Vehicle costing: the intangible factors
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AT a recent seminar arranged by the Davies and Robson consultancy organization, Mr. P. W. Reed presented a valuable paper on vehicle costing which explored the problem of intangible costs. Every road transport operator knows—or should know—how to build up a realistic picture of his operating costs. CM's Tables of Operating Costs are a useful guide both to the novice and the professional manager. But when an attempt is made to evaluate intangible cost factors a well thought out method of approach is essential. Otherwise, a managing director seeking guidance from his accountant, traffic manager and fleet engineer will be faced with starkly conflicting views making any consensus impossible.
Pros and cons Many traders are currently endeavouring to weigh up the pros and cons of vehicle ownership, leasing or contract hire. No sound decision can be made unless a detailed cost structure has been built up, preferably over a period of years. Leasing and contract-hire specialists will soon provide details of their services and the cost, but this information alone does not always provide sufficient information on which to base a wise management decision.
The own-account operator needs to know whether his costs are based on a realistic forecast of load factors. Changing demand patterns may necessitate more loads being delivered in a given time; the radius covered may increase. Conversely, the fleet may shrink if some product lines cease to be manufactured, due to falling demand or some re-jigging of the manufacturing units.
Cost patterns may also change if vehicle utilization varies. The ideal of three-shift operation, seven days a week, is an impossible target for most operators, whether own-account or professional haulier. But any determination of the "owning or hiring" dilemma will be unrealistic if—for any reason—a trader's own fleet has not been operated with maximum efficiency.
Depending upon the sophistication of the accounting organization the trader's transport manager may be certain or reasonably sure that his department has borne its appropriate share of overheads and that it has earned a "proper" rate of return on capital— embodied in vehicles and the "overhead" capital. I suspect that few decisions to go over to contract hire or leasing are based on such detailed criteria!
In justifying the cost of his own fleet every trader would give some marks to the factor of reliability. Many firms would say that unreliable professional haulage explained the original decision to go it alone. Operating standards of many large professional hauliers have improved greatly in the last decade; in today's conditions the attitudes of the Fifties may not be appropriate.
An evaluation of the new licensing opportunities must exercise any own-account operator. With so many imponderables it is not surprising that transport consultants are kept busy spelling out the many alternative distributive methods, complete with estimated price-tags.
In the Davies and Robson lecture Mr. Reed introduced into the discussion of intangible costs some American ideas about output budgeting. He asked some pertinent questions: How important is "reliability", i.e. the degree of certainty that a given transit will take place exactly as planned? Has any attempt been made to measure the effect of unreliability on customer turnover, the need for higher stock levels, etc? If own-account vehicles are decided upon on grounds of the greater reliability they provide, with higher costs, is that "reliability" worth buying? At what level of cost difference will it no longer be worth buying?
Fundamental questions Such fundamental questions highlight the superficial nature of the evidence on which many transport management decisions are taken in this country. Because a problem is difficult and perhaps incapable of precise resolution most of us push it aside, preferring to concentrate on pressing matters that lend themselves to clearcut decision making.
Some of this country's international competitors, as Mr. Reed pointed out, are not "put off" by the difficulties of evaluating intangible cost factors. Their much greater productivity contrasts with this country's traditional "muddle through" philosophy.
"Reliability" may have been defined a decade ago as the ability to deliver goods within working hours on a given day. Much more precision is often called for today. An analysis of the factors of speed, timing and control to determine the degree of certainty that the planned schedule will be maintained is also possible. Manufacturers with well-organized distribution departments are increasingly evaluating the cost of specific transport services; many firms are applying a heavy premium when their customers insist on an exacting level of delivery service.
Every operator of a sizeable fleet must decide whether to maintain a margin of vehicles—in addition to a normal maintenance margin—to meet emergency situations. The conventional solution of spot or shorttime hiring is usually workable but some traders' sales peaks coincide with periods of the year when hiring is difficult. The cost of maintaining spare vehicles in relation to the intangible advantage of use in a possible emergency situation needs to be considered carefully.
