Beware the Pitfalls in Bonuses
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LAST week consideration was given in this series to the introduction of incentive schemes applicable to the operating staff of road transport undertakings. It was emphasized that the frequency with which incentive schemes are successfully adopted in other industries does not ensure their successful employment in transport.
In the latter case, due allowance has to be made for the wide dispersal of transport operating staff—a major distinction between transport and most other industries. More than most industries, successful transport operation is dependent to a large degree on mutual trust and co-operation between transport manager and driver, precisely because the employer has relatively little visual control over his staff. Therefore any incentive scheme which has the .effect of undermining existing confidence is worse than useless in that it will reduce rather than increase overall productivity.
Conversely, however, the greater frequency of incentive schemes in other industries is no reason for assuming that no such schemes, however well devised, are workable in transport. There will probably be greater difficulties to be overcome when inaugurating a scheme to apply to transport operating staff. This is because several factors (e.g. road and traffic conditions), which can substantially affect vehicle productivity, are beyond the operator's control. Nevertheless, in suitable types of work, incentive schemes applicable to both the traffic and engineering aspects of transport operation have proved successful.
Basically, achieving greater efficiency or higher productivity from the operation of a commercial vehicle implies doing the same amount of work as previously done but at lower cost, or increasing the amount of useful work done per vehicle in a given time.
Theoretically, in this latter event, the additional work done should result in a reduction in the cost of each unit collected or delivered. Alternatively, if a greater mileage is covered, the cost per mile would normally be lower.
TWO COSTING GROUPS This lower mileage cost is due to the effect of the basic principles of commercial vehicle costing. Because time arid mileage are inherent in transport operation, the several items of cost involved in operating a vehicle fall naturally into two groups—standing costs and running costs.
Although a universally accepted term, standing costs are in fact a slight misnomer because they refer to those costs which are incurred whether a vehicle is "standing" or not. Nevertheless, there is a clearly understood distinction between these costs and the group termed "running costs ", consisting of those items of expenditure which vary directly in relation to the mileage run.
The addition of standing costs and running costs gives the total operating cost. Because standing costs remain the same irrespective of mileage run, it follows that the proportion of standing costs to be added to the running cost to give a total running cost per mile becomes progressively less as the mileage increases. Thus, quoting from the current edition of The Commercial Motor Tables of Operating Costs, the operating cost per mile of a 7-ton goods vehicle, fitted with oil engine, is shown as 29.62d. when the vehicle averages 200 miles a week. It is reduced to almost half that cost (15-76d.) when averaging 600 miles a week, and to 13.20d. at 1,000 miles a week.
The more intensively a vehicle is operated, therefore, the lower will be the cost per mile. It is an easy, and indeed natural assumption to add that the vehicle is thus achieving higher productivity. This may be so, but only if increases in mileage are matched by corresponding increases in traffic carried.
By definition a commercial vehicle primarily exists to serve a commercial purpose, be it a profit for the professional haulier or an acceptable transport service for the ancillary user. But whilst it follows, therefore, that additional mileage will not be undertaken for no purpose at all, there is tho• unfortunate possibility of paradoxically misusing the higher efficiency to be derived from more intensive vehicle operation.
MISUSE OF EFFICIENCY Such a situation could arise in the following manner. Consider a manufacturer with an ancillary fleet of vehicles about to engage in an expansion programme involving the extension of existing sales—and therefore delivery—areas, It would be rtatutal in such a situation to find that the existing sales areas were sufficiently well established to provIde an even distribution of customers geographically. Reasonably economic loads and delivery journeys could therefore be devised.• New orders, however, will invariably be on the periphery of existing delivery areas and, moreover spasmodic in frequency. The transport manager concerned is consequently faced with a situation in which miieage will be increased appreciably but deliveries only slightly—at least in the early stages of the sales expansion programme.
