Professional Approach to Transport Budgeting (Part - 2 continued)
Transport management is a real-time business!
Focus on the issues that count the most
What have budgets got to do with pricing?
So far we focused this Topic on budgeting, then moved on to the fundamentals of pricing road transport services and it is evident, that while transport budgets set criteria for projecting target income and expenditure for the forthcoming financial period, they are mostly structured on gut feel based on a repeat of this year’s trading, with “adjustments” that are likely to receive shareholders’ approval.
Unfortunately being a demand-driven transactional business, road transport is a moving target, and therefore exactness of expense and revenue budgets depend largely on knowledge of the state of the economy in terms of: growth and/or recessionary trends in the Macro and Micro-environments that affect demand and therefore pricing (Refer to Fig 1).
Fig 1 Critical relationships in road transport
We also identified road transportation as a real-time service delivery industry, where there is virtually no opportunity to turn excess capacity into inventory. Furthermore, performance is largely affected by unpredictable situations that occur in the work space [public domain and legislative changes]; inconsistent utilisation of assets due to shipper demand cycles, as well as delays in loading and off-loading vehicles. There is also extreme difficulty and, in some cases, it's impossible to fill empty back-haul capacity, which means charging trip distance km, not just lead haul km.
Happily on-board vehicle telematics provide accurate recording of TIME events, affording management an opportunity to study the time, place, and magnitude of these negative effects for further analysis and tweaking.
How do you price vehicle standing time ?
I simply don’t understand why Telematics is not fitted as standard equipment on all vehicles but I have been told by some Operators that they simply can’t afford the monthly payments [under 10 cents a km] - well that is when I suddenly discover I have another “urgent” appointment and leave.
Ok, let’s get down to budgeting and pricing: To be honest, budgeting has little or nothing to do with pricing; neither do cpk Cost Estimates (OCEs). Before you hit the exit key hear me out on this one.
Budgeting is essentially a financial accounting forecast tool but is too broad-based for use in managing hour-by-hour mapping in a real-time work place. Let’s consider the practical implications of relying on month-end financial accounts, only to discover later that you are in a hole for overspending or under recovery in your fixed and variable budgets - “its history man”. The same goes for managing variable cost expenditure for the period [this will be discussed later]. Also, when you have missed your revenue target, there is little or no chance of making it up tomorrow or in the future.
For example, you are managing a fleet of say 87 ultra-heavy trucks engaged in hauling loads for say 6 shippers. Take a look at your load board. Operations has scheduled all available vehicles [80 vehicles] for the next 48 hours. Of the remaining 7 vehicles, 2 are off the road due to accident repairs and will be out of service for the next few weeks. The remaining 5 vehicles are in the workshop, of which, 2 will be off the road till next week due to major repairs. The remaining 3 are in for maintenance and should be back in service sometime tomorrow. Three drivers are absent, so you have 4 sitting in the change room.
Unfortunately in this situation, not all scheduled loads have been taken care of, which not only affects customer service delivery but certainly revenue [earnings] during the next 48 hour period. Of course there is a possibility of hiring transport to maintain service delivery but sub-contracting is fraught with risk and possibility of losing future business.
Let’s go one further: Ops has just told you they have a breakdown at Harrismith with and urgent load to Durban – welcome to the “Real-World” of road transport management!
Here is the challenge; to account for how much this will affect your income and expenditure budgets for the next 48 hours. Don’t panic - make a plan - however it is going to reflect badly in the month-end figures, but as I have said, its history. The real problem is that P&L budgets are a two-edge sword [ups expenditure and reduces revenue] when this hits the bottom line and trashes the budgeted P&L numbers you will need to explain.
Let’s add another dimension to this scenario. Of the available vehicles, not all are on long haul operations. 12 vehicles (14%) of them are on medium/short hauls around 150 km/round trip. These vehicles are budgeted to complete three round trips a day for 250 days/year, which is 112 500 km/year, at budgeted cpk revenue of R23.50/km or R10 575.00/day per vehicle.
How do you explain vehicle standing time?
What happens to the budgeted cpk revenue if a vehicle is down for just five days [98% availability] in a financial year period? Well, that is going to produce a R52 875.00 negative variance on the revenue budget, which will certainly affect ROCEBIT in that vehicle’s financial performance. Put another way, it will knock back around 9% off the profit before interest and tax.