Dedicated Fleet Hot Topic 2
If in-house competency is lacking, how will it affect ability to appoint and manage a transportation contractor, and to what extent will you rely on the vendor to provide those skills?
Out-sourcing could cost you more than your current in-house transportation – that is if you don’t really know those costs, or what effect they have on your cost-to-serve
What is wrong with your current Supply Chain strategy which affects transportation cost?
What effect will a 3rd Party service provider have on your customer relations/service delivery and billing policy?
Don’t believe out-sourcing will shield you from road traffic compliance
How will out-sourcing affect your cash flow (POD and damaged goods disputes)?
Don’t out-source transportation thinking it will yield a beneficial taxation advantage.
7 things to know before out-sourcing
Why this Topic?
This Topic was chosen as the trend to out-source non-core business functions is gaining popularity particularly in the light of Cloud technology providing ease of access to real-time Supply Chain information. Availability of advanced logistic systems has prompted Shippers to seek more cost-effective transportation tactics in the face of highly competitive trading and digital technology driving on-line procurement - especially in the retail consumer goods market.
So far these trends have proved effective in developed countries due to the magnitude of scale, however, one must consider whether adoption of such high level technology is warranted locally as well as the difficulty to justify this approach in the domestic market, given the present economic trends.
If you are considering out-sourcing the road transportation of your logistics management division let's begin by asking, is it in the belief that:
the company has out-grown its ability to provide effective customer service delivery relative to competitors?
transportation cost escalation is affecting profit margins?
labour challenges and/or lack of personnel, competency and skills are affecting the business?
scarcity or reluctance to further capitalise fleet replacement/capacity?
distribution challenges - changes in demographics of the market?
If there is a belief that, as transportation is not the core business of manufacturing/wholesale entities, it would be logical to assume if left to a Professional Carrier, efficiency gains would off-set distribution subsidies and improve trading results of the contracting entity and its service provider. The up-side of such a policy would also create an expectation of improved service delivery and freeing up of Capital deployed in non-core assets.
Such reasoning is logical and therefore beneficial to both parties - the Shipper (distributor of the Goods) and the contracted Carrier, so why take on the strain of non-core business? What is illogical, of course, is considering such a strategy without accurate assessment of the existing Status Quo.
Conversations in this Hot Topic will therefore address these issues and we trust will provide valuable opinions on both sides of the negotiation table. Remember, however, that it takes more than one point of view to create a worthwhile conclusion, so please contribute as well as learn from participation in the points raised by respondents.
Let’s get the conversation going on how dedicated fleet operators should tackle this complex challenge.
Index to Conversations
Here's how to get going with your questions and thoughts
Neil J's Question
Hugh, you have talked a lot about what you refer to a "Value Quotient" and say that the derived benefit must be greater than the cost in order to create a positive result. In theory, it sounds simple enough but how does one measure and express this "benefit"?
Neil makes a valid point here so let’s look at it from a supply chain management point of view. First, we must view it in terms of time-and-place convenience created by placing goods at the point of sale.
Next, we look at the “Value” created in terms of the “willing-buyer-willing seller” notion. Obviously the sale isn’t made until the buyer accepts that the purchase price satisfies the need and perceives Value in making the transaction (i.e. what you get relative to how much it costs you).
Now relate the transaction in terms of the supplier. Suppliers perceive Value when the transaction is completed. The supplier could be a manufacturer or distributor of the product and therefore needs to recover the cost of doing business: logically distribution cost must be budgeted separately to production cost.
To be meaningful, the transportation Value Quotient (KPI) should be calculated and expressed as a percentage of sales revenue. In other words, transportation management budgets must express this single KPI Vq = transportation spend in rand expressed as a percentage of sales.
Obviously it is important to distinguish transportation costs away from distribution costs as it does not include total supply chain expenditure, unless it is being compared with 3PL alternatives.
Pieter S' Question
Have you any benchmark numbers to work with regarding this KPI?
