By Jonathan V.L. Kiser and Chace Anderson

I've missed more than 9,000 shots in my career. I've lost almost 300 games. Twenty-six times, I've been trusted to take the game winning shot and missed. I've failed over and over and over again in my life. And that is why I succeed. —Michael Jordan

During the summer of 2000, the Metropolitan Government of Nashville and Davidson County (Metro), TN, set out to establish a clear understanding of all program costs associated with the Division of Waste Managementís (DWM) operations. DWM managers had been unable to determine their bottom-line operating budget because of broad tracking practices that were inaccurate and not capable of identifying specific program costs. To solve this dilemma, a unique, interactive full-cost management (FCM) model was created.

This article explains the process by which DWM managers became empowered, through FCM, to determine the bottom-line costs associated with their programs. In doing so, daily DWM operations have improved dramatically, and waste diversion/recycling efforts have been maximized in a creative fashion.

What Is Full-Cost Management?

Essentially, FCM is understanding the game. It is not accounting. It is not money management. FCM is about linking the activities that make up an operation and the two primary money elements: costs and revenues. If the manager does not understand the costs/revenues side of the operational game, then he will never knowingly set up a "winning shot." That manager simply relies on chance.

Every supervisor of crews and equipment must be a full-cost manager in order to win the game. Michael Jordan never won a championship single-handedly. He needed feeders, blockers, and shooters. The quote above deftly shows that he tracked results. An MSW operation is no different. Supervisors must be trained and entrusted with the ability to understand budgets, track costs, evaluate performance, and make decisions based on FCM. Supervisors can succeed only if they are allowed to fail.

Fundamentally FCM is a tool to change the psychology of the players from being benchwarmers to being in the starting lineup. A supervisor who can tell management the cost associated with their waste management operation(s), and how to improve performance, is valued and integrated.

A New Mayor in Town

Metroís Mayor Bill Purcell won the office in 1999 and set out to restructure many parts of Metro using FCM principles. In the summer of 2000 he targeted waste management and asked that a plan be put together. "The analyses that were used as the basis for this plan were financial, operational, and systemic audits," explains David Manning, director of Metroís finance department and former commissioner for finance and administration for the State of Tennessee. "Together these audits unified a vision of what existed in Nashville and what pragmatic options for the future could be implemented." He adds, "These audits also formed a program tracking strategy that could be used on an ongoing basis by Metro staff."

The plan took six months of long days and longer weeks before it won the acceptance of the mayor and then another year for Nashvilleís 40-member council to concur. A key element was the FCM analysis. This supported the building of an efficient operations infrastructure, including recycling programs to maximize diversion. Nashville would be "clean and green."

The Old Way

Prior to the arrival of FCM, the DWM had a loyal work force of approximately 90 employees. Through a combination of contracts and in-house crews, the division was responsible for collecting trash from 130,000 residences, recyclables from 19,000 homes, solid waste from 2,300 Dumpsters, commercial trash from the downtown area, and bulk and metal goods from 180,000 homes. Further, the DWM operated 12 recycling drop-off areas and two convenience/recycling centers and a household hazardous waste (HHW) facility; oversaw a landfill gas collection and power generation system; stewarded the closing and monitoring of landfills; and operated a mulch yard, a tire collection program, and the disposal of its MSW at a government-sponsored waste-to-energy (WTE) facility run by Nashville Thermal Transfer Corporation.

"None of the division employees had seen a budget or been part of the budget process," says Jack Tucker, DWM operations manager. "No one knew the cost of fuel, the cost of operating their trucks, the cost per ton for disposal, or the cost per house for collection."

This situation existed not because there was a lack of talent within the division. In fact, employees, such as Jack Tucker, strove to put their arms around the costs and to track production. But they ran up against obsolete and fragmented databases, bookkeeping procedures that melded the divisionís budget into four piles of money with little relation to actual activities.

Also, upper management culture operated under the ethos that all things must be done the way they had always been done. Change to this mindset meant the unknown, not the planned. Therefore, it had been feared and avoided. Purcell and Manning moved to shine the spotlight on the old manner in which budget and finance had been conducted. In doing this, they opened and directed the culture toward what Tucker had been advocating. The psychology was changing.

