How to be competitive in fleet management.
The concepts presented here are intended to emphasize the importance of understanding financial information in managing your fleet. Comprehension is not the only factor. Making effective use of accounting and budgetary information will help you keep your fleet competitive. This is not a theoretical model. It is an actual working system that produces positive results.
Does this concept work? Does it provide useable, dependable, and accurate information? Yes, it does! Over the past three fiscal years in which the concept was actively employed, the following results were achieved:
* Three consecutive years of reduced operating budget, while fleet grew at six percent annually;
* One administrative position eliminated;
* Two mechanic positions eliminated (3,176 direct labor hours).
Background and Concept
When the Broward Sheriff's Office decided to renew its privatized fleet maintenance contract, the Fleet Services Division responded to the Request for Proposal. Although eliminated from the competition on a technicality, the proposal was competitive with all the major fleet maintenance contractors. Taking a conservative approach to the analysis resulted in a bid that fell in the middle of the price spectrum. The benefits of undertaking such a project were enormous and far outweighed the amount of effort expended to complete the proposal.
The awarded bid was $1.2 million; the Fleet Services Division bid was $1.4 million. Going through the bidding process greatly increased our working knowledge of our own operation; determined that the Competition Budgeting concept generates excellent information; earned a great deal of respect from top county officials; gained attention among the private companies responding to the RFP; and produced a positive impact on division employees. The employees enjoyed taking positive steps toward determining their own futures rather than forever defending themselves from outside attacks.
I highly recommend that if you have the opportunity to bid on a privatization job, you do so. You may consider doing this project annually for your own operation. If you do, you will be well prepared to answer any questions concerning your operation's competitiveness.
The Financial Tool
Many governmental agencies simply look at a budget's bottom line. Did the agency come in over or under budget? Little attention is given to actual performance. Competition Budgeting forces managers to analyze each and every service delivered by their operations. This analysis is then compared to past performance, other governmental agencies, and private business to determine if it is price competitive. If it is not, the program should be revised so that it is competitive, or justified as to its excess cost. Price is only one way to compete. If the cost to deliver a specific service cannot be cost competitive or justified, it should not be performed.
Competition Budgeting basically calls for structuring maintenance budgets to mirror the budgets used in similar operations in the private sector. For example, a large automotive dealership will have profit centers for all major functions: new car sales, used car sales, truck sales, parts operation, mechanical maintenance, body shop, vehicle rental, and any other vital function. Each profit center has a specific revenue attached to it.
Competition Budgeting replaces profit centers with cost centers, while maintaining a specific revenue source for each cost center. This process allows managers to understand the relationship between cost and revenue in a competitive environment. In addition, this will enable easy comparison of operating costs with other agencies and most importantly, with the private sector. The process also provides a model to demonstrate the effect of policy changes within the organization and provides a convenient format to run "what if" analyses. This exercise also provides an effective way to establish prices for all products delivered by your operation.
Each and every line item in the budget is allocated to a specific cost center. Distribution of costs is a rather subjective factor. Cost accounting principles may provide guidelines for equitable distribution. However, over time, your cost allocation will become more accurate and acceptable.
Determining your "cost centers." These are the specific areas for which you deliver a specific service and have a specific revenue stream. Examples are shown in Table 1. There is no limit to the number of cost centers you can have.
Develop a fully burdened labor rate. The following procedure will develop a fully burdened labor rate from the budgetary information. A similar analysis is performed for each cost center.
The total costs associated with a particular cost center include administrative wages including fringes, mechanics' wages including fringes, and operating costs (utilities, supplies, tools, data processing, purchasing fees, attorney fees) for a total cost. Using the figures in Table 1, the total cost is $2,485,331.
Determine the revenue source to cover this cost center. In the case of a fully burdened labor rate, the revenue will be the hourly rate charged to perform repairs. This is billed to the customer by the repair order billing system.