Thanks for your question. No, unfortunately not, the range of variables is far too great even if we look at similar SC operations. You will see why as we move on to Strategic Focus relating to supply chain management. What I do suggest however is that you begin by isolating all non-road transport expenditure within the supply chain distribution budget. I mean; rail, sea and air as well as WMS expenditure as we are talking about whether or not to out-source the road transport element within your supply chain. You can even go a step further by isolating different products and delivery points as well as by customer.
Once you have established the Vq KPI for the sector under review, you can then compare it with marketing estimates so as to establish positive or negative variances and research which factors are contributing to the variances - if any. All too often this critical aspect within the marketing equation is forgotten in the rush to expand sales revenues in isolation.
Strategic Focus on Supply Chain Management -
The effects on Transportation Cost and Performance
(management has no control)
Global and/or Domestic economic cycles
International Trade relationships
Balance-of-Trade account deficits
Currency - exchange rates with trading partners
Government - Political instability
Fiscal policy - Inflation/economic growth
International - Credit Ratings
Legislation - Regulatory structure and compliance
Global Commodity prices
SARB Interest rates
Infrastructure - roads, power, water supply
Labour Laws - competency, skills and availability
Foreign Investment appetite
Customers, Suppliers and Competitors
(management has little or no control)
Size and demographics of market segments
Cycling/seasonal demand for services/products
Softening or stalled growth within market segments
Entry barriers to market segment
Number and strength of competitors
Bargaining power of suppliers
Bargaining power of customers
Technological developments and obsolescence
Heavy Road Traffic congestion
Recovery of vehicle detention time at loading and off loading points
Strategic Focus: Finance, Resources and Constraints
(Shareholders/management has full control)
Choice on which market and/or segment for investment
Ability to attract Capital investment
Accept accountability to deliver shareholder value and trade responsibly
Choice of establishment location, relative to that of the primary market
Human resources program – building Intellectual Capital/skills/staff churn
Formation of competitive policies/procedures to maximise Shareholder Value
Relative Value of payload per Unit of transportation cost
Willingness to deliver customer service satisfaction
Leadership flexibility – rapid response to Environmental shifts
Conformity - commitment to trade responsibly within the Law
Function efficiently even under challenging constraints
Self-determination to create market differentiation and outperform competitors
Adequate Risk management
The above are by no means conclusive or in order of priority but only intended to illustrate a few examples of how rapidly changing circumstances within these three environments can seriously affect logistics supply chain management and marketing strategies. This is why they should be constantly monitored with effective KPIs and amended to suit prevailing circumstances.
What worked well yesterday could well be obsolete tomorrow
The significance of Company Strategy in relating to the Macro and Market Environments
Given such prodigious significance; it is surprising to note how little attention is given to company strategy in day-to-day decision making. Traditionally, business strategies tend to be held as closely guarded secrets - confidential information only referenced behind “closed door” or quarterly Board meetings. Furthermore, corporate strategies are seldom committed in writing, or challenged as still appropriate in terms of current trading perspicacity.
In an article that originally appeared in Business to Community, 56 per cent of senior executives agree their biggest challenge is ensuring that day-to-day decisions are in line with strategy and allocating of resources in a way that supports that strategy.
Strategy should not be confused with Vision and/or Mission Statements. As we will see later few, if any, of these statements contain tangible evidence that can be measured accurately or monitored, and are mostly open to broad speculation and misleading personal interpretations. In contrast, company strategy is the foundation upon which investment is justified and Shareholder Value augmented.
When formally managed, strategy can be considered the "Core intellect driving company Value". Although strategy has been around for centuries and well documented, it does not receive sufficient recognition as being indispensable in driving a successful business enterprise.
No, strategy is not some earth-shattering, next-big-thing, it’s a live entity that continually monitors the environments in which the business operates, while relating to essential premises on which the company is based; differentiating itself from competition and threats that would otherwise negatively affect Shareholder Value. As such, strategy must operate in a framework of relationships existing within the scope of the Macro and Market Environments. These are the environments over which your company [Micro Environment] has no control and must therefore adapt.
