How Costs, Charges Affect Equipment Finances

There is a big difference between a cost and a charge. Understanding the difference and applying them appropriately enables you to manage the financial side of the fleet more effectively. A cost is money out the door: A payment that you have made to an independent organization arising from purchased goods or services. A charge is money set aside or transferred to another part of your organization to allow for costs that will be incurred in the future …

See the article here - http://www.constructionequipment.com/equipexec/ce05ia005.asp

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Automating Scale House & Trucking 

New technologies and systems continue to be developed at an alarming rate.  These new technologies are often embraced early on by some of the more ambitious Fortune 500 companies and then 18 to 24 months later, make there way into the construction and material supply sectors.  And, the scale house operation is certainly not immune. Many new developments are occurring there, but it is important to think about these developments in the context of the larger systems initiatives within the contracting and/or material supply enterprise.

This article briefly examines some of the more significant trends relative to scale house automation and the downstream processes thereby affected.  It also recommends ways to evaluate these new developments as your organization plans for other developments and future work.

With the advent of less expensive high-speed connections, many scale ticketing companies are trying for real-time processing with their home office systems, rather than traditional batch processing. In years past, scale ticketing systems would reside on a machine (typically a PC) at the scale site and collect data in a detached mode during the day. At the end of the day, the ticket data would be sent, via dial-up connection, to the main office computer and combined with all of the tickets from the other sites and then processed. The obvious problem: Situations could occur during the day that would impact the scale ticket operators if all the information had been known. For example, if a company is on credit hold and a payment is received in the afternoon mail, the scale houses do not know about the payment or release of the credit hold until the next morning when the updates have gone from the main office to the sites.  The converse could also happen, where a truck driver reaches the credit limit at one location and knows he can buy material from another location for the rest of the day.  Real-time processing will keep all plant operators and corporate accounting current with the events of the day, while they are occurring.

GPS, or Global Positioning System, has been used in a number of industries over the years and is now gaining traction in the material supply sector.  Many Ready-mix companies have already moved to this technology to keep up with their mixer trucks in transit and to help the dispatcher plan deliveries.  However, the asphalt and aggregate side has been a little slower to adopt. The author suspects this has to do with the fact that the hauling companies and drivers are often part of a different company than the company placing the order or requiring material.

Photo capture is also catching on as a way to verify orders. Instead of a signature being required on every ticket, the driver’s photo is digitally captured and stored with the ticket when the driver is finishing the order.  This photo can be easily printed on the ticket if needed by the customer or delivery company. 

In the course of the last 15 years working for Heavy/Highway contractors and material suppliers, this author has rarely been impressed with the level of formal production planning that goes on in most aggregate production offices. Instead, white-boards and radio conversations are employed each morning to get a sense of what is needed and where. It is difficult to plan with certainty exactly what stones are required and where, but some level of planning is usually better than none. 

Some of today’s software developers for the back-office accounting and order processing function are trying to take data they already have (as well as new data from pending orders and jobsite requirements) and project material demand over a three-month period. They are taking into account inventory levels of various products, current sales, orders yet to be filled, and production capacities.  This allows site managers to make better decisions about production and shipping of material and avoid the costly problem of bringing in material from far away.  This can only really be accomplished with real-time production tracking facilitated by belt-scales and a diligent production manager at the site.  The system also has to be able to take into account inventory levels at all company locations, as well as sales orders and jobsite requirements enterprise-wide.  Interestingly, this is nothing new.  It is called ERP and has been automated within the manufacturing sector for at least 15 years.

Signature capture technology is now fairly routine and widespread these days.  We see it at most large discount stores and consumer electronics stores. So why can’t we transform the traditional process of printing tickets (frequently in triplicate), handing them to a driver (or using the banker vacuum tubes), getting signatures, and returning copies to the office.  With signature capture devices at the scale speaker, an operator could see his order, truck number, job site and material information appear on a screen.  He could then sign the screen and a copy would print for him there using a thermal printer. The ticket data along with the signature could be saved and only reprinted if someone asked for it.

RFID tags are lower in cost and the technology for the receivers is also becoming more cost effective and reliable.  This means more trucks, company-owned or outside haulers, can check in and get weighed in an unattended fashion.  Then, as those same trucks leave loaded or drive up to the bins, they are once again recognized by the scale system for faster, more accurate processing.

