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Putting Costings to Good Use
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THE costs of operating commercial vehicles have always been a major feature of this series of articles. Both the underlying principle and the specific items of costs have been considered regularly. From long experience it has been found convenient to divide the total operating costs of a vehicle into 10 items grouped into fiVe items of standing costs—licences, wages, rent and rates, insurance, interest; and a further five items of running costs—fuel, lubricants, tyres, maintenance, depreciation.
These 10 items are directly attributable to the operation of a particular vehicle. Additionally, and particularly where a fleet of vehicles is involved, there will be further costs not directly related to any particular vehicle. These are termed administrative, establishment or overhead costs and are incurred in running the business as a whole. This group can include a wide range of miscellaneous items, often incurred relatively infrequently. They can be broadly grouped under the headings of management, office, garage and stores, warehouse, branch depots, sales and publicity, professional services and auxiliary fleets. Having recorded all these miscellaneous items the total then has to be equitably divided between the several vehicles in the fleet in a manner appropriate to the particular type of operation.
Then, where professional operation is concerned in contrast with ancillary users, a profit margin needs to be added —not only so that a net profit should result from the entire exercise, but also to provide some margin against • the inevitable risks in running a business as compared with the relative security of paid employment.
Supplementing these basic principles of costings enumerated in this series, from time to time advice has been given on the most convenient method of recording actual costs, including the use of a recommended vehicle cost sheet. In this context the distinction between past, present and future costs has been described and the occasions on which it is appropriate to use any one of these three alternatives. _ Yet, although the principles and applications of costing is a fundamental pre-requisite to efficient and profitable operation, it does not follow that the results so obtained will automatically be of use. As with any other potential asset there can be both good use, misuse or even abuse. It is therefore mostimportant both when inaugurating a costing system, possibly building up a fleet of vehicles for the first time or at a later stage when a re-assessment is• called for, that the purpose the results of costing are intended to serve should be clearly defined.
In general terms such an objective might be considered to be limited to providing a yardstick by which to judge efficiency of operation whether as applied to one vehicle, a group of vehicles or—traffic-wise—various' types or streams of goods or passengers moved.
Resulting from such a definition of costing objectives it may well be possible to so frame the costing sheet as to reduce the amount of clerical work involved to a minimum whilst still recording sufficient essential data for the purpose. Thus, in many large and well-established transport organizations, a substantial proportion of the work transacted might be largely repetitive, with one day's—or week's—work being very similar to the previous one. That being so it might well prove that sample costings at regular intervals could provide almost the same, if not indeed the same, reliable results.
Process Itself Beneficial Although it would not normally be considered as an ultimate objective, the very process of costing the operation of vehicles can of itself prove beneficial. A specific example can be quoted where a large operator in the Home Counties adopted the vehicle cost sheet recommended in this series and soon noticed benefits. Even before sufficient results had been obtained to make useful comparison, the very knowledge that a costing system was being applied resulted in a more cost-conscious approach by all grades of staff to their work and with benefits in unexpected quarters. Quite apart from the possibility of previously unexplained losses in various directions—not necessarily large, though accumulative—transport operation is always especially vulnerable to the inroads: of hidden subsidies. Often these are not the result of deliberate misuse of services provided, but rather that a particular section or department improves its own efficiency, or more probably its convenience, at the expense of transport operating costs. Particularly can this arise when there is differing view as to what constitutes a reasonable sale service as regards delivery times and frequencies.
In the specific example just quoted the preparatory work actually involved in providing the 10 items of operating costs inevitably brought to the attention of all concerned that costs would henceforth be checked regularly. Correspondingly, practices which were known to be inadequate, but nevertheless allowed to go by default, were teplaced by more efficient methods in the interest of departmental competitiveness.
