TOPIC 3 (Continued)
What you really need to know to optimise your operation
Road transport is extremely time-sensitive to rapidly changing service delivery demands
Now, more than ever, it's Time for road transport operators to manage Asset Utilisation
Throughout these Topics discussions we have emphasised the significance of “real-time” management techniques so essential in road freight service delivery simply because they provide ‘time-and-place’ utility (transportation) to customers. In other words, there is simply no opportunity to create or store a service commodity - such as road transport - as it has absolutely zero shelf life. Road freight operators are therefore entirely reliant upon customers (shippers) for business when, how and where required.
Recent introduction of digital “Control Tower” Tracking and Telematics technology has revolutionized service delivery and communications, but only provide accurate planning and current load status information, it’s still up to boots-on-the ground to deliver the service.
The question that carriers need to ask is; do they pay enough attention to analysing the recorded data? Simple enough, but one might well argue that there is nothing to be gained by deploying scarce and costly resources to analyse history – and is why this Topic has been raised. The core issue here is - who loses out when costly negative variances appear which can be detrimental to the Shipper, Carrier or, most importantly, the Consignee (Shipper’s customer)?
It is virtually impossible to project and control infinitely changing situations in the dynamic road freight environment so within reason, before agreeing to the full extent of contractual obligations, especially in the case of Just-in-Time (JIT) operations, carriers need to carefully research the extent of their commitments. It’s imperative to accurately identify the obstacles most likely to affect cost and service delivery expectations.
Focus on issues that count the most
Managing road transport is really no different from any other business in as much as the primary objective is to invest and service capital in relation to risk. In achieving this primary objective, the business must have the potential to out-perform inflation, while producing acceptable return on capital employed before interest and tax (ROCEBIT).
Many operators tend to focus on “profit” which is not actually the primary concern of shareholders. Profit is an irrelevant term as it reveals little or nothing about how well capital is employed. Bear in mind that capital - especially in the road freight industry - is mostly funded from shareholders and leveraged loans, due mostly to low Asset Turn Ratios, as this affects interest rates when leveraging loans. In other words, using borrowed capital with the expectation that profits will be greater than interest payable.
By now you are probably asking what has finance got to do with the subject of this Topic? The answer is simple - road freight is a dynamic real-time management nightmare!
Given the precarious Global macroeconomic situation and the fact that road freight is a demand-driven service industry, it’s surprising to note how many road freight operators fail to appreciate that their success is driven by how well they manage the TIME aspect of their business.
Tracking/Telematics is deployed to a great extent in monitoring driver behaviour and vehicle/load positions, whereas, the most critical success factor (CSF) is achieving a revenue target relative to an allotted time criterion i.e. Sales revenue per Unit of Time.
Look at it this way
There are 8 760 hours in a year. Operating a long-distance 6-axle articulated truck grossing close to 50 tons gross combination mass (GCM), clocks around 180 000km/annum. Say the average speed, depending on traffic volumes and route is 70 km/h, which means the vehicle wheels are turning (Asset Utilisation) for 2 572 hours or only 29,35% of the total elapsed time of 8 760 hours a year.
Let’s be ambitious and say at full lead and back-haul revenue loads, the Shipper is billed at R26.00/km. So total annual revenue is R4.680.000.00. If the average capital employed is say R2 000 000.00, then the Asset Turn is 2,34. (Note: these numbers bear no relation to any actual operation and are used only to illustrate the points being made).
Now let’s say we increase the Asset Utilisation (wheel turning time) from 29.35% to 40.00% this means at 70 km/h the vehicle will operate for 3 504 hours of the total elapsed time of 8 760 hours (an increase of some 36.27% in on-road hours) and clock 245 280km/annum. This moves the revenue up to R6 377 280.00 - an annual gain of R1 697 280.00! and Asset Turn to 3,81. Let’s leave this up to the financial managers to calculate what this does to the ROCEBIT performance!
Using a “drop-and-hook” principle, working 20 hour on-road-time shift
At 180 000km/annum the asset (vehicle) utilisation is 130 days (Non-productive Time/annum =235 days).
At 245 280km/annum the asset (vehicle) utilisation is 175 days (Non-productive Time/annum =190 days).
Now say we budget for the vehicle to operate 20h/day on-road time, the budget revenue is now in the order of R1 820.00/hour at 70km/h. This moves the emphasis onto managing the revenue earning wheel-turning time. Also known as “vehicle dynamic time”.
Reasons to audit your Asset Dynamic Time (ADT) management
It is common to note that Distance and/or Mass is given precedence over Time in pricing freight transport. Rates are frequently quoted; in charge per unit of distance (Rand/km or mile) and/or mass (Ton-km or Ton-mile) which, in practice, is contradictory to the issue at hand. Think of it like this: Sales targets are set in monetary terms, relative to Time i.e. usually R:C/month, yet rates are mostly set in distance or mass delivered. Confusion arises as there is little or no consistency in budgeting Income and/or Expenditure.
If expenditure budgets were set in relation to income, then this would cap expenditure accordingly, whereas, most Operators manage these two budgets entirely separately - relative to some preconceived dated budget estimates - without a rational relationship to one another. Furthermore, little consideration is given to the effects of inflation or infinitely changing operating environments on historical budget estimates.
Could your budgets withstand scrutiny?
During a long career in senior management and board positions, I am yet to be convinced that financial accounting is a useful tool in managing road freight assets. While standard accounting practice is compulsory in managing company financial statements, in my opinion, it serves only to confuse management. For instance, most budgeting is pure guess work (forecasts into an unpredictable future) and I am still to find an income or expenditure budget that can withstand serious scrutiny.
I am still to find any pricing calculation that can justify acceptance. Harsh criticism but factual. Yes, numbers are necessary in securing business, but they bear little resemblance to reality in execution. Furthermore, they are closely guarded by vendors for fear of being exposed to competitors however bidders must appreciate that business is not worth the effort and risk if it must be subsidised by shareholders.