Determine available billable direct labor hours. The available hours include the total hours (for example, 40 hr x 52 weeks, or 2,080) less vacation (80 hr), sick time (40 hr), holidays (72 hr), and personal days (20 hr) for a net total (1,868 hr). If the goal to capture is 85 percent productivity, with these figures that means 1,588 hours per mechanic per year. If 37 mechanics work 1,588 hours and 4 foremen work 794 hours per year, the total available hours per year is 61,932. Dividing the total cost ($2,485,331) by the total hours (61,932) produces a fully burdened labor rate of $40.13.
Table 1 - Determining Cost Centers Item Cost Revenue Unit Total Units Labor Rate $2,485,331 $40.13/hr 61,932 Hours Rental Operation 523,109 $36.39/mo 1,198 Units Inventory Ops. 1,148,940 17% $982,000 Parts Fuel Markup 240,000 $0.20/gal 1,200,000 Gallons Insurance Cost 603,000 $259.35/yr 2,325 Unit
Success will result from sound management of the total cost of the operation and the total number of labor hours. The major point to be made here is that each cost center has a specific, measurable, and comparable revenue stream. A similar analysis is performed for each and every cost center.
Changing the numbers. As your understanding of the financial model develops, you will realize that you can change the numbers.
* Arithmetic. Elementary arithmetic can be used to change the numbers. By changing the cost distribution of wages and operating costs, you can impact the bottom line cost of delivering a service. The total budget amount will not change.
* Cost Control. By controlling operating costs you can directly impact the cost of service delivery.
* Change Staffing Levels (Mechanics). This will immediately reduce the total cost of operations. Be careful to realize that reducing mechanic staffing levels will not appreciably lower your fully burdened labor rate. What is saved in wages is also lost in billable hours or revenue.
* Change Staffing Levels (Administrative). This will immediately reduce the total cost of operations and lower the cost of each cost center to which the wages were allocated.
* Policy Changes. Policy changes are extremely important to the long term efficiency of the operation. Although the effect of these policy decisions is not immediately noticed, they will have a lasting and positive effect. Look for long term solutions to long term problems. Avoid knee jerk reactions.
Do not borrow long to pay short. An example of this would be using capital recovery or depreciation funds accumulated for equipment replacement to fund operating deficits. Prolonged use of this technique will lead to disastrous results.
A competitive labor rate does not necessarily mean an efficient operation. We must also measure how much work is actually being done during a given hour. Cost per job must also be competitive. The monthly billing mechanism provides valuable information as to job cost competitiveness. Your customers should question any high cost job, then ask for and receive an adequate explanation as to the cost. It is here that we begin to see one of the many control functions Competition Budgeting provides.
As the administrative staff presses to ensure that the per mechanic goal of 1,588 productive hours is being met, the shop supervisors and the customers are pressing to maintain competitively priced jobs. The overall result is effective accounting for productive hours and efficient use of productive time. The result will be the proper staffing levels, and competitively priced jobs.
Potential staffing level corrections may arise if too many hours are being recorded against jobs; the job cost will be too high indicating a possible over staffing situation. Or, if the job cost is competitive but work backlogs are too long, down time is too high, or sublet repairs are too numerous, a staffing shortage may exist.
One main concept of Competitive Budgeting is to apply constant pressure to yourself. Place yourself into the pressure cooker and turn up the heat. Design a system that will bring about internal controls and external controls. This combination will ensure you constantly move toward the most competitive position possible.
Internal controls. The internals will result from the cost center analysis. This analysis will not only determine the operation's cost, but will determine its relative competitiveness. This competitiveness will be determined by surveying other public as well as private operations, and/or by evaluating past performance, or by an acceptable cost based on operating policy. Internal pressure is created by cost center analysis and maintained by internal auditing and regular reports.
External controls. The external controls will come from customers, auditors, vendors, competitors, citizens, and employees. The idea here is to actively solicit external input, especially input dealing with problems, whether actual or perceived. Much more is gained by working with your problem accounts. Go out and find them.
