Rate-cutting or Higher Efficiency
Page 80
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Often an Operator Will Complain That a Competitor. is Quoting Uneconomic Charges Whereas There is Actually a Difference Between the Ways in Which Each Haulier Runs His Business
0 subject is probably discussed among transport operators in more heated terms than rate-cutting, or, to be more precise, alleged examples of this evil. Allegations of rate-cutting have become more peisistent in recent months following a slowing down of production in some branches of industry with a resulting decline in available traffic.
The purpose of the series of articles on costing which has appeared in The Commercial Motor over many years has been to impress on both operators and would-be operators the need to acquaint themselves with the principles of commercial-vehicle costing. Only thus would they be able to estimate with reasonable accuracy their own costs and so know whether any charge submitted to a customer would show a profit or a loss.
Whether or not rate-cutting is done unwittingly, any advantage the operator gains is inevitably short-lived. Unfortunately for his fellow hauliers, the trouble such a policy causes is not limited to, himself.
Before accusations of rate-cutting are made, however, it is most important that it should be clearly understood what is implied. In a limited sense, it might be claimed that until a schedule of rates was both accepted and generally acted upon there was no standard by which it could be determined whether a rate had, in fact, been cut. Even, however, where no accepted rate schedule existed it could be said, in more general terms, that rates were being cut if they did not allow for a reasonable margin of profit, or, worse still, were below the actual cost of operation.
Thereafter it would be more prudent to ascertain all the facts before complaining that this or that competitor was cutting rates. For example, two hauliers might tender for a particular contract. The first may carefully estimate his probable cost and submit his quotation after allowing for a reasonable profit margin. Subsequently, having lost the contract, he may learn that his competitor did the work at a lower rate. To those not conversant with the principles underlying commercial-vehicle costing, it might be considered that this was a clear case of rate-cutting, as. the second haulier must have quoted a rate lower than what would provide an adequate return to the first.
In other words,' the two terms "lower rate" and " ratecutting " would appear to the uninitiated to be synonymous. Such a conclusion, however, could be totally erroneous. Far from operating at a loss, it could even be that the haulier who got the job in this instance might have allowed a higher margin of profit than his unsuccessful competitor. There could be several reasons for this, falling roughly into two groups centring on either the vehicle or load. For example, a wide knowledge of the traffic carried and its particular "loadability " factor or, alternatively, the availability of mechanical means for loading, might well mean the difference between operating at a profit or 'a loss.
Relative Factors
Two factors relative to the vehicle employed on any particular job are of great importance to the total operating cost, and ultimately to the charge made to the customer. Briefly, they are suitability and utilization. In the many inquiries received from operators these two important items are either overlooked or considered to be of secondary importance. Opinions are requested as to whether or not this or that rate is reasonable without any mention being made as to the size of vehicle which it is proposed to operate, or the 'mileage it is expected will be averaged.
I will now take examples from the new 43rd edition of -" ' The Commercial Motor' Tables of Operating Costs" to emphasize the significance of one of these factors and the extent to which it affects costs and charges.
Regarding the suitability of the vehicle, consideration will be limited here to alternative carrying capacities, although obviously there are other factors, such as alternative petrol or oil engines and rigid or articulated construction.
Dealing first with 3-ton oilers, a platform version is estimated 846 to cost £1,310 with an unladen weight of 2 tons 8 cwt. Annual licence duty would therefore cost 130 or 12s. per week. Drivers' wages, in accordance with R.H.64 Grade I, would amount to £8 19s. per week. This includes an allowance for contributions to annual insurance and employers' voluntary liability insurance and two weeks' holiday with pay. Rent and rates are assessed at 9s. 6d. per week, whilst vehicle insurance at 10s. per week is based on an annual premium of £24.
Interest, calculated at 3 per cent. on the initial outlay, adds a further 15s. 7d. per week to the standing cost, which thus totals £11 6s. Id.
a The first item of running cost, namely fuel, is calculated to
cost 2.09d. per mile. This is based on a consumption of 22 m.p.g. and a cost of 3s. 10d. per gallon for oil fuel, Lubricants are expected to add a further 0.23d. per mile. With a set of tyres costing around £110, tyre costs per mile are estimated at 0.96d.
Residual Value
The remaining two items of running cost, maintenance and depreciation, will be calculated on the assumption that the vehicle operates 400 miles per week. Maintenance is therefore reckoned at 1.45d. per mile and depreciation at 2.02d. This latter figure is obtained by deducting the cost of a set of tyres from the initial vehicle price together with an estimated residual value of 124per cent., leaving a balance to be depreciated of £1,050. Assuming a vehicle life of 125,000 miles, a depreciation cost per mile of 2.02d. is thus obtained.
The five items of running cost therefore total 6.75d. for this 3-tonner which, when added to the standing costs, give a total operating cost of 13.53d, per mile when 400 miles per week are operated. Making allowance for overhead or establishment costs and a profit margin of 20 per cent., a minimum charge of Is. 7d. per mile is recommended.
Making similar calculations for a 5-ton platform oiler, the initial top price of the vehicle will now be around £1,530 and the unladen weight in the 21-3-ton tax category. Annual licence duty payable therefore now becomes £35, the equivalent of 14s. per week. As the carrying capacity of 5 tons is still just within the same wage category, the weekly cost allocated to wages remains the same at £8 19s. A slight nominal increase is allowed for rent and rates at 10s. 6d per week.
Because of an increase in both Carrying capacity and initial cost price, the annual vehicle insurance premium is now £42, giving a weekly insurance cost of 13s. 7d. Interest at the same rate as before now becomes 18s. 3d. per week. The total for these five items of standing cost is fl 1 15s. 4d.
With an estimated fuel-consumption rate of 18 m.p.g. and oil fuel purchased in bulk at 3s. 10d. per gallon, fuel costs per week will amount to 2.56d. with lubricants adding a further 0.24d. With a set of tyres now costing £160, tyre cost per mile is raised to 1.41d. compared with the smaller vehicle. Maintenance is likewise assessed a little higher at 1.94d.
Depreciation is calculated on the same method as before and in this instance a balance of approximately £1,200 has been written off, resulting in a depreciation cost per mile of 2.30d. Running costs thus total 8.45d. per mile, again assuming 400 miles per week are operated.
With the same weekly mileage applying, the addition of the standing and running costs gives a total operating cost per mile of /5,51d. Including overhead or establishment costs and profit margin, the minimum recommended charge would be Is. 90.