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Matters

7th August 1953, Page 56
7th August 1953
Page 56
Page 57
Page 56, 7th August 1953 — Matters
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Which of the following most accurately describes the problem?

Arising,

The Ton-mile, Depreciation, Tyre Costs and the Return-load Bogey are Dealt with in this Article, a Response to Various Contentious Points Raised by Correspondents

IHAVE had a spate of inquiries relating to my previous two articles. All of them are interesting as they indicate hauliers' reactions to my recommendation that they should take cost recording seriously if they are to come through the .welter of rate-cutting which I am sure is going to appear when denationalization shortly comes into operation.

One of these inquirers points out that in planning for the assessments of haulage rates, I have made no reference to the ton-mile as the basis of a costs schedule. He tells me that he has been trying to work a system on that basis but, so far, without any success. I am not surprised at this, as the ton-mile is a tricky factor to deal with.

If he had been a regular reader of these articles, he would have known that I do not regard the ton-mile as a suitable unit for assessing charges. The outstanding objection to the use of the ton-mile, as I have many times written, is that the figure for cost per ton-mile varies so greatly. If it is necessary to get down to a fairly close figure in connection with any quotation, the cost per mile is a much more satisfactory basis for calculation, besides being more accurate.

One thing is important. A.haulier who is preparing his own rates schedule should have a reasonably accurate figure for the weekly mileage of the vehicle which he proposes to use, having in mind the kind of job for which he is quotingand the distance it is likely to cover per week to meet" the requirements of the customer.

Deducting Tyre Cost

Another correspondent writes on the subject of depreciation. There are two points of interest in his letter. He had not hitherto, he states, realized that the cost of a set of tyres should be deducted from the original cost of the vehicle to arrive at the basic figure on which depreciation should be calculated. Now, the deduction of tyre cost is necessary, although this is not always obvious to those who have not .hitherto made any study of the operating cost of commercial vehicles.

I have repeatedly pointed out that depreciation, although one of the most important items of running cost, is not an actual out-of-pocket expenditure; it is not a sum of money which the user must pay in cash per mile the vehicle runs, or for each week, month or year while it is in use. It is a negative expenditure, a loss which is going On A34' continually, inviiibly, and, unfortunately in many cases. unregarded.

In this connection I should like to turn to a lighter aspect of the matter, whilst nevertheless indicating how little this subject is understood by So many operators. The story is true. I happened to be present at a meeting of haulage contractors in the Midlands, and in course of conversations which were going on after the main business of the evening had been concluded, I found myself one of a small party which was discussing, of all things, the cost of operating various types of vehicle. One man was saying that he had set his son up in business by giving him a 5-ton lorry. The question of the licence did not arise, for a B licence had been granted.

"A New Machine"

One of the party, with the matter of costing in mind and having realized that I was present and keenly interested, said to the man: "Well, see that your son gets to know something about costing before he gets into trouble, and especially warn him about depreciation."

"There'll be no need to take depreciation into account," retorted the man, "I'm giving him a new machine just so that he won't have to bother about that." Obviously he was under a serious misapprehension.

There must be ample provision for depreciation in any scheme of costs and, if the reader has no idea of what he should allow,let me recommend him to look the item up in The Commercial Motor Tables of Operating Costs." He will find that depreciation is converted into an out-of-pocket expense, a sum which will serve as a contribution towards the purchase of a new machine.

One way to look at this item is to take the figure from the Tables and regard it as the rate at which the vehicle is wearing out. If that amount, therefore, is put on one side as I recommend, then when the time .comes for renewing the vehicle the money will be ready for use in that way. The unwise reader who ignores the warning which the Tables convey overlooks that depreciation is going' on until he is suddenly brought to realize that the capital on which his business depends has gone; his vehicle is done and he has no money with which to buy another to replace it. Moreover, and this is the real thought behind all these articles, if he takes no note of depreciation in his costing, he will be so intecurate in his charges that he will in that unhappy band of rate-cutters who do not know it they are rate-cutting.

The cost of tyres is deducted from the price of the vehicle fore calculating depreciation ostensibly because provision already made elsewhere in the Tables for tyre cost, but Must go a little farther back than that. We must underind why it is that separate provision is made for the st of what is, after all, an inseparable part of the machine. le reason is that the tyres, considered as part of the hide, 'depreciate more rapidly than the rest and have to renewed separately and independently. The figure which 'pears in the Tables for cost of tyres is really a figure of :preciation of tyres. •

Meeting Future Expense Nearly every user of a commercial vehicle realizes that must look forward to the time when a new set of tyres ill be necessary, although, as a rule, 'the user is fortunate that he is able to renew tyres one by one, so that the t.penditure does not come as such a big item. It'still has be .provided for, however, and the wisest way of making at provision is to set aside a sum corresponding to the re coat over any given period.

