Commercial Tyre Maintenance Outsourcing Practices in South Africa
COMMERCIAL TYRE MAINTENANCE OUTSOURCING PRACTICES IN SOUTH AFRICA
by
HENDRIK CHRISTOFFEL KOTZE 9336524
SHORT DISSERTATION
submitted in partial fulfilment of the requirements for the degree
MAGISTER COMMERCII
in
BUSINESS MANAGEMENT
in the
FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES
at the
RAND AFRIKAANS UNIVERSITY
STUDY LEADER: PROF. J.H. DU PLESSIS
Johannesburg OCTOBER 2004
ACKNOWLEDGEMENTS
ALL HONOUR TO GOD. Firstly and foremost I want to acknowledge that
without the strength and guidance of GOD the Almighty this project wouldn’t
have been possible or completed.
Special thanks to the love of my life, my wife Rene, and my sons Dian and
Aiden, for their support, and most of all their patience.
I wish to express my sincere thanks to the current and former management
of Maxiprest Tyres, especially Rocky Boulanger, for giving me the opportunity
and means to conduct this study, and also in particular the management
team and staff of Maxiprest Tyre Leasing, headed by Hilton Cockcroft and
formerly Dave Mills, for sharing their extensive knowledge of the subject
matter with me.
Thanks to Hilton Cockcroft for his valuable input and taking the time to
proofread this study.
My gratitude to Prof. Johan du Plessis for his ongoing constructive criticism,
valuable input and guidance in getting this study on standard and finished in
time.
SYNOPSIS
Commercial tyre maintenance outsourcing is a creative and innovative service offering to the road freight industry in South Africa. It allows fleet operators to focus on their core business aspects, leaving the management and control of the tyres in their fleet to professional service providers with the necessary technical expertise and experience in this field. Currently tyre maintenance outsourcing service providers are under increasing pressure mainly due to price wars in the marketplace between the major tyre manufacturers fighting to maintain or increase their market share. The road freight industry in South Africa is also unique in that there is a hand full of major players, dominating more than fifty percent of the market, thereby leaving tyre suppliers and service providers doing everything in their power to retain the business they do have, and aiming to increase their share of the market at any cost.
The main objective and purpose of this study has therefore been to conduct an investigation into commercial tyre maintenance outsourcing practises in South Africa.
The following aspects were covered in this study: Defining the concept of outsourcing and more specifically tyre maintenance outsourcing. An overview of the tyre maintenance services currently available in the South African market and possible alternatives that may appear in the future. The current state of the commercial tyre industry in South Africa, focusing on the main role players and the services and products they offer to the market. The current state of the road freight industry in South Africa, focusing on the market shares the main role players hold, and other relevant transport statistics. The factors that play a role in the calculation of cost per kilometre rates, as well as the aspects which contribute to the success of a tyre maintenance outsourcing contract. An evaluation of the implications of technological advances on tyre maintenance outsourcing.
Synopsis - i
Based on the above, a number of recommendations were made firstly (i) for companies that are current or potential users of tyre maintenance outsourcing, and secondly (ii) for companies that are current or potential providers of tyre maintenance outsourcing.
(i) Recommendations for tyre maintenance outsourcing users 1. Companies need to identify their core and non-core activities. 2. Potential outsourcing users need to identify the most appropriate service provider not on pricing alone, but should also consider the overall long term business relationship, as well as the total service package on offer. 3. Companies need to realise that outsourcing is not a short-term solution to control costs, but a long-term project where the true benefits will take time to materialize. 4. Companies need to ensure that a clear tyre policy is agreed upon with the service provider at the inception of the contract. 5. Companies need to ensure that a service level agreement with measurable key performance indicators (KPI’s) is agreed upon with the service provider at the inception of the contract. 6. Companies need to understand the full cost of all the different items associated with the contract they are entering into.
(ii) Recommendations for tyre maintenance outsourcing service providers 1. Companies need to build excellent relationships with their clients as to increase communication and flow of information. 2. Companies need to analyse the service they currently provide and determine which factors must be improved upon as to increase their service levels and competitiveness in the marketplace. 3. Companies need to carefully verify all the information they receive from fleet operators upon quoting for a new contract. 4. Companies need to understand the needs of the market they operate in, as to adapt their service offerings around these needs.
Synopsis - ii TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION TO THE STUDY Page
1.1. BACKGROUND 1 1.1.1. Introduction to the subject of outsourcing 2 1.1.2. Introduction to logistics, the supply chain and transport activities 3 1.1.3. Introduction to the South African road freight transport industry 10 1.1.4. Introduction to the South African commercial truck tyre industry 12 1.1.4.1. New tyres 12 1.1.4.2. Retreads 13 1.1.5. Introduction to Tyre Maintenance Outsourcing (TMO) 13 1.1.5.1. Maintenance contracts 15 1.1.5.2. Cost per Kilometre contracts (CPK) 15 1.1.5.3. Tyre leasing contracts 15 1.2. PROBLEM FORMULATION 16 1.3. LITERATURE REVIEW 21 1.3.1. Internal Sources 22 1.3.2. External Sources 22 1.4. RESEARCH METHODOLOGY 24 1.4.1. Secondary data analysis 25 1.4.2. Informal discussions and personal observations 25 1.5. OUTLINE OF CHAPTERS 25 SOURCES OF REFERENCE 28
CHAPTER 2: INTRODUCTION TO TYRE MAINTENANCE OUTSOURCING
2.1. INTRODUCTION 31 2.2. OUTSOURCING DEFINED 31 2.2.1. Definitions 32
Table of contents - i TABLE OF CONTENTS (cont.)
2.2.2. Development 33 2.2.3. Outsourced business processes 33 2.2.4. Main reasons for considering outsourcing 34 2.2.5. Making the outsourcing decision 34 2.2.5.1. Questions for the potential user to consider 34 2.2.5.2. Factors to consider in vendor selection 35 2.2.6. Understanding the risk factors associated with outsourcing 36 2.2.7. Summary 37 2.3. TYRE MAINTENANCE OUTSOURCING (TMO) DEFINED 38 2.3.1. Supply-only contracts 38 2.3.1.1. Advantages of supply contracts to service providers 39 2.3.1.2. Disadvantages of supply contracts to service providers 39 2.3.1.3. Advantages of supply contracts to fleet operators 39 2.3.1.4. Disadvantages of supply contracts to fleet operators 40 2.3.2. On site maintenance contracts 40 2.3.2.1. Advantages of maintenance contracts to service providers 41 2.3.2.2. Disadvantages of maintenance contracts to service providers 41 2.3.2.3. Advantages of maintenance contracts to fleet operators 41 2.3.2.4. Disadvantages of maintenance contracts to fleet operators 41 2.3.3. Cost per Kilometre Contracts (No tyre ownership) 42 2.3.3.1. Advantages of CPK contracts to service providers 43 2.3.3.2. Disadvantages of CPK contracts to service providers 43 2.3.3.3. Advantages of CPK contracts to fleet operators 44 2.3.3.4. Disadvantages of CPK contracts to fleet operators 44 2.3.4. Tyre Leasing Contracts (Tyre ownership) 44 2.3.4.1. Advantages of tyre leasing contracts to service providers 46 2.3.4.2. Disadvantages of tyre leasing contracts to service providers 46 2.3.4.3. Advantages of tyre leasing contracts to fleet operators 46 2.3.4.4. Disadvantages of tyre leasing contracts to fleet operators 47
Table of contents - ii TABLE OF CONTENTS (cont.)
2.3.5. Summary 47 2.4. CURRENT STATE OF THE COMMERCIAL TYRE INDUSTRY IN SOUTH AFRICA 48 2.4.1. Introduction 48 2.4.2. New Tyre Industry 48 2.4.2.1. Introduction 48 2.4.2.2. Major role players 50 2.4.2.2.1. Bridgestone/Firestone 50 2.4.2.2.2. Goodyear 52 2.4.2.2.3. Dunlop 53 2.4.2.2.4. Continental 54 2.4.2.2.5. Michelin 56 2.4.3. Retread Tyre Industry 57 2.4.3.1. Introduction 57 2.4.3.2. Major role players 59 2.4.3.2.1. Maxiprest Tyres 59 2.4.3.2.2. Trentyre 62 2.4.3.2.3. Bandag 63 2.4.3.2.4. Leadertread 64 2.4.3.2.5. Recamic 65 2.5. CURRENT STATE OF THE ROAD FREIGHT TRANSPORT INDUSTRY IN SOUTH AFRICA 66 2.5.1. Introduction 66 2.5.2. South African Transport Statistics 67 2.6. SUMMARY 70 SOURCES OF REFERENCE 72
Table of contents - iii TABLE OF CONTENTS (cont.)
CHAPTER 3: AN ANALYSIS OF COST PER KILOMETRE CONTRACTS AND RELATED ISSUES IN TYRE MAINTENANCE OUTSOURCING
3.1. INTRODUCTION 75 3.2. COST PER KILOMETRE RATE CALCULATIONS 75 3.2.1. Basic CPK rate calculation formula 76 3.2.2. Aspects that play a role in the calculation of the CPK rate 76 3.2.2.1. Buy in prices and discounts structures 76 3.2.2.2. Vehicle configurations, fleet size and average monthly kilometres 77 3.2.2.3. Tyre brands, sizes and tread patterns 80 3.2.2.4. Expected tyre life 81 3.2.2.5. Labour and service costs 83 3.2.2.6. Tyre damage and scrapping 84 3.2.2.7. Breakdowns 85 3.2.2.8. Interest charge on leasing contracts 87 3.2.3. Rate Calculation Model 88 3.2.3.1. Fleet information 89 3.2.3.2. Expected tyre life 90 3.2.3.3. Tyre pricing 91 3.2.3.4. Steer axle calculation 92 3.2.3.5. Drive axle calculation 93 3.2.3.6. Trailer axle calculation 94 3.2.3.7. Tyre damage component 95 3.2.3.8. Labour component 96 3.2.3.9. Breakdown component 97 3.2.3.10. Interest component 97 3.2.3.11. Summarized cost analysis 98 3.2.4. Rate escalation formulae 99 3.2.4.1. New & Retread tyre price increases 99
Table of contents - iv TABLE OF CONTENTS (cont.)
3.2.4.2. Inflation (CPI/PPI index) 100 3.3. FLEET AND STOCK VALUATIONS 101 3.4. ASPECTS THAT CONTRIBUTE TO THE SUCCESS OF A TYRE MAINTENANCE OUTSOURCING CONTRACT 105 3.4.1. Customer relationship 105 3.4.2. Increasing the life of a tyre 106 3.4.2.1. Select the right tyre for the operation 107 3.4.2.2. Tyre maintenance 108 3.4.2.3. Alignment 108 3.4.2.4. Rotate tyres 109 3.4.2.5. Track tyre performance (Test programs) 110 3.5. CONTRACTUAL AGREEMENTS 110 3.6. TOTAL INTEGRATED CPK CONTRACT MODEL 112 3.6.1. Valuations 112 3.6.2. Cost per kilometre income and tyre purchases 117 3.6.3. Tyre damage 118 3.6.4. Total contract period example 119 3.7. SUMMARY 125 SOURCES OF REFERENCE 126
CHAPTER 4: AN EVALUATION OF THE IMPLICATIONS OF TECHNOLOGICAL ADVANCES ON TYRE MAINTENANCE OUTSOURCING
4.1. INTRODUCTION 127 4.2. THE COST EFFECT OF TECHNOLOGICAL ADVANCES 128 4.2.1. Product cost 129 4.2.2. Tyre damage 130 4.2.3. Labour 131
Table of contents - v TABLE OF CONTENTS (cont.)
4.2.4. Breakdowns 132 4.2.5. Summary 132 4.3. TYRE TAGS AND TRANSPONDER TECHNOLOGY 133 4.3.1. Introduction 133 4.3.2. Tag technology 135 4.3.2.1. Single bit transponders 135 4.3.2.2. Read only transponders (tags) 135 4.3.2.3. Read-write transponders 135 4.3.3. Reader systems 136 4.3.3.1. Hand held wands 136 4.3.3.2. Fixed point installation 136 4.3.3.3. Onboard vehicle readers 137 4.3.4. The potential use of tags in the tyre industry 137 4.4. THE CURRENT STATUS OF ‘TYRE TAGS’ 138 4.5. TYRE MANAGEMENT SOFTWARE PROGRAMS 143 4.5.1. In-house packages from manufacturers and retreaders 144 4.5.1.1. Tyre Maximizer (Maxiprest Tyres - subsidiary of Bridgestone SA) 144 4.5.1.2. Fleet Chief (Bridgestone Europe) 147 4.5.2. Independently developed packages 148 4.5.2.1. N-Tyre System (South Africa) 148 4.5.2.2. Total Tyre Control (Australia) 150 4.6. SUMMARY 151 SOURCES OF REFERENCE 153
Table of contents - vi TABLE OF CONTENTS (cont.)
CHAPTER 5: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1. BACKGROUND 154 5.2. GENERAL TRENDS 157 5.2.1. Service provider perspectives 157 5.2.2. Fleet operator perspectives 159 5.3. CONCLUSION 161 5.4. RECOMMENDATIONS 163 5.4.1. Recommendations for tyre maintenance outsourcing users 163 5.4.1.1. Identify core and non-core activities 163 5.4.1.2. Select service provider not on pricing alone 164 5.4.1.3. Outsourcing is not a short term project 165 5.4.1.4. Ensure a clear tyre policy is agreed upon 165 5.4.1.5. Service level agreements with measurable KPI’s 166 5.4.1.6. Understand the full cost of the contract 166 5.4.2. Recommendations for tyre maintenance outsourcing service providers 167 5.4.2.1. Build relationships 167 5.4.2.2. Analyse your current service delivery 168 5.4.2.3. Verify relevant fleet information for rate calculation purposes 168 5.4.2.4. Understand the needs of the market 169
LIST OF TABLES
LIST OF FIGURES
SOURCES OF REFERENCE
Table of contents - vii
CHAPTER 1: INTRODUCTION TO THE STUDY
1.1. BACKGROUND
‘The end users of today seldom buy brand, be it new or retreaded tyres. Currently, the focus seems to be on “value-added” service. End users are looking for a total tyre service package coupled to a national breakdown service. In fact, a vast majority no longer handles its own tyres. Gone are the old “knock and drop” days when customers would place their tyre orders with their suppliers and await delivery. Bar a few exceptions, most transport operators around South Africa are now outsourcing most of their cost centres, among them, tyres. And with good reason. Outsourcing offers a host of benefits for the end user in that it relieves him of many of the additional responsibilities attached to the job, allowing him to concentrate solely on what he knows best, namely transport, his core business.’ (Shaw, 1999:6)
The statement above sets the tone for this study as it touches on several issues pertaining the commercial tyre industry and the service and products it provides to the transport industry, in particular tyre maintenance outsourcing. Before there can be a direct focus on tyre maintenance outsourcing, the concept or subject of outsourcing must be defined.
Page 1 of 169
1.1.1. Introduction to the subject of outsourcing
According to Handfield (2002:116) one of the most complex and important decisions facing businesses today is whether to produce/manage a component, assembly, process or service internally or whether to purchase the component, assembly, process, or service from an external supplier. While this insourcing / outsourcing decision has typically focused on whether to make or buy manufactured items, it is now being applied to virtually all business activities, including manufacturing, assembly, sales, human resources, design engineering, purchasing, information systems and a wide range of other activities.
Outsourcing has many faces, but in short it can be defined as the purchase of a value- creating activity from an external supplier (Hitt, Ireland & Hoskisson, 2001, 127).
According to Peter Bendor-Samuel (The Outsourcing Institute, 2001), outsourcing is what takes place when an organization transfers the ownership of a business process to a supplier. The key to this definition is the aspect of transfer of control. This definition differentiates outsourcing from business relationships in which the buyer retains control of the process or, in other words, tells the supplier how to do the work. It is the transfer of ownership that defines outsourcing and often makes it such a challenging process. In outsourcing, the buyer does not instruct the supplier how to perform his task, but instead focuses on communicating what results it wants. It leaves the process of accomplishing those results to the supplier.
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In an attempt to establish a clear focus on the role that tyres, and the outsourced maintenance thereof, play within the transport industry as a whole, an analysis will be done in the following manner. The cost of logistics within the total supply chain will be analysed and also the cost of transport as part of logistics. Once this is done the cost of tyres and also the maintenance thereof can be analysed as part of total transport costs.
Through doing this cost breakdown it would give an indication of the amount of time and energy that the fleet operator actually needs to spend on the purchase decision concerning tyres.
1.1.2. Introduction to logistics, the supply chain and transport activities
Logistics can be defined as the process of planning, implementing and controlling the efficient, cost effective flow and storage of raw materials, in-process inventory, finished goods, and related information from point-of-origin to point-of-consumption for the purpose of conforming to customer requirements (Lambert & Stock, 1993:4). In short it can be defined as the time related positioning of resources, or the strategic management of the total supply chain (Waters, 1999:5).
Logistics, and the management thereof, has a key impact on the daily lives of people as well as the economic state and development of countries. Consumers of manufactured products and other goods are dependant on logistics and the various activities involved therein, ensuring that the products and services they require are available when, where and how they want them.
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Logistics management is also a key component of the supply chain process. The management and execution of logistics activities in a company is therefore not independent of the other organisations, management structures and activities within the particular supply chain of which it is a part.
Kotler (2000:45) states that for a company to be successful in the modern business environment it also needs to look for competitive advantages beyond its own operations, into the value chains of its suppliers, distributors, and customers. This process of companies partnering with specific suppliers and distributors is referred to as the value-delivery network, or more commonly known as the supply chain.
The basic supply chain can also be defined as a network of organizations or activities that are involved, through upstream or downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer. The supply chain thus involves the network of organisations that performs the activities that enable the physical flows and storage of materials and the system flows of related information. The supply chain for a particular product or service is thus the collection of all components or activities associated with the creation and ultimate delivery of that product or service. Supply Chain Management is therefore the managing of both the flow of materials and the relationships among the channel intermediaries from the point of origin of raw materials through to the final customer.
(Christopher, 1993).
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Therefore, while logistics is concerned with seeking to create a single plan for the flow of products and related information through a business, supply chain management builds upon this plan and framework, seeking to achieve linkage and co-ordination between processes and other entities in the chain or network (suppliers and customers) and the company itself.
A key to the understanding and success of the supply chain is to investigate the value chain concept. The business of a company is often described as a value chain in which all the activities undertaken to develop and market a product or service, yield value
(Gattorna & Walters, 1996).
FIGURE 1.1: THE BASIC VALUE CHAIN
Support Activities
Firm Infrastructure
Human Resource Management
Technological Development
Procurement Inbound logistics logistics Inbound Operations Outbound Logistics Marketing & Sales Service Primary Activities Primary Activities
Source: Porter M.E. 1985; adapted by Kotler, P. 2000:44
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The basic value chain as shown in Figure 1.1 was originally proposed by Michael Porter from Harvard University, and is used by companies to identify ways to create more customer value. According to Kotler (2000:44) this value chain supports nine strategically relevant activities that create value and cost within a specific company. The nine value-creating activities consist of five primary and four support activities. The primary activities represent the sequence of bringing materials into the business
(inbound logistics), converting them into final products (operations), shipping out the final products (outbound logistics), marketing them (marketing and sales), and servicing them (service). The support activities namely procurement, technology development, human resource management and firm infrastructure provide the support for the primary activities to take place, and are handled in certain specialized departments, with a degree of responsibility shared over all the activities of the company.
Inbound logistics activities are those relating to the flow of goods, services and information throughout the organisation and include the receiving, storing and handling of raw materials and components. Outbound logistics activities are those relating to the distribution and supply of goods and provision of services to the market, and include packaging, warehousing and testing. (De Bruyn & Kruger, 1998)
The transportation activity, as a part of the inbound and outbound logistics activities, refers to managing the movement of products that includes activities such as selecting the method of shipment (air, rail, water, pipeline, or road, or a combination thereof), choosing the specific route also known as routing, complying with various local,
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provincial and national regulations and being aware of both domestic and international shipping requirements (Lambert & Stock, 1993:15). The transportation system is the physical link connecting a company’s customers, raw materials, plants, warehouses and channel members, the fixed points in a logistics supply chain (Coyle, Bardi & Langley,
1996:317).
Transportation is the linkage activity in logistics and is often the single largest cost in the logistics process, an important component that must be managed effectively.
Logistics is one of the major expenses a business faces. According to Stock and Lambert
(2001) industries in the USA in 1999 spent an estimated $554 billion on freight transportation, more than $332 billion on warehousing, storage, and inventory carrying costs, and more than $40 billion to administer, communicate, and manage the logistics process, with the total expenditure on logistics therefore amounting to over $920 billion.
This illustrates that over 60% of logistics expenditure goes towards freight transportation, 36% towards warehousing, storage, and inventory carrying costs and approximately 4% towards administering, communicating, and managing the logistics process.
According to Coyle, Bardi & Langley (1996:318) a 1994 study of physical distribution to determine the relative importance of transport in the company revealed that the total
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distribution costs represented 7.7% of sales and that outbound transportation costs amounted to 3.09% of sales or 39% of total distribution costs.
According to Lambert & Stock (1993:16) transportation is often the single largest cost in the logistics process, as illustrated in the figures quoted above, and therefore is an important component that must be managed effectively. Transportation can account for
50% or more of the cost of basic raw materials such as sand and coal. Transportation for such items as computers, business machines, and electronic components may be less than 1%. Generally, the effective and efficient management of transportation becomes more important to a firm as transportation’s share of product cost increases.
The management of all aspects of transportation is affected, including inbound costs for acquisition of raw materials, parts, and supplies, and outbound costs of shipping finished goods to customers (Lambert & Stock, 1993:164). For this reason it is difficult to get an average cost that transport represent as part of the supply chain and ultimately the cost of a product or service.
In an attempt to get closer to the percentage that tyre costs represent of the total vehicle cost, Table 1.1 summarizes the total annual vehicle cost for a few different vehicle configurations, adapted from the Vehicle Cost Schedule published by the Road
Freight Association (RFA) on a biannual basis. This cost schedule serves as a guideline for vehicle costs, and is based on industry averages. The aim is to determine a broad average for all the different cost factors that make up the fixed and variable costs of running a vehicle.
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TABLE 1.1: TOTAL ANNUAL VEHICLE COST SUMMARY (%) Fixed and Variable cost Configuration
as a % of
Total Annual AVER Cost % ANNUAL FIXED (STANDING) COSTS: -Cost of Capital 7.9% 7.6% 7.6% 7.6% 7.7% -Depreciation 15.3% 14.6% 14.4% 14.4% 14.7% -Insurance 8.3% 8.0% 7.8% 7.8% 8.0% -On Vehicle Staff 19.0% 19.6% 19.3% 19.3% 19.3% -Overheads- (Administration) 5.4% 5.6% 4.9% 4.9% 5.2% -Overheads- (Operation) 3.6% 3.7% 3.3% 3.3% 3.5% -License 1.1% 1.2% 1.1% 1.1% 1.1% TOTAL FIXED COST 60.7% 60.4% 58.4% 58.4% 59.5% ANNUAL VARIABLE (RUNNING) COSTS: -Fuel 23.6% 23.1% 24.1% 24.1% 23.7% -Lubricants 0.6% 0.6% 0.6% 0.6% 0.6% -Maintenance 9.8% 9.9% 10.3% 10.3% 10.1% -Tyres 5.3% 6.0% 6.6% 6.6% 6.1% TOTAL VARIABLE COST 39.3% 39.6% 41.6% 41.6% 40.5% GRAND TOTAL 100% 100% 100% 100% 100% Source: Adapted from the Vehicle Cost Schedule (RFA) - Edition 28 (Sept. 2003)
From Table 1.1 it can be seen that on average the total fixed cost of a vehicle is in the region of 60% of the total cost, with total variable cost making up the remaining 40%.
It is also apparent that tyre costs (6.1%) represent the third largest variable cost after fuel (23.7%) and vehicle maintenance (10.1%). As tyre costs represent over 6% on average of the total cost of running a vehicle, and seeing that variable expenses is dependant on the number of kilometers travelled by a vehicle, tyre costs can be seen as a major expense, and it is left unmanaged, it could erode profits.
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1.1.3. Introduction to the South African road freight transport industry
‘Because the South African transport industry is highly consolidated and a handful of companies control nearly two thirds of the total number of rolling wheels, the bigger customer can leverage their buying power and command low prices.’(Colrat. L –
Marketing Manager Bandag SA, 2004:25)
‘Arguably, profit margins continue to diminish. Coupled to that, the market dynamic is such that consumers continue to drive prices down even further. Suffice it to say, the only party in this complicated triangle that is reaping the benefits from this complex situation is the consumer.’ (Shaw, 2004:14)
This sentiment is confirmed when looking at Table 1.2 which shows selected operating ratios for the transportation of goods as reported by the Department of Transport. Net profit figures are on the decline, putting more pressure on the fleet operator to either increase their rates to their customers, or put pressure on their suppliers for better rates.
TABLE 1.2: SELECTED OPERATING RATIOS – TRANSPORT OF GOODS Year 1996 1997 1998 1999 Net profit after tax / Turnover (%) 0.04 0.05 0.006 0.03
Net profit after tax / Fixed Assets (%) 0.03 0.03 0.005 0.07 Source: Adapted form Department of Transport, 2001
The South African transport industry is unique in that it is dominated by 3 major players, combined having a market share in the transport of road freight estimated at more than
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50 percent. A combined look at the published financial results of these major players, compared with the Statistics South Africa statistical release on Land Freight Transport for June 2003 compiled by the RFA reveals the following results in Table 1.3. :
TABLE 1.3: ROAD FREIGHT MARKET SHARES IN THE TRANSPORT INDUSTRY
IN SOUTH AFRICA
Average Monthly Gross Est. % of Market COMPANY Income ('000)* Share Imperial Holdings R 370,750 33 %
Unitrans Limited R 123,585 11 %
Super Group Limited R 112,445 10 %
Freight Dynamics (est.) R 62,500 6 %
Cargo Carriers Limited R 29,847 3 %
Other R 426,744 37 % TOTAL AS PER STATITISTICS R 1,125,870 100 % SOUTH AFRICA (2003) *Source: Obtained from selected available published company financial results.
As can be seen from Table 1.3 Imperial is by quite some margin the leading road freight transport service provider in South Africa according to their average monthly gross income obtained from road freight, followed by Unitrans and the Super Group with almost equal market share. This position allows these companies to qualify for substantial discounts in the marketplace due to their buying power, which results in the tyre companies scrambling for their business. Securing long-term supply contracts with these major players can result in substantial increases in market share for the tyre manufacturers and service providers. The essence of Tyre Maintenance Outsourcing
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contracts is that they will secure long term contractual supply for 2 years and longer.
That is mainly the reason why service providers and manufacturers are willing to supply at almost cost price to these companies, as market share for new tyre companies is mainly determined by units sold, and not turnover or profit margins as is the case in most other industries.
