Flexibility or Rigidity in Rate Schedules?
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An Argument ,with Hauliers Who were Worried About Rates: Inflexible Standards Impracticable
/HAD the luck. tho other day, to he invited to sit in with a small party of old friends of mine, all hauliers. and all rather worried about rates. Curiously enough. it was an owner-drier who set the ball rolling; curious because the general belief is that it is the owner-driver, or the families of owner-drives. who are responsible for much of the rate cutting which is again becoming rife.
At one time, he said, his experience with tyres on a 6-ton lorry engaged on local work was that he was likely to obtain about 20.000 miles from a set. However, a change of conditions arose, and he 'diverted his attention to long-distance transport. He has not yet worn out the existing set of tyres on this class of work, and it appears likely that he will run upwards of 40,000 miles before a change becomes necessary.
" How," he asked. " is that difference going to he taken into consideration in the stabilization of rates? "
Difference Exaggerated
" My first reaction to the question is that the difference in cost of operation as regards one item does not really affect the question of stabilized rates to anything like the extent as might be thought," 1 replied, " But,". he objected. "you have always insisted that the operating cost of the vehicle is the first essential in building up a rates structure."
" Quite. But I will show you. first, that this apparent difference in tyre cost does not make much difference to a stabilized rate, and, secondly; that it is almost certainto be offset by some other item of expense which will tend to equalize the basis of rates calculation.
" Let me compare the figures on the basis of current operating costs. First of all, what was your weekly mileage during the time when you were confining your attention to local haulage?"
" A good average figure would be 300."
" In that case, the basic figures for operating cost calculations are £12 per week for standing charges and 10d. per mile running costs, or £12 10s. per 300 miles a week. In those figures is provision for tyre costs on the assumption that a set costs £150. so that the cost per mile for tyres is I.80d. The total net cost is £24 -10s. a week. To provide for establishment costs and profit. I add nearly a third of the total cost per week, or £8. so that the weekly revenue is £32 10s." .
'• Now that is something that worries me," interrupted my friend. "1 will spend on that item only half the average amount because of the change in the work my vehicle is doing, that is only 0.90d. per mile instead of 1.80d. How
828 ant l going to take care of that difference in preparing my schedule of rates? "
"Right, we'll deal with that right away," l interrupted. " How many miles a week are you running now?
" I should think sdmcwhere between 700 and 750."
"Very good. I'll take the figure to be 720. Now if I take the figure of 10d. per mile, then the running cost per week-720 times 10d. is £30. Add £12 per week for standing charges and the total is £42. A third of that. or £14, will cover establishment costs and profit. It is clear that your minimum revenue must be £56.
"Now. suppose you are correct in your estimate of tyre mileage. so that the tyre cost must be a half, or 0.9d., of the 1.8d. per mile applying when the vehicle was on local work. That will bring s our running cost per mile down to 9.Id., or £27 6s. per week. Your standing charges will remain the same as before, at £12 per week, and the total operating cost, £39 bs. Add, again, a third of that total to provide for establishment costs and profit, and you get the figure of £13 2s. The minimum revenue musttherefore be £52 Ks."
In other words." my friend remarked.." I am allowing myself only £13 2s., against £14, per week for gross profit and, therefore, it seems to me, I am penalizing myself for getting better service from the tyres."
1 had not overlooked that point," I said, "but I am glad you brought it up. I will come back to it in a minute. Meantime, I will, proceed on the orthodox lines, "If you add this £13 2s. to the £39 Gs. total operating cost you get the minimum revenue you ought to earn, taking into consideration the diminished running costs resulting from the longer life you are getting from the tyres.
Extra Costs
" Now, the difference between the two figures for the minimum weekly revenue is 18s. You are well aware, I know, that long-distance haulage brings in its train extra expenses, most of them of a nature not encountered by the man whose vehicles never go more than 50 miles from the home' base. One of these is lodging allowance for the driver when he sleeps away from home, and this alone may, in some weeks, wipe out that I8s. three times over.
" In addition, there arc contingencies such as trunk telephone calls, maintenance costs arising out of defects which have to be remedied away from home, and other items which, unfortunately, are apt to be forgotten."
"I couldn't agree with you more:' he commented.
" Now I will take up the point you raised: that a man ought not to be condemned to earn less profit in a week merely because his operating expenses. are favourable. To show what I have in mind. I will add the original £14 as gross profit. His minimum revenue will have to be put down as £52 13s.
"My criticism of this query is that I do not believe that any rates schedule which results from constant recurrences such as this will ever bring success if it is to 'be rigidly proposed and as rigidly applied. There will have to be allowances for local conditions and, in any event, any schedules of rates relating to long-distance haulage will have to be calculated on a basis differing from one concerning local operation; and those differences are likely to be considerable."
." I don't quite like that idea." he objected. "if you are going to take away that rigidity and allow for a certain, if small, measure of flexibility, you are going to leave the door wide open to rate cutting and we shall be as badly off as ever we have been in the past. We shall foster schemes of cut rates that will be the more baffling because of this very principle you are suggesting."
