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Commercial Tyre Maintenance Outsourcing Practices in South Africa

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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.
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