1.1.4. Introduction to the South African commercial truck tyre industry
1.1.4.1. New tyres
Four local new tyre manufacturers being Bridgestone/Firestone, Goodyear, Dunlop and
Continental dominate the South African commercial tyre industry. The bigger importers of tyres have also emerged strongly in recent years, mainly due to exchange rates dropping significantly. The major importers are Michelin, Yokohama and Pirelli, and the smaller importers, mainly from the eastern block countries being Ohtsu, Kumho,
Hankook and Toyo.
According to researched information received from D. Mills, (General Manager:
Marketing) at Bridgestone Firestone Maxiprest (2004), an estimated 793,500 units of commercial tyres were sold in South Africa during 2003. Of this Bridgestone holds the biggest market share with an estimated 30% of units sold, followed by Goodyear (23%) and Dunlop (19%). Michelin is the biggest importer with a 10% market share, equal to
Continental’s share even though they are a local manufacturer.
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1.1.4.2. Retreads
Four local retreading companies and service providers dominate the South African commercial tyre retreading industry. They are Maxiprest Tyres, a listed entity, with majority ownership by Bridgestone, Trentyre, owned by Goodyear, Bandag, with independent franchised dealers, and Leadertread, a family owned company.
According to researched information received from D. Mills, (General Manager:
Marketing) at Bridgestone Firestone Maxiprest (2004), an estimated 741,000 units of commercial tyres were retreaded in South Africa during 2003. Of this Maxiprest holds the biggest market share with an estimated 35% of units sold, followed by Trentyre at
27%, Bandag at 19% and Leadertread at 10%.
1.1.5. Introduction to Tyre Maintenance Outsourcing (TMO)
‘More and more we find tyre companies being squeezed for lower rates, particularly by the larger transport giants, who in the main, enjoy a monopoly in this country. It is more imperative now than ever before for tyre companies to do their homework thoroughly before committing themselves to a long-term scheme of this kind.’(Shaw,
1999:14)
According to Philip (2004:59) when outsourcing became popular, it originally found favour with larger operations and was mainly centred on vehicle and tyre maintenance.
Through doing this, their attention is concentrated almost entirely on vehicle
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management and client relations. They buy trucks that go easy on high tech electronics and have a reputation for reliability and top-class full maintenance contracts.
In the past the management of tyres was part of the operator’s in house maintenance responsibilities, but recently this notion has changed. Because the tyre seems like such a basic component of the increasingly technology dependent trucking industry, many operators don’t think much about their tyre’s level of complexity or the importance of the proper maintenance needed to maximise the life of this expensive necessity.
The operator doesn’t necessarily have the expertise, knowledge or time available to manage his tyre investment professionally and cost effectively. Operators realised the need for an expert or professional tyre management solution. In line with this trend, and the escalating demand from private and public sectors for ‘outsourced’ transport management, the concept of ‘Tyre Maintenance Outsourcing’ was born. (Maxiprest,
2003)
This is an additional product that is provided by the tyre supplier as a ‘value added service’ to the product they supply, thereby attempting to lock the buyer into a long- term supply relationship. This tendency has lead to greater professionalism in the transport industry, basically as a consequence of the need of the fleet owners to define and control costs.
According to Shaw (1999:6) there are three basic varieties of tyre management
‘services’ that are offered in the marketplace, namely:
Page 14 of 169
1.1.5.1. Maintenance contracts
Also referred to as managed maintenance contracts, these are short-term contracts where the cost of operating the tyre fleet still vests with the operator, but the supplier provides on-site maintenance personnel and Tyre Maintenance Software at a set monthly fee.
1.1.5.2. Cost per Kilometre contracts (CPK)
These contracts endure for at least two years. In terms of the contract, the supplier assumes control of all aspects of tyre management from the operator, charging him a pre-determined rate per kilometre travelled. The fleet operator holds a credit for the value of the tyres in his fleet at the commencement of the contract, such being set off against the valuation of the tyres at the end of the contract.
1.1.5.3. Tyre leasing contracts
These contracts are in essence the same as a normal CPK contract, with the only change being that the service provider takes ownership of the tyres in the fleet they are managing by purchasing them at the commencement of the contract from the fleet operator. At the conclusion of the contract the fleet operator has the option to either buy back their tyres, or allow the service provider to demount them.
The main purpose of ‘Tyre Maintenance Outsourcing’ is to allow the fleet operators to concentrate on their core business functions, and leave the headaches of tyre maintenance to the expertly trained professionals in that field.
Page 15 of 169
This scenario worked well in the South African Transport Industry for several years, and many operators opted to outsource their tyre maintenance and management. The problems started in the late nineties with major price wars taking place between tyre manufacturers as they battled for market share, mainly initiated by the unique scenario the South African transport industry finds itself in during the last decade as already pointed out, with a handful of transport companies dictating the market.
1.2. PROBLEM FORMULATION
It can be said that companies with a competitive advantage enjoy a position of enduring superiority over competitors, in terms of customer preference, which may be achieved through logistics. The source of competitive advantage is in the ability of the organisation to differentiate itself, in the eyes of the customer, from its competitors, and to operate at a lower cost, and therefore a greater profit than its competitors.
Competitive advantage stems from the many discrete activities a company performs in designing, producing, marketing, delivering, and supporting its products. Companies thus gain competitive advantage by performing such strategically important activities more efficiently than their competitors. In so doing they may well find that they are engaging considerable resources in the performing of non-strategically important activities, and may consider outsourcing these to a company that specialises therein.
The specialization and expertise of such a contractor may well provide the company with further competitive advantage in this regard (Christopher, 1993:2).
Page 16 of 169
The technology in the tyre industry as a whole is at such a stage that it is becoming more difficult to differentiate between products when it comes to quality and performance. The only way to differentiate is on the basis of pricing, which leads to unusually large discounts being offered to the major transport operators in the marketplace on new tyres, and more recently also on retread tyres. This phenomenon has had a detrimental effect on tyre maintenance outsourcing, as tyres have become cheaper and cheaper for the larger freight companies because of their buying power, leading fleet operators to believe that they could now provide the service cheaper themselves, rather than paying others to do this for them. This also led to unrealistic
‘Cost per kilometre’ rates being offered to operators, purely to retain their business. The basis of tyre maintenance outsourcing is that it is not only a tyre supply contract, but a full add on service of technical expertise, maintenance and control of the tyres in a fleet.
In the past transport operators were willing to pay a premium, for this add on service they receive, but that is also not the case any more. They perceive this service to be a given, and are not willing to pay for that any more. This puts tremendous pressure on the profitability margins of tyre maintenance service providers, as these type of contracts are labour intensive and therefore expensive to run.
The management decision problem is that these price wars are getting more intense, placing even greater pressure on maintenance service providers to operate profitably.
The future of this innovative service offered to the transport operator hangs in the balance. Tyre companies and service providers are faced with the dilemma of whether they should continue to provide maintenance contracts as a product, or whether they
Page 17 of 169
should return to the traditional scenario of just supplying the tyres on a ‘knock-and- drop’ basis to the customer.
This study aims to analyse and evaluate the current situation concerning Tyre
Maintenance Outsourcing in South Africa, and the possible future that this service may have. It will explore the factors that determine the success of a tyre maintenance contract, and how they are influenced by other internal or external factors.
At present, the South African transport industry is extremely price sensitive. As already stated tyre costs represent one of the largest variable or running cost for the transport operator. Fuel purchase prices are difficult to dictate, as the fuel suppliers and the controlling bodies, including government, set the basis and therefore leave little room for negotiation. Most new vehicles purchased or leased by transport operators have fixed mechanical maintenance contracts, or the maintenance is done by in-house maintenance divisions. Tyre prices, on the other hand, are influenced by an array of mostly uncontrollable variables. Oil prices and exchange rates play a role in price setting, but the major component in setting prices is competition in the marketplace.
The South African market is small compared to other international markets. The transport industry is dominated by a few major players, which makes the retaining of current business that much more important.
Most of the tyre products on offer to the local market are almost indistinguishable as far as build quality and performance is concerned. The only remaining differential factor is
Page 18 of 169
pricing. The larger local manufacturers are fixed in a pricing war, with abnormally large discounts doing the rounds. The discounts have soared to such a level that there is almost no price difference between a new and a retread tyre. New tyres have uncountable advantages over retread tyres, which also places pressure on the retread tyre industry to survive.
The research problem is derived from the statements made above. These factors all combined have a negative influence on the future growth of ‘Tyre Maintenance
Outsourcing’. To understand the whole scenario better, and to be enabled to make realistic deductions, the following factors and concepts will be investigated:
Defining the concept ‘Tyre Maintenance Outsourcing’ more clearly.
The current status of tyre maintenance outsourcing in the South African industry.
Differentiating between the different kinds of tyre maintenance contracts available
on the market, and their advantages and disadvantages.
Analysing the factors that play a role in the calculation of cost per kilometre rates,
as well as the aspects which contribute to the success of a tyre maintenance
outsourcing contract.
New products, services and technological advances in the pipeline.
The research questions are as follows:
What does the future hold for ‘Tyre Maintenance Outsourcing’ in the South African
Transport Industry?
Page 19 of 169
What can be done to kerb the deterioration of profitability and service delivery in
the tyre industry in South Africa?
The following research objectives are proposed for the study:
The main objective:
The main objective of the study is an investigation into commercial tyre
maintenance outsourcing practises in South Africa.
Based on the main objective, the specific objectives are as follows:
To first define the concept outsourcing, and then more specifically tyre
maintenance outsourcing.
To give an overview of the tyre maintenance services currently available on the
South African market, and possible alternatives that may appear in the future.
To conduct an investigation into the current state of the commercial tyre industry
in South Africa, focusing on the main role players and the services and products
they offer to the market.
To conduct an investigation into the current state of the road freight industry in
South Africa, focusing on the market shares the main role players hold, and other
relevant transport statistics.
To analyse the factors that play a role in the calculation of cost per kilometre rates,
as well as the aspects that contribute to the success of a tyre maintenance
outsourcing contract.
An evaluation of the implications of technological advances on tyre maintenance outsourcing.
Page 20 of 169
The benefit of this study will be that it will attempt to better understand and analyse the current perceptions that exist in the tyre industry concerning tyre maintenance outsourcing, thereby assisting in the development of strategies for continued growth of this service into the future.
1.3. LITERATURE REVIEW
The concept of Tyre Maintenance Outsourcing is not a very widely published subject in
South Africa, or worldwide. Searches revealed that no significant studies have been done on the subject in recent years. A concept like ‘Tyre Leasing’ only came into existence in 1992 and no relevant research have been done on defining the concept more clearly.
The literature will be obtained from two main sources, namely internal and external.
Figure 1.2 illustrates this differentiation more clearly:
Page 21 of 169
FIGURE 1.2: LITERATURE SOURCES
EXPLORATION
Internal sources External sources
Marketing Operations Proprietary Public sources documents documents sources
Management Non profit Business Government Business documents organisation agencies
Non profit
organisations
Source: Adapted from Cooper & Schindler, 2001:260
1.3.1. Internal Sources
Through being employed at one of the leading service provider of tyre maintenance outsourcing in South Africa, selected management reports will be accessible, supplying information and statistics on the subject of tyre maintenance.
1.3.2. External Sources
Internet sources will be one of the major secondary sources of information. All the major tyre manufacturers have official websites, offering insightful information on technical data and basic tyre maintenance issues.
Page 22 of 169
The actual service providers of tyre maintenance in South Africa also have official websites with information that is very broad and not specific, as they don’t want to give away too many secrets to their rivals. There are also other websites with basic transport operator information, also including sections on tyres.
Literature on the general concept of ‘Outsourcing’ is more widely available, as outsourcing takes place in various sectors of business. Outsourcing ranges from information technology to human resource management and accounting services.
Secondary literature sources, including textbooks and official websites on outsourcing is available that covers the whole spectrum of outsourcing, including definitions of the concept, and the latest trends in the marketplace.
There are textbooks available that will be used to gather greater insight into the transport operator’s viewpoint on tyre maintenance and the outsourcing of their supply contracts.
There are several transport, logistics and tyre trade magazines in South Africa, which publish an array of relevant information on tyres. Non-profit organisations, for example the Institute of Road Transport Engineers (IRTE), and the Road Freight Association
(RFA), publish relevant information on the industry on a regular basis. These will be consulted for up to date information and articles on tyre maintenance and other issues affecting the marketplace. Magazine articles are not really seen as scientific research,
Page 23 of 169
but they do give insight into the current, most up to date perceptions and trends of concepts, and will thus be consulted for this study.
All of the above mentioned sources would be consulted in gaining greater insight into the subjects under discussion. As the concept of tyre maintenance outsourcing is not a widely published subject, new sources of information will always be sought, as this will only enhance the relevance of this study.
1.4. RESEARCH METHODOLOGY
This study aims at evaluating and exploring the current status and future of ‘Tyre
Maintenance Outsourcing’ in South Africa. The aim is to gain insight and understanding into the issues at hand. The method of research that will be used in this study is the
Qualitative Research Method.
The Research Design aims to explore and understand the research dilemma, to collect information that can help formulate a better understanding of the concept under discussion, as there is not a lot of information available on the problem or subject.
The following data gathering methods will be used:
Page 24 of 169
1.4.1. Secondary data analysis
As discussed in the literature study, secondary data will be obtained through the sources mentioned, mainly through textbooks, internet sources and articles in magazines, as they have the most up to date, published material.
1.4.2. Informal discussions and personal observations
This will be held with various role players involved in tyre maintenance outsourcing activities.
1.5. OUTLINE OF CHAPTERS
The following will serve as an outline for the chapters of this study, and the topics that will be covered therein:
Chapter 1: Introduction to the study
Chapter 1 briefly outlined the role of tyre maintenance outsourcing in the supply chain as a whole, looking mainly from a costing perspective. An analysis was done in an attempt to establish a clear focus on the role that tyres and the outsourced maintenance thereof play within the transport industry as a whole. The cost of logistics within the total supply chain was analysed, and also the cost of transport as part of logistics. The cost of tyres and also the maintenance thereof was analysed as part of total transport costs. The aim of this analysis was to determine whether the cost of tyres as a part of variable transport costs, logistics, and the supply chain as a whole was substantial
Page 25 of 169
enough to warrant this study being conducted. Through doing this cost breakdown it indicated that tyres does represent a major cost for fleet operators and it warrants the amount of time and energy that fleet operator are actually spending on the purchase decision concerning tyres.
Chapter 2: Introduction to tyre maintenance outsourcing
Chapter 2 will briefly introduce and define the concept of outsourcing, as well as more specifically tyre maintenance outsourcing and the different variations thereof. The potential advantages and disadvantages of each of these will be discussed from a service providers’ and fleet operators’ perspective. A brief overview of the current state of the commercial tyre industry in South Africa will be given, placing focus on the competitiveness that currently exists in the marketplace. The road freight industry in
South Africa will be analysed and the uniqueness thereof through being dominated by a handful of big players highlighted.
Chapter 3: An analysis of cost per kilometre contracts and relating issues in
tyre maintenance outsourcing
Chapter 3 will provide a detailed discussion on the concept of tyre maintenance outsourcing and more specifically cost per kilometre contracts, touching on such aspects as the correct method in calculating a cost per kilometre rate to be used for quoting purposes by service providers, or for budgeting or benchmarking by fleet operators. A
CPK rate calculation model will be introduced, incorporating all aspects that play a role in calculating the rate, and the related relationship these aspects have on each other.
Page 26 of 169
Fleet valuations and the importance they have in the total process will be discussed, also taking a look at those factors that could directly influence the successful running of a CPK contract. A total integrated CPK contract model will be introduced to illustrate the interrelationship of all the different factors that are included in a CPK contract, and the cost implication thereof.
Chapter 4: An evaluation of the implications of technological advances on
tyre maintenance outsourcing
In Chapter 4 the role and impact of technology on tyre maintenance outsourcing will be outlined. Intelligent tyre management and mainly the future of tyre tags and transponders will be investigated. It will investigate whether technological advances may hold a direct threat for the future of tyre maintenance outsourcing as it currently exists. An investigation will also be conducted on software programs aimed at tyre maintenance, and the advantages they may hold for the industry. The features of some of the more widely used programs will be detailed.
Chapter 5: Summary, conclusions and recommendations
Chapter 5 will provide a brief summary and background to the study, also having a look from a service provider and fleet operator perspective at general trends in the marketplace, reaching a conclusion as to the finding of the study. Recommendations will be made on the basis of the findings for current and potential tyre maintenance outsourcing users and service providers.
Page 27 of 169
SOURCES OF REFERENCE
• BENDOR-SAMUEL, P. 2001. Outsourcing definitions. The Outsourcing Institute.
[Web:] http://www.outsourcing-faq.com [Date of access: 27 Sept. 2001]
• CARGO CARRIERS. 2003. Annual Financial Statements – 28 February 2003. [Web:]
http://www.cargocarriers.co.za [Date of access: 15 Oct. 2003]
• COLRAT, L. Are Dealers sabotaging their economic well-being? Southern African
Treads – March 2004 Volume 10. Sky Publications. 46p.
• COOPER, D.R. & SCHINDLER, P.S. 2001. Business Research Methods. 7th ed.
Boston: McGraw Hill.
• COYLE, J.J., BARDI, E.J., LANGLEY, C.J. 1996. The management of business
logistics. 6th ed. USA. West Publishing. 631p.
• CRISTOPHER M. 1993. Logistics and Supply Chain Management. 2nd ed. London:
Pitman. 231p.
• DE BRUYN, H.E.C. , KRUGER, S. 1998. Strategic Management Workbook. 2nd ed.
Vanderbijlpark. Entrepro.
• GATTORNA, J.L. , WALTERS, D.W. 1996. Managing the Supply Chain. London.
MacMillan Business.
• HANDFIELD, R.B. 2002. Supply Chain Redesign – transforming supply chains into
integrated value systems. USA. Prentice-Hall. 371p.
• HITT, M.A. , IRELAND, R.D. , HOSKISSON, R.E. 2001. Strategic Management:
competitiveness and globalization. 4th ed. USA: South-Western College. 549p.
• IMPERIAL HOLDINGS LIMITED. 2003. Annual Financial Results – 25 June 2003.
[Web:] http://www.imperial.co.za [Date of access: 15 Oct. 2003]
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• KOTLER, P. Marketing Management – The millennium edition. 10th ed. USA:
Prentice-Hall. 718p.
• LAMBERT, D.M. , STOCK, J.R. 1993. Strategic Logistics Management. 3rd ed. USA:
Irwin. 862p.
• LAMBERT, D.M. , STOCK, J.R. 2001. Strategic Logistics Management. 4th ed.
Boston: McGraw-hill international.
• MAXIPREST TYRES. 2003. Tyre Management. [Web:] http://www.maxiprest.co.za
[Date of access: 27 Sept. 2003]
• MAXIPREST TYRES. 2004. Consultations in August 2004 with the General Manager:
Marketing (Mills, D) regarding the estimation of market share figures for the
commercial truck tyre market.
• PHILIP, I. Small is Beautiful. FleetWatch – July 2004. Tandym Print. 70p.
• ROAD FREIGHT ASSOCIATION (RFA). 2003. Vehicle Cost Schedule, 28th Edition –
September 2003. Pretoria.
• SHAW, L. 1999. Tyre Management Systems - The way of the future. Southern
African Treads – Vol. 5, No. 3 - 1999. Sky Publications. 38p.
• SHAW, L. 2004. Tyre prices: is the consumer getting a fair deal? Southern African
Treads – March 2004 Volume 10. Sky Publications. 46p.
• SUPER GROUP LIMITED. 2003. Annual Financial Statements – 31 March 2003.
[Web:] http://www.supergroup.co.za [Date of access: 15 Oct. 2003]
• UNITRANS LIMITED. 2003. Group Audited Results – 30 June 2003. [Web:]
http://www.unitrans.co.za [Date of access: 15 Oct. 2003]
Page 29 of 169
• WATERS, D. 1999. Global Logistics and Distribution Planning. 3rd ed. USA. CRC
Press. 397p.
Page 30 of 169 CHAPTER 2: INTRODUCTION TO TYRE MAINTENANCE OUTSOURCING
2.1. INTRODUCTION
In this chapter the aim is to provide an overview of the concept of Outsourcing, including the types of business processes currently outsourced, the main reasons for considering outsourcing, and the possible risks and pitfalls associated with outsourcing.
The second part of the chapter will be dedicated to an overview of the concept of Tyre
Maintenance Outsourcing, and also to define four of the different types of contracts that currently exist in the marketplace. The final section will be dedicated to the current outsourcing trends in the South African Transport Industry in general.
2.2. OUTSOURCING DEFINED
The concept of ‘outsourcing’ is fast becoming a familiar idea to most companies, and as the scope of the concept grows, it actually becomes more difficult to properly define it.
According to Hitt, Ireland & Hoskisson (2001) outsourcing is the purchase of a value creating activity from an external supplier. Two of the most comprehensive or complete definitions of outsourcing are presented below.
Page 31 of 169 2.2.1. Definitions
Outsourcing is what takes place when an organization transfers the ownership of a business process to a supplier. The key to this definition is the aspect of transfer of control. This definition differentiates outsourcing from business relationships in which the buyer retains control of the process or, in other words, tells the supplier how to do the work. It is the transfer of ownership that defines outsourcing and often makes it such a challenging process. In outsourcing, the buyer does not instruct the supplier how to perform his task, but instead focuses on communicating what results it wants. It leaves the process of accomplishing those results to the supplier. (Bendor-Samuel: The
Outsourcing Institute, 2001).
Outsourcing is the transferring of an internal business function or functions, plus any associated assets, to an external supplier or service provider who offers a defined service for a specified period of time, at an agreed but probably qualified price. From this definition it can be seen that the control of the functions in question will thus reside with the service provider. This outside organisation, as a specialist in its field, will usually be in a position to add value not normally obtainable in a non-core function retained in-house. (Heywood, 2001:27)
Basically outsourcing comprises of the following factors (Embleton and Wright -1998):
Having an outside provider supply a service that you usually perform in-house.
Transferring of routine and repetitive tasks to an outside source.
Paying other companies to perform all or part of the work.
Page 32 of 169 2.2.2. Development
In the early 1990’s management theorists stated that in order to maintain competitiveness it was essential that the organisation differentiate between core and non-core functions, and that the non-core functions be transferred to a specialist in that function, as it is believed that there are organisations that can perform your non-core function better than you ever could. Outsourcing may sound like a relatively new concept, but the externalising of functions to outside specialists has been practised for many years under various other names, including contract manufacturing and facilities management. The outsourcing of IT functions was the first major growth area for outsourcing, and still is today. Outsourcing wasn’t always a successful venture to follow, but it became more apparent as time passed that there is actually major cost saving potential when outsourcing is attempted where both parties are sufficiently motivated.
2.2.3. Outsourced business processes
The major types of business processes that are currently outsourced include the following (The Outsourcing Institute, 2004):
Information technology
Finance and accounting
Human resources including payroll administration
Internal audit functions
Customer service
Marketing and sales
Logistics, including distribution and transportation
Page 33 of 169 2.2.4. Main reasons for considering outsourcing
According to the Outsourcing Institute’s Annual Survey of Current and Potential
Outsourcing End-Users (1998), the top 10 reasons companies consider outsourcing are as follows:
Reduce and control operating costs.
Improve the company focus.
Gain access to world-class capabilities.
Free internal resources for other purposes.
Resources are not available internally.
Accelerate reengineering benefits.
Function difficult to manage or out of control.
Make capital funds available.
Share risks.
Cash infusion.
2.2.5. Making the outsourcing decision
2.2.5.1. Questions for the potential user to consider
There are some real risks for both parties to an outsourcing contract, but more so for the potential client, as any changes to his current service levels could have a detrimental effect on the future of his company. Before the decision is made to outsource, the decision makers must ask themselves the following pertinent questions that will assist them in the final decision: (Adapted from Heywood, 2001:109)
Page 34 of 169 What do I do when I want to cancel the contract and take the service back?
What happens when the service provider is taken over or merges with another
company, or even goes under?
Will the service be flexible enough to cater for major changes that may occur in my
business?
Will there be possible disruption of normal business during the transition to the
third party service provider?
Can the service provider’s staff have the same knowledge and commitment as the
client’s own employees?
Will the client totally lose the know-how to carry out that outsourced task over
time?
These are all real concerns that a company may have, and for good reason. Outsourcing is not something that can be done without careful consideration of all the possible pitfalls that may exist.
2.2.5.2. Factors to consider in vendor selection
From the above it can be seen that selecting the correct service provider may be the most important aspect when considering outsourcing. The following factors will assist in the selection process and need to be considered carefully before making the final decision on selecting an outsourcing service provider (The Outsourcing Institute - 2004):
The service provider’s commitment to quality and how it will be measured.
Page 35 of 169 Analysing the cost or pricing quoted by the service provider, eliminating any
possible hidden costs.
References or reputation of the service provider in the marketplace.
Flexible contract terms.
Scope of resources.
Additional value added capability of the service provider.
Cultural match between the parties concerned.
Existing relationship between the parties.
Location of the service provider, and their ability to keep up with the expansion of
your business.
2.2.6. Understanding the risk factors associated with outsourcing
There are several factors that can be considered by the company in aiming to reduce the potential risks that may occur in outsourcing. The following 10 factors are considered by the Outsourcing Institute’s Annual Survey of Current and Potential
Outsourcing End-Users (1998) to be essential for successful Outsourcing:
Understanding your own company goals and objectives.
Setting up a strategic vision and plan for your company.
Selecting the right service provider.
Ongoing management of the relationship between the parties.
A properly structured contract to eliminate any possible pitfalls.
Open communication with the individuals or groups affected by outsourcing.
Senior executive support and involvement throughout the entire process.
Page 36 of 169 Careful attention to personal issues.
Near term financial justification.
Use of outside expertise to assist in the decision-making and transformation
process.
2.2.7. Summary
From all of the above it can be concluded that it is often essential for a company to make use of outside suppliers or service providers through outsourcing to help them maintain and increase their competitiveness in the marketplace. There may be considerable advantages to the outsourcing of certain non-core functions of a company, but as many companies have experienced, there are also great risks and possible difficulties in following this route. It is not just a quick fix to problems that may exist in a company, but a long-term partnership that can shape the future competitiveness of a company.
In conclusion, the growth of outsourcing has resulted from an economic climate characterised by fierce competition, and emphasis on cost savings and increased profit.
At the same time, the technology of the late 1990s provided a new window of opportunity for the provision and the purchase of outsourcing services (Embleton and
Wright, 1998).
Page 37 of 169 2.3. TYRE MAINTENANCE OUTSOURCING DEFINED
Tyre maintenance outsourcing can be defined as the situation that exists where a fleet operator takes the conscious decision to outsource the supply and maintenance of the tyres in his fleet to a third party tyre service provider in any of the four types of supply contracts including supply-only, maintenance, cost per kilometre or tyre leasing, or any variation thereof. Even though supply-only contracts cannot be seen as a form of outsourcing, it is included in the discussion so as to form a clear picture and provide a comparison of the services currently on offer in the industry.