Before rushing out to purchase and implement the latest new technology at the scale house, it is important to take a small step back to gain perspective and set direction. The whole material management process from quotes to orders to deliveries and billing should be one streamlined process with good technology in place each step of the way. It does not do much good to spend lots of money on one particular technology when several other areas of the process are not working well either. Try to “process map” the entire workflow and look for critical risk areas and/or inefficiencies.  Once they have all been identified, develop an 18-24 month technology plan for the entire function. Some initiatives can then be started immediately, while others wait for resources.  But, at least it is all part of a single, focused automation plan.

Also, make sure someone in management takes ownership of the automation efforts. Every implementation needs an Executive Sponsor, someone in management who has vested interest in seeing that the selection and implementation of these technology initiatives is successful.  They don’t have to take an active role in day-to-day meetings, but they do need to be available to ensure that the responsible team has the resources they need and does not run into any organizational obstacles as they work through implementation.

Finally, start small and build out. Many IT or system initiatives fail because they are too ambitious. Implement a system at one plant location and, once successful, roll to additional sites.  Or, implement photo cameras at the sites before doing RFID.  Companies that automate in a careful, methodical approach nearly always end up with better solutions than those who are trying to make up for five years of lack of attention in six months.

One final look forward:  In Thomas Friedman’s new book, The World is Flat, the author has an example of technology at work at the drive thru of a local McDonalds in Cape Girardeau, Illinois.  The situation would not be all that interesting if it were not for the fact that the drive-thru operator was on a remote headset in Ft. Collins, Colorado.  Here, internet technology is transforming one of the more mundane activities we take for granted every day.  But think about it, why have an operator at each location if the drive thru business is cyclical throughout the day? One operator can work for three stores on a given day with IP telephony connected directly to the speaker.  Photo capture at the menu board ensures that the right customer receives the right Value-Meal when they pull up. Apparently, this has reduced errors and sped up processing at the window. How long until one central scale ticketing operator is controlling multiple remote plants, as well as a central quarry site and asking if the driver wants to Super-size their load.

Article prepared by:
Christian Burger, President
Burger Consulting Group

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Measuring World Class Maintenance

We frequently use the word “World Class” without a true comprehension as to what it really means.  Having helped two organizations win the North American Maintenance Excellence (NAME) Award and another to win the Fleet Masters Award (for excellence in fleet management), I thought it might be helpful to summarize what it takes to have a World Class maintenance operation.

World Class maintenance organizations are those that consistently demonstrate industry best practices and produce bottom-line results as well.  It is my opinion that the later part of that statement is what really separates the best from the rest.   There must be a justifiable return to the business for the assets applied.

I believe it is possible to have a World Class maintenance organization without paying through the nose to achieve it. Several years ago, I would send clients to benchmark an organization that had long been recognized as World Class amongst its peers.  But closer examination showed that their maintenance costs were high as compared to a percent of Estimated Replacement Value (ERV).  On top of this, they had numerous spare or redundant equipment which positively affected their uptime, but lowered the return from their assets.  After a while, I stopped sending clients to this location because it was not a model of encouraging cost reduction through efficiency gains versus large capital outlays and heavy budgets. 

One of the advantages of tracking RONA (Return on Net Assets) or ROCE (Return on Capital Employed) is it begins to show how efficient we are with generating returns from our asset pool.

RONA is a measure of financial performance calculated as:

Net Income

Fixed Assets + Net Working Capital

The higher the return, the better the profit margin performance for the company. In other words, we return greater margins when we can produce more with less.  This is similar to increasing turn rates of inventory so we are more efficient with smaller amounts of inventory.  Greater RONA is achieved by increasing the numerator and reducing the denominator.   

ROCE is another ratio that indicates the efficiency and profitability of a company's capital investments.  ROCE is calculated as:

EBIT

Total Assets - Current Liabilities

EBIT is profit before interest and tax.  Obviously, ROCE should always be higher than the rate that the company borrows at; otherwise, any increase in borrowings will reduce shareholders’ returns and earnings.  It is a measure of the returns that a company is realizing from its capital. Therefore, capital employed. It is calculated as profit before interest and tax divided by the difference between total assets and current liabilities and represents the efficiency with which capital is being utilized to generate revenue.

If we understand that our mission, in maintenance, is to ensure maximum capacity, we should also be aware that it is ensuring the right mix of assets to do the job.  In other words, it is not enough to ensure availability, we should also be looking at utilization and returns from each asset.  The problem is that we often look at groups of equipment and rarely focus on individual equipment Profit and Loss. 

