Additionally, the various measurement criteria maintained in a benchmarking database provide an opportunity to evaluate cost control performance relative to those who do it the best in the business--the lowest cost producers. Data compiled by FMI Corporation, management consultants to the construction industry, in a performance benchmarking database, permits extensive analysis of criteria that impacts total production cost per ton produced. The criteria includes:
-- Type of fuel used (natural gas, liquid propane, oil, coal, etc.);
-- Ownership of quarry or sand and gravel pit in which the plant is located;
-- Percentage of raw material acquired from outside suppliers (if the asphalt plant operator does not own his aggregate sources);
--Tons produced (per plant);
-- Percentage of virgin raw materials used for plant operations vs. percentage of recycled (RAP, glass, shingles, etc.) materials used.
Database analysis
An analysis of this database reveals that 33% of the hot-mix asphalt plants are 30 years old (or older) and another 26% are 21 to 30 years old. Additionally, only 13% are less than 5 years old. FMI concluded from this information that the majority of operators in this business haven't invested heavily in new plants recently. This, the company claimed, is because a high percentage of asphalt plant owners around the country still operate relatively small family-owned businesses and typically reinvest a limited amount of hard-earned profits into new equipment, preferring to spend what dollars are available on plant maintenance and custom modifications to maintain plant throughput.
Further analysis of plant information contained in the database revealed that 60% of the plants use oil as the fuel for plant operations and 32% use natural gas. FMI has said they have seen little significant change in this composition or mix over the last 3 and 4 years. However, they claim oil industry experts believe oil prices will escalate substantially over the next 12 and 24 months, a rise that could result in a slight to moderate near-term shift of fuel types used by plant operators. Sixty-four percent of the plants in the database are batch and 36% are drum. This reflects the national composition of the marketplace. Most producers still maintain smaller fixed operations and have little need for the more significant throughput capabilities provided by drum plants. Drum plants typically provide advantages over batch plants if an operation primarily emphasizes or targets medium-to-large highway jobs for the bulk of its hot-mix asphalt use and minimizes or downplays the importance of supplying a large percentage of hot mix to "outside" or "third-party" customers.
Third-party buyers of hot-mix asphalt often prefer to purchase hot-mix where they don't get slighted from a service perspective. Batch plants provide greater flexibility relative to delivering different mixes than do drum plants. Consequently, operators, who need to maximize the full sales potential of selling mix to third parties and using mix for their own laydown operations, will likely have batch and not drum plants.
A detailed breakout of the specific costs to produce a ton of hot-mix is also available in this database. Key cost factors that can be analyzed by the hot-mix producer to monitor and compare with lowest cost producers include:
-- Asphaltic cement (liquid asphalt) cost per ton;
-- Aggregates cost per ton;
-- Maintenance and repair cost per ton;
-- Drying cost per ton;
-- Labor cost per ton;
-- Depreciation cost per ton;
-- Land/property/site/lease cost per ton;
-- Quality assurance/testing cost per ton;
-- Power/electricity cost per ton; and
-- Other equipment (bins, loaders, etc.) cost per ton.
Regarding total production cost per ton produced, all producers in the FMI database averaged $17.82 to produce a ton of hot-mix asphalt in 1995. This average compares to a total cost per ton to produce of $16.70 in 1994 and $17.12 in 1993. However, lowest cost producers produced hot-mix asphalt at an average of $14.70/ton in 1995. This represents a 10.4% jump from $13.32 per ton in 1994.
Cost increase
Why the recent escalation in the total cost to produce a ton of hot-mix asphalt? One significant contributing factor was the increasing price of asphaltic cement (AC). In 1994, the average cost per ton paid for AC by all producers in the database was $5.87. This cost inflated 18% in 1995 to $6.95 per ton. But when the AC cost per ton produced by lowest cost producers was evaluated, FMI found it evident that producers who qualify for this designation pay less for their AC. In 1994, lowest cost producers averaged $5.33 AC cost per ton produced. However, AC cost per ton produced for lowest cost producers only rose 15% in 1995, to $6.11 per ton.
Transportation costs significantly impact the cost of AC. But other factors for the hot-mix producer are timing of purchases, ability to store and inventory products, ability to buy in bulk, and understanding of various AC supply situations not only in the U.S., but internationally as well. Sophisticated lowest cost producers are allocating additional time and resources to monitor and improve these situations, according to FMI.
Some key questions regarding the cost of AC will include: Who are the current liquid suppliers? How do they work to maximize inventory control procedures? Are they sharing the latest trends and developments regarding their short- and medium-term supply situation?
Addressing these and other issues allows the producer to control AC costs to the greatest extent possible. There is a definite correlation between lowest cost producers and those operators who actively manage their AC supply position, according to FMI.
Aggregate cost variable
Another piece of the lowest cost to produce puzzle is the aggregate cost variable. Producers who demonstrate the ability to control aggregate costs per ton maintain a better opportunity to earn the lowest cost producer designation. Average aggregate cost per ton of hot-mix asphalt produced for all plants increased from $5.72 per ton in 1993 to $6.10 per ton in 1995.
However, the aggregate cost per ton for lowest cost producers jumped from $4.05 in 1993 to $4.85 in 1995, a 20% rise. Clearly, proximity to the source of aggregates impacts price paid, but recent results seem to indicate that the differences between aggregate cost per ton of production for all producers and lowest cost producers is shrinking.
Aggregate cost per ton produced varies by region, however. Costs for producers operating in states in the Pacific region range from $4.20 per ton to $4.50 per ton. Aggregate cost per ton produced for Mountain state operators range from $4.50 per ton to $4.75 per ton. Aggregate costs per ton produced in the South Atlantic region have skyrocked from $7.75 in 1993 to $9.75 in 1995, showing that analyzing aggregate cost per ton must be confirmed on a regional basis to validate a comparison.
Centrally controlling aggregate costs is important to maximizing profitability for the hot-mix producer, but FMI found that numerous producers are now evaluating the total supply arrangement (assuming that aggregates are coming from a source outside of the company) and not just the initial price paid per ton for stone or sand and gravel. This would include quality and consistency of materials provided, dependability of the supplier in meeting needs (high or low volume), ease and reliability of supplier personnel in meeting and keeping promises, etc. The total supply relationship often provides a more complete measurement of total aggregate cost per ton produced than just initial price paid for a ton of stone/sand and gravel.
Knowledgeable operators of hot-mix asphalt plants have discovered that valuable insights are available from industry-specific cost benchmarking information. At a minimum, producers can increase understanding of lowest cost producer comparative performance, which could lead to development of strategies to lower overall operating costs.