2.3.1. Supply-only contracts
Supply-only contracts, better known in the industry as ‘knock and drop’ contracts, can be defined as an agreement between the service provider and the fleet operator where a predetermined set discount structure is fixed for an agreed period on the supply of tyres and related services and products. The service provider will only be responsible for the supply of the products on request of the fleet operator, which includes the delivery of new or retreaded tyres and collection of smooth casings for retreading. The parties can also agree that the service provider will act as intermediary for the supply of services associated with possible breakdowns outside the service area of that specific service provider. The service provider will also be available to assist the fleet operator with technical advice as and when needed, including attending the scrap analysis on the request of the fleet operator to help them determine the cause for the premature failure of their tyres.
Page 38 of 169 This type of initial contract is normally the forerunner of a possible maintenance or CPK contract once the fleet operator is comfortable with the products and service he is receiving from the service provider. The aim of these contracts is to get a proverbial
‘foot in the door’ of the fleet operator, and to pursue the possibility of locking them into long term supply and service contracts. This can only be done if the service provided is of high standard and the products of good quality, thereby fulfilling the needs of the fleet operator as and when required.
2.3.1.1. Advantages of supply contracts to service providers
The service provider gets the opportunity to establish a relationship with the fleet operator, and if his products fare well against the competition, he could move to one of the other forms of supply and thereby fixed contracts for set periods.
2.3.1.2. Disadvantages of supply contracts to service providers
The full purchase decision and control over the expenditure still vests with the fleet operator.
2.3.1.3. Advantages of supply contracts to fleet operators
The fleet operator still has the final say in the purchase decision concerning his tyres, with the added benefit of special pricing and free advice as and when required. The service provider can, through the extensive data available, assist the fleet operator in determining the correct tyre selection based on the operating parameters of a particular fleet or contract.
Page 39 of 169 2.3.1.4. Disadvantages of supply contracts to fleet operators
The pricing that a fleet operator will receive on this type of contract is normally not as good as that which he will receive on the other forms of supply arrangements.
Even though expert advice is at hand, the maintenance of the tyres is still the responsibility of the fleet operator himself.
2.3.2. On site maintenance contracts
On site managed maintenance contracts or tyre bay maintenance contracts takes the concept of supply only contracts a step further. According to Shaw (1999:7) they can be defined as contracts where the service provider puts full time staff on the premises of the fleet operator to effectively take over the maintenance role that the fleet operator provided himself. The staff compliment will normally include at least a site supervisor and a few tyre fitters, depending on the size of the fleet. The site supervisor will be responsible for supervising the tyre fitters in proper maintenance procedures, including the fit and strip of tyres, the maintenance of proper inflation levels as well as other predetermined maintenance procedures determined in the agreement between the two parties.
The purchase decision will still be taken by the fleet operator, as per the normal supply agreements already discussed. The fleet operator will normally set a specific budget for the site supervisor to run the operation at, which requires close cooperation between the two parties if this is to be achieved.
Page 40 of 169 Whereas the fleet operator previously employed all the tyre related staff, they will now only be billed a predetermined labour rate by the service provider.
2.3.2.1. Advantages of maintenance contracts to service providers
A main advantage is that there is a fixed supply contract for a set period. On site personnel allows for a control mechanism over the maintenance and the supply of the tyres. Through this the fleet operator can be persuaded into purchasing the service provider’s preferred tyre brands, which could allow for higher profit margins.
2.3.2.2. Disadvantages of maintenance contracts to service providers
The full purchase decision and control over the budget still vests with the fleet operator, still keeping full control out of the hands of the service provider.
2.3.2.3. Advantages of maintenance contracts to fleet operators
The fleet operator can relinquish more controls and especially the maintenance of his tyres to the service provider, which allows him more time to focus on his core business.
The employment and control over the tyre staff will fall away as they will now be employed by the service provider.
2.3.2.4. Disadvantages of maintenance contracts to fleet operators
The service provider could willingly aim to maintain the tyres at the lowest possible acceptable level to the fleet operator, because the lower the maintenance levels, the
Page 41 of 169 more frequently tyres have to be replaced and the higher his supply of tyres at the cost of the fleet operator.
The only possible answer to the above dilemma may be to build key performance indicators (KPI’s) into the contract, but this will mean that control and monitoring of the tyres is still a function of the fleet operator, but to a lesser extent.
2.3.3. Cost per Kilometre Contracts (No tyre ownership)
According to Shaw (1999:9) cost per kilometre (‘CPK’) contracts can be defined as those where the service provider takes over full responsibility for the supply and maintenance of the fleet of tyres at a predetermined cost per kilometre rate agreed between the parties. The income derived from the rate charged to the fleet operator will be used to cover the cost of the purchase of tyres which is now for the account of the service provider. The CPK rate to be used for the duration of the contract is calculated on a basis that will allow the service provider to maintain the tyres in the fleet on approximately the same level as they were taken over at the beginning of the contract.
A small profit margin is built into this rate charged, but profit is only attainable if the service provider can maintain the tyres as best possible to increase the mileages travelled per tyre. A fleet valuation is conducted at the commencement of the contract as to establish what the condition or value of the fleet currently is. This is commonly known as the Opening Valuation. The only way that the Opening Valuation can change is when new vehicles are added to the fleet, or current vehicles are transferred or sold
Page 42 of 169 from the fleet. This is known as additions or deletions to the Opening Valuation. As the contract progresses, regular valuations are done to determine any increases or decreases in the fleet value. This is commonly known as the Current Valuation. The
Current Valuation changes due to the normal operations and the replacement cycles of the tyres. As the vehicles travel, the tread reduced, and so the value of the tyre. At the end of the contract, the difference between the Opening Valuation and the Current
Valuation is either payable to the service provider if the latter is of greater value, indicating that the condition of the fleet has increased, or payable to the fleet operator if the opposite is the case.
2.3.3.1. Advantages of CPK contracts to service providers
Fixed supply contract for a set period as determined by the contracts negotiations. The industry norm is currently at least two years.
The service provider can supply any tyre of his choice in the fleet as to keep the cost per kilometre as low as possible, thereby allowing for higher profit margins.
2.3.3.2. Disadvantages of CPK contracts to service providers
The fleet operator will sometimes have difficulty in accepting the fact that the control over his tyres is now in the hands of an outsourced third party.
The profit margins on CPK contracts are very small and require numerous control mechanisms to ensure that a profit situation is in fact realised.
Page 43 of 169 2.3.3.3. Advantages of CPK contracts to fleet operators
The fleet operator can focus fully on the other core aspects of his business. His only involvement will be in receiving monthly reports to keep him informed on the state of the tyres in his fleet. Regular meetings will also be scheduled, especially as the contract gets closer to its termination date. At these meetings the fleet operator also has the opportunity of informing the service provider of any changes to his current fleet or operations.
2.3.3.4. Disadvantages of CPK contracts to fleet operators
The cost of a CPK contract is normally seen as more expensive than the rest of the other services on offer, but this is normally only over the short term, as the long term benefits which cannot always be measured in real terms, are extensive. The perception that CPK contracts are more expensive is mainly due to the fact that fleet operators are not always in a position to really establish the true cost per kilometre of their tyres, and therefore could make uncalculated guesses based on industry norms.
2.3.4. Tyre Leasing Contracts (Tyre ownership)
Tyre Leasing contracts can be defined as those where the service provider takes full ownership of the entire fleet of tyres, including the stockholding of tyres, and maintain them on a contract basis similar to normal CPK contracts. The transfer of ownership at the commencement of the agreement between the parties is based on a full survey and valuation that is done on the tyres in the fleet to determine an agreed value for the transfer of this asset. The agreed value is paid over to the fleet operator, thereby
Page 44 of 169 effectively transferring ownership thereof. A normal Cost per Kilometre contract is then entered into, which will run for a set period, with the possibility of extending the contract as it reaches maturity. The rate to be used for the duration of the contract is calculated on a basis that will allow the service provider to maintain the tyres in the fleet on approximately the same value as determined at the beginning of the contract. Any investment into the fleet, including additional vehicles added to the fleet, will be for the account of the service provider, as the CPK rate is not designed to cover this additional expense. The added value to the asset will only be realised when the contract is concluded, and the fleet operator must pay back to the service provider the recalculated value of the tyres in his fleet.
These contracts are not as common as normal CPK contracts, as most fleet operators are not open to the concept of relinquishing the ownership of their tyres to a outsourced third party. The effective control of the tyres is transferred to the service provider, allowing them to specify the tyres that will allow them to maintain their newly acquired asset in the best possible manner. The fact that the fleet operator loses the ability to specify the specific tyres to be used in his fleet is often seen as a downfall for tyre leasing. The upside of this is however that due to the fact that the asset now belongs to the service provider, they will do everything possible in their power to maintain their asset in the best possible manner, thereby not allowing the degradation of the acquired asset and a possible loss in value.
Page 45 of 169 2.3.4.1. Advantages of tyre leasing contracts to service providers
The fact that the fleet operator was willing to trust the service provider by allowing him to purchase the tyres in his entire fleet, indicates that there is a greater level of cooperation between the parties. Due to this tyre leasing contracts normally last for much longer than normal CPK contracts, because as time passes it becomes more difficult for the fleet operator to change back to maintaining his own fleet, and also due to price increases in the marketplace, the asset he sold could now be worth twice what he sold it for. Contracts of five years and more are common in the marketplace.
2.3.4.2. Disadvantages of tyre leasing contracts to service providers
The fact that tyres have to be purchased at the beginning of the contract from the fleet operator means that the service provider has to be in a very strong cashflow position, especially as the larger fleet values can amount to several million rand.
The above also suggests that a return on this initial outflow of capital similar to what can be achieved from investing the capital with a financial institution has to be built into the cost per kilometre rate. With the current competitiveness in the marketplace it is not always possible to achieve this, and is often overlooked in negotiations.
2.3.4.3. Advantages of tyre leasing contracts to fleet operators
The fleet operator can get a substantial cash boost to his business which can be utilised for any possible growth prospects to the core business, or for any other purpose the operator sees fit.
Page 46 of 169 2.3.4.4. Disadvantages of tyre leasing contracts to fleet operators
The fleet operator has effectively lost control over an essential asset in his business, which, if managed poorly by the service provider, can result in having an effect on the effective running of the rest of his core operations.
The fleet operator must realise that this type of arrangement is long term, and if he intends to cancel the contract, he must be in a position to buy back the asset at current market values.
2.3.5. Summary
‘Any way you look at it the demand for this type of service has escalated to such a
degree that tyre retailers are now focusing a great deal of their efforts on sourcing and
training suitable people for site management.’ (Shaw, 1999:14)
The four types of tyre maintenance outsourcing contracts offered in the marketplace are
not set in concrete, but can be adapted to best suit the needs of the fleet operator. As
the statement above points out clearly there is an increase in the demand for these
types of add-on services, as most fleet operators have realised that there is other
alternatives to managing your own tyres. The service providers on the other hand must
ensure that the service they do provide are of a professional nature, as this will ensure
the retention of business and growth in the long term.
Page 47 of 169 2.4. CURRENT STATE OF THE COMMERCIAL TYRE INDUSTRY IN SOUTH
AFRICA
2.4.1. Introduction
‘By virtue of the nature of the industry, daily challenges are extremely competitive, because we operate in a tough and competitive business environment where everybody is striving for his or her share of the market, yet the market is only so big, with new entrants continuously emerging. Responsible, consistent and trustworthy trading remains the key, but this is sometimes difficult to sustain when confronted with very active competition, let alone keen pricing in the marketplace.’ (Bowren, 2004:4)
As can be seen from this statement the commercial tyre industry in South Africa is not the easiest to operate in, as it is very competitive and pricing seems to be the main focus point from the manufacturing, retail and end user point of view.
This following section will provide an overview of the new tyre manufacturing and retreading industries in South Africa, focusing on the major role players and the products and services they provide.
2.4.2. New Tyre Industry
2.4.2.1. Introduction
According to Wada (2004:5) the South African tyre industry can still be described as traditional, with distribution taking place via a dealer network. Tyre dealers are
Page 48 of 169 adversely affected by fluctuating currencies, and as such pre-empted the proliferation of cheap imports from different parts of the globe. South African tyre dealers appear bent on continuing to sell on price alone.
This statement effectively sums up the state the new tyre industry finds itself in, in
South Africa. Price wars have been looming for the last few years, and with the ever- changing face of the road freight transport industry to a few major players, it has become more difficult to grow and even sustain market shares.
It is a difficult task to determine an accurate market share figure new tyre companies in
South Africa. The main reason is that the importers of tyres are not obliged to report any sales figures to any regulating body in South Africa. The companies that do have manufacturing facilities in South Africa report their manufacturing statistics to The South
African Tyre Manufacturers Conference (SATMC). In Table 2.1 the estimated market shares is shown respectively for radial truck tyres and fabric truck tyres as per the
SATMC figures, with the imported figures being estimated. Table 2.1 was adapted from researched information received from D. Mills, the General Manager: Marketing at
Bridgestone Firestone Maxiprest (2004).
Page 49 of 169 TABLE 2.1: ESTIMATED COMMERCIAL TYRE MARKET SHARES BY NEW TYRE
COMPANIES - 2003
Manuf/ Units Share Units Share Units Share Company Factories Import Radial % Fabric % Total % Bridgestone 2 Manuf. 183,300 30% 55,600 30% 238,900 30% Goodyear 1 Manuf. 125,000 21% 54,900 30% 179,900 23% Dunlop 2 Manuf. 103,200 17% 50,000 27% 153,200 19% Continental 1 Manuf. 60,000 10% 21,000 11% 81,000 10% Michelin 0 Import 80,000 13% 0 0% 80,000 10% Yokohama 0 Import 26,000 4% 1,500 1% 27,500 3% Pirelli 0 Import 20,000 3% 0 0% 20,000 3% Other 0 Import 10,000 2% 3,000 2% 13,000 2% TOTAL 6 607,500 100% 186,000 100% 793,500 100% Source: Adapted from Mills, D. (GM: Marketing – Maxiprest Tyres)
From Table 2.1 it can be seen that Bridgestone holds the biggest market share in the
South African commercial truck tyre market with 30%, followed by Goodyear(23%) and
Dunlop(19%). Michelin is the biggest importer with a 10% market share, equal to
Continental’s share even though they are a local manufacturer.
It can also be seen from table 2.1 that an estimated 793,500 new commercial tyre units were sold in South Africa in 2003. If a very conservative average selling price of R2,000 is multiplied with the number of units, it constitutes that the new commercial tyre industry could be worth up to R1,590 million in South Africa.
2.4.2.2. Major role players
2.4.2.2.1. Bridgestone/Firestone
The Bridgestone Firestone brands are manufactured and distributed in South Africa by
Bridgestone SA, a wholly owned subsidiary of Bridgestone Japan, and considered to be
Page 50 of 169 the biggest tyre manufacturer worldwide. As can be seen from Table 2.1 they also hold the biggest market share in South Africa with an estimated 30% of new commercial tyre sales. They have two factories in South Africa, one situated in Brits, and the other in
Port Elizabeth, mainly producing Firestone passenger and commercial tyres. Almost all of their Bridgestone tyres for passenger, commercial and Off-the-road (OTR) use are imported.
Bridgestone distributes their tyres through a mostly dedicated distribution arms in which they own equity stakes, either as franchised dealers or as direct subsidiaries. Their passenger distribution is mainly done through Supa-Quick, Autoquip or Speedy Tyre and
Exhaust franchised dealerships. Their commercial and OTR distribution is mainly done through Maxiprest Tyres, a listed tyre distributor and service provider in which they own an estimated 66% stake.
Bridgestone also recently announced that they intend to invest around R700 million in upgrading and expanding their Brits factory, bringing the total investment that
Bridgestone Japan has made in South Africa to R1,32 billion. This indicates that
Bridgestone Japan sees South Africa as a market worth investing in, particularly with a view to extending their distribution into the rest of Africa and also increasing the market share they already hold. (Shaw - 2004:30)
Page 51 of 169 2.4.2.2.2. Goodyear
Goodyear South Africa is a division of Goodyear Tyre and Rubber Company
International, based in the USA. Looking back, the founding of The Goodyear Tire &
Rubber Company in 1898 seems especially remarkable, for the beginning was anything but auspicious. The 38-year-old founder, Frank Seiberling, purchased the company's first plant with a $3,500 down payment — using money he borrowed from a brother-in- law. The rubber and cotton that were the lifeblood of the industry had to be transported from halfway around the world, to a landlocked town that had only limited rail transportation. Even the man the company's name memorialized, Charles Goodyear, had died penniless 30 years earlier despite his discovery of vulcanization after a long and courageous search.
Yet the timing couldn't have been better. The bicycle craze of the 1890s was booming.
The horseless carriage, some ventured to call it the automobile, was a wide-open challenge. Even the depression of 1893 was beginning to fade. So on August 29, 1898,
Goodyear was incorporated with a capital stock of $100,000.
With just 13 workers, Goodyear production began on Nov. 21, 1898, with a product line of bicycle and carriage tires, horseshoe pads and — fitting the gamble Seiberling was making — poker chips. The first recorded payroll amounted to $217.86 based on the prevailing wage of 13 to 25 cents an hour for a 10-hour day. After the first full month of business, sales amounted to $8,246. Since the first bicycle tire in 1898, Goodyear pedaled its way toward becoming the world's largest tire company, a title it earned in
Page 52 of 169 1916 when it adopted the slogan "More people ride on Goodyear tires than on any other kind," becoming the world's largest rubber company in 1926.
Today, Goodyear measures sales in excess of $15 billion, although it took 53 years before the company reached the first billion-dollar-year milestone. The company has about 85,000 associates worldwide. And it all began in a converted strawboard factory on the banks of the Little Cuyahoga River in Akron, Ohio. Spanning the years, through all of those yesterdays, a legion of firsts and facts and figures appear that reflects the making of a company. (Information adapted from Goodyear: 2004)
The South African operation is based in Uitenhage in the Eastern Cape, with the factory producing not only tyres, but also other rubber products including rubber hoses, conveyor belts and power transmissions. Goodyear also owns the Tredcor Group that includes Mastertreads and Trentyre, and also the franchised Hi-Q Group. Trentyre is mostly responsible for the distribution of commercial tyres, with Hi-Q taking care of the passenger tyre distribution. As can be seen from Table 2.1 they also hold the second biggest market share in South Africa with an estimated 23% of new commercial tyre sales.
2.4.2.2.3. Dunlop
Dunlop Tyres, a division of Dunlop Tyres International, is a South African company with its head office in Durban. Dunlop manufacturers steel radial tyres for passenger vehicles, trucks, tractors, busses and earthmoving equipment through the two factories
Page 53 of 169 it has in South Africa. During the past 5 years Dunlop has invested in excess of R100 million in upgrading its factories, allowing for the reengineering of their truck tyre range.
(Dunlop, 2003:47)
As can be seen from table 2.1 Dunlop holds a 19% market share in South Africa in the commercial new tyre industry, with an estimated 153,200 units sold through its distribution arms. Distribution and service delivery largely takes place through their franchised Dunlop Accredited Dealers (DAD), but also distribute direct from their factories to the bigger customers.
2.4.2.2.4. Continental
The General Tyre and Rubber Company (SA) Pty Ltd or Gentyre as it is better known was established in 1947 by the Williams Hunt Group, South Africa, and General Tyres
International in Akron, Ohio. The manufacturing facility was built in Port Elizabeth in
1948 and by the end of 1950, tyres, tubes and repair materials were being sold in South
Africa, the Rhodesias (now Zambia and Zimbabwe), Nyasaland (Malawi) and South West
Africa (Namibia).
The Company continued to expand through the 1950's and in the early 1960's General’s steelbelted radial ply tyres were introduced in the market. In 1978, General Tyre in
South Africa concluded a technical service agreement with Continental AG in Germany - the first formal association between the two companies - which gave the Company access to the technology required to build high performance steelbelt radial ply tyres in
Page 54 of 169 South Africa. In 1985, the association was further consolidated when Continental in
Germany approved the production of Continental branded products by General Tyre at its factory in Port Elizabeth.
Continental tyres were launched in South Africa in 1986 and quickly achieved success in both the original equipment and replacement markets. Internationally, the 1987 acquisition of General Tyre USA by Continental AG, further reinforced the association between the Continental and General brands in South Africa and helped create new product opportunities.
A major milestone for General Tyre in South Africa was the approval for Continental branding of a range of South African designed and developed recreational vehicle (RV) tyres - which had previously been marketed as General branded products. The General
Tyre and Rubber Company also introduced Continental commercial steelbelted radial ply tyres, where they have been particularly well received in the uniquely South African minibus taxi market. Limited numbers of imported Continental heavy truck tyres have been introduced in South Africa and exciting opportunities exist for the local manufacture of these and other giant truck tyres. South African locally manufactured
General tyres are backed by comprehensive after-sales, service and technical support from the factory and by a nationwide dealer and field service network.
Over the past four years, Continental Tyre SA has invested over R200 million in the modernisation and upgrading of its research, development and manufacturing facilities.
Page 55 of 169
According to Table 2.1 Continental only has an estimated 10% market share in the commercial tyre industry, mainly due to the fact that most of their commercial tyres are imported. Distribution and service delivery mainly takes place through their franchised
Conti Partners dealerships.
(Information adapted from Continental:2004)
2.4.2.2.5. Michelin
Michelin South Africa Pty Ltd was launched in July in 1998 to manage and develop the markets of South Africa, Botswana, Namibia and some of the other neighbouring countries, Swaziland, Lesotho and Zimbabwe. The Michelin brand was present in South
Africa for the previous 62 years through various distributors. Michelins head office in
South Africa is situated on the east of Johannesburg. This office houses all its national management and operational staff including departments like customer service, product management, marketing, logistics, finance, personnel, communication and information technology.
Michelin South Africa is supported by a network of regional offices based in Cape Town and Durban. Each of these offices has its own sales force covering a wide range of products, brands and geographical territories.
The tyres marketed in South Africa include those for passenger car/light truck, earthmoving equipment, truck and bus, agricultural and industrial equipment and
Page 56 of 169 motorcycles. Three of the Michelin Groups global brands can currently be found in South
Africa: Michelin, BF Goodrich, and Kormoran. (Information adapted from Michelin:2004)
Even though Michelin doesn’t have a manufacturing facility in South Africa and fully import all their tyres, according to Table 2.1 they hold an estimated 10% of the market share, tied with Continental, which do manufacture in South Africa. Michelin have limited but loyal distribution in South Africa, but is regarded very highly in the marketplace. They only employ in the region of 54 staff members that provides sales, service and technical backup.
According to Holdsworth (2003:31) Michelin also recently introduced a new service called Michelin Fleet Solutions, which is dedicated to providing tyre management solutions to fleet operators. They are the first new tyre company to provide this service direct and not through service providers in their distribution channels.
2.4.3. Retread Tyre Industry
2.4.3.1. Introduction
The retread tyre industry is going through tough times in South Africa with companies seeing units dropping in the wake of price wars taking place in the new tyre industry.
Some retailers, according to King (2004:20), over the past few years have seen alliances with manufacturers taking place, sometimes even in the form of equity in distribution channels.
Page 57 of 169 As with the new tyre scenario it is also difficult to estimate market share figures for the
South African truck retread market, as companies are not obliged to report any figures to a central controlling body as with new tyres. Table 2.2 was also adapted from researched information received form D. Mills, the General Manager: Marketing at
Bridgestone Firestone Maxiprest (2004), and gives an indication of the estimated market shares that the retreading companies hold in South Africa in the commercial tyre market.
TABLE 2.2: ESTIMATED COMMERCIAL TYRE MARKET SHARES BY
RETREADERS - 2003
Company Factories Owned/Franchise Units Retread Share %
Maxiprest (Bridgestone) 17 Owned 259,000 35% Trentyre (Goodyear) 17 Owned 200,000 27% Bandag 26 Franchise 141,000 19% Leadertread 18 Franchise 74,000 10% Other (Independants) 15 Owned 67,000 9% TOTAL 93 741,000 100% Source: Adapted form Mills, D. (GM: Marketing – Maxiprest Tyres)
According to Table 2.2 an estimated 741,000 units of commercial tyres were retreaded in South Africa during 2003. Of this Maxiprest holds the biggest market share with an estimated 35% of units sold, followed by Trentyre at 27%, Bandag at 19% and
Leadertread at 10%. If a very conservative average retread price of R500 is multiplied with the number of units, it indicates that the commercial tyre retread industry could be worth up to R370 million in South Africa.
Page 58 of 169 The services these companies provide in the marketplace are the biggest differentiating factor, as there are not really significant differences in the quality of the retreads that are produced. The major services these companies provide are shown in Table 2.3.
TABLE 2.3: AFTER SALES & SUPPORT SERVICES - RETREADERS
Service Maxiprest Trentyre Bandag Leadertread 24/7 Breakdown Yes Yes Yes Yes Mobile on-site wheel alignment Yes Yes No No Technical department Yes Yes Yes Yes National network Yes Yes Yes Yes Regional network Yes Yes No No Maintenance software program Yes Yes Yes Yes Software support Yes No No No Tyre bay maintenance Yes Yes Yes Yes C.P.K. contracts Yes Yes No No Tyre Leasing Yes No No No Source: Adapted form Mills, D. (GM: Marketing – Maxiprest Tyres)
According to Table 2.3 Maxiprest Tyres provides the most comprehensive service package in the industry. This is clearly reflected in them being the market leader in terms of market share. Having these ad-on services allows a company to lock in their customers into using their products.
2.4.3.2. Major role players
2.4.3.2.1. Maxiprest Tyres
Bridgestone Firestone Maxiprest Limited (Maxiprest Tyres), established in 1988, is
Southern Africa's predominant retreader, multi-brand new tyre distributor and tyre management service provider. From table 2.2 it can be seen that they hold a 35%
Page 59 of 169 market share in South Africa in the retreading industry, with an estimated 259,000 units produced through its 17 owned factories.
Through its wholly owned subsidiaries, Maxiprest Tyres (passenger, truck, bus and agricultural markets) and Quality Tyres (mining and earthmover), the Group's current footprint comprises 93 branches and 20 retread factories across the sub-continent - also enabling it's 24 hour transporter tyre breakdown service.
Maxiprest Tyres is a vertically integrated group encompassing all aspects of the tyre industry, from the manufacture of precured tread and bonding material, to the supply of retreaded and new tyres to commerce and industry, and to professional fleet operators under cost per kilometre leasing and maintenance contracts. Maxiprest is currently the only service provider in South Africa offering the full tyre leasing product to customers, where ownership of tyres is assumed by them.
The partnership with Bridgestone / Firestone, the world's No. 1 tyre manufacturer, and the acquisition of OTR (Off the Road) specialists, Quality Tyres, substantially improved the companies’ ability to provide truly holistic tyre management solutions to their customer base.
The world's leading new tyre and rubber manufacturer, Bridgestone Corporation
(Japan), holds a strategic 70% stake in the Group via its local subsidiary Bridgestone
Page 60 of 169 Firestone South Africa Holdings (Pty) Ltd - with the balance of the shareholding being held by management and the investing public alike.
The network also supports the all-hour tyre breakdown service which is currently being serviced by Maxiprest Tyres stores and associations developed with independent operators in areas where the company is not represented. This service is a recent innovation and has proved to be an exceptional success contributing positively to group earnings.
Maxiprest Tyres has the license for the Maxiprest compressed tread retreading system for Africa. The application of precure tread under compression is the only major innovation in the method of retreading since the precure process was developed.