Having obtained the operating costs of a specific vehicle the comparison then most readily made is probably between current and past performance. Where budgetary control is in force present performance will be compared with estimated performance—indeed there is a tendency throughout costing as a whole to rely more and more for management decisions on present or future costs rather than past or "historic " costs. Nevertheless, reasonable use of past costs can give assurance or otherwise that the trend in current costs is reasonable. Any deficiency in past costs, Or in the manner of their presentation, can provide a basis for future improvement.
Outside Operator's Control Of the 10 items of operating costs it must be admitted that several are partly, or indeed almost wholly, outside the control of the operator. Thus, running quickly through the 10 items of operating costs, the rate of excise licence duty is obviously fixed but there is some margin for possible economy in the actual unladen weight of most vehicles. Where such opportunity exists it would often imply a higher initial outlay possibly because of special body construction. Assuming funds were available to make such additional outlay, if it were considered advisable then the existence of detailed costing would permit a reasoned judgment. This would be dependent on whether the additional interest thereby necessitated was more than offset by a reduction in licence duties and—probably more important—the additional and accumulative revenue thereby potentially available by way of increased payload. Wages are similar to licences in that basically minimum rates are a statutory requirement directly for Aand Blicensed operators, indirectly for the C-licensed operator and directly for certain types of passenger operators. But though the basic minimum rates are fixed, obviously the amount of overtime involved is dependent on individual circumstances.
Although increasing traffic congestion on the roads and delays at terminal points frustrate endeavours towards higher efficiency, it is probably still true to say that the key figure in determining overall transport efficiency and profitability is the traffic controller, whether or not he has just such a designation, or—too often—has no more status than that of a clerk. Yet in creating reasonable order out of a multiplicity of consignments and destinations can depend the success or failure of a transport organization.
Misused or Misread Unfortunately, it is when consideration is being given to this most crucial aspect of transport operation—namely, traffic control—that otherwise accurately recorded operating costs can be either misused, or at least misread. Much as one would wish to quantify all aspects of a transport service so as to facilitate regular comparison, there is a limit to this process. But even where this limit is recognized there is a tendency to underrate, or even virtually ignore, factors which defy evaluation numerically.
Because transport, distribution and sales are so closely linked it is inevitable that the implementation of a particular sales policy will have a direct bearing on transport costs. For this very reason some large national organizations consider it logical to group sales and transport under one department. But whether or not this is done, there can be an inherent, if underlying, conflict in the interest of those two functions—sales and transport. Whilst.
when carried to extremes, it is obvious that an improved sales service can involve higher transport costs, in the majority of cases the problem is to determine what is a reasonable balance between the two interests. Just where that balance is struck can be dependent on the overall policy of the companies concerned, the competitiveness of the particular trade or industry, the relative seniority of sales manager and transport manager, or just plain "tradition ". In the latter context one delivery a week may seem sufficient in one part of the country, whilst in the very same trade two deliveries are considered essential in another area. One suspects that " service " is not only what the customer demands. It can also be what he had been con ditioned by the provider himself to consider reasonable. Obviously, in the two cases just quoted, if the total throughput is similar then it is more than likely that the operator making two deliveries a week, along with other work, may well find his delivery cost per ton higher, although his operating cost per vehicle was the Same or even less than the other operator.
Here again the distinction between one and two deliveries a week is clear cut. But there can be many other less obvious distinctions in the quality of service provided which can have direct bearing on operating costs.
In this respect an aspect of large-scale organization needs consideration. Usually, any economy resulting from such organization is linked with bulk buying and depot fleets of adequate size to ensure 'economic utilization of maintenance 'equipment and traffic control, particularly if trunking is involved. There is, however, also the sales aspect. Despite often being engaged in highly competitive trades, large national organizations nevertheless do seem more 'able to set and maintain a regular pattern of delivery days to which customers adjust their requirements. In contrast, smaller companies may endeavour to offset other limitations in their sales service by offering more frequent or even specially arranged delivery. Here again such conditions would invalidate straight comparison of respective operating costs, even though, overall, they might consider it worthwhile.