Let’s take, for example, an instance where we have several of the same type of equipment.  In this case, we have fifteen rubber-tire backhoes used in our construction business.  Now, when I examine the asset utilization of the group, I notice that as an average, they all are at 51%.  However, when I examine the asset utilization for each one, I can see that there is a significant range from 10% to 85%.  I further find that several are used for stand-bys, while others are worked very hard, hence the 85% for the top four.  We find the poor coordination of equipment moves, excessive idle equipment and insufficient tracking of each backhoe’s performance contributes to the poor utilization of the bottom three.  Now, if we sell off the bottom three and focus more on improving the utilization and coordination of the remaining twelve, or renting the three when needed, we can produce the same level of output or more with fewer units. By lessening the amount of equipment, I also lower the overhead to support that equipment. My ownership cost per unit goes down, while my returns per asset go up.

The problem I found is that few, if any, are actually looking at the bottom line of each piece of equipment.  Measuring utilization helps, but it also is affected by weather conditions, operator availability, business, scheduling, and other variables not really directly related to equipment performance.  Availability (the amount of time the equipment is available upon demand or scheduled) is a much better indicator of equipment performance.

Still, the heart of the issue is, “How much does the equipment capital really return?” We assume that if we are spending more money on Preventive Maintenance and Condition-Based Monitoring, we are doing an awesome job in reducing costs to the organization.  But annual maintenance costs seem to escalate unless management constantly reviews buy-sell-lease options and measuring the costs and returns of all assets.  Part of the answer lies with doing good maintenance, but the remainder of the answer lies with the efficient examination of a P&L by equipment piece.   Ultimately, we should ask, “Just how much does this equipment return to my organization and is that the best we can do?” Benchmarking against manufacturers’ data, your best piece(s), or comparing to historical performance, can give you a relative point.

Most see maintenance as merely the function or activities that service and keep the equipment functional.  Maintenance can be seen as more than a necessary evil when it talks the language of those who make the final decisions about the fate of maintenance.  We move from maintaining assets to managing assets.

Article prepared by:
Preston Ingalls, President
TBR Strategies LLC

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Heavy & Highway Mini-Conference at the CFMA National Conference Feedback from May 2005

• 58% of attendees felt the mini-conference exceeded their expectations, 31% said it met their expectations, and 11% did not respond.
   

• Attendees most liked the focus on specific heavy & highway issues/topics.
   

• Attendees liked the variety of topics and speakers, and sharing of Heavy & Highway specific ideas, experiences, and best practices.
   

• Topics of special interest were: safety improvement, equipment costing, cost allocation methods, insurance, software issues, and the paperless environment.
   

• When asked on how CFMA can better meet the needs of heavy & highway professionals, the responses were to keep producing this newsletter, consider quarterly or semi-annual roundtables, and involve more H&H members in the group.  (If you would like to join our Subcommittee, please contact Karen Schneider (kschneider@cfma.org.)
   

• The preferred format for next year’s session is to hold another half-day mini-conference.

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Heavy & Highway Hot Topics – Let Us Know What You Think!

• Depreciation bonus on equipment purchases

• Increases in pricing of fuel, steel & concrete

• Technology helping the Heavy & Highway market get into gear

• Asphalt plants, scale systems, hardware costs, running asphalt or batch plants

• Tier 2 of new EPA diesel standards – how will this impact the construction industry

• Equipment Maintenance

We are interested in the topics that interest you!  So, please take a few minutes to tell us what you think by completing this short survey! Results will be published in the next issue of the newsletter.

If you have any questions or comments – or just want to let us know how you like this e-publication - please feel free to e-mail Karen Schneider at HQ.

We also ask that you share this newsletter with other members of our industry so they will learn about the focus on Heavy & Highway within CFMA and join as a result. Individuals interested in membership can visit www.cfma.org to complete a membership application, or contact Karen Schneider at HQ for more details.

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Many thanks to the following Heavy & Highway Subcommittee members who were instrumental in developing this newsletter:  

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© 2005 Construction Financial Management Association.  All rights reserved.
No portion of this e-newsletter may be reproduced without the expressed written permission of CFMA. 

The opinions expressed by the authors featured in Talking Heavy are theirs alone and do not reflect an endorsement by CFMA. The individual authors are responsible for the validity of any numbers and mathematical operations used in any examples and for obtaining permission to use any works cited in their respective articles.