This technology, used by the company in its retreading facilities in South Africa,
Botswana and Swaziland, is a unique process applying 6% more precure rubber and utilising compression to apply the precured tread to truck or bus tyre casings as opposed to applying it under tension like other retreads. The technology is also used under license from Maxiprest Tyres by factories in Malawi, Zambia and Zimbabwe.
The unique qualities of the compressed tread retreading system is supported by an independent scientific test carried out by the CSIR which confirmed that, among other features:
Resistance to penetration and cuts is improved – with the consequent reduction of
downtime due to punctures and the protection of the casing.
Page 61 of 169 A denser, firmer tread area is created thereby resisting wear and extending the
retread life.
The vertical integration of the manufacture of precure rubber and bonding materials and supply processes ensures that these products are only supplied to Maxiprest Tyres owned or licensed facilities. This gives the company the advantage to supply a unique product and cost advantages which allow it to establish price leadership in a price-led market.
(Information adapted from Maxiprest: 2004)
2.4.3.2.2. Trentyre
Trentyre is one of the largest Tyre service providers in Southern Africa and was established in 1948. It is currently fully owned by new tyre company Goodyear South
Africa. From table 2.2 it can be seen that they hold a 27% market share in South
Africa in the retreading industry, with an estimated 200,000 units produced through its 17 owned factories. The Trentyre retreads are branded Arctic Rubber. They have a network of some 145 branches strategically positioned across South Africa. Trentyre employs over 4000 people countrywide. They participate in the overall tyre supply market with specialist focus on the following sectors:
Earthmoving / Mining
Giant Truck and Bus
Retail passenger / LDV Services
Agriculture
Page 62 of 169 Fork lift and Industrial
Wheel rims
Arnco flatproofing (tyrefill)
Trentyre owns 17 factories that are also strategically placed to cater for all the requirements in the tyre and allied industry. They are able to retread all categories of tyres, as well as the manufacture, redish and repair of wheel-rims.
Trentyre also provide tyre management solutions to fleet operators in the form of maintenance and cost per kilometre contracts. They also recently introduced a 24/7 on road breakdown service to assist fleet operators with road tyre emergencies.
(Information adapted from Trentyre: 2004)
2.4.3.2.3. Bandag
Founded in 1957 as a commercial franchisor, Bandag has over 1,100 franchised dealers in more than 100 countries world-wide, replacing almost 9 million truck and bus tyres a year.
The parent company was formed in 1957, when Roy Carver purchased the rights to a revolutionary precured retreading process from its German inventor, Bernhard Anton
Novak. The name Bandag comes from his original company – Bernhard Anton Novak
Darmstadt AG.
Page 63 of 169 Bandag SA has over 40 independently franchised retreading factories in Southern Africa, and distributes through its strategically placed dealer network. From table 2.2 it can be seen that Bandag holds a 19% market share in South Africa in the retreading industry, with an estimated 141,000 units produced through its 26 franchised factories.
A quality certification programme for all dealers is carried out on a bi-annual basis. The
Bandag Manufacturing Excellence Programme (MEP) is used to ensure that Bandag
Retreads are manufactured to Bandag’s global quality specifications on a consistent basis.
Bandag dealers along with a number of other service providers also form part of an
Emergency Tyre Assistance Programme (ETA), which ensures that downtime is kept to a bare minimum.
(Information adapted from Bandag: 2004)
2.4.3.2.4. Leadertread
In the mid '50s John Sproson and his father Jim were retreading in Zimbabwe (then
Rhodesia). John came to South Africa to set up Regent Tyre Services in Sauer Street
Johannesburg in 1964. The move to the present location, Industria, took place in 1970.
By 1975 adjoining property was acquired to accommodate the new venture of tread manufacture under the name of Oliver Rubber SA (PTY) Ltd.
At inception, this was under licence to Oliver USA. As the business grew, new
Page 64 of 169 relationships were forged with European tyre manufacturers and a healthy exchange of know-how enabled the company to expand its operations to mixing their own rubber compound. United Patch was incorporated in 1984 in order to manufacture consumables used in the repair and retreading of tyres. The company now supplies a complete range of materials & equipment to the retreading industry as well as providing a turn key operation for new retread plants which have been installed throughout Africa, Europe and the Middle East. This allowed for total quality control, from beginning to end, of the materials required to produce a premium retread.
In 1990 the company had truly come of age and elected not to renew the license agreement with Oliver USA. Its first goal was the achievement of the ISO 9002 standard; the first tread manufacturer in South Africa to receive the award.
(Information adapted from Leadertread: 2004)
From table 2.2 it can be seen that Leadertread holds a 10% market share in South
Africa in the retreading industry, with an estimated 74,000 units produced through its
18 factories.
2.4.3.2.5. Recamic
Recamic is the retreading system owned and promoted by Michelin tyres. They currently have 4 franchised retreading facilities in South Africa.
Page 65 of 169 The Recamic Cold Retread Process is a revolutionary system that exclusively uses
Michelin raw materials. Developed, approved and controlled by Michelin, the Recamic
"cold-cure" or "pre-cured" retreading system claimed to have the ability to create truck tyres that are more like new than retreads. The claimed reason being that the high percentage of natural rubber used in the process lowers rolling resistance and consequently improves fuel economy. This process also uses a thinner undertread that dramatically reduces heat build up, which is the major enemy for both new and retreaded tyres. The tread is backed with a special polyester film and cured with
Michelin manufactured cushion rubber for improved adhesion and joint bonding.
Pre-cured Recamic treads are manufactured from the same compounds and patterns as new Michelin tyres, and are identified on the shoulder area with the Michelin name.
(Information adapted from Michelin: 2004)
2.5. CURRENT STATE OF ROAD FREIGHT TRANSPORT INDUSTRY IN SOUTH
AFRICA
2.5.1. Introduction
‘The unpredictability of the rand, inflation and interest rates have all had an impact on the South African Transport Industry. Add to that a surprising influx of new players, transport rates that are more cut-throat that ever before and rising diesel and tyre costs, and one would have to question the unfathomable attraction of the road freight industry, particularly the general freight sector which is well and truly saturated.
Page 66 of 169 Transporters are unanimous in two things, namely that the transport industry is not for the feint hearted and that curtailing running costs has never been more critical to the overall preservation and well-being of their businesses.’ (Shaw, 2002:4)
2.5.2. South African Transport Statistics
Since the mid-1980s the South African road transport industry has grown considerably.
In South Africa an average of 7% of the Gross National Product (GDP) is spent on freight transportation alone. About 69% of road-freight tonnage is carried by firms or operators transporting freight in the course of their business, and 29% by firms transporting goods for reward. (South African Government Yearbook 2003/2004)
TABLE 2.4: THE CONTRIBUTION OF THE TRANSPORT SECTOR TO THE GROSS
DOMESTIC PRODUCT (GDP) (million rand): 1994 - 1999
Year 1994 1995 1996 1997 1998 1999 Gross value added at 440,144 500,353 565,976 625,420 670,381 723,247 basic prices Transport & 38,296 44,538 51,787 57,765 63,498 71,340 Communications sector Percentage (%) of 8.7% 8.9% 9.2% 9.2% 9.5% 9.9% GDP Source: Adapted form Department of Transport, 2001
Table 2.4 indicates that the Transport Sector as a whole, including the Communications sector, contributed almost 10% to the GDP in 1999. It can be seen that this contribution percentage has grown with steady pace since 1993, increasing by more that 1% up to
1999. This shows that transport is not only important because it contributes significantly
Page 67 of 169 to the GDP, but also because it keeps the economy rolling as it delivers essential services as and when needed.
TABLE 2.5: EMPLOYMENT IN SOME SUBSECTORS OF THE FORMAL
TRANSPORT SECTOR
Year 1992 1993 1994 1995 1996 1997 Transnet 156,069 131,937 116,319 115,049 113,034 109,300
Passenger transport 24,739 21,840 20,325 19,085 20,080 20,067 Private road 53,215 55,620 53,438 57,093 59,089 57,201 transport of goods TOTAL 234,023 209,397 190,082 191,227 192,203 186,568 Source: Adapted form Department of Transport, 2001
The transport sector is also a major employer in South Africa, employing in the region of
186,000 people in the formal transport sector as can be seen in Table 2.5. Transport is also a major employer in the informal transport sector.
According to Table 2.6 there was in the region of 248,000 minibusses registered in
South Africa in 2000. If it is assumed that there is one driver per minibus, the informal employment in the minibus industry alone exceeds that of the formal transport sector.
Page 68 of 169 TABLE 2.6: ‘LIVE’ VEHICLE POPULATION OF SOUTH AFRICA (1998 – 2000)
Year Vehicle Class 1998 % 1999 % 2000 % Motorcars & stationwagons 3,784,289 64.7% 3,847,952 64.6% 3,913,470 64.7% Minibusses 248,698 4.3% 252,977 4.2% 248,837 4.1% Busses, bus-trains & 25,133 0.4% 25,741 0.4% 25,943 0.4% midibusses Motor- / Tri- / Quadrocycles 158,895 2.7% 156,848 2.6% 158,606 2.6% Ldv's & panelvans (<3.5t) 1,219,471 20.8% 1,261,815 21.2% 1,297,383 21.4% Trucks (heavy load draw > 227,123 3.9% 227,468 3.8% 226,937 3.8% 3.5t) Other self-propelled vehicles 186,957 3.2% 182,148 3.1% 178,788 3.0% Total self-propelled 5,850,566 100% 5,954,949 100% 6,049,964 100% vehicles Caravans 120,508 17.2% 117,595 16.6% 113,965 15.9% Light load trailers (< 3.5t) 479,283 68.6% 491,262 69.5% 502,322 70.1% Heavy load trailers (> 3.5t) 99,107 14.2% 98,410 13.9% 99,806 13.9% Total trailers and caravans 698,898 100% 707,267 100% 716,093 100% Source: Adapted form Department of Transport, 2001
South Africa is one of the countries in Africa with probably the best road infrastructure.
Table 2.6 indicates that in 2000 there were approximately 6 million self-propelled vehicles in use on South African Roads. The biggest portion of this is motorcars, adding up to more than 64% of the total vehicles.
Of interest for this study is the number of trucks on the roads adding up to 226,937 at the end of 2000. It is interesting to see that this figure has stayed almost constant between 1998 and 2000, only dropping slightly in this period.
Page 69 of 169 TABLE 2.7: TONNAGE TRANSPORTED PER TRANSPORT MODE SECTOR (‘000)
1994 Sector Private % Public % Rental % TOTAL % Agriculture, hunting, forestry & fishery 43,424 13% 62,469 44% 3,178 25% 109,071 22% Mining & quarrying 19,534 6% 33,038 24% 0 0% 52,571 11% Manufacturing 122,540 36% 42,676 30% 662 5% 165,878 34% Electricity, gas & water 4 0% 0 0% 0 0% 4 0% Construction 11,202 3% 0 0% 87 1% 11,289 2% Wholesale, retail trade, catering etc. 38,790 11% 2,245 2% 4,020 32% 45,055 9% Financing, insurance, real estate etc. 5,935 2% 0 0% 2,416 19% 8,351 2% Community, social & personal services 96,511 29% 0 0% 2,324 18% 98,835 20% TOTAL 337,939 100% 140,427 100% 12,687 100% 491,054 100% % OF TOTAL 69% 29% 3% 100% Source: Adapted form Research Unit for Transport Economic and Physical Distribution Studies, RAU, 1994
Table 2.7 gives an indication of the sort of tonnage transported in the road freight industry in South Africa. A distinction is made between Private operators, being a company whose primary objective is not transport, Public operators, which transport goods for reward, and Rental, which refers to goods transported on rented vehicles.
From table 2.7 it is seen that Private fleets still makeup the biggest portion at 69% of operating fleets. The manufacturing sector also constitutes the biggest transport activities, at 34% of total tonnage transported.
2.6. SUMMARY
According to Nell (2004:54) the outsourcing of non-core activities is a continuing phenomenon in the South African road freight industry, and organisations are demanding that freight operators be responsible for an increasingly larger part of the
Page 70 of 169 inbound and outbound supply chain processes and management functions. Companies have used external suppliers to provide services traditionally part of the internal organisation, but deemed to add limited value to the companies’ bottom line or where the function performed requires a greater level of investment than can be provided.
In today’s highly competitive transport marketplace, fleet operators are aiming to eliminate or reduce every expense that does not contribute to their primary business of hauling freight. A more effective third party service provider can directly affect a fleet’s profitability, and also other aspects like customers service, equipment safety and vehicle performance and efficiency. These are some of the main reasons why fleet operators may consider outsourcing their tyre management functions.
Page 71 of 169 SOURCES OF REFERENCE
• BANDAG SOUTH AFRICA. 2004. History and background. [Web:]
http://www.bandag.co.za [Date of access: 27 August 2004]
• BENDOR-SAMUEL, P. 2001. What is Outsourcing? – The Outsourcing Institute. .
[Web:] http://www.outsourcing-faq.com [Date of access: 27 Sept. 2001]
• BOWREN, A. (Managing Director: Hi-Q Franchise Chain). Interviewed by Shaw, L in
Southern African Treads Magazine – March 2004 Volume 10. Sky Publications. 46p.
• CONTINENTAL TYRE SOUTH AFRICA. 2004. Brief history. [Web:]
http://www.continental.co.za [Date of access: 27 August 2004]
• DEPARTMENT OF TRANSPORT see SOUTH AFRICA. Department of Transport.
• DUNLOP TYRES. 2003. Fleetwatch Magazine – March 2003. Newslink cc. 54p.
• EMBLETON, P.R., WRIGHT, P.C. 1998. A Practical Guide to Successful Outsourcing.
Empowerment in Organisations, 6(3). [Web:]
http://www.barbarina.emeraldinsight.com [Date of access: 28 Aug. 2004]
• GOODYEAR. 2004. About Goodyear. [Web:] http://www.goodyear.com [Date of
access: 31 August 2004]
• HEYWOOD, J.B. 2001. The Outsourcing Dilemma. London: Pearson. 207 p.
• HITT, M.A. , IRELAND, R.D. , HOSKISSON, R.E. 2001. Strategic Management:
competitiveness and globalization. 4th ed. USA: South-Western College. 549p.
• HOLDSWORTH, M. 2003. Tired of Tyres. Focus on Trucking and Logistics –
September 2003. Goldfields Press. 46p.
Page 72 of 169 • KING, M. (Sales and Marketing Director: Goodyear). Are dealers sabotaging their
economic well being? Southern African Treads – March 2004 Volume 10. Sky
Publications. 46p.
• LEADERTREAD SOUTH AFRICA. 2004. Company history. [Web:]
http://www.leadertread.co.za [Date of access: 27 August 2004]
• MAXIPREST TYRES. 2004. Consultations in August 2004 with the General Manager:
Marketing (Mills, D) regarding the estimation of market share figures for the
commercial truck tyre market.
• MAXIPREST TYRES. 2004. About Maxiprest. [Web:] http://www.maxiprest.co.za
[Date of access: 25 Sept. 2004]
• MICHELIN SOUTH AFRICA. 2004. About Michelin South Africa. [Web:]
http://www.michelin.co.za [Date of access: 27 August 2004]
• NELL, J. Outsourcing: Article published in Truck and Bus South Africa – July 2004.
Titan Publications. 60p.
• RAU. 1994. Research Unit for Transport Economic and Physical Distribution
Studies. As reported in Department of Transport. 2001. Transport Statistics - 2001.
Pretoria. [Web:] http://www.transport.gov.za [Date of access: 02 September
2004]
• SHAW, L. 2004. Article on Bridgestone SA. Southern African Treads – March 2004
Volume 10. Sky Publications. 46p.
• SHAW, L. 2002. End users voice tyre concerns. Southern African Treads – June
2002 Volume 8. Sky Publications. 38p.
Page 73 of 169 • SHAW, L. 1999. Tyre Management Systems - The way of the future. Southern
African Treads – Vol. 5, No. 3 - 1999. Sky Publications. 38p.
• SOUTH AFRICAN GOVERNMENT see SOUTH AFRICA. South African Government.
• SOUTH AFRICA. Department of Transport. 2001. Transport Statistics - 2001.
Pretoria. [Web:] http://www.transport.gov.za [Date of access: 02 September
2004]
• SOUTH AFRICA. South African Government. 2004. Yearbook – 2003/2004.
Pretoria. [Web:] http://www.info.gov.za [Date of access: 07 September 2004]
• THE OUTSOURCING INSTITUTE. 2004. Survey of Current and Potential
Outsourcing End-Users (1998). [Web:] http://www.outsourcing.com [Date of
access: 19 March 2004]
• TRENTYRE SOUTH AFRICA. 2004. About Trentyre. [Web:]
http://www.trentyre.co.za [Date of access: 27 August 2004]
• WADA, T. (Chairman and CEO: Bridgestone SA). Interviewed by Shaw, L in
Southern African Treads Magazine – June 2004 Volume 10. Sky Publications. 46p.
Page 74 of 169 CHAPTER 3: AN ANALYSIS OF THE CONCEPT OF COST PER KILOMETRE CONTRACTS AND RELATED ISSUES IN TYRE MAINTENANCE OUTSOURCING
3.1. INTRODUCTION
In this chapter the aim is to provide an in depth discussion on the concept of Cost per
Kilometre (CPK) contracts as a specific product offered as part of Tyre Maintenance
Outsourcing. There will be a detailed discussion on CPK rate calculations, and the factors that influence this calculation directly or indirectly. The factors that attribute to the success of Tyre Maintenance Outsourcing will be analyses, as well as a look at the outlay of the legal contract or agreement between the fleet operator and service provider.
3.2. COST PER KILOMETRE RATE CALCULATIONS
The correct calculation of the initial Cost Per Kilometre (CPK) rates could be seen as one of the most crucial aspects of the tyre outsourcing contract for the service provider, as it could signal the difference between a potential profit or a loss in the long term. There are many aspects that need to be considered if a CPK rate as close as possible to the actual running cost is to be calculated and put on the table in initial negotiations. Most fleets vary in the vehicle configurations they run for specific contracts, be it long distance or local delivery, or on what type of road surface they travel, either gravel or tar, or a mixture thereof, these are all factors that could have a profound impact on the
Page 75 of 169 CPK rate that the service provider will commit to manage the fleet at. The following section will aim to shed some light on the specific aspects that should be considered carefully in the calculation of CPK rates.
3.2.1. Basic CPK rate calculation formula
The basic formula that can be used to calculate a CPK rate is as follows:
(Tyre cost – casing credit) (R) ______X Number of Tyres = CPK Rate (R/km) in configuration Estimated tyre performance (km)
A detailed CPK rate calculation model, incorporating all the different detailed aspects that could influence the calculation, would be introduced later in this chapter.
3.2.2. Aspects that play a role in the calculation of the CPK rate
The following aspects can be considered to be critical factors in the calculation of the most accurate CPK rates that are either quoted by service providers, or by fleet operators to use for benchmarking or budgeting purposes.
3.2.2.1. Buy in prices and discounts structures
The pricing policies that dominate the current commercial tyre industry in South Africa are very unique when compared to other countries. The South African transport industry is unique in that it is dominated by 3 major players that combined have a market share
Page 76 of 169 in the transport of road freight estimated at more than 50 percent. This strong position allows these companies to qualify for substantial discounts in the marketplace due to their buying power, which results in the tyre companies scrambling for their business.
Due to this situation there is a great variance between the pricing for these large companies, and the normal small transport operator. In some instances the price difference on a specific tyre may vary by up to 40% between the big and small players in the marketplace.
Because of the industry scenario above it can be assumed that pricing is potentially the single biggest variable that can have an impact on the calculation of a CPK rate. When a potentially new CPK contract is identified, and negotiations start, one of the first items to discuss is what the potential discounts could be that the fleet operator would qualify for if they were to purchase tyres directly from the service provider on a supply only agreement. Once this discount is agreed upon, it will be used in the calculation of the rate. As most CPK contracts start out as normal supply contracts, these discount structures may already be in place when negotiations start.
3.2.2.2. Vehicle configurations, fleet size and average monthly kilometres
The vehicle configurations in use in the transport of road freight are varied according to the operational requirements of fleet operators, including the loads they are transporting, the road surfaces they travel on, the point of distribution, and many more.
As the configurations differ, naturally the number of tyres in use on a vehicle may vary and so impact on the CPK rate. The fewer tyres in use, the lower the CPK rate. The
Page 77 of 169 most common configurations in use on CPK contracts as adapted from the Vehicle Cost
Schedule published by the Road Freight Association (RFA) are shown in Table 3.1. It can be seen that the number of tyres in use can vary from 14 on a basic 4 axle vehicle, to even 26 on a 7 axle truck tractor with an interlink trailer.
According to the Vehicle Cost Schedule for September 2003, published by the Road
Freight Association (RFA), the average cost per wheel position for the configurations mentioned in Table 3.1 is approximately 2.08 cent per kilometre. The average long distance transporters normally run a 26-wheel configuration, which means that they could have a CPK rate of as high as 54 cent per kilometre. If a vehicle runs an average distance of 10,000 kilometres per month, their CPK expense on tyres is R 5,400 per month. This shows that at around 2 cent per kilometre the fleet operator should always keep tyre expenditure in mind when considering vehicle configurations, as one less trailer axle could save him up to 8 cent per kilometre or R 800 per month. This may not seem significant, but according to Table 2.6 discussed in Chapter 2, supplying information on the ‘live’ vehicle population in South Africa, there were 99,806 heavy load trailers registered on South African roads in the year 2000. If the amount of R 800 can be saved on each of these vehicles, the saving would amount to an astronomical figure of nearly R 80 million rand per month. For the average fleet operator that runs a fleet of 100 truck tractor and trailer combinations, this saving will amount to an estimated R 80,000 per month.
Page 78 of 169 TABLE 3.1: BASIC VEHICLE CONFIGURATIONS
Tyres Qty: Rigid 6 01 Trailer 8 4 Axle Artic (4x2 TT+Tandem Axle ST) Total 14 Tyres Qty: Rigid 10 02 Trailer 8 5 Axle Artic (6x4 TT+Tandem Axle ST) Total 18 Tyres Qty: Rigid 6 03 Trailer 12 5 Axle Artic (4x2 TT+Tridem Axle ST) Total 18 Tyres Qty: Rigid 10 04 Trailer 12 6 Axle Artic (6x4 TT+Tridem Axle ST) Total 22 Tyres Qty: Rigid 6 05 Trailer 12 5 Axle Combination (Doubles Combination) Total 18 Tyres Qty: Rigid 6 06 Trailer 16 6 Axle Combination (4x2 TT+Tandem/2 Axle Trailer) Total 22 Tyres Qty: Rigid 10 07 Trailer 16 7 Axle Combination (6x4 TT+Tandem/2 Axle Trailer) Total 26 Tyres Qty: Rigid 10
08 Trailer 16 7 Axle Interlink (6x4 TT+Tandem/Tandem ST) Total 26 Source: Adapted from the Vehicle Cost Schedule (RFA) - Edition 28 (Sept. 2003)
Table 3.1 outlines some of the basic vehicle configurations commonly making use of cost per kilometre contracts in South Africa. The size of the operator’s fleet doesn’t have a direct impact on the calculation of a CPK rate, as the rate is calculated and charged per vehicle, and not for the fleet as a whole. The fleet size does impact on the labour
Page 79 of 169 cost associated with maintaining the fleet. The bigger the fleet, the more tyre personnel are needed to service the fleet as per the basic accepted maintenance levels. The labour and service costs are normally charged as a fixed cost, but it can be linked to the kilometers travelled by the fleet, and as such included in the CPK rate.
In an attempt to establish an estimated average fleet size for the purposes of the calculations in this chapter, some of the major transport fleets will be analysed.
According to Imperial Holdings (2004), they have an estimated fleet of 4,690 vehicles operating in South Africa in their logistics division, which operates in excess of 55 different sub-divisions (an estimated average of close to 85 vehicles per sub-division).
According to Supergroup (2004) their Alex Carriers division had approximately 150 truck tractors operating in its fleet. Unitrans (2004) reports that it has 1,270 units operating in
5 separate divisions (If it is assumed that a unit refers to a truck tractor and a trailer, they had an estimated average of 127 draw vehicles per division). According to Cargo
Carriers (2004) their Sugar division had an estimated 140 vehicles in its fleet. As can be seen from limited available information the actual size of fleets are difficult to calculate, but for the purposes of further calculations in this chapter, an average of 100 vehicles in a fleet will be used, as this is seen as a fair reflection on a possible average in the marketplace.
3.2.2.3. Tyre brands, sizes and tread patterns
One of the most crucial success factors in any CPK contract is to select the right tyre for the right application. The biggest challenge is to prevent premature tyre removal,
Page 80 of 169 because the loss of tyres due to irregular wear can inflate CPK rates at alarming rates.
As there are so many different configurations that operate on different road surfaces and on different types of contracts, there are so many different factors that could influence irregular wear. The service provider should rely on their technical knowledge and experience in choosing the correct tyre for the operation they intend managing.
In the South African marketplace there is an abundance of tyre brands to choose from, with the most well known being Bridgestone, Firestone, Michelin, Goodyear, Continental,
Dunlop, Yokohama, and also the not so well known being Kumho, Kelly, Mabor,
Hankook, to name but a few. All these manufacturers produce commercial tyres in different sizes, with the most common in the CPK fleets being 315/80R22.5, 12R22.5 and 385/65R22.5. There is a further distinction namely tread patterns. There are tread patterns for steering axle, driving axle and trailer type fitment, as well as for different driving conditions, be it on-road highway transport, off-road transport or a combination of both.
3.2.2.4. Expected tyre life
The expected tyre life that a service provider estimates they can achieve on a vehicle in certain conditions is also of great importance in the calculation of a possible CPK rate they intend quoting to a fleet operator (Refer section 3.4.2 for more detail). This is basically the only factor that the service provider is able to influence directly. A CPK rate is calculated in such a way that the income obtained from the rate will equal the expense for the replacement of tyres in a certain period, normally a year. A small
Page 81 of 169 margin is added as profit for the service provider. The calculation of the CPK rate as per the formula quoted in section 3.1 is based on a conservative estimated kilometers achievable as agreed upon by the fleet operator and service provider in their negotiations. If the service provider focuses on instituting stringent tyre maintenance procedures in an effort to increase the life of a tyre, they will get a greater rate of return as they are prolonging the life of a tyre.
If for example the cost of a tyre is R2,000 and the expected kilometers achievable over the life of that tyre is 100,000 kilometers, the CPK rate can be calculated at 2 cent per kilometer (R2,000/100,000km). If the service provider maintains the tyre even better as to achieve 110,000 kilometers, the CPK rate will be reduced to 1.8 cent per kilometre. A rate reduction of 0.2cpk may not seem significant, but if it is taken on a vehicle configuration of 26 wheels that travels 10,000km per month, the saving amounts to
R520 per vehicle per month. On an average fleet of 100 truck tractor and trailer combinations, this saving on tyre expenditure will amount to an estimated R 52,000 per month. For a company like Imperial Holdings that runs a fleet of over 4600 commercial vehicles as per their latest financial results released in June 2004, the saving could amount to almost R 28 million per year.