As can be noted from (Fig 1) that the relationships of the business [Micro Environment], to the Macro and Market Environments, places opportunities/constraints that may directly affect the market segments where your company trades. This schematic diagram is intended to illustrate the Reactive and Responsive interfaces that exist between the Micro Environment [your Business] and the other two environments [Macro and Market Environments] that dominate and influence the trading platform.
Reactive Interface 1 connects the Strategic Relationships between the Macro and Market Environments. For instance, should the Market Environment [customers and suppliers] react to changes in the Macro environment, these may also affect the established patterns of trading with the Micro Environment. The effect of these reactions is also likely to impact across the Strategic Relationships that exist between the Market environment and your business [Micro Environment], through Responsive Interface 3. Inversely, these and/or other changes in the Macro Environment, may also impact directly through the Strategic Relationships that exist between the Micro Environment [your business], without consequence to the Market Environment. The one to watch closely is the Reactive Interface 2 between your business and sudden changes in the Macro-Environment, is referred to as Reactive as there is little or no chance of influencing the status-quo.
By illustrating these rather complex relationships in a two-dimensional graphic (Fig 1) it becomes obvious that a company is not an island and that the success or failure of a business is highly dependent on monitoring and translating the perpetually moving horizon which can alert investors to new opportunities or, if ignored, severely impact on an otherwise successful investment and render it a liability to shareholders and creditors alike.
Further reference to (Fig 1) shows the prominent position afforded company strategy. It is so positioned to have equal exposure to all three principal environments within the business arena so as to continually monitor change and provide timely direction as to where opportunities and potential threats may call for rapid or long-term responsive action [Responsive Interface 3]. You will also note the equal proportions, depicting the balanced rationale applied to illustrate equal priority given to all three Environments, and the Strategic Relationships connecting them.
Debunking the myth that “supply chain transportation is not your core business”
These words should never be uttered in a board room! Intelligent in-and out-bound transportation is a key component of competitive and profitable trading. In today’s highly challenging business environment cost-to-serve supply chain expenditure is the last frontier to preserve razor-thin margins, yet it is the most misunderstood and neglected link in the supply chain.
The advent of urbanisation heralded the concept of TIME & PLACE convenience to the manufacture and distribution of goods - we all know the incredible technological advances made since then - where barge and water cannels gave way to truck-congested motorways, and so supply chain transportation management became a science and not just an expensive inconvenience.
Yes, some amazing advances have also been made in converting raw materials into Value-yielding convenience goods that we now take for granted. However in the chase for affordable manufacturing of these goods, Global trading has spawned off-shoring production, further adding to the critical significance of economical transportation to market.
Failure to factor in supply chain transportation costs when implementing innovative marketing strategies can have a devastating effect on trading performance
One only has to follow developments in international marine and air transport sectors to appreciate the effects of off-shoring, especially in terms of import/export freight movement.
Obviously governments have failed to recognise these developments in terms of providing infrastructure capacity resulting in chronic local road traffic congestion as well as inter-state traffic flows from harbours to DCs and finally to point of sale and consumption.
In this series we will attempt to draw attention to road transportation challenges facing SA manufacturers and importers of goods, including commodity exporters, which are serious threats to the country’s economic growth as well as unemployment in a shrinking and over-supplied Global trading environment.
We will be making references to issues relative to the three environments: Macro, Market and Micro Environments, as these are explicitly linked to supply chain cost-to-serve expenditure.
Charles Davidson's thoughts Group Transport Manager SPAR
We move our products with our own fleet as we have done many exercises to compare own fleet vs outsourced, and every time own fleet is the best for the business.
As a distributor, transport is our core business and I believe that applies to all who distribute their own products.
We have outsourced some cross-border deliveries however we constantly re-evaluate this to ensure the costs remain effective. What we have also done is to look for joint ventures when a transporter is delivering into our DC's and has no return trip and will deliver for us on their return leg, which helps us reduce costs.
We are backhauling product and doing a lot of work in our supply chain to help reduce costs.
You say that you have done many comparative exercises to compare own with out-sourced transport and every time; "own is best for the business". You also accept that as a distributor; "transport is your core business." There is also an extremely interesting point you make and that is you also; "look for joint ventures by up-ticking this policy with transporters when the opportunity exists to fill their empty back halls from your DCs.