Other questions Other considerations may come to mind. Is the packing adequate in relation to the risk of damage in transit? Is the size-module efficient in relation to the body type fitted? What is the advertising value of vehicle livery as compared with the cost of providing it and keeping it clean and dealing with complaints from casual motorists about the driver's behaviour? What is the value of a driver-salesman or driver-demonstrator to the distribution function? How much extra does it cost to combine these skills with those normally expected of a driver? Is the dualpurpose driver paid enough—or too much? However difficult these questions may be it is right to examine them in a methodical fashion.
Mr. Reed gave a practical example to illustrate his argument. For a firm with products requiring nationwide distribution it is assumed that there are two basic lines: one is a standardized product (S), the other consists of "one-off" variations on a broad theme (V). Both commodities are produced at one centralized factory.
Product S is distributed by a system of regional depots so that the transport operation consists of (a) tnuiking from the central factory to the depots and (b) local distribution from depots to points of consumption.
Product V cannot be economically distributed in this way and it is distributed (c) nationally from the factory.
It v-as suggested that each one of these operations should be separately analysed, although the aim of total cost minimization, including warehousing and other factors, should never be forgotten.
Some of the more important factors influencing the decisions of transport managers are represented in the above table. Factors calling for decision (the rows) are assessed in relation to the type of operation (the columns). A column "total system effects" is added to cover those cases where it is impossible to disentangle neatly the types of operation. Each "cell" is divided by a diagonal line, costs being entered above the diagonal and benefits, below.
Of course, no management is likely to indulge in such a troublesome exercise unless it is convinced that the outcome will be worthwhile. As Mr. Reed stressed, the point is that if a rational decision is to be taken all the factors involved in that decision should be systematically set out.
Individual factors such as the interaction of reliability and trunking costs should first be considered. A further stage would be the consideration of all the factors together for individual types of transport. For example, different costs and different benefits will result from different degrees of reliability. The relationships between different transit speeds and costs is another area worthy of exploration.
Alternatives
The optimum -Mix" of speed and reliabitty may not be the same as that resulting from a consideration of the two factors in isolation. Speed may have to be sacrificed to some extent in the interests of reliability to obtain the best overall solution. Posed in the form of a choice between an average running speed of, say, 25 mph with a reliability factor of 92 per cent and an average running speed of 23 m.p.h. with a reliability factor of 98 per cent I suspect that few professional transport managers could quickly say that one alternative was to be preferred. Other functional management views would certainly need to be considered.
Once the costs and benefits associated with the different factors have been assembled, and their relationship with each other is known, the desired service qualities may be varied until an overall optimum is attained. Perhaps it is needless to point out that the factors are all subject to change; what can be justified as the best "mix" or compromise today will not necessarily prove so in two years' time.
By setting out systematically and explicitly all the factors entering into the decision-making process a decisive step forward has been taken towards scientific transport management. At present most of the criteria governing decisions in transport and distribution are carried round inside the heads of individuals in the chain of responsibility. Mr. Reed is quite right, in my view, to stress that as the distribution problem grows in complexity it will become more and more difficult to do this. Hence the value of a formal, methodical approach.
The fact that the data is not available to construct such tables is not a reason for rejecting this approach. The success of the analysis does not depend on having precisely accurate measurements. Broad figures checked against experience are often good enough. The mental discipline of compelling management to think about the various relationships has a pay-off of its own. Moreover, such an exercise must help to improve the status of the transport manager since he will be brought face to face with other executives in discussing and attempting to quantify many of the imponderables that are part of the transport equation.
Already used The technique suggested by Mr. Reed is already being used in various complex situations, not least in the sphere of governmental transport planning. When motorways, airports, estuary barrages, bulk tanker installations—even that old contender the Channel Tunnel—are planned Governments do not get to the crunch stage of decision taking until elaborate cost/benefit studies have been undertaken.
Perhaps it is Utopian to expect that such methods will become widespread in the transport and distribution field in the next few years. Certainly many of the older generation of transport managers would be extremely sceptical of their practicality.
But rule-of-thumb techniques do not suffice in modern industries facing international competition. T he increased domestic competition facing all road transport operators as the licensing featherbed is progressively rolled back will compel a more intellectual approach to fundamental problems of distribution. Moreover, the new recruits to the industry from the universities and technical colleges will take such methods in their stride.