Public Transport – Financial Planning Model
The Scenario
Our client, a major public transport provider, operates over 1300 vehicles, employs over 3900 staff, and operates from 9 bases. Around 260 million journeys are provided annually – across about 100 routes.
They operate in a highly regulated environment under contract to the local authority with contacts awarded for 5 to 7 years under a rolling tendering programme.
All fares are passed straight through to the authority, and our client is paid for providing the service. As bid tenders are won and lost largely on the basis of price, it is essential for them to plan and to estimate their costs accurately before bidding – they cannot adjust prices or recoup income through fares later. Profitability during the contract period is therefore largely a function of bid price and operating efficiency.
The Challenge
Whilst the everyday operation of the business is comparatively straightforward, the cost of running a route depends on factors such as length, size and frequency of vehicles, time of day, staff shift premiums, etc.
Every year, as the combination of routes they were bidding for and operating changed, so they needed to review and change their plan to:
- Decide the optimum number & allocation of vehicles to minimise operating costs and provide the most competitive basis for bid prices
- Assess the impact of reallocating vehicles, staff and routes as a result of either consolidating depot space or acquiring new depots
- Examine the ROI sensitivity to changes in fuel cost, wage-inflation & maintenance costs
With so many routes and depots, it soon became very difficult to evaluate and compare the many different options and combinations of options to answer these questions. Like many companies, they used a highly complex series of spreadsheets for planning. However, such was the complexity of the task, that it took around 3 months every year just to devise a working plan using this approach and so there was very little scope to examine alternative operating scenarios. Consequently there was little confidence that the most cost-effective plan was in place for a new mix of routes.
The Solution
The client commissioned Paragon Simulation to give them the tools to examine their options more thoroughly. Paragon started by restructuring the spreadsheets reusing the underlying calculations in order to retain confidence in the numbers.
Paragon then integrated the spreadsheet within the Paragon scenario planning environment with an easy-to-use interface. This made it easier for them to try different ideas and scenarios, to store them, and to compare and consolidate results. The model automatically maintained an audit trail of incremental changes to the plan, so that they could retrace their steps, and it allowed data to be shared with more clarity.
The Benefits
The new system enabled new scenarios to be evaluated in about an hour, allowing them to expend their effort on analysing and optimising the plan rather than organising data. This would provide them with information for bidding against new tenders and for re-planning every year once they know which tender/routes have been won.
Accountants can develop alternative scenarios in parallel and once a plan is decided they have far greater visibility of expected results.
The model also reduced the effort needed to compare actual results with expected results. The new system enabled them to increase the frequency of financial reviews from quarterly to monthly, giving the management greater control over their business.