This shows that careful consideration should be given to the expected tyre life achievable, as an incorrect calculation at the beginning of the contract could cost the service provider their profits in the long term. Most of the professional service providers have technical departments that are focused on testing tyres for certain conditions on
Page 82 of 169 certain configurations. These test tyre databases provide useful insight for the service provider as to what type of mileages is achievable in controlled circumstances.
3.2.2.5. Labour and service costs
In addition to the CPK Rate that is calculated as per the above, the fleet operator has to pay the service provider for staff and support costs related to the supply of an efficient service as stipulated in the contract between the parties. The basic cost items that could be included in the service charge or maintenance fee are the following:
Contract on-site supervisor salary.
Tyre fitter wages, with the number depending on the size of the fleet.
Service vehicle costs, including fuel, finance costs and maintenance.
Equipments cost, including the supply of mobile compressors if necessary.
Any other sundry costs associated with the running of a fleet of tyres, for example
replacement valve caps, valve cores, valve extensions etc.
Telephone and fax facility costs
This service fee must escalate annually by the same percentage as agreed by the parties, either being linked to an index like CPI, or to actual wage increases as determined by the Bargaining Council of the Motor Industry in its respective regions.
Page 83 of 169 3.2.2.6. Tyre damage and scrapping
The premature removal of tyres from the operation is not seen as part of the CPK rate negotiated, as this rate is designed to cover costs where the tyre runs its full life. This cost for tyre damage or mechanical irregularities on the fleet operator’s part, where the service provider could not have prevented the tyre being prematurely removed, will be invoiced back to the fleet operator on a pro rata basis. The cost to be invoiced to the fleet operator is calculated using the full cost of a casing and the cost per millimetre remaining on the tyres at removal. Tyres are prematurely removed due to the following reasons:
Vehicle accidents.
Wilful neglect by the drivers causing impact fractures, sidewall and tread cuts or
large penetrations.
Overloading of vehicles.
Mechanical irregularities on vehicles, for example alignment problems, worn
bearings, or any mechanical fault that could lead to the premature removal of
tyres.
Run flat tyres caused by punctures, and brake flat caused by brake problems.
The fleet operator and service provider in general conduct a joint monthly scrap analysis as to determine the reason for tyre failures, and to agree on who will be responsible for the cost. Premature removal caused by casings defects or insufficient tyre maintenance like under- or over-inflation will be for the account of the service provider themselves.
Some fleet operators elect to have an independent technical tyre expert, normally from
Page 84 of 169 a new tyre manufacturer, present to assist them in keeping the scrapping procedure fair, as they don’t have the tyre knowledge to contest any findings by the service provider.
As the essence of a CPK contract is that the fleet operator has a flat line of expenditure on tyres, tyre damage could cause unexpected spikes in their costs. It is for this reason that some fleet operators elect this cost to also be linked to the CPK rate, paying a fixed cost per kilometre for their tyre damage per month, calculated on the basis of their actual historical expenditure. The service provider still keeps record of the actual cost for tyre damage over the period as to assist them in managing it downwards, and to help them recover extra costs when rate negotiation next take place.
3.2.2.7. Breakdowns
Breakdowns refer to on-road tyre failures that occur due to impact fractures, sidewall and tread cuts, large penetrations, run flats, damage due to mechanical irregularities or any other type of failure that will cause the tyre to be deflated or not able to allow the vehicle to continue with its journey. Breakdowns could also occur due to tyres being stolen from vehicles when parked, vehicles being involved in accidents, or even wheels coming loose while driving.
Most operators in South Africa elect not to carry spare wheels due to various reasons, the most important being because of internal fraud or theft from vehicles. This makes the provision of on-road breakdown services essential.
Page 85 of 169 An on-road tyre failure can easily cost twice that of a normal replacement tyre in a fleet.
This is mainly due to the fact that the fleet operator or service provider are in the hands of breakdown service providers with which they have no set pricing policies, and as such they can charge whichever rates they see fit. It is not only the cost of the tyre that has to be paid for, but a callout fee, depending on the breakdown being during office or after hours, per kilometre travelling fee at a set rate, and sundry incidental costs.
Due to the downtime that the fleet operator suffers, there is also a loss of productivity that leads to reduced operating times and consequent increases in fixed costs.
The bigger service providers mostly don’t have the increased prices of tyres to reckon with, as they can rely on their own chain of dealers to perform the on-road breakdown service due to their larger footprint in a specific area. It is only breakdowns in remote areas or cross border where the increased tyre costs are relevant.
In tyre maintenance outsourcing contracts, and specifically CPK contracts, the service provider is required to attend to any breakdown of any of the vehicles at any location outside the depot of the fleet operator, and must supply the replacement products as might be required to attend to the breakdown as part of their contract rate. The replacement products will not be charged for over and above the CPK rate provided the damaged tyres removed from the vehicle are returned to the depot either by the breakdown service provider, or preferably by the fleet vehicle itself. As stated above the
Page 86 of 169 fleet operator will be obliged to pay the service provider a set callout and travelling fee per kilometre.
The agreement between the parties normally state that tyre related breakdowns within a hundred kilometre radius from the transport depot shall be attended to by service provider on-site personnel. A specific time can also be set in the contract within which a breakdown must be attended to so that the downtime for the fleet operator can be reduced and also ensuring that the service provider will react promptly and efficiently to any such incidents. As the fleet operators are also under pressure by their customers to deliver on time, and late deliveries often being deducted from their income, this cost could well be passed to the service provider.
3.2.2.8. Interest charge on leasing contracts
As stated in chapter 2 there are CPK contracts where the fleet operator retains ownership of his tyres, and tyre leasing contracts where the service provider takes full ownership of the entire fleet of tyres, including the stockholding of tyres, and maintains them on a contract basis similar to normal CPK contracts.
As the service provider has to provide the necessary capital to initially purchase the tyres form the fleet operator, and furthermore finance any growth in the fleet of the fleet operator, it is suggested that a return on this initial outflow of capital similar to what can be achieved from investing the capital with a financial institution has to be built into the cost per kilometre rate. This charge is calculated on the proposed interest
Page 87 of 169 that could have been earned per month, divided by the total fleet kilometres travelled per month.
3.2.3. Rate Calculation Model
As part of this study an easy to use CPK rate calculation model that incorporates all the relevant factors to consider in calculating the actual rate to quote on a new contract or to use for benchmarking or budgeting purposes was designed over a two year period after extensive consultation with various individuals in the tyre industry, including specifically R. Boulanger, previously Executive Director Sales & Marketing of Maxiprest
Tyres. It allows the user to compare different tyre cost vs. kilometres achieved scenarios, as to get the most cost effective combination running in a fleet. The model consists of eleven sections, outlined as follows:
Section A: Fleet information (Table 3.2) Section B: Expected tyre life (Table 3.3) Section C: Tyre pricing (Table 3.4) Section D: Steer axle calculation (Table 3.5) Section E: Drive axle calculation (Table 3.6) Section F: Trailer axle calculation (Table 3.7) Section G: Tyre damage component (Table 3.8) Section H: Labour component (Table 3.9) Section I: Breakdown component (Table 3.10) Section J: Interest component (Table 3.11) Section K: Summarized cost analysis (Table 3.12)
Page 88 of 169 Each component will be discussed on the basis of an example, as set in the tables to follow. The model is largely formula driven, and requires minimum input of information.
Only the areas highlighted in light grey requires input. Some of the relevant formulas are set out in detail in the far right column.
3.2.3.1. Fleet information
Section A shown in Table 3.2 focuses on the specific fleet information required to calculate the rest of the CPK rates to follow.
TABLE 3.2: FLEET INFORMATION
Section FLEET INFORMATION: Month Year A: Average kilometers per vehicle 10,000 120,000 Total km reporting vehicles in fleet 100 100 (truck tractors): Total Fleet kilometers: 1,000,000 12,000,000 ROLLING WHEELS (Current split) New Tyres 1820 70% (Including trailers) Retreads 780 30% TOTAL 2,600 100% No. of CONFIGURATIONS: Tyres TRUCK TRACTORS - Steer Axle 2 - Drive Axle 8 TRAILERS - Interlink 16 TOTAL 26
Required is the total number of vehicles reporting kilometres in the fleet, normally the truck tractors, as very few trailers are fitted with devices to record kilometres travelled, and with the average kilometres they travel per month. The current split between New and Retreads tyres in the fleet is also required, as most fleet operators want this mix to remain constant when service providers take over, but if it can be proven to them that a different mix might be more cost effective, they might elect to change it. It is generally
Page 89 of 169 accepted that new tyres fail less often due to operational and road hazards, so the cost of possible downtime should also be taken into consideration when choosing this mix.
The basic configurations used in the fleet are of utmost importance, because as already shown in section 3.1.1.2 the number of tyres in a configuration has a huge impact on the ultimate CKP rate.
3.2.3.2. Expected tyre life
Section B as shown in Table 3.3 focuses on the expected tyre life that the service provider estimates he will achieve in this specific fleet, broken down for new and retread tyres in each of the axle positions. This information is normally derived from test data that is gathered over time.
TABLE 3.3: EXPECTED TYRE LIFE
Section EXPECTED TYRE LIFE B: STEER AXLE: (MAKE, SIZE, PATTERN) NEW 100,000 km STEER AXLE: (MAKE, SIZE, PATTERN) RETREAD 60,000 km DRIVE AXLE: (MAKE, SIZE, PATTERN) NEW 130,000 km DRIVE AXLE: (MAKE, SIZE, PATTERN) RETREAD 70,000 km TRAILER AXLE: (MAKE, SIZE, PATTERN) NEW 120,000 km TRAILER AXLE: (MAKE, SIZE, PATTERN) RETREAD 80,000 km
The impact that the expected tyre life have on the calculation as a whole is discussed in section 3.6 in more detail.
Page 90 of 169 3.2.3.3. Tyre pricing
Section C requires the input of the tyre pricing to be used for the purposes of this calculation, as shown in Table 3.4.
TABLE 3.4: TYRE PRICING
Section LIST TYRE PRICING: DISC. C: PRICE NEW TYRES: * LESS 50% STEER AXLE: (MAKE, SIZE, PATTERN) R 5,800 R 2,900 DRIVE AXLE: (MAKE, SIZE, PATTERN) R 5,500 R 2,750 TRAILER AXLE: (MAKE, SIZE, PATTERN) R 5,700 R 2,850 RETREADS * LESS 50% STEER AXLE: (MAKE, SIZE, PATTERN) R 1,500 R 750 DRIVE AXLE: (MAKE, SIZE, PATTERN) R 1,400 R 700 TRAILER AXLE: (MAKE, SIZE, PATTERN) R 1,500 R 750 CASINGS PURCHASE CREDIT A gr. CREDIT B gr. STEER AXLE: (MAKE, SIZE, PATTERN) R 700 R 600 R 500 DRIVE AXLE: (MAKE, SIZE, PATTERN) R 750 R 650 R 550 TRAILER AXLE: (MAKE, SIZE, PATTERN) R 700 R 600 R 500 Average R 717 R 617 R 517
The list price is the price as per the published price list from new tyre manufacturers or retreaders in the marketplace. The discount that could be negotiated with suppliers depends largely on the size of the fleet, and in a South African context the larger transport company it is part of.
Casing prices are split between the purchase price, which is the price payable for the casing if it is purchased as part of a stock casing (casing already retreaded), the credit value of a new tyre with no tread if sold (A grade or virgin casing), and the casing value of a previously retreaded tyre if sold (B grade casing).
Page 91 of 169 3.2.3.4. Steer axle calculation
In section D in Table 3.5 the first of the calculations can be done, in this case for the
Steering Axle, using the information already supplied in section A – C.
TABLE 3.5: STEER AXLE CALCULATION
Section STEER AXLE: TOTAL R 0.0446 D: A = (BxD)+(CxQ) FLEET ANALYSIS: (Percentage) 100% NEW TYRES 90% B RETREADS 10% C STEER AXLE: NEW TYRES R 0.0460 D = L + P No. of tyres 2 E Estimated tyre performance (km) 100,000 F Tyre Purchase Price R 2,900 G Calculation: Kms per year per vehicle (km) 120,000 H Tyres used per year 1.20 I = H / F Cost per year per tyre R 3,480.00 J = H x J CPK Rate per tyre per year R 0.0290 K = J / H CPK Rate per Steer configuration R 0.0580 L = E x K CASING CREDITS: Casing price: R 600.00 M Tyres used per year 2.40 N = E x I TOTAL CREDIT (R 1,440.00) O = M x N CPK Casing Credit (R 0.0120) P = O / H
STEER AXLE: RETREAD R 0.0317 Q No. of tyres 2 Estimated tyre performance (km) 60,000 Tyre Purchase Price R 1,450 Calculation: Kms per year per vehicle (km) 120,000 Tyres used per year 2.00 Cost per year per tyre R 2,900.00 CPK Rate per tyre per year R 0.0242 CPK Rate per Steer configuration R 0.0483 CASING CREDITS: Casing price: R 500.00 Tyres used per year 4.00 TOTAL CREDIT (R 2,000.00) CPK Casing Credit (R 0.0167)
Page 92 of 169 The formulae used to calculate the rate are explained on the side of the table (letters A
– Q). A separate calculation is done for new and retread tyres, and the cost is split as per the fleet analysis percentages inserted. From the example it can be seen that retread tyres would derive the best CPK at R0.0317, against a rate of R0.0460 for new tyres. As the steering axle is crucial to keeping control over the vehicle in the event of a tyre failure, and retreads are more prone to failures, most fleet operators elect to only use new tyres on steering axles. In this example the percentage used for new tyres was set at 90%. The total CPK rate for the steer axle comes out at R0.0446.
3.2.3.5. Drive axle calculation
In section E as shown in Table 3.6 the calculation is done for the drive axles, using a mix of 70% new and 30 % retread tyres.
TABLE 3.6: DRIVE AXLE CALCULATION
Section DRIVE AXLE: TOTAL R 0.1213 E: FLEET ANALYSIS: (Percentage) 100% NEW TYRES 70% RETREADS 30% DRIVE AXLE: NEW TYRES R 0.1292 No. of tyres 8 Estimated tyre performance (km) 130,000 Tyre Purchase Price R 2,750 Calculation: Kms per year per vehicle (km) 120,000 Tyres used per year 0.92 Cost per year per tyre R 2,538.46 CPK Rate per tyre per year R 0.0212 CPK Rate per Drive configuration R 0.1692 CASING CREDITS: Casing price: R 650.00 Tyres used per year 7.38 TOTAL CREDIT (R 4,800.00) CPK Casing Credit (R 0.0400)
Page 93 of 169 DRIVE AXLE: RETREAD R 0.1029 No. of tyres 8 Estimated tyre performance (km) 70,000 Tyre Purchase Price R 1,450 Calculation: Kms per year per vehicle (km) 120,000 Tyres used per year 1.71 Cost per year per tyre R 2,485.71 CPK Rate per tyre per year R 0.0207 CPK Rate per Drive configuration R 0.1657 CASING CREDITS: Casing price: R 550.00 Tyres used per year 13.71 TOTAL CREDIT (R 7,542.86) CPK Casing Credit (R 0.0629)
The calculation shows that retread tyres again come out cheaper at R0.1029 compared to new tyres at R0.1292, but most fleet operators will again elect to rather use more new tyres from a reliability and a safety point of view. The total rate, with a mix of 70% new and 30% retread is calculated at R0.1213.
3.2.3.6. Trailer axle calculation
In section F as shown in Table 3.7 the calculation is done for trailer axles.
TABLE 3.7: TRAILER AXLE CALCULATION
Section TRAILER AXLE: TOTAL R 0.2230 F: FLEET ANALYSIS: (Percentage) 100% NEW TYRES 30% RETREADS 70% TRAILER AXLE: NEW TYRES R 0.3000 No. of tyres 16 Estimated tyre performance (km) 120,000 Tyre Purchase Price R 2,850 Calculation: Kms per year per vehicle (km) 120,000 Tyres used per year 1.00 Cost per year per tyre R 2,850.00 CPK Rate per tyre per year R 0.0238 CPK Rate per Tailer configuration R 0.3800
Page 94 of 169 CASING CREDITS: Casing price: R 600.00 Tyres used per year 16.00 TOTAL CREDIT (R 9,600.00) CPK Casing Credit (R 0.0800) TRAILER AXLE: RETREAD R 0.1900 No. of tyres 16 Estimated tyre performance (km) 80,000 Tyre Purchase Price R 1,450 Calculation: Kms per year per vehicle (km) 120,000 Tyres used per year 1.50 Cost per year per tyre R 2,175.00 CPK Rate per tyre per year R 0.0181 CPK Rate per Trailer configuration R 0.2900 CASING CREDITS: Casing price: R 500.00 Tyres used per year 24.00 TOTAL CREDIT (R 12,000.00) CPK Casing Credit (R 0.1000)
It can be seen that there is a significant difference between the rate for new tyres at
R0.30 and retread tyres at R0.19, mainly due to the fact that retread are significantly cheaper than new tyres, and on trailers they also achieve relatively better tyre life when compared to the other axle positions due to less force being placed on them. In this instance it would make sense to fit more retread tyres to the trailer axles, and for that reason the mix is selected as only 30% new, and 70% retreads, deriving a total rate of
R0.223.
3.2.3.7. Tyre damage component
In section G in Table 3.8 below the estimated tyre damage component is calculated.
Page 95 of 169 TABLE 3.8: TYRE DAMAGE COMPONENT
Section TYRE DAMAGE COMPONENT: G: Rolling Wheels in fleet 2,600 A Estimated average Scrapping Rate (%) 2.50% B Number of tyres scrapped per month in fleet 65 C = A x B Average Casing Value R 717 D Estimated Tread Value per mm R 90 E Average mm left 3 F Estimated cost per month R 64,155 G = Cx((E x F)+D) Total kms per month 1,000,000 H CPK Damage component R 0.0641 I = G / H
This section is largely based on estimates due to the fact that it is almost impossible to predict when tyres will fail prematurely, may it be due to operational conditions, maintenance levels, or direct tyre failures. An average scrapping rate in a normal long distance fleet of vehicles is in the region of 2.5 – 3% of the total rolling wheels per month. This rate increases significantly when fleets travel on gravel roads, or in regions with poor road conditions. The fleet operator can choose to either be charged this calculated CPK rate of R0.0641 per month, or the actual cost of damaged tyres.
3.2.3.8. Labour component
In section H the estimated labour costs is put into cost per kilometre terms as shown in Table 3.9.
TABLE 3.9: LABOUR COMPONENT
Section LABOUR COMPONENT: H: Estimated Labour cost per month R 50,000 A Total kms per month 1,000,000 B CPK Labour component R 0.0500 C = A / B
Page 96 of 169 The labour cost varies according to the size of the fleet, and its depot locations. The basic labour fee includes all the items already mentioned in section 3.1.1.5. In some instances the service provider would take over the existing staff compliment running the tyres as to prevent any layoffs and possible labour disputes. In these instances the service provider undertakes extensive training sessions as to get the staff to perform to their set standards and requirements.
3.2.3.9. Breakdown component
In section I as shown in Table 3.10 the costs associated with Breakdowns are put in cost of kilometre terms.
TABLE 3.10: BREAKDOWN COMPONENT
Section BREAKDOWN COMPONENT: I: Estimated number of Breakdowns per 20 month A Average cost per Breakdown R 500 B Estimated cost per month R 10,000 C = A x B Total kms per month 1,000,000 D CPK Breakdown component R 0.0100 E = C / D
As the cost of a tyre fitted on a breakdown is already calculated into the normal replacement CKP rate, only the callout fee, travelling and sundries fitted must be included under breakdown costs.
3.2.3.10. Interest component
In section J as per Table 3.11 the possible interest component on tyres owned by the service provider (tyre leasing contracts) is calculated.
Page 97 of 169 TABLE 3.11: INTEREST COMPONENT
Section INTEREST COMPONENT: OWNED TYRES J: Stock value R 4,000,000 A Possible borrowing interest rate % 10% B Calculated cost per month R 33,333 C = A x (B / 12) Total kms per month 1,000,000 D CPK Interest component R 0.0333 E = C / D
During negotiation with fleet operators, the service provider will give them the option of outright purchasing the tyres in the fleet of the operator. As there is a capital outlay on the side of the service provider, he has to be compensated in a way for the risk he takes, and the potential income he could have earned on that capital had he invested it elsewhere. If the fleet operator elects not to sell al his tyres to the service provider, and as such retain ownership, this section will be excluded from the total rate.
3.2.3.11. Summarized cost analysis
Section K in Table 3.12 provides a summary of all the calculations made above.
TABLE 3.12: SUMMARIZED COST ANALYSIS
Section SUMMARIZED COST ANALYSIS: K: STEER CONFIGURATION R 0.0446 DRIVE CONFIGURATION R 0.1213 TRAILER CONFIGURATION R 0.2230 PRODUCT COST R 0.3889 MARGIN R 0.0432 10% PRODUCT COST INCL. MARGIN R 0.4321 TYRE DAMAGE R 0.0641 LABOUR R 0.0500 BREAKDOWNS R 0.0100 INTEREST R 0.0333 TOTAL OTHER CHARGES R 0.1574 TOTAL CALCULATED CPK R 0.5895
Page 98 of 169 As per Table 3.12, a total for the product costs is derived, the margin the service provider intends making, and the other costs associated with this contract. A total CPK figure of R 0.5895 is calculated for this specific example.
This model aims to show how simple an actual CPK rate calculation can be if all the relevant variables that can influence it are carefully considered. No matter how accurate the estimates made may be, this calculation is still only a guideline as to what rate a fleet should be run at, and there is always a risk to the service provider that he will not be able to run a fleet at the rate calculated. Careful consideration should be given to all the factors shown in this model that could directly influence the outcome of a CPK contract.
3.2.4. Rate escalation formulae
3.2.4.1. New & Retread tyre price increases
As the prices of tyres are the single biggest variable that can have an impact on the calculation of a CPK rate, the service provider should be allowed to adjust the negotiated CPK rate if any changes occur in the price he pays for tyres. Some CPK rates have a split portion for New and Retread tyres, so the rate adjustment can be done proportionally according to the split in rolling wheels for the fleet. The new adjusted CPK
Rate can be calculated in accordance with the following formula:
A1 ___ - 1 x 100 = % increase applied to the CPK Rate
A2
Page 99 of 169 Where:
A1 represents the current new tyre/retread price for tyres at the time of review, and
A2 represents the ruling price for tyres at the commencement of the agreement or, the price ruling at the last review date.
In such a competitive marketplace as South Africa it is often difficult for the service provider to pass increases in their input costs on to the fleet operators, even if it is stipulated in the agreements, and are sometimes forced to absorb these increases. Once this occurs, it is impossible to recover those increases in the long term, and the service provider will always lag behind. As the market is very competitive it sometimes becomes necessary to sacrifice a portion of profits in a bid to retain long-term business.
3.2.4.2. Inflation (CPI/PPI index)
The fleet operator often prefer to use more general indications of price increases to determine their proposed increase in their CPK rate. This is mainly due to the fact that they must recover the increased cost from their customers, and the increases that they qualify for is often not linked to a specific change in the price of a commodity, but a general index like inflation, and more specific the Consumer Price Index (CPI) or the
Producer Price Index (PPI).
The specific change for a set period, normally a fiscal year, can be applied to the CPK rate, which will escalate by the same percentage as reported by the statutory bodies responsible for these statistics.
Page 100 of 169 3.3. FLEET AND STOCK VALUATIONS
A joint fleet valuation is conducted at the commencement of the contract by the fleet operator and the service provider as to establish what the condition or value of the fleet and the stockholding currently is. This is commonly referred to as the Opening
Valuation. The only way that the original Opening Valuation can change is when new vehicles are added to the fleet, or current vehicles are transferred or sold from the fleet.
This is known as additions or deletions to the Opening Valuation.
As the contract progresses, vehicles are inspected and surveys done as they become available on an ongoing basis, as to determine the changes in the millimetres tread left on the tyres, and to assess when the tyres need to be replaced due to normal wear and tear. These surveys are used to update tyre maintenance software programs that assist in calculating the fleet values, thereby determining any increases or decreases in the fleet value. This valuation that changes due to normal tyre replacements as a result of wear and tear is commonly known as the Current Valuation.
Upon termination of the contract, the difference between the Opening Valuation and the
Current Valuation is either payable to the service provider if the latter is of greater value, indicating that the condition of the fleet has increased, or payable to the fleet operator if the opposite is the case.
In most instances CPK contracts run a period longer that two years, and many changes can take place to a fleet. Most fleet operators prefer to settle the difference between the
Page 101 of 169 Opening and Closing valuations on a more regular basis as to soften the cash implication for either party. In some instances this settlement period is linked to their financial year, and others prefer settlement when increases on their CPK rate are applied. Prior to the implementation of each CPK Rate increase that is calculated on a basis of increases in the cost of sales, be it new or retread tyres, the fleet is jointly valued as per the Opening valuation. A physical exchange of cash for the valuation difference doesn’t always take place, but the following scenario could also prevail.
Should the interim Closing Value exceed the Opening Value the difference shall be deducted from the Opening Value originally calculated, and should the Opening Value exceed the interim Closing Value the difference shall be added to the revised Opening
Value. Upon termination of these agreements, the normal cash exchange will take place.
The valuation of the tyres in the fleet is done in the following manner. Any products that need to be valued for any purposes of a CPK agreement shall be valued in accordance with set principles that are stipulated in the contract between the parties.
New Tyres are valued using the existing list price of new tyres used in the operation as determined by the manufacturers, deducting the discount this type of fleet operator would normally qualify for if they were buying their tyres direct from service providers.
This value is split on the basis of a Casing Value and a Tread Value which is calculated using a simple formula.
Page 102 of 169 The aim of this exercise is to determine a separate value for the Casing that stays constant and doesn’t change as the tyre runs in the fleet, and a cost per millimetre for the remaining tread, as this is the variable in determining the total tyre value.
The Casing value is based on existing market prices for the exchange of smooth casings, and is normally in the region of 25% – 35% of the total value of the tyre.
The Tread value per millimetre is calculated as follows:
(Tyre cost – Casing Value) (R) ______= Tread value per mm
(Opening Tread depth – Removal Tread depth) (mm)
The Opening Tread depth refers to the original Tread Depth as per the New Tyre
Manufacturer’s specifications for that specific tyre. In truck tyres this ranges normally from 14 – 21mm.
The Removal Tread depth refers to the minimum tread depth that a tyre can be removed at as to still make it safe for retreading. The less tread on the tyre the more prone it becomes for penetrations due to normal road hazards. The minimum tread ranges between 2 – 4 mm. In the retreading process the remaining tread is buffed off as to make way for new tread to be placed on the casing.
The difference between the Opening Tread depth and the Removal Tread depth is referred to as the Usable tread of a tyre, and it is this range that holds a value.
Page 103 of 169 The current Tread Value of a tyre is calculated by multiplying the Tread Value per millimetre as determined above by the remaining tread depth of the tyre as measured during a tyre inspection using a tread depth gauge, less the removal tread depth as set above.
The Total value of the New Tyre will thus be the sum of the current Tread Value and the
Casing Value.
