ADVICE ON TRANSPORT PROBLEMS
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Putting purpose into paper work
Because road transport is a service industry it has an especial need for a valid yardstick by which to check current efficiency and future trends
WRE ATTENTION was given to the costing of commercial ,ehicle operation in 1967 than for many years. A major reason for this was the reaction to the recommendation of the Prices and Incomes Board in its first and subsequent reports on road haulage rates and wages when it repeatedly stressed the need for greater attention to be given to this subject.
At the same time, however, the Board's allied recommendation—that the Road Haulage Association should promote greater accounting responsibility in general and among small hauliers in particular—was a pointer to where current shortcomings lay. Moreover as I emphasized last week 85 per cent of all road transport operators have five vehicles or less and accordingly the need for costing information by this large section of the industry is—in total—large.
Individually, however, the costing needs of these small operators is relatively limited and it is therefore important that any recommended system should be kept as simple as possible. Last week I sought to dispel possible inhibition in approaching this subject of costing as revealed by taking a too dogmatic attitude to alternative costing procedures. The test is which procedure is the most appropriate in a given set of circumstances, bearing in mind that because of the very flexibility for which road transport is rightly recognized, operational conditions and therefore costs can vary substantially.
Fleet size
The PIB report on road haulage also recorded that as the generation which entered the road haulage industry after 1918 passed away, the absorption of the small man into larger units seems likely to take place. However logical that conclusion is, similar predictions were being made about 40 years ago when the reports which led to the current licensing systems were being prepared. Yet there is still that 85 per cent with five vehicles or less.
Inevitably the operator from a fleet with five vehicles or less has seldom any margin of staff to be solely engaged on clerical work. An understandable reaction therefore—and all too common in practice—is for such operators to doubt the need for costing, at least for such small units.
Therefore if the substantial proportion of small operators who do not at present keep adequate costing of their operations are to be persuaded not only to start but also keep up a costing system, then they must be convinced that it is a worthwhile exercise. Indeed if any costing system cannot be shown to be just that then there is no justification for the time and expense involved. Systems which are impressive—as a paper exercise—but quite irrelevant to securing increased efficiency are an unnecessary expense.
Because the operator of a small transport fleet usually tends to be a man with a practical background such as motor engineering it is understandable if he often looks on paperwork as time wasted on a negative and cheese-paring exercise. But this is an unfortunate misconception.
No matter how assiduously a costing system is maintained it is equally important that skill should be employed in drawing the right conclusions from the results obtained and determination shown in giving practical effect to those conclusions.
PIB report
A first objective, therefore, in setting up a costing system is that the operator should be determined to put the results obtained to positive use. This pre-requisite will to some extent prescribe the type of system to be set up. The PIB Report stressed the small hauliers' need for comparative information on the relationship between costs, turnover, capital and profit margins so that each operator could judge his performance by the achievement of others.
Admittedly much needs to be done in this direction. But an earlier and more immediate need is for comparison to be made within a small operator's own fleet. Even at this relatively simple level several worthwhile comparisons can be made and in so doing provide a pointer to improved efficiency.
In considering the cost of operating a single vehicle, its current performance can be compared with previous records either over a corresponding period or over an appropriate accumulative period.
The prime function of road transport, of course, is to move goods or passengers. That basic function is reflective in the division of a transport organization into the two departments of engineering and traffic. Admittedly the actual division may not appear as such in small fleets nor in large organizations in that precise terminology.
But this functional division nevertheless remains even when only one vehicle is operated. Likewise this functional division can be reflected to good purpose in whatever costing system is used.
Briefly an engineering department can be said to be concerned primarily with the selection and efficient maintenance of vehicles. From that point a traffic department takes over and moves goods or passengers at the most profitable compromise between the level of service provided and the cost involved in maintaining it.
Considering the purpose of costing from the engineering angle, it is a recognized practice to break down the total cost of operating a commercial vehicle so as to facilitate analysis and comparison. In compiling the COMMERCIAL MOTOR Tables of Operating Costs it has been found a, practical proposition to divide the total operating cost into 10 items.
But although so long established it should not be overlooked that even this procedure is nevertheless an arbitrary one. There is not necessarily a clear cut line between one item and another: some are inter-related so that action which might have beneficial effect on one could have an adverse result on another.
Total cost
Provided this possibility is recognized there are still advantages to be gained by this breakdown of operating costs. Here, once again, it is worth while re-emphasizing that it is the high proportion of small fleet operators that are most in need of costing advice and, moreover, that such advice must be readily understood. Therefore this division of the total operating cost must be kept within bounds however mudh an elaboration of such division can be shown to provide a marginal increase in accuracy.
In addition to the division of the total cost of operating a commercial vehicle into 10 items there is also the division of these 10 items into two groups. The purpose of this is to segregate those items which are associated with the time element of road transport operation into one group, i.e. standing costs, as opposed to those related to the mileage operated by a vehicle which comprise the other group, namely running costs.
Because the 10 items of operating costs are themselves interrelated they will all be involved when comparisons are being made as to the optimum requirements of both the engineering and traffic departments.
It must be admitted that in endeavouring to obtain increased efficiency or profitability within their two departments disagreement can arise as to priorities. When this does arise the availability of an adequate costing system does provide the opportunity to arrive at a rational solution more readily than on the basis of what otherwise would be little more than opposing hunches, however well intended.
Unfortunately a long period of inflation has tended to put the first priority of any costing system to be able to show how best increased prices and wages can be absorbed or partially absorbed through increased efficiency. To some extent, even if the necessary increased efficiency is forthcoming, many operators might look on this as another example of the negative side of costing.
Customer demand
In contrast, however, the results obtained from an adequate costing system provide the only sound means of devising a new or improved service. Despite adverse fluctuations in the political and economic climate of the country, technological developments within trade and industry will increasingly compel road transport operators to make appraisals of new services demanded by customers.
Here it needs to be stressed that costing can be concerned with past, present or future operations. Therefore, particularly as it concerns the small operator with little experience in costing, it should be clearly understood at the outset what the purpose of any particular costing exercise is and the extent to which it is related to past, present or future operations.
Operational records
Obviously in dealing with future operation there can be no actual costs as such, but the estimates or forecasts made have to be accepted as "costs" until such time as subsequent operation has either confirmed or disproved the original forecast.
In addition to determining at the outset the precise purpose of any particular costing exercise, it is also necessary to recognize that the work is facilitated if it follows a logical pattern. While the increased attention being given to cost comparison and profitability ratios for a transport department or business as a whole is to be encouraged, basic operational records still need to be kept. Otherwise defects in any particular direction revealed by cost comparison techniques will not be so readily located, if at all, and the necessary remedial action taken---which is the sole justification for such a costing exercise.