Keeping work in-house or contracting it out?

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?

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.

No, it doesn't work like that.

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

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

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.

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.

Humph. "... like to think..." or know for a fact? If your example numbers have the right number of noughts on the end, and assuming delivery cost (just for one region) is just a few percent of t/o, I assume you're talking of a c.£1bn+ t/o company.

That being the case, I assume you / they have fully detailed mgt accounts each month and that's where I'd be looking first.

Then ask questions like why only one fuel supplier? How often do they get comparative quotes?

How old is your fleet? Is the depreciation being applied realistic? Is maintenance disproportionate to age of vehicles?

How productive and well utilised is your in-house (presumably?) garage operation?

How does drivers' pay and overnight etc allowances compare with the market?

Is the cost per mile / per delivery / per unit load etc split accurately between regions, or are you comparing a local region 3rd party price with your own UK-wide average cost?

Does your in-house transport cost include stuff the 3rd party excludes? Eg vehicle inactivity during loading?

Is the finance cost of your fleet competitive (eg best available in the open market) or in internal rate which the FD requires you to charge? (Or maybe you lease?).

Does 3rd party quote include for using your livery? Uniformed drivers?

If your drivers unload at customers, will 3rd party drivers do likewise?

Is 3rd party offering to use similar vehicles to yours (tautliners, artics, small rigids with tail lift, etc)?

You get the idea... :-) The reason for such different costs is there somewhere - you just need to find it !!

HTH - and please don't say it's an essay question :-(