All this makes absolute sense but the most interesting point is that each time you do an exercise on own verses out-source, own proves to be best for the business. Is this due to your transport division being a separate stand alone 3PL operation from your retail outlets?
Charles Davidson's reply - Group Transport Manager SPAR
Hugh, our transport is not a stand alone entity. Exercises were done many years ago with some of the big transport companies and it was shown that we can run our vehicles as cost effectively as any Transporter out there.
Since I have been with the company, we again have had Transporters quote us and when we have done our numbers we still are able to be better, which is generally because the Transporters carry for reward and have to make a profit, and their replacement policy is shorter than ours.
We do not have to make a profit and we are able to sweat our assets and, through having our own workshops on site for servicing, R & M and preventative maintenance programs, this enables us to keep our vehicles reliable for a good length of time.
Charles we are indebted to you for your excellent response so early in this Topic. It is living proof that when done correctly, and with dedication and competence, Own-fleet can actually outperform large Professional Carrier offerings.
You explain a number of sound reasons why; “you can run your vehicles as cost-effectively as any transporter out there” and explain the KEY component of your policy as that of extending the economic life of vehicles through competent transport management and sound SMR practices, which reduces ownership and operating costs – both essential in realising competitive supply chain transportation and cost efficiency. Are you in a position to disclose the number of HCVs in your fleet?
I need to find out which variables are taken into consideration to come to the realization and conclusion that using your trucks is more efficient than outsourcing the transportation to other 3PL companies. Is it using your trucks to backload for other companies on return trips that make the difference? If so, does it mean this happens very often?
Kayode you omitted to say where you operate and what type of fleet you’re referring to, which makes it impossible to narrow down your questions to specific issues. For instance, are you talking about long-haul, short-haul, or urban less-than-truckload (LTL) trucking? As we don’t know where you operate, we can’t get too specific about road traffic compliance. Furthermore, you have not said what sort of loads you’re carrying or the size of your fleet and your operation. These are only a few issues that have an enormous influence on deciding whether to fill back-hauls or out-source to a 3PL vendor.
We have scheduled considerable future space to cover this important Topic as there are more than a dozen issues to consider and debate in such a manner as to narrow down the field to some of the more common issues and benefits involved in making such a crucial decision.
For now, let’s focus on the issues you raised. Your first one asks: “which variables are taken into consideration”? One must be cautious about what is meant by “variables”. This can mean vehicle-specific-Variable Costs or variable vehicle-specific-applications as well as seasonal variations in demand for transportation services. All these are important considerations that affect transportation efficiency and Cost-per-unit-delivered, whether the work is done by own fleet or outsourcing. We will however be addressing all these issues and how they are likely to influence the final choice most beneficial to companies and service delivery to their customers.
Second, you refer to; “conclusion that using your trucks is more efficient than outsourcing transportation to other 3PL companies.” Here one must distinguish between Professional Carriers and 3PL vendors. This brings us to: are you relating to entire warehousing and distribution in your supply chain, or just the road transportation component? However before this can happen, you must have a firm policy committed in writing (Service Level Agreement) detailing the precise methodology on which this conclusion will be motivated and implemented and, most of all, Bench-mark KPIs to measure success of the outcome.
Finally: “the myth of back-hauling for other customers reduces cost.” American Trucking stats show that less than 40% of freight offers potential back-haul business. Take SA’s commodity exports for instance 100% is lead-haul only business.
Why CFOs should encourage Dedicated fleet ownership
Following this exercise could change your thinking about vehicle costing and why it can offer exciting investment opportunities.
by Hugh Sutherland
There are many reasons - to own or not to own ‘Dedicated’ supply chain transportation fleets. Recent economic developments in South Africa have negatively affected investment in capital-intensive assets such as heavy commercial vehicles (commonly referred to as “non-core” assets).
While supply chain transportation encompasses in-and out-bound logistics - both critical components in the supply chain - they are seen as somewhat removed from the “core” business of manufacturing and distribution. And, from a pure investment point of view, considered to have a negative affect on company financial performance.
