Hot-Mix Asphalt Producers Monitor Profitability Through Benchmarking

Scott Humrickhouse and Carol Edwards / December 28, 2000

Senior management and plant operators can manage improvement targets in cost to produce per ton. Benchmarking is a powerful management tool that enables hot-mix asphalt producers to monitor and compare critical factors that impact the profitability of their operation. It's a mechanism that allows senior management and plant operators to establish improvement targets in cost to produce per ton.

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.

About the Author

Further information about FMI's performance benchmarking report for the asphalt producer can be obtained by contacting Carol Edwards at (919) 787-8400.

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