In order to start a successful road transport operation (whether freight or passenger), requires a basic understanding of the fundamentals of transport economics. Too many start-ups in the road freight market, lead to disaster for lack of simple attention to fundamentals. This is sometimes aggravated by dependence on suppliers of “kits” and “gadgets” that supposedly give control.
The first principle is that, there must be identified continual demand, before there can be sustainable provision of transport. The implications of this fact are that it is necessary to evaluate the demand for transport services over the lifespan of the assets that are to be used, starting a business on the basis of uncertain demand, or unsecured contracts beyond the immediate future is a recipe for disaster. Low or fluctuating utilisation of transport assets is one of the major causes of business failure in the industry.
The services to be provided by a road freight operation will be valued in direct relation to meeting the needs of the customer; these include speed, reliability, safety, convenience and of course cost. All aspects of the service are important to the customer in varying measures that can only be assessed by the customer. Successful services must be tailored to meet all customer requirements, cost is not always the most important factor but efficiency and reliability are usually not negotiable.
The further fundamental requirement in the development of freight transport operations is the structuring of the bookkeeping process to ensure that management information is produced in formats that are useable in the control of the operations. It must be understood that financial accounting is by its very nature, the record of “costs that have been incurred” and that it is not practically possible to effectively run a transport operation using only financial accounting (it would be equivalent to driving with eyes on the rearview mirror). Financial accounting is essential to assess the progress made by a company and to meet all legal obligations but does not serve the purposes of operational management.
It is essential that the costs (expenditures) incurred by the operation are separated into fixed and variable costs. In addition there must be accurate detailed records of vehicle utilisation, tons and loads hauled, kilometres travelled and hours worked, for each job.
Variable costs include fuel, tyres, spares and parts, workshop costs (labour, and/or invoices from outside workshops), repair costs as the result of damage and accidents, and any equipment that must be bought for operations. It is essential that the cost accounting system can isolate these categories of costs and allocate them by vehicle to enable management of the cost of each vehicle for each operation. A further very effective refinement is to analyse the costs of repairs by component area.
The second category of costs (fixed costs) include licences, insurance, capital costs (expressed as loan capital, own funding, HP, leasing or any other form), other costs incurred in buildings and vehicles. Included in the fixed costs should be an apportionment at a standard rate, of the total cost of drivers (and where relevant crews).
It is essential that management accounting is current and sufficiently detailed to enable individual vehicle costing and the items correctly defined, up-to-date, and available [presented in easily assimilated formats], to operations management, if there is to be effective management control at the operational level.
Typical problems that are experienced with new freight transport operations often result from successfully landing a “job” or contract. The entrepreneur who starts the operation, starts with one job or contract and one or more vehicles engaged in the transport of one commodity or one particular service. If the service provision is effective, the business grows.
When the business grows, it begins to diversify into other work, comities, routes customers etc; it becomes difficult to decide what costs are to be allocated to which activities and this is where the management information system becomes essential. It can provide the answers if it is correctly structured in the first place. Among the many questions that must be answered by the information system the following are essential:
- to know what operations are profitable and what are not,
- to be sure of costs when quoting for work (and in sometimes to be able to discount rates to get work), without jeopardising the profitability of the overall operation.
- to have accurate management information for decision making about issues such as individual vehicle costs, vehicle replacements, levels of utilisation and payloads on specific duties, evaluation of specific equipment and vehicle makes, models and specifications. These and a lot more decision points are the essentials of effective operations management.
The accumulation of real, core management information is the issue; all too often the fundamentals are not acknowledged or are masked by the use of electronic equipment that provides so much data that the management hardly uses it. In other cases there is reliance on financial accounting systems that are not sufficiently detailed, out of date, and do not supply “operational” data.It is not necessary to aim at high levels of sophistication, but it is essential to ensure that data recording and analysis is a primary function, not an optional extra. Decisions made without information are a very expensive way to kill a business.