Three Steps to Responsible Management

Equipment managers and field managers who understand the value of good numbers and excellent communication can ensure maximum performance for the company

Construction Equipment - March 1, 2005

Mike Vorster
Contributing Editor

Responsibility centers focus expertise and manage a specialized aspect of an organization. Equipment, equipment management and all the functions needed to properly manage an equipment fleet are invariably grouped together in a single responsibility center. These centers range from "shops," which are small operations that move, repair, store and look after the fleet, to "equipment divisions," larger complex operations with clearly stated functional and financial responsibilities.

Defining the role these centers play within a company and maintaining relationships is not a simple task, especially when equipment and field operations are mutually interdependent and where decisions taken by one can have a profound impact on the other. Roles, responsibilities, authority and accountability must be clearly defined, but nothing is achieved when teamwork between equipment and operations breaks down and when each sees the other as inhibiting rather than facilitating success.

Three things can be done to dramatically improve relationships between equipment and field operations and ensure that the responsibility center concept works to the best advantage of the company as a whole.

1) Recognize the nature of costs

Everyone must understand that the hourly cost for a piece of equipment is not a single number. It is an aggregate of many different values: Some accrue on an annual basis and are dependent on annual utilization; others accrue on an hourly basis and are dependant on machine age and onsite conditions.

Let's look at the two: owning costs and operating costs. The three components of owning costs—depreciation, interest and other owning costs—all accrue on an annual basis. Equipment managers control none of these costs but can influence depreciation by selecting and purchasing wisely and making sure that the machine is in the best possible condition when sold.

The fact that owning costs accrue on an annual basis means that the hourly owning cost recovery rate is dependant on annual utilization. Utilization is a direct result of decisions made in the field regarding the number of machines required on site and the hours they will work. Tensions arise in the organization when equipment managers are held accountable for rate variations and under-recovered owning costs due to low utilization.

Operating costs are proportional to the number of hours worked and, thus, the hourly cost recovery rate is largely independent of utilization. Operating costs are, however, affected by the work the machine is doing and the conditions under which it is working. The fleet manager can't control fuel, wear parts and tire costs; they are often direct job costs. The manager can control preventive maintenance and repair parts and labor, but that's usually only about 30 percent of the total owning and operating cost.

2) Provide focused actionable information

Companies that use responsibility centers successfully use focused actionable information to measure performance and take corrective action. Let's use an example to illustrate the importance of this (see table).

Suppose the equipment account operating statement for a given year shows that the costs recovered from equipment operations totals $12,111,000 and that the total actual costs for the same period amounted to $12,479,000. It is clear that equipment operations show a loss of $368,000 or about 3 percent of revenue. Other than that, not much can be said with confidence given the information presented. It is too broad, there is no clear indication of where the problems lie, and other than "cut costs" there is no guidance as to where attention must be focused.

Conventional thinking would point to the largest controllable cost category, that is, repair parts and labor, and action would be directed to reduce this from 31 percent of revenue to 28 percent to "fix" the problem.

In our example, the equipment operating statement is split into three owning and three operating cost categories, showing recovered costs and actual costs, as well as the loss, broken down by each category. It is now possible to focus on specific problem areas and take appropriate action. The numbers show that there is under-recovery of fixed owning costs of about $455,000 and overrun on fuel of $106,000. Clearly we should look at these two areas.

We also need to acknowledge and reward a saving in repair parts and labor, other operating costs, and overhead.

A lack of focused and actionable information of this kind leads to confusion, conflict and disagreement. Nothing is as demotivating and frustrating as an incorrect diagnosis pointing at problems in your area of responsibility when you know that the information used to make that diagnosis is either incomplete or inaccurate.

The fact that equipment cost is an aggregate of many different types of cost and is influenced by different parts of the organization makes it imperative to have a budgeting and cost-control system like that given in our example that provides the information needed to clearly identify areas for action and match accountability with responsibility.

3) Break barriers

Successful companies spend a lot of time breaking down the specialist stove pipes that occur when responsibility centers are used to define expertise and measure performance. Equipment managers are often heard to complain about a lack of "understanding for the iron" among accounting and finance specialists. Accountants believe that equipment managers do not understand that "it is all about making money." Neither side is correct, and nothing is achieved by pointing at perceived deficiencies in the other party.

Equipment managers need not be accountants, but they must understand accounting principles and the constraints under which financial and tax decisions are made by the company. Accountants need not be equipment managers, but they must understand the complexities of the business and the factors that drive decisions and determine the life-cycle cost of equipment. Communication, a shared language, and a shared commitment to the company are absolute prerequisites to making responsibility centers work.

The responsibility center concept is a powerful tool that many companies use to their advantage. It is, however a double-edged sword as dysfunctional "us vs. them" behavior can easily result. The danger is nowhere more apparent than in the mutually interdependant relationship between equipment and operations.

An equipment-using firm can achieve much if everyone recognizes that equipment cost is not a single number under the control of a single part of the organization; if focused and actionable information is used to help communication rather than add to disagreement and conflict; and if everything is done to minimize barriers between areas of specialist expertise and responsibility.

Category	Costs Recovered		Actual Costs		Over
	$1,000's	%	$1,000's	%	(Under)
Owning Costs
Depreciation	$3,270	27%	$3,462	29%	-$192
Interest	$1,332	11%	$1,482	12%	-$150
Other Owning	$1,090	9%	$1,203	10%	-$113
Total Owning	$5,692	47%	$6,147	51%	-$455
Operating Costs
Fuel	$1,211	10%	$1,317	11%	-$106
Repair Parts & Labor	$3,755	31%	$3,596	29%	$159
Other Operating Costs	$969	8%	$947	8%	$22
Total Operating	$5,935	49%	$5,860	48%	$75
Shop Overhead	$484	4%	$472	4%	$12
Total Equipment Operations	$12,111	100%	$12,479	103%	-$368