Retread tyres are valued on the same basis as explained for new tyres, with the difference being that it is easier to determine the split value between tread and casings, as there is already a split charge for the tread and the casing from the retreader.
The Casing value is based on existing market prices for the exchange of smooth casings as per the new tyre scenario, and is normally in the region of 25% – 35% of the total value of a new tyre, but after retreading the value is depreciated due to the fact that the casing is now in its second life.
The Tread value per millimetre on retreaded tyres is calculated in the same way as for new tyres, with the only difference being that the separate price for the tread alone is available separately.
(Retreading Tread cost) (R) ______= Tread value per mm
(Opening Tread depth – Removal Tread depth) (mm)
Page 104 of 169 The calculation of the Total value of the retreaded tyre is the same as per the New tyre scenario.
The values calculated as per the above formulas for New and retread tyres will stay constant for the duration of the contract for both the Opening and Closing valuations, as it is essential that the base price to compare these valuations remain the same. Inflation of prices should play no role, as the valuation is only done to determine if the overall fleet condition has improved or diminished. The only time the fleet values can change is when the settlement of the difference in the Opening and Closing valuation takes place, either at the end of the agreement, or when rate increases are applied, depending on how the contract is formulated.
3.4. ASPECTS THAT CONTRIBUTE TO THE SUCCESS OF A TYRE
MAINTENANCE OUTSOURCING CONTRACT
3.4.1. Customer relationship
The nature of the relationship between the fleet operator and the service provider may be the most important aspect that can contribute to the future of a tyre maintenance outsourcing contract. It is of utmost importance that there is a trust relationship between the parties, as an open line of communication will ensure that relevant information that can impact on the smooth running of the contract will be exchanged without hesitation between the parties as required.
Page 105 of 169 There has to be a trust relationship, especially in the exchange of information and data between the parties. For example it is required that the service provider ensure that the information provided in their monthly reports is accurate and up to date as to reflect a true picture of the condition of the tyres in the fleet they are managing. Initial routine checks by the fleet operator can verify the validity of the information they receive, but the trust must grow with time that this becomes unnecessary.
Another example is the monthly reporting by the fleet operator of kilometres travelled by the fleet. The accuracy of this information is of great importance, as the CPK income of the service provider is based on this information. The fleet operator must ensure that their fleet lists are up to date at all times, as to ensure that any fleet movements or changes are reported to the service providers in due time. The fleet operators must also ensure that the tachometers are maintained and in good working condition on the vehicles. As with the previous example the service provider must also initially be given every reasonable opportunity to inspect all fuel consumption, kilometre, and other relevant records kept by the fleet operator with a view to checking the accuracy and veracity of the CPK Returns from time to time. Spot checks can also be performed on vehicles upon the inspection of their tyres as to verify the reports.
3.4.2. Increasing the life of a tyre
The ultimate success of a CPK contract, mainly for the service provider, depends on the profit he can make from this contract, and the only controllable variable factor he holds
Page 106 of 169 in his hands is to increase the life of the tyres he is managing. This can be achieved by proper maintenance of the tyres, and thereby reducing irregular wear.
Bridgestone South Africa (2003) have identified five areas as discussed below, that, if looked after properly, can significantly reduce irregular wear and so increase the life of a tyre an as such reduce the overall CPK rate. The potential sources of irregular wear are highlighted in Figure 3.1 below:
FIGURE 3.1: POTENTIAL SOURCES OF IRREGULAR WEAR
Source: Reduce irregular wear the SMART way (BFSA) (2003:45)
3.4.2.1. Select the right tyre for the operation
One of the biggest challenges faced when fighting premature tyre removal is the loss of tyres due to irregular wear. The aim is to find the most suitable tyre design that wears
Page 107 of 169 the most evenly, and that will give the best cost per kilometre. This becomes a playoff between getting higher mileages with a tyre that is not that expensive. Proper test tyre programs are the best way to determine which tyres will achieve the best CPK.
A good measurement as to how effective you are in choosing the correct tyre is to analyse your tyre damage reports, as they will indicate which type of tyre were removed prematurely most frequently.
3.4.2.2. Tyre maintenance
Good maintenance can also go a long way to reducing the incidence of irregular wear.
The easiest, least expensive and most cost effective maintenance that can be performed on tyres is to keep them properly inflated at the correct pressures. The Tyre
Maintenance Council (TMC) reports that 10 percent under-inflation will shorten tread life by 9 to 16 percent. Not only is tread life shortened, but the casing is also damaged due to under-inflation, which will influence the retreadability of that casing in the future.
To prevent tyre removal due to bad maintenance you should check tyre pressures regularly with a quality pressure gauge that is calibrated often. The wheels should be kept clean and properly lubricated, and the valve stems, valve cores and valve caps should be in good condition.
3.4.2.3. Alignment
Proper alignment of vehicles assists in a great way to reduce operating costs through prolonging the life of tyres. When a vehicle is aligned, it means simply that all the tyres are rolling in the same direction that the vehicle is travelling in. The benefit of proper
Page 108 of 169 alignment doesn’t only stop at the tyres, but vehicle manufacturers suggest there are significant improvements in fuel economy, component wear, and even less driver fatigue.
Some fleet operators routinely align their vehicles as part of their maintenance process.
Others only do it when an irregular tyre wear problem develops. As alignment of vehicles is part of the proper maintenance procedures on the part of the fleet operator, the service provider only has the responsibility of informing the operator of any irregular wear that is taking place. As this impacts on the cost of sale of the service provider and their CPK achievable, it is normally written into contracts that if vehicles are not aligned within a certain period after the fleet operator have been informed of any problems, the service provider will invoice the lost millimetres to the operator.
3.4.2.4. Rotate tyres
Tyre rotation can be an effective method of equalizing irregular wear on tyres. Irregular wear is when some parts of the tyre is more worn that other parts. Fleet operators should establish rotation guidelines for their maintenance staff to work from, as to keep the process of rotation uniform throughout the fleet. Where a CPK contract is entered into, the guidelines should be discussed with the service provider, as this will become their responsibility. Some fleets rotate tyres when there is a certain overall tread depth difference between tyres on equivalent positions. Other fleets base rotation on mileage and maintenance schedules. Rotation may not eliminate irregular wear by reversing or
Page 109 of 169 correcting it, but what it does is change the way that irregular forces are applied to tyres, thereby equalizing the overall wear pattern of that tyre.
3.4.2.5. Track tyre performance (Test programs)
One of the best ways to determine whether you are getting out of a tyre what you paid for it is to track the performance of every tyre throughout its useful life. Some fleet operators and even service providers see this as extra paperwork, but what you may learn is that the lowest priced tyre is not always the least expensive. If the overall cost of a tyre is put into cost per kilometre terms, the kilometres achieved starts playing an important role. A good test tyre program is the best way to compare different brands and models, and can also help control maintenance, repair and retreading costs.
3.5. CONTRACTUAL AGREEMENTS
In modern business it is not advisable for any company to leave anything relating to their business to chance. This is even more the case when a CPK contract is concerned, as there are many specific areas that need to be laid out in detail as to prevent any confusion when problems do arise between the parties concerned. Most professional
CPK contracts consist of lengthy agreements that set out in detail the duties of all parties that fall under the contract. The basic components of a CPK contractual agreement, as adapted from Maxiprest (2004) is as follows:
Stating the full name and addresses of the two parties concerned.
Defining or interpreting any concepts or services relating to the contract.
Page 110 of 169 Stating the duration of the contract including notice periods.
Defining the products that can be supplied by the service provider.
Stating the terms relating to Tyre Damage costs.
Stating the terms relating to Breakdown costs.
Clearly stating the CPK rate to be charged for the contract, and stipulating when
the escalation of the rate will be allowed for.
Stating the fleet operator’s duty relating to timely, accurate kilometre records, and
what the payments terms for the contracts are.
Stating the conditions relation to Stock Valuations, and in particular how the
Opening and closing valuations will be calculated and conducted.
Stating the fleet operators undertaking to maintain his vehicles in good condition.
Stating what terms under which either party shall be deemed to be in material
breach of the contract.
Signatures of duly authorised personnel of both parties.
These are just some of the basic elements that need to form part of the basic agreement between parties to a CPK contract. As these types of contracts are designed around the needs of the fleet operator, no two agreements are exactly the same. It is of utmost importance that the agreements are of such a professional nature that they can be enforced on either party if any breach should occur before due termination thereof.
Page 111 of 169 3.6. TOTAL INTEGRATED CPK CONTRACT MODEL
The best possible way to determine if the concept of tyre maintenance outsourcing, and in particular cost per kilometre (CPK) contracts is viable is to put them to the test. In the preceding sections the various concepts and aspects that is part of a CPK contract was discussed, including cost per kilometre rates and how to calculate them, purchasing and pricing structures, tyre damage, stock valuations and various others. This section will be dedicated to putting all of these concepts together in an integrated model that will provide valuable insight to both service providers and the users of CPK contracts as to what the possible pitfalls could be, and which aspects to keep an eye on as the contract progresses.
The concepts will first be introduced and explained separately, and then on the hand of a possible real life example.
3.6.1. Valuations
The stock and fleet valuation and how it is interpreted is possibly still the only concept in the whole model that is still a contentious issue. Measurements on the tyres in a fleet were initially done as a basis of determining the average millimetres on the tyres in that fleet so that this could be used as a measurement tool by the fleet operator to see if the usable condition of the tyres in his fleet has varied over the specified contract period.
The theory is that a CPK rate is designed and calculated in such a way as to only maintain the condition in the fleet, and doesn’t allow for added investment to increase
Page 112 of 169 the condition. An example is where a fleet is found to have an average of 12 millimetres left on the tyres at the inception of the contract the service provider must ensure that this average is at the same level at the close of the contract. If it is lower, it is perceived that the service provider has unfairly gained advantage by running the fleet down, thus receiving income but not maintaining the fleet at the level it was.
This scenario worked well, but certain service providers attempted to make this valuation an exact science with the introduction of better technology in the form of computer software programs. This enabled the service provider to trace the life of a tyre from inception into the fleet to the end of its life. On top of providing the average millimetres in the fleet on a more accurate basis, a value could now also be attached to each tyre, splitting the value between that of a casing, and that of the tread left on the tyre. As surveys are done on the fleet, and captured on the software program, the accurate millimetres for a specific tyre could be supplied, thus giving a revised value for that tyre as the millimetres left are declining. This saw the introduction of the terms
Opening and Closing valuation, where the exchange of money between the service provider and fleet operator could now take place on the basis of the difference between these two values. If the closing value were higher than the opening value, it shows that the service provider increased the value of the tyres in the fleet at his own expense, and needs to be compensated for this. If the opposite is true, the fleet operator needs to be compensated for his loss of value.
Page 113 of 169 The problem arose when these valuation values were incorporated into the financial performance of the contract, and were not merely used as a measurement as to what the average condition of the tyres in the fleet were. The theory behind incorporating this into your financial results, playing a part in determining a true profit or loss for the account, is well thought out, but experience has shown that in practice there are problems especially associated with the fact that all tyres in a fleet could not be measured at the same point in time as the vehicles barely stand parked off to allow ongoing surveys to be done. Another problem is that the valuation values used to determine the value of the tyres in a fleet often differ with the actual purchase prices of these tyres, making an accurate comparison of rises and falls in the valuation unrealistic.
The following valuation model explains the integration of the valuation as part of the financial performance of a contract This example is based on using a 6 x 4 truck tractor, thus having two tyres on the steering axle (S1 & S2), and having eight tyres on the two drive axles, with dual fitment (D1 – D8).
Page 114 of 169 TABLE 3.13: OPENING VALUATION: MONTH 1
OPENING VALUATION: 6 x 4 Truck Tractor Position Casing Tread Total Open Min Use- Cost Value Value Value mm mm Able / mm S1 STEER TYRE R 900 R 1,755 R 2,655 16 3 13 R 135 S2 STEER TYRE R 900 R 1,755 R 2,655 16 3 13 R 135 D1 DRIVE TYRE R 900 R 1,800 R 2,700 21 3 18 R 100 D2 DRIVE TYRE R 900 R 1,800 R 2,700 21 3 18 R 100 D3 DRIVE TYRE R 900 R 1,800 R 2,700 21 3 18 R 100 D4 DRIVE TYRE R 900 R 1,800 R 2,700 21 3 18 R 100 D5 DRIVE TYRE R 900 R 1,800 R 2,700 21 3 18 R 100 D6 DRIVE TYRE R 900 R 1,800 R 2,700 21 3 18 R 100 D7 DRIVE TYRE R 900 R 1,800 R 2,700 21 3 18 R 100 D8 DRIVE TYRE R 900 R 1,800 R 2,700 21 3 18 R 100 TOTALS R 9,000 R 17,910 R 26,910
The total value of the tyre is split between the casing and the tread on that tyre. The casing value is determined from current market values for the purchase of casings, in this example R 900. The tread value is the difference between the total purchase price and the casing value, being R 1,755 in the case of S1. The purpose of this exercise is to determine a value per millimetre for these specific tyres. A steer tyre starts off with 16 millimetres, and a drive tyre with 21 millimetres. In the industry this full 16 millimetres are not usable, as the norm is that tyres are removed at 3 millimetres to still make the casing safe for retreading. This makes the usable millimetres 13 for steer and 18 for drive tyres. This will ensure that when a tyre is removed at 3 millimetres it is only valued at a casing price, with no value for tread remaining. The cost per millimetre is determined by dividing the tread value with the usable millimetres.
This examples show that the Opening value for this specific vehicle with brand new tyres are R 26,910, with R 9,000 as casing value, and R 17,910 as the value of the remaining tread. This figure will remain the same for the period this vehicle remains
Page 115 of 169 running in the fleet, and will be used as a measurement against the closing or current valuation when the contract concludes.
The current valuation is the value of the tyres on that vehicle at a specific point in time when a survey is done and the millimetres left are measured. The current valuation will be used as the closing valuation once the contract has come to an end.
For the purposes of this model the following assumptions were made regarding the current valuation:
This vehicle will travel an average of 10,000 kilometres per month. The income
derived and explained later will also be based on this assumption.
The steering tyres will wear at an average of 1 millimetre per 10,000 kilometres.
The drive tyres will wear at an average of 1.5 millimetres per 10,000 kilometres.
TABLE 3.14: CURRENT / CLOSING VALUATION: MONTH 1
CURRENT VALUATION: 6 x 4 Truck Tractor Position Casing Tread Total Curr Total Close mm Diff S1 STEER TYRE R 900 R 1,620 R 2,520 15 R 135 S2 STEER TYRE R 900 R 1,620 R 2,520 15 R 135 D1 DRIVE TYRE R 900 R 1,650 R 2,550 19.5 R 150 D2 DRIVE TYRE R 900 R 1,650 R 2,550 19.5 R 150 D3 DRIVE TYRE R 900 R 1,650 R 2,550 19.5 R 150 D4 DRIVE TYRE R 900 R 1,650 R 2,550 19.5 R 150 D5 DRIVE TYRE R 900 R 1,650 R 2,550 19.5 R 150 D6 DRIVE TYRE R 900 R 1,650 R 2,550 19.5 R 150 D7 DRIVE TYRE R 900 R 1,650 R 2,550 19.5 R 150 D8 DRIVE TYRE R 900 R 1,650 R 2,550 19.5 R 150 TOTALS R 9,000 R 16,440 R 25,440 R 1,470
As can be seen the value of the tyres after one month has declined to R 25,440, making the difference between the opening and closing valuation R 1,470. This means that if
Page 116 of 169 the contract were to close on this date, the service provider were to pay the fleet operator R 1,470 due to the decline of the fleet value. This value will become bigger as the vehicle runs longer and the millimetres decline even more.
3.6.2. Cost per kilometre income and tyre purchases
The cost per kilometre income refers to the kilometres travelled by a vehicle in a certain month, multiplied by the CPK rate as quoted to the customer at the inception of the contract. For the purposes of this exercise the CPK rate was calculated as to keep the current condition of the fleet at the same level. No margin for profit has been built into the rate.
TABLE 3.15: COST PER KILOMETRE INCOME AND PURCHASES: MONTH 1
INCOME PURCHASES Kms Cpk Cpk Purch. Casing Nett Rate Charge Price Credit Purch. S1 10,000 0.0135 R 135 N / A N / A R 0 S2 10,000 0.0135 R 135 N / A N / A R 0 D1 10,000 0.0150 R 150 N / A N / A R 0 D2 10,000 0.0150 R 150 N / A N / A R 0 D3 10,000 0.0150 R 150 N / A N / A R 0 D4 10,000 0.0150 R 150 N / A N / A R 0 D5 10,000 0.0150 R 150 N / A N / A R 0 D6 10,000 0.0150 R 150 N / A N / A R 0 D7 10,000 0.0150 R 150 N / A N / A R 0 D8 10,000 0.0150 R 150 N / A N / A R 0 TOTALS 0.1470 R 1,470 N / A N / A R 0
As can be seen from the table, the CPK rate differs for the steering (R0.0135 cpk) and driving (R0.015 cpk) axles. As per the assumptions made in section 3.6.1.1, the vehicle will travel an average of 10,000 kilometres per month. The calculation of the CPK rate, as discussed earlier, is designed to maintain the fleet at its current level. This can be
Page 117 of 169 seen when the CPK income of R 1,470 as shown in Table 3.15 is compared with the valuation difference of also R 1,470 in Table 3.14. This shows that if the contract was to end after one month, the service provider would have received R 1,470 in income, but he would have had to pay the fleet operator R 1,470 for the difference in the opening and closing valuation. The net effect is thus a breakeven situation. This shows that if a profit is to be made by the service provider, it must be built into the CPK rate. This shows that the initial calculation of the CPK rate is essential if the contract is to run successfully and profitable.
As the vehicle has done only 10,000 kilometres in the first month, there was no need yet to replace any tyres, thus keeping the purchases at a zero. If there was to be replacement of any tyres, in theory the purchase price should be similar to the valuation prices stated in Table 3.13, put this is not always the case in practice where everybody is always pushing for the lowest possible prices.
3.6.3. Tyre damage
Tyre damage is what occurs when a tyre needs to be prematurely removed from service due to it being unable to continue running safely on that vehicle. The cost implication of an event like this to the service provider is that they need to replace the tyre at their own cost, but needs to be compensated for the loss of income due to the tyre being prematurely removed.
Page 118 of 169 TABLE 3.16: TYRE DAMAGE: MONTH 1
INCOME: Month 1 PURCHASES: Month 1 TYRE DAMAGE: Month 1 Kms Cpk Cpk Purch Casing Nett Casing Tread Total Rate Charge Price Credit Purch S1 10,000 0.0135 R 135 R 0 R 0 S2 10,000 0.0135 R 135 R 0 R 0 D1 10,000 0.0150 R 150 R 0 R 0 D2 10,000 0.0150 R 150 R 0 R 0 D3 10,000 0.0150 R 150 R 2,700 R 2,700 R 900 R 1,650 R 2,550 D4 10,000 0.0150 R 150 R 0 R 0 D5 10,000 0.0150 R 150 R 0 R 0 D6 10,000 0.0150 R 150 R 0 R 0 D7 10,000 0.0150 R 150 R 0 R 0 D8 10,000 0.0150 R 150 R 0 R 0 TOTALS 0.1470 R 1,470 R 2,700 R 2,550
If the tyre fitted on position D3 has to be removed during month 1 for any particular reason pertaining to tyre damage, the tyre has to be replaced at a full cost of R 2,700.
The tyre that was removed prematurely has to be invoiced back to the customer at the current valuation value as shown for month 1 in Table 3.14, coming to R 2,550. The difference of R 150 is not a loss to the service provider, as he in fact received CPK income for that tyre running for one month amounting to R 150, thus leaving the account at a breakeven level. This again shows that if a profit is to be made on these types of contacts, a profit margin has to be built into the CPK rate.
3.6.4. Total contract period example
The example used in the explanation above only shows the contract running for one month. The best possible test would be to run the example for a longer period, allowing the tyres to run smooth, thereby allowing for purchases to be made. For the purpose of this example the starting point is the same vehicle as shown in Table 3.13, and that is used as the opening valuation. The net effect of trading in month 1 is shown in Table
Page 119 of 169 3.17. The valuation has decreased by R 1470, and the CPK income was also R 1470, thus remaining at a breakeven.
TABLE 3.17: NET EFFECT: MONTH 1
NET EFFECT: 6 x 4 Truck Tractor: MONTH 1 VALUATION CPK PURCHASES TYRE (PROFIT) / DIFFERENCE INCOME DAMAGE LOSS S1 R 135 (R 135) R 0 R 0 R 0 S2 R 135 (R 135) R 0 R 0 R 0 D1 R 150 (R 150) R 0 R 0 R 0 D2 R 150 (R 150) R 0 R 0 R 0 D3 R 150 (R 150) R 0 R 0 R 0 D4 R 150 (R 150) R 0 R 0 R 0 D5 R 150 (R 150) R 0 R 0 R 0 D6 R 150 (R 150) R 0 R 0 R 0 D7 R 150 (R 150) R 0 R 0 R 0 D8 R 150 (R 150) R 0 R 0 R 0 R 1,470 (R 1,470) R 0 R 0 R 0
If the vehicle was to run until month 3, and the tyre in position D3 is damaged, the effect would be as follows:
TABLE 3.18: CURRENT / CLOSING VALUATION: MONTH 3
CURRENT VALUATION: 6 x 4 Truck Tractor Position Casing Tread Total Curr Total Close mm Diff S1 STEER TYRE R 900 R 1,350 R 2,250 13 R 405 S2 STEER TYRE R 900 R 1,350 R 2,250 13 R 405 D1 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 D2 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 D3 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 D4 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 D5 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 D6 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 D7 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 D8 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 TOTALS R 9,000 R 13,500 R 22,500 R 4,410
Page 120 of 169 This amount of R 2,250 shown as the last value that the tyre has recorded, has to be re- invoiced to the customer as a loss of revenue. A new tyre has to be purchases at the original value as per the opening valuation, amounting to R 2,700. This is shown in
Table 3.19.
TABLE 3.19: CPK INCOME, PURCHASES AND TYRE DAMAGE: MONTH 3
INCOME PURCHASES TYRE DAMAGE Kms Cpk Charge Purch Casing Nett Casing Tread Total Rate Price Credit Purch. S1 30,000 0.0135 R 405 0 0 S2 30,000 0.0135 R 405 0 0 D1 30,000 0.0150 R 450 0 0 D2 30,000 0.0150 R 450 0 0 D3 30,000 0.0150 R 450 2,700 2,700 900 1,350 2,250 D4 30,000 0.0150 R 450 0 0 D5 30,000 0.0150 R 450 0 0 D6 30,000 0.0150 R 450 0 0 D7 30,000 0.0150 R 450 0 0 D8 30,000 0.0150 R 450 0 0 TOTALS 0.1470 R 4,410 2,700 2,250 The current valuation will change as a new tyre is fitted in that position, making the valuation difference at a zero.
TABLE 3.20: CURRENT VALUATION: MONTH 3 (AFTER TYRE REPLACEMENT)
CURRENT VALUATION: 6 x 4 Truck Tractor Position Casing Tread Total Curr Total Close mm Diff S1 STEER TYRE R 900 R 1,350 R 2,250 13 R 405 S2 STEER TYRE R 900 R 1,350 R 2,250 13 R 405 D1 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 D2 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 D3 DRIVE TYRE R 900 R 1,800 R 2,700 21 R 0 D4 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 D5 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 D6 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 D7 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 D8 DRIVE TYRE R 900 R 1,350 R 2,250 16.5 R 450 TOTALS R 9,000 R 13,950 R 22,950 R 3,960
Page 121 of 169 This entire transaction, taking place in month 3, will have the following effect on the valuation, income, purchases and tyre damage as shown in Table 3.21.
TABLE 3.21: NET EFFECT: MONTH 3
NET EFFECT: 6 x 4 Truck Tractor: MONTH 3 Valuation Cpk Purchases Tyre (Profit) / Difference Income Damage Loss S1 R 405 (R 405) R 0 R 0 R 0 S2 R 405 (R 405) R 0 R 0 R 0 D1 R 450 (R 450) R 0 R 0 R 0 D2 R 450 (R 450) R 0 R 0 R 0 D3 R 0 (R 450) R 2,700 (R 2,250) R 0 D4 R 450 (R 450) R 0 R 0 R 0 D5 R 450 (R 450) R 0 R 0 R 0 D6 R 450 (R 450) R 0 R 0 R 0 D7 R 450 (R 450) R 0 R 0 R 0 D8 R 450 (R 450) R 0 R 0 R 0 R 3,960 (R 4,410) R 2,700 (R 2,250) R 0 As the contract runs, month 12 will be the first month in which there has to be a major expense for the service provider, as all the drive tyres have reached 3 millimetres, and needs to be replaced. The current valuation in month 12 before the replacement of the tyres will be as follows as per Table 3.22:
TABLE 3.22: CURRENT VALUATION: MONTH 12
CURRENT VALUATION: 6 x 4 Truck Tractor Position Casing Tread Total Curr Total Close mm Diff S1 STEER TYRE R 900 R 135 R 1,035 4 R 1,620 S2 STEER TYRE R 900 R 135 R 1,035 4 R 1,620 D1 DRIVE TYRE R 900 R 0 R 900 3 R 1,800 D2 DRIVE TYRE R 900 R 0 R 900 3 R 1,800 D3 DRIVE TYRE R 900 R 450 R 1,350 7.5 R 1,350 D4 DRIVE TYRE R 900 R 0 R 900 3 R 1,800 D5 DRIVE TYRE R 900 R 0 R 900 3 R 1,800 D6 DRIVE TYRE R 900 R 0 R 900 3 R 1,800 D7 DRIVE TYRE R 900 R 0 R 900 3 R 1,800 D8 DRIVE TYRE R 900 R 0 R 900 3 R 1,800 TOTALS R 9,000 R 720 R 9,720 R 17,190
Page 122 of 169 It can be seen that the drive tyres are all at a 3 millimetre level, thus only having a casing value left at R 900, except for D3 that was replaced in month 3 due to tyre damage.
TABLE 3.23: CPK INCOME, PURCHASES AND TYRE DAMAGE: MONTH 12
INCOME PURCHASES TYRE DAMAGE Kms Cpk Charge Purch Casing Nett Casing Tread Total Rate Price Credit Purch S1 120,000 0.0135 1,620 0 0 S2 120,000 0.0135 1,620 0 0 D1 120,000 0.0150 1,800 2,700 (900) 1,800 0 D2 120,000 0.0150 1,800 2,700 (900) 1,800 0 D3 120,000 0.0150 1,800 2,700 2,700 900 1,350 2,250 D4 120,000 0.0150 1,800 2,700 (900) 1,800 0 D5 120,000 0.0150 1,800 2,700 (900) 1,800 0 D6 120,000 0.0150 1,800 2,700 (900) 1,800 0 D7 120,000 0.0150 1,800 2,700 (900) 1,800 0 D8 120,000 0.0150 1,800 2,700 (900) 1,800 0 TOTALS 0.1470 17,640 15,300 2,250 It can be seen from Table 3.23 that there is a casing credit of R 900 that is deducted from the purchase price. This is because the casing that is removed from the vehicle at
3 mm can be sold in the marketplace for that value, thus reducing the net purchase price. The net effect of this whole transaction is shown in Table 3.24.