A Tattered Operating System

Operationally the division had 130 pieces of old and battered equipment. Trucks that were some 26 years old still were cranked up to perform daily work duties. No capital replacement plan existed for the DWM. No understanding of the cost to repair these vehicles existed. Supervisors found themselves having to reason the ridiculous: If it were a rainy and overcast day, then they could not send out truck 08lC27 because its windshield wipers and headlights would not work simultaneously. Since it is often rainy and overcast in Nashville, this was too often a problem!

On the face of it, Nashvilleís MSW disposal mechanism appeared to be a good deal for the taxpayers. The gate rate at Thermal was $24/ton. Thermal burned the trash and produced and distributed steam and chilled water to 39 downtown buildings. When asked what the cost per ton for disposal was, the answer was the gate rate. Not included in the gate rate were the following types of expenses: (1) about $25/ton to haul and process 88,000 tons of Thermal ash into a gravel substitute, (2) a fly-ash cell operation, (3) postclosure landfill care, (4) scale-house operations, and (5) the annual Metro fee that Thermal received to balance its books and meet its bond debt covenants.

Further, there were operational problems associated with Thermal. "The facility was constructed with boilers to handle approximately 1,000 tons per day," notes Don Castro, vice president of HDR Engineering Inc., and yet, "Metro and private trash haulers combined were only supplying the plant with approximately 650 tons a day." He adds, "The plant could not keep up with even that small flow of waste, and trash haulers would frequently wait in line for hours to dump because one or two of the plantís three boilers, or two of its three cranes, would be down with mechanical problems." Thermal had a plant availability rating of just 63%, compared with the modern industry average exceeding 90%. The result was that MSW regularly had to be diverted to a transfer facility at an additional cost.

The Analysis

In response to these and other concerns about DWM operations, Metro organized a team of national experts to determine what improvements could be made. Under an existing contract with Gresham Smith and Partners in Nashville, a team led by Gershman, Brickner & Bratton Inc. (GBB) of Fairfax, VA, was formed. Harvey Gershman led the consultantís investigation of the WTE facility. HDR Engineering of Tampa, FL, came onboard to study the mechanics of the plant. Gresham Smith and Partners examined the utility supply lines and surveyed the existing heating and cooling customers.

In addition, GBBís Frank Bernheisel led a team that helped perform the financial and operational audits of the DWM. Bernheisel explains, "The projectís resulting management tool was based on a unique model derived from workbooks produced by the United States Environmental Protection Agency/Government Finance Officers Association and the Texas Natural Resource Conservation Commission. It was tailored to address the DWMís specific operational needs."

Creating the FCM Model

In building the FCM model, the primary objective was to establish a baseline tracking of all DWM program costs, revenues, and material quantities. The GBB model included worksheets with the necessary data categories, calculations, and forecasts to allocate DWM data into separate activities or cost centers. Table 1 shows four of the worksheets used to build the DWMís FCM model.

With the preliminary structure in place, GBB then conducted interviews and field visits to Nashville to collect data. Extensive follow-up was necessary to complete this process. The end result was the identification of 29 DWM activities or cost centers (a.k.a. business units). As shown in Table 2, which depicts the costs that centers used to construct the DWMís fiscal year 2002 budget, these business units were organized within five more general program categories.

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This restructuring and broadening of existing DWM program categories was undertaken to better reflect actual operations. It was an interactive process that shed light on operational details while new business units were being built. Significantly, the new categories replaced an existing system, which lumped division expenses into four broad operational categories. Under the old system, tracking true program costs virtually was impossible.

