Just musing over a present real-life scenario and would appreciate any
thoughts.

Assume a company distributes a product across a given region. It currently
uses an external third party to carry out this task at a cost of, say, £10m
per year.

The company already has a transport arm but bringing the distribution
in-house would cost, say, £15m (the third party can undercut the in-house
operation by virtue of the fact that they already distribute a competitor's
products across the region, i.e they're basically piggy-backing us onto the
back of them).

As it stands, the £10m cost is paid to a third-party and is gone. Whereas,
if the operation was brought in-house, even though the cost is higher, it
stays within the parent company.

What am I missing?

Justin Credible wrote:
Just musing over a present real-life scenario and would appreciate any
thoughts.

Assume a company distributes a product across a given region. It
currently uses an external third party to carry out this task at a
cost of, say, £10m per year.

The company already has a transport arm but bringing the distribution
in-house would cost, say, £15m (the third party can undercut the
in-house operation by virtue of the fact that they already distribute
a competitor's products across the region, i.e they're basically
piggy-backing us onto the back of them).

As it stands, the £10m cost is paid to a third-party and is gone. Whereas,
if the operation was brought in-house, even though the cost
is higher, it stays within the parent company.

What am I missing?

About £5m.

The £10m you're talking about doesn't stay in the company if the transport
is brought in-house. It goes out of the company in the cost of additional
lorries and drivers and all the rest, along, it seems with that additional
£5m.

You could bring delivering the company's letters in-house too. But it
wouldn't be economic, for exactly the same reasons.

"Norman Wells" wrote in message
...

About £5m.

The £10m you're talking about doesn't stay in the company if the transport
is brought in-house. It goes out of the company in the cost of additional
lorries and drivers and all the rest, along, it seems with that additional
£5m.

You could bring delivering the company's letters in-house too. But it
wouldn't be economic, for exactly the same reasons.

Sorry, I wasn't clear.

The £15m includes the cost of any additional drivers and vehicles, it's the
bottom line figure.

So, parent company pays satellite company £15m (i.e it's all still
in-house)........current state of affairs is parent company pays third party
£10m.

Justin Credible wrote:
"Norman Wells" wrote in
message ...

About £5m.

The £10m you're talking about doesn't stay in the company if the
transport is brought in-house. It goes out of the company in the
cost of additional lorries and drivers and all the rest, along, it
seems with that additional £5m.

You could bring delivering the company's letters in-house too. But
it wouldn't be economic, for exactly the same reasons.

Sorry, I wasn't clear.

The £15m includes the cost of any additional drivers and vehicles,
it's the bottom line figure.

So, parent company pays satellite company £15m (i.e it's all still
in-house)........current state of affairs is parent company pays
third party £10m.

So, parent company is £5m out of pocket. Satellite company takes profit of,
what, £2m on £15m turnover? Total company loss £3m.

Norman Wells wrote:

Justin Credible wrote:
"Norman Wells" wrote in
message ...

About £5m.

The £10m you're talking about doesn't stay in the company if the
transport is brought in-house. It goes out of the company in the
cost of additional lorries and drivers and all the rest, along, it
seems with that additional £5m.

You could bring delivering the company's letters in-house too. But
it wouldn't be economic, for exactly the same reasons.

Sorry, I wasn't clear.

The £15m includes the cost of any additional drivers and vehicles,
it's the bottom line figure.

So, parent company pays satellite company £15m (i.e it's all still
in-house)........current state of affairs is parent company pays
third party £10m.

So, parent company is £5m out of pocket. Satellite company takes profit
of, what, £2m on £15m turnover? Total company loss £3m.

The raw cost of the work is surely more or less the same, so if the
in-house company charges £5m more than the external competitor, won't
it make £5m more profit? So if the external company would make £2m
profit on £10m turnover, the in-house one could make £7m on £15m. That
would put the parent company quids in. £2m in in fact.

There could also be other considerations, such as helping to keep the
daughter company afloat if they're going through a rough patch.

Put another way, suppose you had a son who had just set himself up as
a self employed window cleaner. He charges £30 to clean 10 windows.
Your house has 10 windows and you want them cleaned. Your neighbour's
son offers to do it for £20. To whom do you give the job?

Ronald Raygun wrote:
Norman Wells wrote:

Justin Credible wrote:
"Norman Wells" wrote in
message ...

About £5m.