TABLE 3.24: NET EFFECT: MONTH 12
NET EFFECT: 6 x 4 Truck Tractor: MONTH 12 Valuation Cpk Purchases Tyre (Profit) / Difference Income Damage Loss S1 R 1,620 (R 1,620) R 0 R 0 R 0 S2 R 1,620 (R 1,620) R 0 R 0 R 0 D1 R 0 (R 1,800) R 1,800 R 0 R 0 D2 R 0 (R 1,800) R 1,800 R 0 R 0 D3 R 1,350 (R 1,800) R 2,700 (R 2,250) R 0 D4 R 0 (R 1,800) R 1,800 R 0 R 0 D5 R 0 (R 1,800) R 1,800 R 0 R 0 D6 R 0 (R 1,800) R 1,800 R 0 R 0 D7 R 0 (R 1,800) R 1,800 R 0 R 0 D8 R 0 (R 1,800) R 1,800 R 0 R 0 R 4,590 (R 17,640) R 15,300 (R 2,250) R 0
Page 123 of 169 If this model is analyzed carefully, some valuable lessons can be learnt from it:
It is essential that the CPK rate is calculated in such a way that the fleet can be
maintained at a certain level acceptable to the fleet operator. If the information
used to calculate the rate is incorrect, for instance the projected kilometres are
way over the actual kilometres achieved, a certain loss situation will prevail.
The CPK rate is the main aspect that should include a profit margin. Any other
means of cutting corners, like running a tyre past the 3mm set standard, would be
detrimental to the contract as a whole.
The valuation values used should always be as close as possible to current market
purchase values. It is beneficial to the service provider if he could purchase tyres
below this valuation value, as this will result in a profit increase. It is advisable to
increase the valuation values as market purchase prices increase, as this will allow
the purchases and valuation fluctuations to be comparable. This can be done by
flattening the difference between the opening and closing valuation by payments
made to either the service provider or fleet operator.
Tyre damage should always be charged back to the fleet operator, as the loss of
income on that specific tyre has to be recovered.
It is always advisable to return the vehicle to the fleet operator at the closing of
the contract with a closing value as close as possible to the original opening value
as to minimise the cash outflow in one specified period from the fleet operator.
Even though the income was recovered over a long period, the settlement of the
valuation difference may take place in one month, thereby putting pressure on
cashflow requirements.
Page 124 of 169 3.7. SUMMARY
‘That the logistics will eventually be ironed out to everyone’s satisfaction, we have little doubt. Any way you look at it the demand for this type of service (TMO) has escalated to such a degree that tyre retailers are now focusing a great deal of their efforts on sourcing and training suitable people for site management.’ (Shaw: 1999:14)
This chapter focused on very direct factors that have an influence on the successful running of a Tyre Maintenance Outsourcing contract. The calculation of an accurate cost per kilometre rate was discussed, and a model for easy use was presented. The factors that could contribute to the success of a TMO contract were discussed at length as to assist fleet operators and service providers alike in achieving their set objectives.
Page 125 of 169 SOURCES OF REFERENCE
• BRIDGESTONE SOUTH AFRICA (BSA). 2003. Reduce irregular wear the SMART
way. South Africa. 45 p.
• CARGO CARRIERS. 2004. Divisional information. [Web:]
http://www.cargocarriers.co.za [Date of access: 30 Oct. 2004]
• IMPERIAL HOLDINGS LIMITED. 2004. Annual Financial Results – 25 June 2004.
[Web:] http://www.imperial.co.za [Date of access: 1 Oct. 2004]
• MAXIPREST TYRES. 2004. Management reports and example contractual
agreements supplied after discussion with Mr. H. Cockcroft: General Manager –
Tyre Leasing Division.
• ROAD FREIGHT ASSOCIATION (RFA). 2003. Vehicle Cost Schedule, 28th Edition –
September 2003. Pretoria.
• SHAW, L. 1999. Tyre Management Systems - The way of the future. Southern
African Treads – Vol. 5, No. 3 - 1999. Sky Publications. 38p.
• SUPER GROUP LIMITED. 2004. Divisional Information. [Web:]
http://www.supergroup.co.za [Date of access: 30 Oct. 2004]
• UNITRANS LIMITED. 2004. Divisional Information. [Web:]
http://www.unitrans.co.za [Date of access: 30 Oct. 2004]
Page 126 of 169 CHAPTER 4: AN EVALUATION OF THE IMPLICATIONS OF TECHNOLOGICAL ADVANCES ON TYRE MAINTENANCE OUTSOURCING
4.1. INTRODUCTION
In this chapter the aim would be to provide insight into the implications that technological advances could have on tyre maintenance outsourcing. The first section would focus on intelligent tyre management hardware systems, in particular transponder technology. The second section will focus on current available computer software programs.
In the competitive arena that companies function in the modern era, technology plays a major role in staying ahead of competitors. A company cannot succeed today without incorporating into its strategy the astonishing technologies that exist and continue to evolve. Technological advances create new products, evolve other products, advance production techniques, and enhance better ways of communicating and managing. In addition, as technology evolves, new industries, markets, and competitive niches develop. The best example is the advent of computers that created a huge industry on its own. According to Post & Anderson (2000:5) the effect of changing technology is that it alters the way businesses operate, which changes the jobs that people perform.
New technological advances are enhancing management principles, and are making information more readily available. Computers can now monitor productivity and performance of people and products, and note performance deficiencies.
Page 127 of 169 Technology is changing society, business and jobs. In some instances technology can replace human labour, making it cheaper and more cost effective, and also easier to manage.
4.2. THE COST EFFECT OF TECHNOLOGICAL ADVANCES
The management of tyres is very labour intensive. All data collected from tyres that will help in managing them more effectively is done manually. The kinds of data concerned includes tyre pressures, temperatures and tread depths. Readings from hand held gauges are recorded manually on paper sheets. From there it is manually captured into a computer software program from which reports can be compiled.
As per the CPK model tested in Chapter 3 (Section 3.2.2), the total calculated CPK rate comprises all the factors as summarized in Table 4.1, first introduced as Table 3.12.
The model was tested for a fleet of vehicles consisting of 100 vehicles with a 26 wheel configuration, traveling an average of 10,000 kilometres per vehicle per month.
The cost savings that could be achieved through technological advances in tyre maintenance, specifically associated with tyre tags and transponders, will be discussed as per the effect they would have on the aspects mentioned in Table 4.1.
Page 128 of 169 TABLE 4.1: SUMMARIZED CPK COST ANALYSIS
SUMMARIZED CPK COST ANALYSIS CPK
STEER CONFIGURATION R 0.0446 DRIVE CONFIGURATION R 0.1213 TRAILER CONFIGURATION R 0.2230 TOTAL PRODUCT COST R 0.3889 MARGIN R 0.0432 PRODUCT COST INCL. MARGIN R 0.4321 TYRE DAMAGE R 0.0641 LABOUR R 0.0500 BREAKDOWNS R 0.0100 INTEREST R 0.0333 TOTAL OTHER CHARGES R 0.1574
TOTAL CALCULATED CPK R 0.5895
4.2.1. Product cost
The major saving that technology could have on products costs relates to the total kilometres that can be achieved with a tyre. The higher the mileages consistently achievable, the lower the product cost. If tyres run under-inflated, or if alignment wear takes place, it means that the tyres have to be removed prematurely. If technology can detect these problems immediately, remedial action can be taken sooner.
In the CPK rate calculation model as per the above, it was estimated that a new steering tyre could consistently achieve 100,000 kilometres in its first life. This resulted in a rate of R 0.046 ((R2300 / 100,000) x 2). If the tyres could run consistently to 120,000 kilometres, the rate would drop to R 0.038 ((2300 / 120,000) x 2), a difference of
R0.008. This may seem small, but in this fleet example doing 12,000,000 kilometres per year, the saving would amount to a possible R 96,000 for the period.
Page 129 of 169 If an extra 20,000 can consistently be achieved on all tyres on the steer, drive and trailer axles, the saving would amount to R 0.0661 per kilometre, or for the fleet example doing 12,000,000 kilometres per year, the saving could be as high as R800,000 over this period.
4.2.2. Tyre damage
In the area of tyre damage there can be substantial savings with the introduction of technology, as the early detection of possible problems on a tyre could save it from being totally destroyed and becoming unusable, leaving only minor repair costs.
Especially the systems that detect possible problems while the vehicle is traveling could prompt the driver to rather stop and do a physical inspection, before a possible tyre failure at high speed could destroy the tyre, potentially causing an accident or damage to the vehicle.
As per the CPK model introduced in Chapter 3 and mentioned above, the total cost of tyre damage amounted to R 0.0641 per kilometre or R 64,155 per month. The number of tyres scrapped in a month totaled 65, at a cost of approximately R 987 per tyre. If the early detection of possible tyre damage could cut the number of tyres damaged by half, the saving would be in the region of R 32,000 per month, or a possible R 380,000 per year.
This saving only relates to the physical cost saving on the tyre damaged, but the further cost saving on reduced downtime on the part of the fleet operator is immeasurable.
Page 130 of 169 4.2.3. Labour
Labour costs could be saved due to the following reasons. Currently the service personnel must inspect every tyre in the fleet to see which are faulty. The average fleet sizes ranges between 1000 and 3000 wheel positions. It is a fulltime job just to try and find possible problems in the fleet, not even speaking of trying to correct them. Taking pressure readings from tyres entails removing the valve cap, taking the reading with a pressure gauge, recording it manually on paper, and replacing the valve cap once you are finished. This may sound simple, but it is very time consuming. Sometimes valves are not always accessible, as most fleets run duel fitment configurations on their vehicles.
Depending on the size of the operation, you need at least one person to manually record the data from the vehicles parked in the yard. You also need another computer literate person to capture the data into the software system. Over and above this you also need people to correct the problems in the fleet as they arise, for example inflating tyres if they are under the specified pressure, and also others to fit and strip and brand tyres, as they need replacement due to normal operating conditions. This brings the staff compliment to a possible 4, depending on the fleet size.
Labour costs will be saved mainly due to the fact that technology will automatically detect only the tyres that have potential problems, cutting out the need to inspect the whole fleet. This will be a huge time saving for maintenance staff. The fleet operators
Page 131 of 169 will also benefit due to the fact that their vehicles won’t have to stand out of service for long durations while inspections take place.
Effectively the staff members responsible for surveying the fleet and capturing the data will become redundant. As the basic wage for staff at these levels are in the region of
R500 per week, or on average R 2,000 per month (excluding overtime), the fleet operator could potentially save R 4,000 per month on labour costs, or R 48,000 per year.
4.2.4. Breakdowns
Due to the early detection of possible tyre failures, the occurrence of on road breakdowns could be reduced. For the purposes of the CPK model proposed in Chapter
3, the average cost of a roadside breakdown amounted to R 500, with a possible 20 breakdowns per month. If this amount could be cut by half, the saving would amount to
R 50,000 per year for the entire fleet.
Again this saving only relates to the physical costs saved on breakdown callout fees and other related costs, but the further cost saving on reduced downtime on the part of the fleet operator is immeasurable.
4.2.5. Summary
If all the possible savings for the different cost categories of product (R0.0661), tyre damage (R0.032), labour (R0.004) and breakdowns (R0.005) are taken into account,
Page 132 of 169 the resultant saving in the total CPK rate would amount to R0.107, dropping the quoted rate from R 0.5895 to R0.4824. This would have saved the company almost R 1,300,000 per year on tyre related costs.
Although this is only a model used to test some theoretical aspects related to the composition of a CPK rate, they do give a very good indication of what the cost impact of technology could be to a fleet of tyres.
4.3. TYRE TAGS AND TRANSPONDER TECHNOLOGY
4.3.1. Introduction
According to Transponder News (2002) transponders were originally electronic circuits that were attached to some item whose position or presence was to be determined.
The transponder functioned by replying to an interrogation request received from an interrogator, either by returning some data from the transponder such as an identity code or the value of a measurement, or returning the original properties of the signal received from the interrogator with virtually zero time delay, thereby allowing ranging measurements based on time of flight. As the interrogation signal is generally very powerful, and the returned signal is relatively weak, the returned signal would be swamped in the presence of the interrogation signal.
Page 133 of 169 The functioning of the Transponder was therefore to move some property of the returned signal from that of the interrogation signal so that both could be detected simultaneously without the one swamping the other.
Transponder systems have recently started to become major players in the field of electronic identification. Within this application, it is necessary to make the transponders as cheap as possible, and to rather build the sophistication into the readers. This lack of sophistication generally means that changing the transmission frequency is no longer an option, as the frequency translation needs expensive and complex tuned circuitry. Instead the transponders have given up the ranging ability and rather time slice the communications channel with the interrogator. Here the interrogator (called a reader) sends an interrogation signal for a limited time. The transponder receives the signal and waits for its completion, and then responds on the same frequency with its identity and data code.
The devices are sometimes called transponders and are also sometimes called tags, most probably because their end application eventually will be the tagging of goods, in this case tyres.
RFID refers to radio frequency identification. It is a widely varied collection of technologies for various applications, ranging from the high speed-reading of railway containers to applications in retail that can be regarded as a potential successor to the bar-coding technologies in use today.
Page 134 of 169 4.3.2. Tag technology
There are several tags currently available on the market, and are discussed under the following headings.
4.3.2.1. Single bit transponders
Single bit transponders are used generally in Electronic Article Surveillance (EAS) systems. The single bit status conveys an ON or an OFF status to a reader. An example of its use is in anti-shoplifting systems.
4.3.2.2. Read only transponders (tags)
This is the most basic form of transponder. In its most simple form, it could comprise some read only memory. As the memory is often permanent, the tags do not need power to retain their identity and often would be passive in nature (that is no battery).
Transponders in this form can be made very cheaply, often comprising only a single integrated circuit, which is attached to an antenna.
4.3.2.3. Read-write transponders
Read-write requirements introduce many new levels of complexity over the read only transponders. Read-write transponders find application in situations where the information to be carried by the transponder is variable, and might be altered along the route.
Page 135 of 169 For a tag to be suitable for use in read-write situations, it must have some form of static memory, and a method of retaining that state when not in the interrogation field.
Such memory might be battery backed up memory, or alternatively magnetic based memory that will retain its magnetic status when not powered. A read-write tag needs some form of receiver on board to receive communications from the reader that contains the data to be stored.
4.3.3. Reader systems
There are basically three types of reader systems that can be used in the applications specific to the tyre maintenance industry. They are discussed under the following headings.
4.3.3.1. Hand held wands
The hand held wands can be used to manually walk between the vehicles and so record the data. Once all the data is recorded, it can then be transferred to the main computer system.
4.3.3.2. Fixed point installation
Fixed-point installation systems can be allocated at the entrance gates of transport operators. As the vehicles enter the premises and drive past the reader, it could take the readings and transfer the findings to a central computer. The staff could be alerted to problems that may exist, allowing them to rectify the problems while the vehicle is still on the premises.
Page 136 of 169 4.3.3.3. Onboard vehicle readers
These readers are fixed in the vehicle. The smaller fleets or owner operators, time- sensitive freight haulers, fleets with no dedicated maintenance facilities and fleets that hold drivers accountable for tyre expenditure will mainly use these systems. These readers can be used in conjunction with the other two readers mainly as a preventative maintenance tool.
4.3.4. The potential use of tags in the tyre industry
The tyre industry has started to make use of tyre tags, or read only transponders, over the last few years. Every tyre has a unique brand- or batch number, which is recorded on the sidewall of a tyre, and is used to identify that specific tyre. In most tyre maintenance operations the tyres are also manually branded by using a heated brand iron with a specific number sequence (almost the same as branding of cattle in the old days), mostly pertaining to the specific contract or company they are used. This number will be recorded on the computer systems to track the performance of that specific tyre through its useful life. In America the new tyre manufacturers are experimenting with read only transponders that will have this unique number stored in its memory. This will make the physical branding of tyres obsolete.
The use of read-write transponders is the kind of tags that will make life in the tyre management industry a lot easier. These kinds of tags will not only have an identification number, but will also be able to translate other information, like pressure and temperature to the user.
Page 137 of 169 Read-write transponders have one major downfall, and that is their cost. According to the RFID Journal (2003) the cost of these tags will be in the region of $30 each. If taken at current exchange rates in 2004 between the Rand and the Dollar, the price will be in the region of R200 per tag in South Africa. This may not seem to be high, but if the average retail price of a new tyre is taken as R 2,800, an increase to R 3,000 or an estimated 7% is significant, especially if this cost increase is to be picked up by the end user. This can be applied to the CPK model introduced in section 3.2.2 for a fleet of 100 vehicles with a 26 wheel configuration traveling an estimated 1,000,000 kilometres per month to put it into perspective. The increased retail price of R 200 per tyre results in the CPK rate increasing with R 0.02 per kilometre, or taken for the whole fleet, increased expenditure of R 20,000 per month, or R 240,000 per year.
4.4. THE CURRENT STATUS OF ‘TYRE TAGS’
Tyre tags are not in use in the South African commercial tyre industry yet, as our market is very small compared to other markets around the world. The USA is regarded as the leader in tyre tag technology. Most of the new tyre manufacturers, including
Bridgestone Firestone, Michelin, and Goodyear are experimenting with this kind of technology. Self-monitoring tyres are currently undergoing fleet tests in the USA.
According to Heavyduty Trucking (2002) things are rolling slowly on the development of electronic chips in tyres. Manufacturers say they must be absolutely sure the RFID tags will have the life, durability and accuracy that users demand. Fleet tests are now
Page 138 of 169 underway, but it will be some time still before the devices are ready for the mass market. Initial tests show that the chips may be worth the wait because they’ll make tyre maintenance much easier than it now is.
RFID chips will be installed inside the tyre casings during the manufacturing process.
They will differ from current aftermarket tyre-pressure monitoring systems in that each chip will have a unique ID number. The chip will broadcast its ID, along with the tyre’s air pressure and temperature, when scanned by an electronic reader. This will not only make monitoring of tyre performance almost effortless, but also help tyre maintenance specialist and the customer alike with record keeping and reporting. As theft is a major problem in South Africa, this will also assist in the identification of stolen tyres. If all the tyres in a fleet have the chips, data on them can be automatically stored in a computer every time a vehicle’s tyres are read either at fixed-point installation, or with the hand held wands.
More than 18,000 tyres are now running with ID-only chips in America. There are some problems however. Some of the users state that they were unable to make the wand work with its current computer systems, which means that the ID cannot be used to track tyre costs, as was intended.
Among the features on fleet managers’ wish list for tyre tags are a memory that will record when a tyre runs under inflated and therefore at higher temperatures than normally accepted, resulting in damage to the tyre and a shorter life span. Excessive
Page 139 of 169 heat hinders a casing’s retreadability, so this kind of information will be valuable in deciding to retread a tyre or not when the time comes.
With current technology, a memory requires a battery. On this issue, the two tyre makers who are working on RFID chips and will discuss their work publicly —
Bridgestone and Goodyear — have gone in different directions. Bridgestone’s chip is
“active,” with a battery and a memory, while Goodyear’s is “passive,” without a battery.
The reason is price, or what they believe tyre buyers are willing to pay for a feature they say they want.
According to Bridgestone USA (2002) a survey is cited done by The Maintenance
Council of ATA several years ago which indicated buyers would be willing to pay up to
$20 per tyre to get all capabilities, including a unique ID number, real-time reading of temperature and pressure, and the memory to record unusual events. At Goodyear, surveys indicate that fleets want tags to do all this, but they don’t want to pay for the benefit. As the tyre industry in South Africa is very price sensitive, the introduction of the improved technology could be hampered, as the user won’t be willing to pay so much more for their tyres.
Several hundred Goodyear tyres with built-in chips are now in fleet tests. These have no memory, but indicate temperature and pressure when activated by a reader. Three configurations are being tested, with the latest on the road for almost six months. The
Page 140 of 169 best place to put a chip appears to be in the bead area of a tyre, where casings flex least. There seems to be no magnetic interference from a steel wheel.
Bridgestone developmental RFID chip, whose first version was called the “Tyre Tag” at its unveiling a couple of years ago, has a memory powered by a tiny battery with a hoped-for life of 10 years. But right now, those in fleet tests register air pressure and temperature at the moment of reading. Almost 1,000 of the tagged tyres, some of a
“phase 2” configuration, are in testing in three fleets and they are read frequently, often daily, so for now the memory is not needed.
When a reader activates the memory, there may be a problem as to how the data needs to be read. For air pressure a reading may be needed for the last few weeks, as some vehicles are not seen that often. The same might be true for temperature. There would be a time stamp for unusual events, but parameters need to be determined by the industry.
Some of the test chips have gone through retreading and have survived the heat and pressure involved with the process. Tests also indicate that various types of “non- destructive” examination of casings, which introduce electric current or sound waves, should not hurt the chips. The chips are also small and light enough that they have no effect on balancing of tyres. For example, Goodyear’s is about the size of an American quarter and weighs only a few grams.
Page 141 of 169 Bridgestone plans to offer chips two ways: built into a new tyre, and as an aftermarket product that can be added to an existing tyre. Fleets that want to use this technology will want all their tyres equipped with chips, but they won’t want to buy all new tyres to achieve it. The chips may last a long time and prove robust.
Fixed-point electronic readers are currently more commonly used, but are still relatively bulky. Eventually, small hand-held readers will be readily available for use by drivers and owner-operators.
In an article in the CAR Magazine of April 2003 it was stated that Michelin is on the forefront of a campaign to establish an industry standard for tyre-embedded programmable transponder chips. The company is even prepared to share its radio frequency tyre identification embedded chip technology with other tyre manufacturers.
This concerted drive from one manufacturer could speed up the introduction of transponder chips as standard fitment to all tyres produced.
From the above information it can be assumed that Tyre Tags will have a profound effect on the Commercial Tyre Market as we know it. It will greatly reduce labour costs and save time, but these savings could be wiped out by the cost of employing the technology used to run these systems successfully. As this kind of technology is not readily available in South Africa, the cost of importing it at current exchange rates will make them very expensive. The cost of these systems will have to be absorbed by somebody, be it the manufacturer, supplier or user of the tyre. As the Transport
Page 142 of 169 Industry in South Africa is already very price sensitive, it will be a difficult task to pass the cost on to the users. Margins on tyres are already getting smaller, and will be greatly reduced if the manufacturer or distributor were to absorb these costs.
4.5. TYRE MANAGEMENT SOFTWARE PROGRAMS
In the competitive international tyre industry most companies have long since realised that their long-term survival is dependant on them offering an ad on service when selling a tyre to a customer. It is for mainly this reason that most new tyre manufacturers, retreaders and tyre maintenance outsourcing service providers have developed computer software packages to assist the fleet operators in simplifying the management of the tyres in his fleet. Most companies offer this software as part of a maintenance contract only, thereby ensuring that mostly their brand of tyre are used in that fleet, or others provide the program as a stand alone product to any customer at a set licence fee per month. There are also some independent companies that have no ties with any manufacturers that provide stand-alone maintenance software. These programs are normally spin-offs from fleet maintenance software that all have a basic tyre maintenance module, which is just developed further as a stand-alone product.
In this section a brief description will be given of the most common and well-known computer software packages available on the market from service providers and manufacturers, be it either in-house or independent packages.
Page 143 of 169 4.5.1. In-house packages from manufacturers and retreaders
Most of the new tyre manufacturers, including Bridgestone, Goodyear, Michelin and retreaders like Maxiprest and Bandag have developed their own in-house tyre maintenance software programs which they provide to their customers as part of a total service package with the aim of retaining long term business. Most of these programs are very similar, all keeping track of the current condition, performance and movement of tyres in a fleet, and being able to generate reports from the data captured. The main difference is in how the data is captured, be it manually or electronically with specially adapted hardware. In the following section a brief outline is given of two of these types of programs, one developed by a retreader and tyre maintenance service provider, and the other direct by a new tyre manufacturer.
4.5.1.1. Tyre Maximizer (Maxiprest Tyres - subsidiary of Bridgestone SA)
Tyre Maximizer is a tyre management system developed in-house by listed entity
Maxiprest Tyres, a new tyre distributor, retreader and tyre maintenance service provider, with majority shareholding by Bridgestone South Africa, that enables fleet operators to record and track all tyres and tyre related issues within their operations.
The information recorded is analyzed and reflected in numerous graphical reports. Tyre
Maximizer is a Microsoft Windows based program that makes use of a host of features enabling ease of use and understanding. The following are the main features of the
Maximizer program (Information adapted from Maxiprest - 2004):
Page 144 of 169 Installation Options
In the first place it is offered as a stand alone system where the program is installed on a stand alone PC with no communication available to other computers. The second option is on a client server installation that makes use of existing Local Area Network
(LAN) or Wide Area Network (WAN) setups. A usefull feature of this software program is that you are able to install it on a server and allow dial-in access to the server and access to the Maximizer database. It is also possible to host and publish the Maximizer on the Internet and allow access to the system via the Internet.
Security
The system is completely username and password protected. All user functions and access rights can be predetermined. All transactions are recorded with the username, leaving an audit trail of events.
Vehicle information
All Vehicle information is recorded and used in various reports for analysis of tyre performance. Changes of Fleet and registration numbers are also recorded and you are able to view old and new fleet number and registration number details.
Tyre information
All tyre information is recorded on initial capture. Information includes Make, Size,
Starting Tread depth, Current Tread depth, value, supplier, invoice details, projected distance for performance comparison, brand number, serial number etc.
Page 145 of 169 Tyre locations
Tyres can be fitted to vehicles, allocated to stores, retreaders or breakdown suppliers.
Tyre movements include Purchase, Take On, Sell / Reverse Sell, Scrap / Reverse Scrap,
Rotate, Inspect, Move Between Stores, Fit and Remove on Vehicles, Send and Receive to / from Retreaders, Send and Receive to / from Breakdown Suppliers.
Tyre related breakdowns
The system allows the user to record all details regarding breakdowns including driver-, supplier-, tyre- and financial details. Dates and times ranging from date and time of report to date and time completed are also recorded enabling pinpoint analysis of delayed vehicle down time.
Reports
The most unique feature of the Tyre Maximizer is the fact that no reports are hard coded in the program, and as such all reports are customizable according to the needs of the fleet operator.
Help file
As per most Windows based programs there is a fully functional help file with notes on all aspects of the Tyre Maximizer. This is a very helpful tool if you need to make technical information available to the users of the software, and also included are
Acrobat files like Tyre Damage Guides, Price Lists & maintenance manuals.
This system became available on the market in 2001, and is marketed as part of the tyre maintenance outsourcing products on offer by Maxiprest Tyres. A unique marketing approach that proved successful is the fact that the system is also available to any fleet operator, not necessarily a traditional Maxiprest customer, at a set monthly
Page 146 of 169 license fee, varying according to fleet size. As most service providers supply their systems for no fee to fleet operators with the condition that they purchase their tyres from them, this was a fresh approach that proved to be very successful for the company. Maxiprest has a dedicated service team, including a computer programmer, providing service backup and training as part of the licence agreements. There is a 24- hour toll-free phone-line for the assistance in resolving any queries on the system.