For each of the DWM cost centers, total expenses, revenues, and material uantities were defined in separate tables. The following specific categories were included:

• Employee Wages and Benefitsóincluding overtime, out-of-class pay, longevity, sick leave, and vacation
• Vehicle Expensesóincluding fuel and maintenance
• Debt Interestóon vehicles and waste management site development
• Capital Depreciationóon buildings, waste management vehicles, and equipment
• Noncapital Direct Costsóincluding contract services, communications, insurance, supplies, and utilities
• Indirect Expensesódetermined as 55.63% of regular wages, longevity, overtime, and out-of-class
• Revenuesófrom tipping fees, material sales, and landfill gas sales
• Material Quantities (Tonnage)óbased on data extrapolation in most cases since weight data were lacking

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The summary output of the FCM model was an overview table reflecting a rollup of cost center operating results, as shown in Table 3.

Data Collection Hurdles

In order to complete the DWMís FCM mission, it was necessary to overcome many hurdles. These related to misperceptions about the FCM process, poor Metro management practices, ineffective software systems, inaccurate tracking techniques, and more.

While most participating Metro officials cooperated by meeting with GBB and provided the requested data, some put up direct resistance. However, Purcellís leadership and Manningís insistence made it possible to overcome the trepidation some felt about disclosing data and unifying it into a central source.

A specific hurdle example involved the diesel fuel consumption tracking system used by Metroís motor pool. This system did not provide accurate data on an individual vehicle basis. This was because it allowed workers to share the pump authorization cards, resulting in multiple fuelings reported to a single truck. The FCM solution was to aggregate the fuel consumption for all DWM vehicles and reallocate the expense to business units on a prorated, per-vehicle basis.

Similar problems were encountered with Metroís fleet management software used to track other DWM vehicle costs. The software initially had not been implemented properly, was poorly administrated, and was not trusted to provide solid information. For example, it was not linked to the fuel system, which compounded that problem. Appropriate data extrapolation techniques were used to solve this challenge.

Tracking material tonnage on a business unit basis also was difficult since actual weight data were not available for most DWM programs. During the initial data collection effort, the audit relied on verbal communication with program managers and data extrapolation to derive the best tonnage estimates. GBB subsequently developed for the DWM a materials and cost-tracking database known as MatTrack. Kevin Callen, a GBB principal associate, explains, "MatTrack consolidates tonnage data from all sources [for example, scale tickets, daily logs, manifests, estimates] into one electronic location." Callen adds, "It has enabled DWM managers to readily print out performance reports not only relating to material tonnage but for program costs and revenues as well."

Accurately tracking revenues generated was another hurdle because Metroís general ledger accounting system had no way to allocate this back to individual business units. Revenue generated by DWM programs was directed to Metroís general fund, not back to the DWM budget. GBB worked around this hurdle by manually accounting for business unit revenue in the FCM model.

Another notable obstacle was making it clear in the minds of key Metro personnel that the FCM effort was not going to replace the existing general ledger system but actually was a management tool to help improve DWM operations. Herbert Majors, cost accounting manager with Metroís Office of Management and Budget, points out, "Once this was understood, a concerted effort was made to modify the general ledger accounting codes to closely track the line items established in the FCM model." Accomplishing this demanded regular interfacing with strategic personnel within the Departments of Public Works, Finance, Information Systems, and others; monthly progress meetings; completing separate revenue, tonnage, and other analyses; and incorporating the FCM model principles into the DWMís budget process (i.e., for fiscal years 2001 through 2003).

FCM Model Results

The FCM effort resulted in many critical findings that the DWM subsequently has been able to address. The direct result has been improved operations and an ongoing drive toward excellence. Key finding highlights from the initial FCM assessment include:

• Metroís cost structure did not reflect DWM operations. For example, vehicle maintenance labor was being billed at $20/hour for general ledger accounting purposes, instead of the real cost of $107/hour.
• The DWM was short of personnel and was using overtime and out-of-class assignments to make up the shortfall. Overtime was $377,000 in FY 2000, averaging 22% of staff payment.
• The DWM vehicle fleet was old and needed upgrading. Vehicle spares were at 100%, compared with the industry standard of 20-25%.
• The DWM was carrying unused and obsolete equipment.
• One rearloader maintenance cost for the year 2000 was higher than its replacement cost. Eight other vehicles were at 80% of replacement or higher.
• Brush collection was not keeping up with the rate at which materials were being set out (i.e., every block reviewed had brush piles).

