Why CFOs should encourage Dedicated fleet ownership - continued
Moving on with this important Topic, we now continue the Conversation and invite readers to share their Thoughts and ask Questions.
Herman Lemmer's Questions and Thoughts -
This is a very interesting and informative article on, "to own or not to own." Here are a couple of points which you might want to discuss:
1) Capital employed per ton of capacity:
In my view this is not a meaningful metric as it bears no relationship with the utilisation of the vehicle. It's merely an indication of cost per capacity.
2) Sales as a multiple of capital employed:
Why are you not using the formal term "asset turn"?
3) Loads on return leg:
This is a powerful instrument in the hands of professional carriers and could be seen as them having an edge on own transport, providing certain customer service levels are met. In many cases we see customers’ service level not being adhered to and thus another reason why own transport is preferred. reasons being that shippers sometimes don't manage professional carriers properly and/or do not have proper service level agreements in place that should be enforced.
4) Competent management and staff:
In many instances CFO's should encourage dedicated fleets, provided it is supported by competent management and staff to run the transport operation.
5) Please include a paragraph on your conclusions.
Hello Herman, thank you for your Questions and Thoughts as they raise some interesting observations.
The following are my explanations in response to Herman's Questions and Thoughts (shown in bold italics).
HL “Capital employed per ton of vehicle payload capacity is not a meaningful metric as it bears no relationship with the utilisation of the vehicle. It’s merely an indication of the cost per capacity”.
HS I refer you to the subhead in the article, where the points being made are to change traditional thinking about vehicle costing and why it can offer exciting investment opportunities. However lack of understanding about the importance of justifying capital employed, in what has been termed “Non-core” business assets (fleet), C-suite executives are said not to favour Capex for fleet replacement and/or expansion. This Hot Topic therefore sets out to show that companies are losing out on great opportunities for potentially better returns on fleet ownership than their “Core business”. Financial analysis in the article makes the point that unless cognisance is taken of profit on capital employed, there is no way to justify shareholder investment in fleet. For example, the rationale relates to the Value being generated by moving 12 480 pallet loads per annum with the chosen vehicle configuration. Now this is where the Capital employed per unit of payload capacity plays a decisive role because it determines the amount of investment needed to deliver the annual pallet load target. However unless the Value created in moving 12 480 is credited to the cost of doing so, there is no possible way to measure Profit on Capital employed.
Another way of explaining this is to look at the effects of reducing Capital cost/ton of payload or per pallet load, as vehicle depreciation reduces the amount of capital employed over the five year economic life from R1,977,100.00 down to R355, 878.00 by year six.
This configuration is probably one of the most costly dedicated fleet vehicles per Unit of payload capacity - in this instance, Pallet capacity - not tons.
In this application, it is rather constricted in distance (km) traveled per financial period resulting from proportionately long loading and off loading times, especially when applied in multi-load/shift deliveries. In Bridging applications, a drawbar trailer combination might be considered to increase payload capacity.
2. HL "Sales as a multiple of capital employed, why are you not using the formal term "asset turn"?
HS “Asset Turn” in this instance, can be rather confusing as we are evaluating capital employed in the vehicle and not in the business, as would normally be included in the annual profit and loss account i.e.(Fixed Assets + Current Assets – Current Liabilities). The possibility of alternative accounting and financial definitions flags up one important point to bear in mind - in any discussions about ratios one must establish how they have been defined if their interpretation is to be meaningful.
3. HL "Loads on return leg is a powerful instrument in the hands of professional carriers and could be seen as them having an edge on own transport, providing certain customer service levels are met".
HS This example was chosen to illustrate an example of “Dedicated Fleet” operation, and mention was made that “The possibility of filling back-hauls is extremely remote so, in this case, it was ignored”. However if by some chance there was a possibility of securing back-hauls, it would needed to have been included in the assumptions - in which case - the vehicle would not have completed the target of delivering 780 full truck loads per annum, due to loading and off-loading time for the back-haul business. Besides, this is a very special vehicle (Reefer) and transports temperature-controlled consumer food stuff.
One should also be cautious when talking about filling empty back-hauls with dedicated fleets as, at best, it would seriously compromise the SLA delivery terms and conditions.
Empty back haul business is only a rare possibility in cases where a general public haulier, using general purpose, multi- load vehicles, finds an opportunity to score business in this sector.
I would also point out that this recommendation was made in the study: "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 and 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”.
4. HL"In many instances CFO's should encourage dedicated fleets, provided it is supported by competent management and staff, to run the transport operation".
HS Road Transport Operators need to understand that there is legal responsibility to employ competent and suitably experienced personnel when using a Public Road in the course of their business, and not endanger public safety by believing it’s not their core business.
5. HL"Please include a paragraph on the content of the article and one on your conclusions".
HS As this is a "Conversation" and not a formal text book, we decided to keep it as informal as possible. The Idea is to raise a Hot Topic – lay a foundation for discussion/conversation - then leave it open for interested people to have their say and points of view, so we purposely don’t form any conclusions while the Topic is open.
JGH's Thoughts -
My experience is that many large, small, professional, corporate and private fleets, don’t really understand the true meaning of CPK and therefore don’t know their true operating cost - be it a profit or loss. They make, or don't make decisions, without accurate or factual information, and misled by poorly educated and unskilled subordinates.
It is a fact that these issues could be detrimental to their business decisions going forward. It is also a fact that we do not use professional skills available to right the situation, continuing with blindingly poor business practice - claiming that it will cost too much for training or consultancy services. Needless to say, these unwarranted costs will have already been lost or irrecoverable, resulting in undercutting competitors and offering unattainable deliveries/promises, due to an unrealistic approach to the business at hand - which could be recoverable in most cases.
Hi JGH, I see you get to the point very quickly by calling a "spade" a "shovel", and from a lot of coalface experience, include most SA fleet Operators in general. Of course, the problem initiates in our Road Traffic Legislation, where the only individual required to be licensed to operate a heavy commercial vehicle, is the driver!
Furthermore, another astonishing fact is that anyone can service or repair a ultra-heavy vehicle as absolutely no qualification is required.
SA certainly has one of the most comprehensive Road Traffic Act and Regulations in the world but regrettably it is not a condition to have any awareness, competency or qualification of how to interpret or apply this legislation in order to register as the Owner, Operator or Proxy. And as for knowledge of Section 49, it's my bet that only 2% of road transport Operators have any idea of the awesome responsibilities attached to this legislation - including imprisonment!
One can perhaps expand this to our law enforcement officers and prosecutors. I posses a valid EC driving licence and a short while ago, while travelling with a person who had a valid learner's licence, was stopped in a road block. The traffic officer politely requested my driving licence and promptly told us I was not permitted to cover the learner... because I did not have the required category of driving licence!
As far as understanding operating cost and quoting rates, this is almost as astonishing as, the technical/competency requirements.
Frankly, I don't see the situation changing in the near future. Now there is a new class of commercial vehicle road transport operator known as an "Emerging Operator" (don't refer to the Definitions, Section 1, or Regulation 1 it's not in there).
According to a recent article in FREIGHT & TRADING WEEKLY, Friday 4 August 2017, Nicole Jacobs, in her article Stringent regulations hold back emerging transport sector, she wrote:“Naïve entrants might not protect themselves through standard trading conditions or limits of liability,” said Van der Merwe. “If you can only just afford the cost of a rig, invariably it is going to be a tight push to cover all of the other costs.” He pointed out that the risk of not doing so would be losing work to larger operators.