38K/year Equipment needs $150K in repairs next year, and again in three years, these will be capital, not operational expenses It is hard to judge how productive your department is on a per lbs or per room night basis because so many other hotels have already outsourced, they don’t have benchmark data. Your productivity results are in-line with prior years. One operations leader suggests they have about 10-15% slack in their operation and could improve, but that is purely anecdotal. Hotel is 900 rooms and runs an average annual occupancy of 80%, no major market changes expected in future. In-Class you proposed many questions about an outsourced laundry alternative. You note that approximately 80% of other hotels surveyed use an outsourced partner for a variety of reasons. You identified one vendor that uses high-tech equipment and much less manpower to clean laundry, and you validate that they are a reputable vender which can service your hotel. They provide a bid to you, and per your questions, below are notes about the bid and ramifications of choosing the outsourced partner. Partner will charge $0.41 per pound, which is about in-line with other hotels Department would need 3 employees at $10/hour to receive and distribute cleaned linen from partner. Department supervisor would still be needed. Department would only have $2.5K in controllable expenses moving forward Department would still generate $80K in revenue from guest dry cleaning Hotel would need to buy $75K in linen due to turnover time of having stock out of the hotel being cleaned. This would be a one-time cost, and future linen costs would be similar to if the hotel maintained an in-house operation. The decision to outsource is possible in the current labor environment, but will cause unrest among staff being let go, and could cause issues with other departments in the hotel. The Human Resources leader is very concerned about going down this road, but based on the net employee reduction has given you guidance that severance costs will result in a one-time expense of $100K should the hotel outsource the department. In considering outsourcing, all equipment is owned outright, with no debt. Salvage value will offset cost of removing equipment so nets to zero. In the future, space is not sellable, but could be used for storage and offices. May make some staff happier, but would not yield any financial benefit. For investment decisions hotel management usually uses a 5-year scope and 15% hurdle rate in making these types of decisions.