Why the reluctance to own and operate fleets?
Apart from perpetuating growth, shareholders look for positive financial performance in terms of incremental Shareholder Value. Profit Before Interest and Tax (PBIT) is also an important measure of C-suite competency as, while they don’t normally feature in funding Capital, they are nevertheless responsible for the performance of the investment. Another important measure used to assess business performance is sales as a multiple of Capital employed.
Let’s see how these ratios relate to business performance:
Profit on Capital employed %
Profit on Sales %
Sales as a multiple of Capital employed
PBIT/Capital employed %
Ways of achieving increased Profitability are also addressed:
Increase Profitability or reduce Capital employed
Monitor Profit on Capital employed
Increase price or reduce cost
Monitor Profit on Sales
Reduce Capital employed
Monitor Sales as a multiple of Capital employed.
Most of the problems are propagated in Boardrooms
Most supply chain transportation challenges begin in Boardrooms, where elementary errors are made in developing or expanding new marketing strategies and often manifest in acute consequences for supply chain transportation costs. Furthermore, commonly available Operating Cost Estimates (OCE) – be they provided by Associations or OEMs – can be very misleading. Also where transport is treated as an overhead expense in the company accounts, there is no way to accurately assess investment performance to justify the fleet.
Naming the players
This example is based on approaching the road transport aspect of supply chain distribution separately from core business interests of manufacturing retail consumer goods. To enable this, the core business is named SNAPPY COLD CHAIN (the Shipper) and the "non-core" business, SCC Hauliers (the Carrier).
It might come as a surprise but supply chain transportation has potential scope to expand very profitable investment opportunities, in both the core business as well as what has been referred to as “non-core” business. This is where one needs to accept that, yes, transportation is very different from manufacturing and packaging food stuff. For this reason dedicated fleets need to be managed as transport companies – not manufacturing or packaging operations and, as you will see, should be considered stand-alone investments with audited trading accounts, usually justifiable when the net asset value of the fleet exceeds around R10mn.
Manage the cost of delivering freight – not kilometre
At the outset, reliance on cents per km – now rand per km – is extremely misleading as it has no bearing on anything other than Variable Costs/km.
Let’s look at this typical 6x2, 8,4m reefer, favoured in urban food distribution to Super Market retailers, featured in a prominent transport magazine. This vehicle was chosen to illustrate the principals addressed in this exercise as it’s a very capital-intensive machine; one that needs high-end transportation knowhow. To authenticate the numbers, and with the kind permission of author Max Braun, of Max Braun Consulting Services, a long standing independent transport, logistics and distribution consultancy, I used the well understood principals of financial management in applying these profitability ratios.
If you have been following this series you will have noticed that I referred to it [reefer] as a “BIG liability” in the rear-end photograph of one. It’s more than just a delivery vehicle – It’s a temperature-controlled refrigerator transported on an extra-heavy motor vehicle, which together, carry a heavy price tag of just on two million rand – R146 452/ton of payload capacity or R123 570/pallet load capacity! Also, it’s transporting what is mostly considered relatively low-value, highly-perishable, freight.
In this instance Fixed Cost was referred to as "Standing Cost", this can be confusing as Fixed costs also occur when the vehicle is travelling. Fixed cost is also difficult to manage in this application due to very low annual kilometer utilisation resulting from deliveries on heavily trafficked routes as well as lengthy loading and off-loading delays. So here one starts to understand why we chose this extreme case to prove that, if managed correctly, a truck can provide consistent economic transportation for the core business [Shipper], while earning very attractive PBIT for the fleet owner [Carrier] throughout its first economic life. The answer is simple but the approach is very different – we don’t include the familiar c.p.k or cost-plus mark-up in our rationale!
Choosing the right vehicle for the job
We must assume that the operation was thoroughly researched by a competent road transport engineer and this reefer configuration was recommended as the optimum vehicle, after taking into account all of the various aspects in augmenting service delivery in the areas of, loading, off-loading and route planning as well as on-road performance and economy. However the Variable Cost assumptions were made on those common to Premium truck brands.
