Lies, damned lies and rates

Don’t ever let anyone tell you that being in the transport game is easy, writes JIM WARD. Instead, he says it is fraught with potential pitfalls – that can cost a business dearly.

The South African transport sector is widely recognised as one of the most contested and competitive industries of its kind anywhere in the world. This translates into pressure on manufacturer and operator alike, seen in ferocious performance targets for sales and operations staff, and relentless pressure on transport rates. If you are too expensive, you simply lose the work; if rates are attractively low for the client, the contract may never earn its keep or generate returns.

Remember that famous caveat, “If it looks too good to be true, it probably is”? Those are wise words…

Some years back, when full maintenance rates for new 6×4 trucks ranged from around 72 cents per kilometre (cpk) to over 89 cpk, an excited contract manager emailed a certain technical manager asking him to urgently peruse the costing for a quarry operation. It was a short, risky contract term of three years, on 100% gravel roads, with tippers fully laden in one direction, short leads, minimal load and offload times (seldom achieved in reality), a high duty cycle, and PTO hydraulics in use for 18/24 operating hours – harsh terrain and tough operating conditions in any language.

The first thing to determine was whether there was adequate budget for the expected high vehicle maintenance required for truck and trailer. There appeared to be a glaring error, as this budget had been based on a 480 hp truck rate at a miserly 27 cpk. A quick calculation showed this would not even cover routine service costs, let alone the full maintenance rate required.

Thinking there must be some mistake, the technical manager asked the contract manager to send the actual quote. There was concern that he had been duped into believing he was getting more than was actually included. Yet there it was in black and white: 27 cpk for a full comprehensive vehicle maintenance rate for six new vehicles in an off-road operation. The manufacturer was contacted to check if there had been some error, affording them a chance to rectify it before the final rate was presented to board and client. There was no mistake.

A meeting was called and – after some tooth pulling and panel beating – it emerged that the rate included 60 cents’ worth of “outside assistance” (OA). This is a subtle, unwritten code for a vehicle maintenance rate subsidised by the manufacturer and/or dealer network to secure a sale – and never shown anywhere in the rate proposal.

So, the real rate was 87 cpk. With open book costings, the customer would review the figures and seize upon the low rate. At contract termination, some cannon fodder from marketing would have to stand on an MD’s carpet and withstand the white hot blast furnace of outrage and abuse, after sharing the joyful news that a new contract would require something in the region of a 370% increase in maintenance rates… just to cover actual costs.

Relationship burnt, contract shredded, and no renewal. What was achieved? A false expectation based on a sub-economic rate allowed a sales target to be met. Trucks were sold that would otherwise be gathering cobwebs and floor plan. An operator was left looking like they didn’t understand their operating costs. Just as the honeymoon period ends, with trucks bearing the scars of being pummelled by three years of bad roads and high engine hours, the contract downgrades to a mere service contract to secure continued work… and then dies a slow death as major components start failing. Alternatively, the operator bites the bullet – absorbing a massive maintenance cost increase that its transport rates cannot recoup – and suffers financial torture.

Either way, nobody wins.