The £10m you're talking about doesn't stay in the company if the
transport is brought in-house. It goes out of the company in the
cost of additional lorries and drivers and all the rest, along, it
seems with that additional £5m.

You could bring delivering the company's letters in-house too. But
it wouldn't be economic, for exactly the same reasons.

Sorry, I wasn't clear.

The £15m includes the cost of any additional drivers and vehicles,
it's the bottom line figure.

So, parent company pays satellite company £15m (i.e it's all still
in-house)........current state of affairs is parent company pays
third party £10m.

So, parent company is £5m out of pocket. Satellite company takes
profit of, what, £2m on £15m turnover? Total company loss £3m.

The raw cost of the work is surely more or less the same

No it isn't. If the outside company is delivering to all the necessary
areas already, it costs them hardly anything to add your business in. Think
about delivering your own mail rather than giving it to the Post Office.

, so if the
in-house company charges £5m more than the external competitor, won't
it make £5m more profit? So if the external company would make £2m
profit on £10m turnover, the in-house one could make £7m on £15m.
That would put the parent company quids in. £2m in in fact.

No, it doesn't work like that.

There could also be other considerations, such as helping to keep the
daughter company afloat if they're going through a rough patch.

There could, if it's worth it, and if the parent company can afford to
subsidise it.

Put another way, suppose you had a son who had just set himself up as
a self employed window cleaner. He charges £30 to clean 10 windows.
Your house has 10 windows and you want them cleaned. Your neighbour's
son offers to do it for £20. To whom do you give the job?

Are you kidding? It goes to the neighbour's son every time.

On Tue, 11 May 2010 18:22:37 +0100, Justin Credible wrote:
Just musing over a present real-life scenario and would appreciate any
thoughts.

Assume a company distributes a product across a given region. It currently
uses an external third party to carry out this task at a cost of, say, £10m
per year.

The company already has a transport arm but bringing the distribution
in-house would cost, say, £15m (the third party can undercut the in-house
operation by virtue of the fact that they already distribute a competitor's
products across the region, i.e they're basically piggy-backing us onto the
back of them).

As it stands, the £10m cost is paid to a third-party and is gone. Whereas,
if the operation was brought in-house, even though the cost is higher, it
stays within the parent company.

What am I missing?

If the third party is already cheaper than your company's transport arm,
wouldn't it be more sensible to sell that arm off to the distribution
company, rather than keep them in-house?

"pete" wrote in message
...

If the third party is already cheaper than your company's transport arm,
wouldn't it be more sensible to sell that arm off to the distribution
company, rather than keep them in-house?

They're only cheaper because they already service all the outlets in the
region that we supply already.

As someone else has pointed out, think Royal Mail............if I want to
send a parcel from Penzance to Aberdeen, it'll cost me a few
quid).........there's no way I could deliver it myself for that price.

But if I was already going to Aberdeen from Penzance, I simply piggyback off
of the existing route.

"Justin Credible" wrote in message
...


"pete" wrote in message
...

If the third party is already cheaper than your company's transport arm,
wouldn't it be more sensible to sell that arm off to the distribution
company, rather than keep them in-house?

They're only cheaper because they already service all the outlets in the
region that we supply already.

I disagree. 3rd party prob cheaper for more reasons than just "going that
way anyway".

It's (presumably) their core business, they'll be doing efficient
back-loads, utilising hubs, switching drivers' costs on and off at will,
economies of scale on vehicle purchase & disposal plus maintenance and fuel,
real-time vehicle scheduling & tracking, minimum VOR time, etc etc.

The big retailers, for instance, don't subcontract their transport for fun.
Despite the livery, their fleets are mostly 3rd party ops.

--
Martin

"Martin" wrote in message
...

I disagree. 3rd party prob cheaper for more reasons than just "going that
way anyway".

It's (presumably) their core business, they'll be doing efficient
back-loads, utilising hubs, switching drivers' costs on and off at will,
economies of scale on vehicle purchase & disposal plus maintenance and
fuel, real-time vehicle scheduling & tracking, minimum VOR time, etc etc.

The big retailers, for instance, don't subcontract their transport for
fun. Despite the livery, their fleets are mostly 3rd party ops.


I'd like to think our transport arm were doing all that as well!

For example, I know the Fleet Manager has a weekly meeting with a guy from
the company that sells us fuel (we have our own pumps) and they negotiate
how many litres at £x (Jesus, it used to be x pence) they'll supply.