I did not agree. "1 think there will have to be a margin, and 1 think it will be something like the margin which is allowed in a machine shop in reference to the finished sizes of parts. There will be a plus or minus over and under the fixed rate to make adequate allowance for special conditions."
"Flexibility a Mistake "
"The problem is recurrent," said my friend. "We have always had it with us, and I fear we always shall have it. but I am still of the opinion that to make the schedules flexible will be a mistake."
" Well.I said, and I hoped my reactions to this defeatist attitude were not noticed, "we seem to have come to A deadlock. I am for flexibility, you for rigidity. That is now the problem, and as it is based on a matter of principle we are likely to go a long way before we come to agreement. I expect we shall have to agree to differ. You think that flexibility will encourage—even, perhaps, facilitate— rate cutting. I think that rigidity will eventually destroy the structure: that it will cease to be practicable and will quickly fall out of use."
" But you are going against your own recommendations." he protested. "You say that a minimum rate must be based on three things: operating costs, establishment costs and profit. and that minimum rates must not be cut."
" Minimum.'" I echoed, " minimum ' is the operative word. Fix a minimum rate according to my recommendations and add to it suflicient to allow for contingencies normally to be expected. Let the sum of those figures be your standard rate, which you will then know includes a small margin for bargaining, and you are on the way to framing a schedule.
—But S.T.R. Disagrees "You must not forget the factor of competition,I continued. "Fair economic competition is the life blood of any industry. It is important that there must be means for meeting competition, and one of the means, I believe, will have to be a certain degree of flexibility in the stabilized rates."
don't agree with you at all," he said, "The proper method is to have rigidity in the rates structure and to provide for competition by the service rendered. Under such conditions, the haulier who gives the best service will get the business."
" You'll have to be very careful to define service.I said. "otherwise there will arise not one, but several kinds of service, outside the schedule. I might add, which, in their application, might be more uneconomic than some of the 'cut rates of which so many of you chaps complain."
" What might that kind of service be?" He was puzzled.
"Take, for instance, the delivery of coal to houses, or feeding stuffs to farms. Both commodities are usually delivered in sacks and on ground level. It is quite likely that in his zeal to provide service a haulier will carry the coal up a flight of stairs, or feeding stuffs up a ladder to a loft, and make no extra charge. That is the kind of uneconomic service I have in mind."
"That wouldn't cost much."
" Wouldn't it? Take the case of a man delivering five tons of feeding stuffs to a farm and having to hump every sack up a steep ladder into a loft, He will take possibly an hour longer to unload than if he were dumping the sacks on the ground. And, bear in mind that as part of his equipment this haulier will have a sack-loader for reducing his loading and unloading time.
"He will have been put to expense in purchasing that loader only to have its value frittered away because he is anxious to give just that little hit of extra service. That extra hour will cost the haulier anything up to eight shillings, and in the case of a 5-tonner that is equivalent to Is_ 9d. per ton."
"Hut, surely, provision for extra charges for unusual difficulties in loading and unloading will 'have. to be made in the rates schedules? "
Overburdened "It will.be, hut only up to a point. You cannot provide for every small variation in conditions, for if you were to do so you would need a whole library of books to contain your schedules. No one would ever read or understand them, and no haulier would ever adhere to them. He would have every excuse for not working to them, and that is what I mean when I say that if you try to make your structure completely rigid it will crack and collapse."
Then came the dreaded question. "What do you suggest, then?"
" I'm not quite sure," I was obliged to admit. " It is difficult to tie it down, and I can only say: a standard rate, taking into consideration the three essentials, vehicle operating costs, establishment costs-and profit, plus a small margin to allow for small defections in order to cover yourself when special conditions arise, conditions which can hardly justify an extra charge over and above the standard rate.
"This margin should.be regarded as an insurance against these possible occurrences which may arise in the case of only one in 10 loads. Your own experience is the only guide."
My friend was still not convinced. "With a flexible rates structure we shall always remain as we are." he said. "Give a man freedom to depart from the standard and he will soon be doing it all the time, making his own rules, as 1 might put it, as the game proceeds,"
No Experience "You have no real ground for your objection to flexibility. Or, at least, you have no• experience to back you up in your lack of faith. There is no standard of rates, at least not a country-wide one, and so long as we are without that, so long will rate-cutting be rife," I said.
" Here is a familiar story relating to a type of traffic for which there is no standard rate, although attempts are being made to compile one. I was told that the traffic in a certain commodity used to be £1 4s. for a given lead. That was six or seven years ago. Now the rate is 8s. How did that level come into being? I will tell you.
" Initially, £1 4s. was the standard rate. An astute buyer of transport got it reduced to 2s. When another buyer came along the haulier overlooked the fact that the standard rate was 1 4s. and quoted 2s. This second buyer, being even more astute than the first, was able to bring the price down another 4s., making the rate 18s. That then became the standard rate, but not for long, and ultimately, by means of a series of cumulative cuts, the rate eventually
arrived at was 8s.S.T.R.