The Management Tool
The financial model provides the foundation of the Competition Budgeting concept. Assembled upon that foundation are the major tenants of the concept.
Ownership/accountability. Operate the organization as if it were your own business. Realize that it is not just account numbers you deal with, but actual dollars. You function as the Chief Executive Officer. Your stock holders, to whom you are ultimately accountable, are the taxpayers of your community. Those taxpayers expect that you perform as efficiently as possible, meeting their expectations as to the delivery of your service.
Get in the habit of asking yourself simple questions - questions that bring your focus toward your accountability.
* Would I spend my own money that way?
* Does this provide the greatest benefit to the greatest number of customers or taxpayers?
* Is this consistent with the image that our customers/taxpayers expect of us?
Customer service. Do not assume that the vehicles you purchase, service, and control have to be purchased, serviced, or controlled by your organization. You must regard each person, entity, or agency you service as your CUSTOMER. And, every customer has certain rights:
* the right to complain;
* the right to demand fast service;
* the right to demand quality service;
* the right to question the cost;
* the right to be correct;
* the right to shop around;
* the right to be treated as a customer;
* the right to expect that you understand the importance of its business;
* the right to expect you to help them deliver their specific service to its customers;
* the right to expect courtesy and consideration from your operation.
We observe all too often a lack of customer orientation in the public sector. Studies agencies that have been privatized indicate they generally share this common trait - a lack of customer orientation.
Understanding and training. Ensure that all key personnel are well trained in the total concept of Competition Budgeting, from a thorough understanding of the finances to all of the other tenants. Establish an ongoing training program to expand key personnel's knowledge of the concepts. It is essential that the total concept trickle down from the very top to the very bottom of the organization. As the fleet manager, you must lead the way toward a more competitive operation. This is an absolutely essential ingredient to success. Without a total commitment to being competitive from top management, little progress will be realized. The more details that are understood by as many personnel as possible, the more smoothly the operation will go. And the more benefits you will realize from Competition Budgeting.
Decentralized decision making. Once key personnel are trained in the Competition Budgeting process, their decision making responsibilities should be expanded. Try to have all decisions made as close to the area of need as possible. A well trained shop supervisor will make the right maintenance related decisions with respect to the major tenants of Competition Budgeting: ownership, customer service, cost, and budget impact.
Competition will manifest in many varying forms at different levels of the organization. It can be as simple as returning a phone call or responding to correspondence in a timely manner. Key personnel must be encouraged to recognize these competitive pressures and make the correct decision based on the Competition Budgeting concept.
Openness with all personnel. Disseminate as much detailed information as possible in key areas of the operation. Keep all personnel well informed as to budget performance, pay for performance agreements, goal attainment, problems, what is happening at "city hall," and issues that may impact the operation in the future (ADA, upper level policy changes, etc.). There is absolutely no substitute for a well-informed work force.
The fleet maintenance function is like a ball. The ball is comprised of a core made up of the financial information and cost of operations. The skin of the ball is made up of the major tenants of Competition Budgeting: ownership, customer service, decentralized decision making, openness, and training. Competition, both internal and external, provides the driving force for the ball. The slope and direction of the playing field is determined by policy.
It is up to you as the manager to make sure that the ball stays round. If it goes flat on any side, it will not roll properly. It will bounce as if on a rough road, and may even grind to a halt. At this point you have lost. Your organization will be subject to severe criticism from both internal and external sources.
It is ultimately up to each one of us to shape our organizations to meet the needs of our community. There is no adequate justification for inefficiency. We must make our operations competitive in every sense of the word. Forget the buzz words, forget the way it used to be, get back to basics, clean your house, and seek out, embrace, and encourage competition at every level of your organization.
Mr. Sitnek is Director, Fleet Services Division, Public Works Department, Broward County Commission, Fort Lauderdale, Florida.
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|Date:||Jun 1, 1996|
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