4.5.1.2. Fleet Chief (Bridgestone Europe)
Fleet Chief is a tyre maintenance computer software program developed and distributed by Bridgestone Europe, but also available across the globe. The Fleet Chief software is also available with an optional hardware kit comprising a hand-held computer, a digital tread depth gauge, a digital pressure gauge, and a rechargeable battery pack.
According to information available from Bridgestone Europe (2004), this package has the following benefit to the user:
The program generates a variety of reports that can be tailor-made to meet any
fleet’s special requirements in terms of tyre monitoring and casing management,
therefore reducing operating costs. The reports include tyre reports for individual
vehicles, pressure-, tread-, fault-, performance- and comparison reports.
Installation and use of the system is easy. The package is fully compatible with
Windows, and its user-friendly interface makes initial use more intuitive, with no
need for complex training.
Page 147 of 169 The system enables service providers to provide superior service to fleet operators
by maintaining an accurate electronic record of the condition and performance of
tyres, safely stored in a database, and also by giving reliable advice on optimal
running set-ups and timely indication when tyre positional changes or
replacements are due.
The system also includes the optional on-site inspection kit comprising the hand
held computer that automatically collects data from the high quality digital gauges
as measurements are done. This reduces the time it takes to do tyre checks
significantly. The system also has the ability to download tyre information directly
onto the user’s computer.
The inspection kit also enables the user to log details on tyre usage and to note
any irregular wear, tread cuts, or any other observed damage or relevant
information.
The key benefit of the system is to eliminate repetitive data entry wile reducing
the risk of human error.
4.5.2. Independently developed packages
4.5.2.1. N-Tyre System (South Africa)
The newly developed N-Tyre System (NTS) can cause a possible revolution in the tyre maintenance outsourcing industry as a whole. It is the only complete tyre maintenance system incorporating software and various hardware devices in monitoring tyres.
Page 148 of 169 The NTS was developed to meet the specific needs of monitoring tyre pressures, wheel bearing, brake temperatures as well as the excessive vibration caused by tread separation. It was also designed to operate reliably in the extremely harsh environment of a heavy-duty truck. The unique method of transmission of the data utilized by the system allows the NTS to guarantee a 100% reliability of its signal transmission.
The system comprises a unit for the horse, called the Main Cab Display Unit "MCDU," a trailer identification unit and a transmitter for each wheel that services two adjacent tyres, the Dual Hub Unit "DHU". The system allows the driver to identify and rectify any of a number of potential problems, which would otherwise normally not be known to him. The DHU's transmit the following data, every 15 seconds, to the receiver in the cab:
Tyre Pressure
Hub Temperature
A faulty tread beginning to separate
Serial number of the transmitter
Distance Covered
Automatic tread depth readings are currently under development and it is anticipated that this feature will be available at the time of the launch of the entire system in 2005.
As can be seen from the above this system will play a major role in the future direction of tyre maintenance outsourcing. One of the current downsides of the system, and also
Page 149 of 169 possibly why it is not used extensively already, is the cost of the hardware employed, but as time passes and technology improves the cost is set to reduce.
Systems like these, if used properly by fleet operators, could make the outsourcing of tyre maintenance as it is known today redundant in the not to distant future.
(Information adapted from N-Tyre - 2004)
4.5.2.2. Total Tyre Control (Australia)
Total Tyre Control (TTC) was developed by and is a registered trademark of Klinge &
Co (Pty) Ltd and is copyright protected by Australian and International law. Under the name Total Tyre Control they have developed various specialized software packages in response to the wants and needs of the tyre, mining and transport industries.
Total Tyre Control tracks tyres and rims, it provides in depth information on tread wear, tyre usage, manufacturer comparison and more. The system identifies the best tyre for the job, monitors day-to-day tyre maintenance, reports on tyre performance and condition (both on screen and printed) and includes accurate tyre budget forecasting.
It will perform tyre brand comparisons, project inventory needs, evaluate repair and retread performance, monitor casing age, flag tyre warnings, detect possible mechanical problems and calculate cost per kilometre (or mile) based on actual tyre performance.
Total Tyre Control software is designed to:
Identify the best tyre for the job
Page 150 of 169 Project tyres required (Budget)
Calculate tyre delivery schedule
Monitor tyre-related downtime - Scheduled versus non-scheduled
Allow immediate real-time comparison of different tyre brand results, including
retreads
Eliminate the need for time-consuming manual record keeping
Calculate tyre cost per kilometre/mile and per hour simultaneously
Provide retread whole-of-life and/or current life performance/cost analysis
(Information adapted from Total Tyre Control - 2004)
4.6. SUMMARY
As discussed in this chapter technology could have a significant effect on the future of tyre maintenance outsourcing as it is known today. There will be savings in almost all spheres of tyre related CPK costs, including the product rate, tyre damage, labour and breakdowns. The introduction of tyre tags is imminent, as most parties realise the benefits they may have to the end user in tracking and managing their tyres. The only stumbling block is the cost and current reliability of the technology, as it is still in its development stages. Once mass production starts, the cost is set to reduce, making the availability even in developing countries possible.
The main drive for these systems has to come from the tyre manufacturers. They will be responsible for the manufacture of tyres that already have these tags fitted in the
Page 151 of 169 casings, as the aftermarket systems proves to be unreliable and even more expensive.
The advantage of these tags has to be so profound that they must outweigh the cost of fitting the tags. Users have to be convinced that the additional cost of the tags in tyres will eventually help them to save on their total tyre bill as they will be able to pick up possible problems earlier, and correct them in due time.
On the software side there are many systems available, all with basically the same features. The most successful are those that have the capability to be adapted according to the specific needs of fleet operators. It can also be seen that there are already complete systems available on the market that fully integrates software and hardware, making the monitoring of tyres a lot easier, but once again currently very costly.
The introduction of the technology mentioned in this chapter is imminent, and tyre maintenance outsourcing service providers should be at the forefront of developments if they intend surviving in an ever increasingly competitive marketplace.
Page 152 of 169 SOURCES OF REFERENCE
• BRIDGESTONE USA. 2002. Tire Maintenance. [Web:] http://www.trucktires.com
[Date of access: 4 April 2004]
• BRIDGESTONE EU. 2004. Fleet Chief. [Web:] http://www.bridgestone-eu.com
[Date of access: 2 August 2004]
• COTTER. CAR Magazine: 13, April 2003. SA. Ramsay, Son & Parker (Pty) Ltd.
• HEAVYDUTY TRUCKING. 2002. Tire Tags. [Web:]
http://www.heavydutytrucking.com [Date of access: 27 March 2002]
• MAXIPREST TYRES. 2004. Tyre Maximizer. [Web:] http://www.maxiprest.co.ca
[Date of access: 27 July 2004]
• N-TYRE SYSTEM. 2004. [Web:] http://www.n-tyre.co.ca [Date of access: 27 July
2004]
• POST, G.V. & ANDERSON, D.L. 2000. Management Information Systems. 2nd ed.
USA: McGraw-Hill. 666 p.
• RFID JOURNAL. 2003. New RFID tire sensor for trucks. [Web:]
http://rfidjournal.com [Date of access: 30 September 2003]
• TOTAL TYRE CONTROL. 2004. [Web:] http://www.totaltyrecontrol.co.ca [Date of
access: 02 August 2004]
• TRANSPONDER NEWS. 2002. [Web:] http://rapidttp.com [Date of access: 6 March
2003]
Page 153 of 169
CHAPTER 5: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1. BACKGROUND
In today’s highly competitive transport marketplace, fleet operators are aiming to eliminate or reduce every expense that does not contribute to their primary business of hauling freight. A more effective third party service provider can directly affect a fleet’s profitability, and also other aspects like customer service, equipment safety and vehicle performance and efficiency. These are some of the main reasons why fleet operators may consider outsourcing their tyre management functions.
The unpredictability of the rand, inflation and interest rates have all had an impact on the South African transport industry. Add to that a surprising influx of new players, transport rates that are more competitive than ever before and rising diesel and tyre costs, and one would have to question the unfathomable attraction of the road freight industry, particularly the general freight sector which is well and truly saturated.
The technology in the tyre industry as a whole has reached such a stage that it is becoming more difficult to differentiate between products in terms of quality and performance. The only way to differentiate is on the basis of pricing, which leads to unheard-of discounts being offered to the major transport operators in the marketplace on new tyres, and more recently also on retread tyres. This phenomenon had a detrimental effect on tyre maintenance outsourcing, as tyres became cheaper for the larger freight companies because of their buying power. This lead fleet operators to
Page 154 of 169
believe that they could now provide the service cheaper themselves, rather than paying others to do this for them. This also led to unrealistic ‘cost per kilometre’ rates being offered to operators, just for the sake of retaining their business.
The basis of tyre maintenance outsourcing is that it is not only a tyre supply contract, but a full add on service of technical expertise and maintenance and control of the tyres in stock and in the fleet. In the past transport operators were willing to pay a premium for this add on service they receive, but that is also not the case any more. They perceive this service to be a given, and are not willing to pay for that any more. This puts tremendous pressure on the profitability margins of tyre maintenance service providers, as these types of contracts are labour-intensive and therefore expensive to run.
These price wars are getting more intense, placing even greater pressure on maintenance service providers to operate profitably. The future of this greatly innovative service offering to the transport operator hangs in the balance. Tyre companies and service providers are faced with the dilemma of whether they should continue to provide maintenance contracts as a product at break even or a loss, or whether they should return to the traditional scenario of just supplying the tyres to the customer and thereby realising small profits, but not being able to retain long term business.
This study aimed to analyse and evaluate the current situation concerning tyre maintenance outsourcing in South Africa, and the possible future that this service may
Page 155 of 169
have. It explored the factors that determine the success of a tyre maintenance contract, and how they are influenced by other internal or external factors.
At present, the South African transport industry is extremely price sensitive. As stated tyre costs represent one of the largest variable or running costs for the transport operator. Fuel purchase prices are difficult to dictate, as the fuel suppliers and the controlling bodies, including government, set the basis and therefore leave little room for negotiation. Tyre prices, on the other hand, are influenced by an array of mostly uncontrollable variables. Oil prices and exchange rates play a role in price setting, but the major component in setting prices is competition in the marketplace. The South
African market is small compared to other international markets. The transport industry is dominated by a few major players, which makes the retaining of current business that more important.
The broad purpose of this study therefore has been to investigate commercial tyre maintenance outsourcing practices, trends and issues within the road freight transport industry in South Africa.
Specific topics covered in this study were as follows:
Defining the concept of outsourcing.
Defining the concept of tyre maintenance outsourcing.
Tyre maintenance services currently available in the South African market.
The current state of the commercial tyre industry in South Africa.
Page 156 of 169
The current state of the road freight industry in South Africa.
Factors that play a role in the calculation of cost per kilometre rates.
Aspects that contribute to the success of a tyre maintenance outsourcing contract.
The implications of technological advances on tyre maintenance outsourcing.
5.2. GENERAL TRENDS
5.2.1. Service provider perspectives
The general consensus from tyre maintenance outsourcing service providers is that it is increasingly becoming more difficult to retain long term supply agreements, as customer loyalty is no longer linked to tyre brands and tyre performance, but directly to tyre pricing. Tyre maintenance outsourcing has become the only method to currently lock the fleet operator in a longer-term supply agreement. As this type of business is labour intensive, the overheads and expertise needed to run these contracts successfully have made them less profitable than the normal sale of tyres, where attaining a good margin on the selling of the tyre is the only concern.
As the South African road freight transport industry has changed in recent years, with the market being dominated by four big players, it is becoming more and more difficult as a service provider to retain the supply of tyres to these operators. If supply is possible, the profit margins are minimal. Another problem that is arising is that due to the size of these fleets, these companies are negotiating directly with the new tyre manufacturers in South Africa, who in turn cut out the service providers and traditional
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dealer networks by supplying directly to these operators at prices that no service provider can compete with mainly due to the size of orders placed. Fortunately for the dealer networks and service providers, recently these practises by new tyre manufacturers has lead to pricing wars with other manufacturers, thus putting them also in the position where it is difficult to secure long term supply contracts.
This again has prompted these tyre manufacturers to explore their distribution networks carefully, with some making equity stakes in dealer networks that could help them provide the full spectrum of services to fleet operators, including tyre maintenance outsourcing contracts. This meant that the service providers now had lower CPK rates on offer to the big fleet operators, and due to the nature of these types of agreements could guarantee the tyre manufacturers long term sustainable business.
Another evident problem was that the small and medium sized fleets took notice of the discounts the bigger fleets were qualifying for and thus the lower CPK rates they were running at for similar vehicle configurations. Naturally they demanded similar treatment but due to their size and the fact that the new tyre manufacturers were very selective as to who qualified for direct supply contracts with bigger discounts, the pressure was put on the service providers to either change their pricing policies or stand to lose these contracts. As the service providers were also not receiving the best discounts from the new tyre manufacturers on these contracts, the only remaining factors that could be considered was to reduce the operating and overhead costs, making these contracts run very lean, in some instances even sustaining losses.
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As it is difficult and costly to regain lost contracts, service providers will do anything in their power to retain the business they have, thus making them vulnerable to fleet operators pushing for lower rates. The cumulative effect is that service providers have some contracts with the smaller fleet operators running profitably, thus subsidizing their bigger contracts with the large fleet operators running at a loss or breaking even, which they retain as to stop their parent companies losing volumes to competitors.
5.2.2. Fleet operator perspectives
The fleet operators in South Africa are in a similar position to the service providers as they are also under pressure from their customers to keep transport rates as low as possible. Add to that a surprising influx of new players, transport rates that are more cut-throat than ever before and rising diesel and tyre costs, and one would have to question the attraction of the road freight industry, particularly the general freight sector which is well and truly saturated. Fleet operators are unanimous with regards to two things, namely that the transport industry is not for the feint hearted and that curtailing running costs has never been more critical to the overall preservation and well being of their businesses.
More professional fleet operators have seen the need to place focus on their core business of transport, as this is where their expertise is at its best. This realization by some has created the need for tyre maintenance outsourcing, as it is felt by most that even if they outsource the maintenance of their tyres at a premium, there will be a cost saving in the medium to long term as the tyre expenditure is sure to drop due to the
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expertise of the service providers on maintenance and control of tyres. This may sound promising for the service providers at first, but experience has shown that fleet operators have short term memories as to what the state of the tyres in their fleets was like when they were doing the maintenance in-house. As many of them state,
“Yesterday’s achievements becomes today’s norms”.
As the fleet operators are well aware of the competition that is rife in the tyre industry, they will exploit their service providers and place excessive pressure on them to decrease their running costs even further.
There is however some tyre maintenance outsourcing contracts that work wonderfully well. This is mainly due to a fleet operator that has taken the decision to outsource the management of the tyres in his fleet, but realises that he cannot relinquish his role totally and distance himself from this aspect of his business. Experience has shown that the successful contracts are those where there are open lines of communication and trust between the fleet operator and service provider, realising that in order for the contract to run for the better of both parties, they have to work closely together. These are normally also the fleet operators that realise they are in business to make profit, and their service provider are in business for the same reason. They know that if the service providers are not allowed to make a profit, they will cut corners in their service provision to realise some sort of profit.
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5.3. CONCLUSION
Companies with a competitive advantage enjoy a position of enduring superiority over competitors, and the source of competitive advantage is in the ability of an organisation to differentiate itself, in the eyes of the customer, from its competitors, and to operate at a lower cost, and therefore with greater profit than its competitors. Competitive advantage stems from the many discrete activities a company performs in designing, producing, marketing, delivering, and supporting its products. Companies thus gain competitive advantage by performing such strategically important activities more efficiently than their competitors. The specialization and expertise of such a contractor may well provide the company with further competitive advantage in this regard.
This statement is true for both the providers and users of tyre maintenance outsourcing.
The users of these products need to identify what their core competencies are, and focus on those items through specialization, leaving the non-core items to outsourced service providers, with the expertise in those fields. On the other hand the service providers internally also have to analyse the service they provide, focusing on the factors that could differentiate them from their competitors.
As most of the tyre products and services on offer to the local market are almost indistinguishable as far as build quality and performance is concerned, the only remaining differential factor is pricing. Local new tyre manufacturers and some importers are fixed in a pricing war, with ridiculous discounts doing the rounds. The
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discounts have soared to such a level that there is almost no price difference between a new and a retread tyre.
There is a constant threat of new entrants to the marketplace on the pure supply of tyres, especially as the capital requirements to establish a franchised dealership is not substantial. However it is more difficult to enter the servicing market on commercial tyres, as most fleet operators run nationally, and most often cross border, making the need for a well-established service provider with a wide dealer footprint essential. As tyre maintenance outsourcing requires a well-established dealer network to run successfully, the main threat will be from established players in the market increasing their service compliment. As current rivalry is mainly based on pricing wars, the service industry is ailing because of this. It is still believed that if a service provider can supply a professional and reputable service combined with acceptable pricing strategies, they can let their business grow significantly, as there is a sure need for these types of service offerings in the marketplace, especially where the bigger fleet operators are concerned.
This brings us to possibly the biggest threat to the tyre maintenance outsourcing industry as a whole, and that is the bargaining power buyers. As fleet operators are also under pressure from their customers to keep costs as low as possible, this pressure is transferred to their suppliers in pressurising them for lower prices for products as well as services. The possible solution for service providers in attaining and retaining long- term service contracts is to stick to their pricing policies on products, but to ensure that their service delivery is impeccable. The fleet operators will soon realize that the added
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benefits of excellent service delivery outweighs the possible lower cost of products. Just as they aim to provide professional services to their customers, they will learn to accept and appreciate a professional service provided to them.
5.4. RECOMMENDATIONS
Based on the discussions in the preceding chapters of the study, the following recommendations can be made (i) for companies that are current or potential users of tyre maintenance outsourcing, and (ii) for companies that are current or potential providers of tyre maintenance outsourcing.
5.4.1. Recommendations for tyre maintenance outsourcing users
5.4.1.1. Identify core and non-core activities
Potential outsourcing users need to identify their core and non-core activities.
By outsourcing some of the non-core activities, a company can utilise the expertise they do have in other aspects of their business, leaving the activities not directly related to their business functions to the experts in the field to manage. It is important that the company identifies the non-core activities correctly, as a possible error in judgement could be detrimental to the future profitability of a company in the long term.
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5.4.1.2. Select service provider not on pricing alone
Potential outsourcing users need to identify the most appropriate service provider not on pricing alone, but should also consider the overall long term business relationship, as well as the total service package on offer.
Deciding on the correct outsourcing service provider should not be based on pricing only, but the overall business relationship between the companies, because if a long term mutually beneficial relationship is the goal, this needs to be in place from the start.
A long term strategic relationship or partnership with the focus on sharing information, benefits, risks and resources, must involve an emphasis on innovation and performance as to attain maximum productivity.
Potential outsourcing users need to realise the most important factor for ensuring the long term success of an outsourcing arrangement is that the relationship between the parties is one where an open line of communication exists at all times thus ensuring that potential problems can be identified and solved in due time.
The potential outsourcing user should also consider the total service package that the service provider could offer. This includes considering the service provider’s dealer network footprint, cross border exposure, breakdown service, technical expertise and innovation in product offerings to the market.
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5.4.1.3. Outsourcing is not a short term project
Potential outsourcing users need to realise that outsourcing is not a short-term solution to control costs, but a long-term project where the true benefits will take time to materialize.
Companies should not see the decision to outsource as a short term cost control measure, but rather as a long-term project that has to be implemented properly to achieve the real benefits as the possible transfer of resources may take place. All functions that will be impacted on by the possible outsourcing must be consulted in the process.
5.4.1.4. Ensure a clear tyre policy is agreed upon
Potential outsourcing users need to ensure that a clear tyre policy is agreed upon with the service provider at the inception of the contract.
It is essential for the potential user of tyre maintenance outsourcing to protect his long term interest by ensuring that a clear tyre policy concerning the make, size and preferred brands of tyres to be fitted in his fleet. This will ensure that if the service provider runs into difficulties controlling costs that no inferior products are fitted to his fleet that could put his staff and others in danger.
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5.4.1.5. Service level agreements with measurable KPI’s
Potential outsourcing users need to ensure that a service level agreement with measurable key performance indicators (KPI’s) is agreed upon with the service provider at the inception of the contract.
In order to ensure that the service provider keeps to the terms and conditions stated in the contract over the long term, and to put pressure on him to keep the standards of maintenance high, measurable key performance indicators (KPI’s) must be included in the contract as part of the service level agreement. These KPI’s could include the following aspects:
Correct inflation or pressure levels of tyres.
Minimum response time to roadside breakdowns, thereby minimising downtime.
Minimum inspection cycles of vehicles, normally at least once per month.
Timely reporting of mechanical irregularities and operational defects.
Damaged tyres as a percentage of rolling wheels between agreed parameters.
Kilometres reported between breakdowns for the fleet as a whole between agreed
parameters.
5.4.1.6. Understand the full cost of the contract
Potential outsourcing users need to understand the full cost of all the different items associated with the contract they are entering into.
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During contract negotiations the potential users focus only on the cost per kilometre rate on offer, and often omit looking at the total cost of all items associated with the contract. The items sometimes overlooked include:
The costs associated with roadside breakdowns, be it during office hours or after
hours, including callout fees, travelling rates per kilometre and sundry costs.
The total cost of tyres damaged, and the rate at which they will be invoiced back
to the fleet operator, be it a per kilometre rate, or the value of the tyre at the time
of it being damaged.
The cost of equipment, including compressors, tools, jacks etc.
The total labour cost, specifically variable items such as overtime worked.
The cost associated with mechanical irregularities on vehicles not corrected within
the specified contract terms as reported by the service providers.
5.4.2. Recommendations for tyre maintenance outsourcing service providers
5.4.2.1. Build relationships
Service providers need to build excellent relationships with their clients as to increase communication and flow of information.
Good relationships are of critical importance to the service provider if it aims to retain and sustain the business in the long term. This relationship will also ensure that communication and flow of essential information in both directions is at the best possible levels at all times, making the service provider responsive to any problems that may arise. This relationship will also ensure pleasant working conditions for both parties.
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5.4.2.2. Analyse your current service delivery
Service providers need to analyse the service they currently provide and determine which factors must be improved upon as to increase their service levels and competitiveness in the marketplace.
The service providers have to sit back and analyse their own companies and the services they provide, including its strengths, weaknesses, opportunities and threats.
They must have a close look at the services they currently provide, and propose ways to make their services innovative and flexible as to distinguish them and set them apart from their competitors. This aspect is essential to the long term survival of any service provider as the market is already saturated as it is.
5.4.2.3. Verify relevant fleet information for rate calculation purposes
Service providers need to carefully verify all the information they receive from the fleet operator to be used to calculate the CPK rate that will be quoted in the new contract.
As discussed in chapter 3 it is of utmost importance that the information the service provider receives from the fleet operator concerning his fleet is as accurate and honest as possible, as the calculation of the correct CPK rate is the aspect that could have the most detrimental influence on the contract if done incorrectly. The following information will assist in calculations, and should be verified:
Fleet size
Commonly used tyre sizes, makes and types
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Vehicle types and configurations
Loads / products transported
Fleet kilometres per month
New vs. retread tyre split
Current tyre related staff compliment
Mileages achieved on tyres currently in use
Number of on road breakdowns per month on average
Main routes travelled, either local or cross border
Depot distribution
5.4.2.4. Understand the needs of the market
Service providers need to understand the needs of the market they operate in, as to adapt their service offerings around these needs.
Service providers should be prepared to adapt and change their service offerings to the market to optimally fulfil the needs of their customers. They should not be rigid in their set service offerings, but be innovative and creative in the services they provide, because no one customer is alike in the specific needs they have.
Page 169 of 169 LIST OF TABLES
Page TABLE 1.1 TOTAL ANNUAL VEHICLE COST SUMMARY (%) 9 TABLE 1.2 SELECTED OPERATING RATIOS – TRANSPORT OF GOODS 10 TABLE 1.3 ROAD FREIGHT MARKET SHARES IN THE TRANSPORT INDUSTRY IN SOUTH AFRICA 11
TABLE 2.1 ESTIMATED COMMERCIAL TYRE MARKET SHARES BY NEW TYRE COMPANIES - 2003 50 TABLE 2.2 ESTIMATED COMMERCIAL TYRE MARKET SHARES BY RETREADERS - 2003 58 TABLE 2.3 AFTER SALES & SUPPORT SERVICES - RETREADERS 59 TABLE 2.4 THE CONTRIBUTION OF THE TRANSPORT SECTOR TO THE GROSS DOMESTIC PRODUCT (GDP) (million rand): 1994 - 1999 67 TABLE 2.5: EMPLOYMENT IN SOME SUBSECTORS OF THE FORMAL TRANSPORT SECTOR 68 TABLE 2.6 ‘LIVE’ VEHICLE POPULATION OF SOUTH AFRICA (1998 – 2000) 69 TABLE 2.7 TONNAGE TRANSPORTED PER TRANSPORT MODE SECTOR (‘000) 70
TABLE 3.1 BASIC VEHICLE CONFIGURATIONS 79 TABLE 3.2 FLEET INFORMATION 89 TABLE 3.3 EXPECTED TYRE LIFE 90 TABLE 3.4 TYRE PRICING 91 TABLE 3.5 STEER AXLE CALCULATION 92 TABLE 3.6 DRIVE AXLE CALCULATION 93 TABLE 3.7 TRAILER AXLE CALCULATION 94 TABLE 3.8 TYRE DAMAGE COMPONENT 96 TABLE 3.9 LABOUR COMPONENT 96
List of Tables - i
LIST OF TABLES (cont.)
TABLE 3.10 BREAKDOWN COMPONENT 97 TABLE 3.11 INTEREST COMPONENT 98 TABLE 3.12 SUMMARIZED COST ANALYSIS 98 TABLE 3.13 OPENING VALUATION: MONTH 1 115 TABLE 3.14 CURRENT / CLOSING VALUATION: MONTH 1 116 TABLE 3.15 COST PER KILOMETRE INCOME AND PURCHASES: MONTH 1 117 TABLE 3.16 TYRE DAMAGE: MONTH 1 119 TABLE 3.17 NET EFFECT: MONTH 1 120 TABLE 3.18 CURRENT / CLOSING VALUATION: MONTH 3 120 TABLE 3.19 CPK INCOME, PURCHASES AND TYRE DAMAGE: MONTH 3 121 TABLE 3.20 CURRENT VALUATION: MONTH 3 (AFTER TYRE REPLACEMENT) 121 TABLE 3.21 NET EFFECT: MONTH 3 122 TABLE 3.22 CURRENT VALUATION: MONTH 12 122 TABLE 3.23 CPK INCOME, PURCHASES AND TYRE DAMAGE: MONTH 12 123 TABLE 3.24 NET EFFECT: MONTH 12 123
TABLE 4.1 SUMMARIZED CPK COST ANALYSIS 129
List of Tables - ii LIST OF FIGURES
Page
FIGURE 1.1 THE BASIC VALUE CHAIN 5 FIGURE 1.2 LITERATURE SOURCES 22
FIGURE 3.1 POTENTIAL SOURCES OF IRREGULAR WEAR 107
List of Figures - i
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