For example, if we take a 5-ton lorry, the figure for tyre )st in-the current issue of the Tables is 1.33d, per mile. he is covering an average of 400 miles per week with tat particular 5-tonner, he will put 45s. per week on one de towards the new tyres and, if he does that, the expense f buying either one tyre or a set can be easily borne. He ill be able to make the purchase out of what is a sinking and for tyres and will not need to disturb any investients or any other regular expenditure which the carrying n of his business necessitates.

If we can make this principle, so easily understood in onnection with tyres, equally applicable in the case of the chicle itself, we shall get over that too frequent oversight f depreciation which is responsible for so much loss on the art of hauliers. The thing to do is to set apart, each week r each month, an amount to make up the loss in value rhich the vehicle has suffered during that period.

Over ELMO Saved Taking again the case of the 5-tonner and assuming hat the mileage it runs is 400 per week, the amount which nust be put aside for depreciation is 400 times 2.1d., that oeing the figure per mile, as set down in the Tables. That um, 70s. per week, will provide enough to buy a new 'elide when that becomes necessary, and any allowance vhich may be obtained for the old one in part-exchange will be pure profit. Actually, the figure is based on a life tit 150,000 miles, so that at the end of 7f years the user will save saved well over £1,300 which should buy a first-class i-tonner.

Another haulier asks me how depreciation should be dlocated, whether it should be set among the running costs Pr the standing charges. There ha's always been a difficulty here, inasmuch as there is need for recording depreciation is an annual charge—that is to say, a standing charge—to neet the requirements of the income tax assessors who isually allow 25 per cent, per annum, calculated each year m the depreciated value of the vehicle.

On the other hand, for our purpose, it is quite obvious that such a method of calculation is of no use wheh we are trying to determine the actual cost of operation. As far as we are concerned, a vehicle depreciates only to the extent to which it is used. Obviously, other things being equal, one that runs only 100 miles per week is going to last longer than one which does 1,000 miles per week.

The only practical way of calculating depreciation from our point of view is to take it as a running cost, and I am most interested to have confirmation of my .assertion from this correspondent, an experienced user, who, having tried to meet it as a standing charge, has come to the conclusion that it is sounder from the business aspect to take it as a running cost.

. A north countryman asks me if I think I can devise a method of dealing with rate-cutting which will eliminate it altogether. I cannot. Neither do I think that it will ever be eliminated. I can diminish it to a certain extent, by educating the haulier to keep records of hi's costs so that he does not overlook any item. That, at least, will make him rather more chary of entering into a contract which is going to be uneconomic.

It should be realized that rate-cutting is due to two main causes; one, ignorance of costs of operation and blindly quoting for work at, say 6d. per ton less than the rate being received by a competitor. The second cause is deliberate; the cutter deliberately quotes a rate which he knows is insufficient to show a profit but which will benefit him in some other way.

What should be borne in mind when dealing with this matter is that rate-cutting, in one form or another, is universal. It occurs in almost every trade. Take the car trade and recall what used to happen in the days before the war and will almost certainly happen again when new cars are to be had on demand, and the buyers' market controls prices and tends to set them at a level below the economic.

Excessive Allowance

In that business, the part-exchange deal was the stumbling block in the way of those who were out for a fair deal at a fair price. A trader who was willing to cut the price to a customer but dared not do so openly, could cover his delinquency by making an excessive allowance for the customer's used car. So widely was this known, that people about to buy new cars have deliberately bought old crocks and used them to extract discounts off the list price of the new car.

In the haulage industry, we have an even more difficult stumbling block in the way of countering the rate-cutter. It takes the form of return loads. The ruin of the haulage business is the unfair competition of the man with the empty lorry; the man who, in the course of his business, finds himself many miles away from his home depot with the journey home already paid for in the price paid for the outward journey. He sees in a return load at any price a revenue which, in the existing conditions, is all profit. A load for a return journey in any circumstances whatever has an appeal which it is practically impossible to resist, however low the price which is offered.

Net Profit on Load

If the haulier is properly paid for the contract upon which lie is engaged, and which may consist merely of loads in one direction only, obviously anything which he may obtain for carrying a return load is net profit. Further, if his main contract is not quite as profitable as he at first thought it would be, every penny from the return load .goes towards making that contract profitable.

The trouble is, of course, that the prices accepted for these return loads tend to become the highest prices which customers in that district will pay, and the effect on the haulage business as a whole is disastrous. Return loads are invariably taken at reduced rates, hence the unfair competition. The man with a load to offer having once experienced the advantage of giving it to a haulier who is looking for a return load, looks again for that advantage when he has another load to offer and, consequently, is apt to be scornful of the prices which are tendered by local haulage contractors.

As this return-load bugbear is not confined to any one locality, the evil spreads and, in the end, there is a strong tendency for the reduction of regular rates to the returnload figure.

S.T.R.

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