It should also be noted that correct vehicle selection is a critical aspect in planning and predicting road transport economics, as no amount of accounting or fleet management expertise can overcome inherent problems associated with the wrong vehicle for the job-to-be-done. For example, this vehicle configuration is limited to a maximum load of 844 kg/pallet when fully loaded. This means as a rear-loading configuration, it is necessary to conform to a “first-in-last-out” loading sequence, which is likely to result in overloading the steer axle after the first drop. It is also critically important to ensure that the vehicle is fully loaded with 16 pallets, as cost/pallet-delivered is used in calculating the business profitability ratios that follow.
Every delivery presents a different set of conditions that can greatly affect the sensitive ratio of Fixed-to-Variable Cost, way beyond just distance [c.p.k] and this is the first error made by a great number of Shippers and Carriers. Simply put, it’s a matter of what is the most economical load? – why not more or fewer pallets?
The willing buyer/willing seller principal
Begin by identifying the key Value Quotients i.e. Function/Cost (what you get for how much it costs you). In this study we are looking at it from two perspectives:
a) The Shipper’s transportation cost per rand of product delivered
b) The Carrier’s PBIT on Capital employed to motivate investment in fleet assets, this applies
equally, whether the Shipper is also the Carrier or not.
"One swallow doesn’t make a summer” and this is particularly true when it comes to trucks. Your best cost estimates are out-dated at sign-off. It’s the very real issue of Time Value of Money, especially in SA. Furthermore, it’s pure guesswork to apply any math to your projections. It’s also impractical to revise your projections every time the rand loses or gains value, or the price of fuel moves and so we can continue in every aspect of your budget forecasts.
Here is another aspect to consider
Vehicle operating costs don’t happen in 12 unequal financial periods each year and so serious economic analysis requires Life-to-Date (LTD) costing with deferred expenditure management accounting, despite this being rejected by financial accountants for tax reasons. For example, vehicle maintenance and repair budgets are used to monitor spend ahead of actual expenditure, however, when a major component blows the 'monthly' budget, unless LTD costing has been applied, its negative impact on the budget is embarrassing for those held accountable.
There's a whole lot more that can skew budget variances but these are subjects for future discussion. Right now we want to know if it is feasible to create a reasonable business proposition to justify Capital Investment in supply chain transportation assets [fleet], while supporting competitive trading results in the “core” business.
Let’s begin by getting acquainted with the Assumptions in Fig 1.
Using current pricing as at May 2017, I extracted numbers from the (MBCS) operating cost schedule in order to authenticate the exercise as close as possible to reality. However the operating criteria have been altered to illustrate the effects of using the vehicle in an urban delivery application, rather than a medium distance haul, so annual km has been reduced from 135 000km to 58 000km and, worked on three full-load deliveries (totaling 48 pallets) per shift.
The idea is to illustrate the effect of asset utilisation in terms of Cost per TRIP, rather than per km.
The possibility of filling backhauls is extremely remote so, in this case, it was ignored.
Big Liability or Great Asset?
It begins with setting the Shipper's budget for transportation cost per rand of product delivered
Value of product/pallet
I must emphasise that this format is designed to lead readers through the principles of assessing Profitability Ratios. It must not be compared with those of an OCE. References to the MBCS OCE were drawn merely to avoid possible distortions occurring in pricing of the vehicle and consumables in this exercise. Furthermore, this exercise does not relate to any haulier or private fleet Operator. (refer to the NRTA Chapter 1, Definitions for Operator)
As mentioned earlier, it's futile to budget haulage costs on perceptions of what you believe to be the operation, or for that matter, on last year’s numbers “adjusted for inflation”. It starts with realising that every trip presents a different set of conditions that affect the cost of moving freight and this is your first challenge. In other words, the numbers produced from this set of ASSUMPTIONS cannot be used for long-haul applications, where the Fixed to Variable cost ratio differs from this urban short-hall operation (refer to pin)
The average speed has a profound effect on the hub-time cost per km due to higher fixed cost/ km traveled. At 42 km/h the trip takes 5,31 hours (Fixed cost) amounting to R1 357.82 or 40,39 % of the total hauling cost of R3 313.18/shift.