Despite repeated claims to the contrary, many ancillary users do know the cost of operating their fleet in considerable detail. Such knowledge is, however, not necessarily limited to the transport manager. Certainly the secretary or accountant of the manufacturing company concerned, and possibly the other members of the staff, will be acquaOted with these details. On occasion, therefore, the transport manager may be placed in the unfortunate position of having the operating costs of his own vehicles quoted back at him as a reason for embarking on what to him appears an uneconomic extension of existing services.
Thus, in the examples just given, the operating costs of a 7-ton goods vehicle is shown as 15.76d, a mile at 600 miles a week. Additionally, the cost at 800 miles a week is 14-16d. a mile, again quoting from the current edition of "The Tables". The examples could also be expressed as an operating cost per week, thus £39 8s. at 600 miles and 147 4s. at 800 miles a week.
Superficially, therefore, it can be contended that as the difference between these two amounts is £7 16s., the cost per mile for the additional 200 miles (600 to 800) is only 9-36d. compared with 15-76d. at 600 miles a week. (This amount of 9-36d. is, of course, identical to the running cost only of
this particular vehicle, without the proportional addition of standing costs.)
Anxious to justify the extension of the distribution area in this hypothetical case, the sales department might contend with apparently some justification that the cost of the extended journeys was in fact, at the rate of 9,36d. a mile, so allowing lighter loadings than on the existing journeys.
A DANGEROUS FALLACY This approach to costing and charges has unfortunately been all too prevalent and persistent in the road transport industry. The details and circumstances may vary, the problem of back loading or the permanent acceptance of long, if not excessive, hours as " standard ". But a dangerous fallacy is common in every case. It is the assumption the long-standing " breadand-butter" traffic provided by loyal customers will always be there for the asking at rates sufficient to subsidize the intermittent traffic of an unjustifiably favoured customer.
When that assumption proves to be an illusion then not only has a substantial proportion of profitable traffic been lost, but many remaining customers will have been conditioned to a level of rates for the relatively small amounts of traffic they provide which does not, by any means, include the true and total cost. The likelihood of now being able to persuade them to accept charges which will at last include a fair proportion of standing costs, amongst other items, will be remote.
This situation is, of course, more directly associated with the professional haulier but a similar set of circumstances can result in the apparent higher "productivity" of an ancillary user being uneconomic when transport costs are considered in isolation.
Although transport costs are included in the delivered price of the product in the case of a manufacturer operating his own vehicles, inequitable subsidies as between one customer and another on account of hidden transport costs can still persist. Because standard prices for commodities are common practice. irrespective of the distance of the customer from the manufacturer, some cross-subsidization of distribution costs has to be accepted. But it is important that this is done methodically, so that transport costs are as fairly recouped as is reasonably possible over the entire area of distribution.
In contrast, the accumulative effect of what originally were isolated and largely haphazard estimates at favourable rates can undermine the overall efficiency of a transport undertaking.
The distinction between a methodical or a haphazard approach to higher productivity can mean the difference between success, failure or, at least, wasted effort for little return. Higher productivity for a transport operator often involves extending services already provided, assuming the maximum utilization of vehicles has already been achieved to cope with existing traffic. Admittedly, extending services or inaugurating new ones, whether by professional hauliers or ancillary users, may and probably will involve extra expenditure initially. In the early stages this could result-in an adverse balance between income and expenditure.
The crucial factor, however, is not that there may be a possible adverse balance in the early stages of expansion, but that it has been duly allowed for when estimating the cost of the intended expansion of services. Moreover, to do this implies that an assessment has been made of the extent of this initial period, with its acceptance limited to the short term. Justification for such an expansion programme is invariably to be derived from new traffic eventually firmly established over a relatively long period.
For the transport operator, therefore, higher productivity and greater efficiency are seldom to be secured in appreciable measure by short-term plans. Apart from the possible acquisition of additional vehicles and the outlay thereby involved, sufficient financial reserves wilt be necessary to tide the operator over the early stages when the acceptance of unprofitable traffic
might otherwise be wrongly entertained. S.B.