Improving DWM Operations

Primary goals related to using FCM in Nashville included shedding light on the actual costs associated with each DWM cost center, identifying ways to improve DWM operations through FCM principles, and training DWM managers to assume program management and budget responsibilities. Armed with FCM, DWM managers have been able to initiate program changes that, among other results, have expanded recycling efforts and reduced daily operating expenses. Select examples include the following:

• FCM efforts brought to light inefficiencies associated with the DWMís brush collection program. The DWM staff did time studies on collection and measured production based on cost per ton of materials collected. Within one year, the performance increased drastically. The number of tons collected rose by 54%, from 12,464 to 19,115, while the cost per ton decreased by 34%.
• FCM documented that the DWM-managed brush processing operation was too expensive and unable to keep up with the flow of materials. The solution was privatization, which reduced the gross operating costs from $74 to $22 per ton. Operations have improved as well, with brush quantities processed increasing from 6,000 to 29,000 tpy.
• FCM facilitated the implementation of Metroís residential curbside collection program, providing key performance measures. Specifically, the cost for curbside recyclables collection is $0.95 per household per stop, the set-out rate is 49%, and the set-out size is 43 lb. FCM also enabled DWM managers to forecast accurately program costs before implementation.
• FCM dramatically impacted Metroís HHW program. By carefully analyzing facility costs, alternative recycling methods for oil, antifreeze, and batteries were implemented, and paints, brake fluid, and other materials were reused. New training techniques were implemented to reduce the burden on the HHW disposal company. New and less expensive packing material sources also were found. Metro has expanded its operations from 48 hours a year to 3,298 hours a year. In the first year of these program changes, the operating budget was reduced from $293,000 to $156,000. Also, the number of customers served increased from 1,500 to 5,200. During FY 2003, a full-time HHW technician has been hired to serve an estimated 8,000 customers at a total cost of $222,479. FCM helped decrease the cost per customer from $184 to $28!
• FCM highlighted the costs and tons associated with the DWMís downtown business trash collection program, which has led to increased recycling efforts. The operational audit identified significant old corrugated cardboard (OCC) in the waste and the availability of two dual-packer trucks. DWM managers utilized these packers for the six-nights-a-week downtown collection, placing OCC in one side of a packer and trash in the other. The recycled OCC avoids the $26.60/ ton disposal fee, and generates $5/ton in revenue. Further, the amount of OCC diverted has increased from half a ton a week to 5 tons per week. DWM officials now are examining whether to expand this program to collect all paper types for recycling.
• FCM identified the costs associated with Nashvilleís two recycling/convenience centers. In FY 2000, these centers cost $991,436 to operate. The primary costs were tied to disposal, hauling, utilities, and personnel. In FY 2002, while the operating cost dropped to $736,925, the days of operation increased from five to seven days a week and the number of customers increased from 42,133 to 88,086. By analyzing cost variables, management diverted more material to recycling thereby diminishing disposal expense. In addition, contracted rolloff hauling was replaced with in-house hauling and material was packed into the rolloffs more efficiently. All of these efforts, coupled with the increased use of the centers, lowered the cost per customer from $23.53 to $8.37.

Bottom Line

FCM has brought clarity to the issues that Metro policy-makers decide on and to the daily operational decisions faced by DWM managers. This clarity tells a story that the public can readily see and understand, which makes explaining a programís reason for being, and its benefit to the community, much easier.

According to Manning, "The FCM effort completed within Metroís DWM has completely reengineered the divisionís budgeting process. It has empowered DWM managers to be accountable for their own programs within the larger context of Nashvilleís fiscal budget and, ultimately, to the people of Nashville [whom] these operations serve." Program changes resulting from FCM have led to expanded recycling initiatives and program savings. Manning adds, "FCM is about managing for results. We are delighted with the progress made thus far!"

Jonathan V.L. Kiser is senior associate with Gershman, Brickner & Bratton Inc. in Harrisonburg, VA. Chace Anderson is director of the Division of Waste Management, Metropolitan Government of Nashville and Davidson County, TN.

MSW - September/October 2003