Based on information provided in the ASSUMPTIONS, SCC Hauliers (the Carrier) has come up with these cost projections
RATIO = 1,57:1
These numbers are taken from the SCC Hauliers budget Profit and Loss account for the purpose of setting primary Operating benchmarks used to monitor KPI performance assessments.
It becomes evident that these figures break up the various costs associated with the total hauling cost/hour at the achievable average speed of 42km/h. They do not include load handling costs. Yes, it is imperative to prioritise monitoring of this single benchmark - before any other KPIs. Any variance here will have a marked effect on all the other Performance figures, especially Fixed cost /hour. Remember that Hauling Cost includes both Fixed and Variable costs.
Next, carefully monitor the loading and off-loading times. Variances here will also affect on-road (hub-time) targets and consequently, the Pallet delivery target as well as the budgeted Cost of Sales/pallet if fewer pallets are delivered/shift.
It is alarming to note how the totals shown in the red cells accentuate the responsibilities associated with distribution management and supervision. (see Pin = Value of product delivered/shift hour) with this single vehicle refer Fig 3
We now move on to the SCC Hauliers performance ratios in Figure 3
This is where it comes together. From what appeared to be a simple budgeting exercise we can now appreciate the huge challenge of projecting justification to invest shareholders' Capital in fleet.
The first and most important objective, is to manage the asset in terms of justifying the investment, while providing competitive Service Value to the Shipper, whether or not the Shipper owns the fleet. The way of doing this is to now add Operations Management and Administration costs to arrive at the budgeted Operating Profit or (margin Before Interest and Tax), bringing the Total annual Transportation Cost projection to R1 911 854.34.
Fig 3 summarises the total transportation Cost budget; Unit per hour and total cost percentages. The most informative of these is to note that the highest, by a large margin, is the Fixed Cost. The significance of this is that it is the area which needs the most real-time Management attention.
At this point we have established that at a delivery of 12 480 pallet loads/annum, the average delivery cost is R153.19/pallet. Failure to meet this budget target will increase the average cost/pallet delivered.
To assess the Value Quotient, we multiply the average pallet load value (R4 000.00) by the number of pallets delivered and arrive at very close to R50 000 000.00. worth of product delivered/annum. The average transportation cost/pallet delivered (R153.19), is then divided by the average value of product/pallet (R4 000.00), to arrive at the transportation cost/rand of product delivered, which is 3.82 Cents in the Rand or 3,82% of delivered product sales revenue.
Another way of looking at the Value Quotient is to divide total value of product delivered (R50 000 000.00) by the total annual transportation cost (R1 911 854.34) (Vq = 26,15 see pin) - That's impressive!
There's an old saying that goes: "The party ain't over till the fat lady sings". So now that the Shipper should approve the Budget, what about servicing the shareholders' investment in Fleet?
Fig 5 shows the projected Profit and Loss account for SCC Hauliers
On the face of it, these figures support SCC Hauliers pricing but we need to look at a breakdown of the Variable Cost Budget and how the Straight-line depreciation has been calculated: refer to Figs 6 and 7
HOW IT WORKS
PROFIT ON CAPITAL EMPLOYED
It's time to view how these ratios relate to business performance and justify Capital investment.
Of course these numbers are in present Rand Values and will be revised quarterly or annually but the purpose of this exercise is to illustrate how Sales as a multiple of Capital employed provides exceptional investment opportunity - whether for the Core business - as owner of the fleet - or as an outside contractor, over the intended first economic life of the asset.
An Asset turn of 1,00 is essential to service the investment at PBIT of 20%.
A reduction in the asset value after 1st year depreciation improves the PBIT margin.
A further reduction in Capital starts to make the investment attractive.
Having depreciated nearly half the asset value brings Asset turn close to 2,00 with spectacular results!
2,615 Asset turn is the ultimate but it's trade-in time.
Are you going to "sweat the asset" or Out-source?