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by Maurice Rounding Mins M, AMInstT
5: The rate for the job
THE METHOD of quoting rates will depend on the type of service being operated.
Scale rates are usually associated with "liner" services, i.e. those services such as parcels, smalls, regular trunk services, which rely for their existence on a large number of customers many of whom only use the service intermittently, although in total the market may be large. With such services (especially parcels and smalls) it is not practicable to calculate individual consignment costs so that there is frequently a certain arbitrariness about the calculation of rates, but so long as in the aggregate the revenue received is sufficient a lot of averaging is unavoidable. The level of rate is closely related to the standard of service offered, and a parcels service giving next-day delivery will usually command a much higher rate than a service taking three or more days.
One major freight network that has always used scale rates successfully is the Freightliner. Here there is a fixed scale of charges per container, the charge being
related to the type or size of container, i.e. 10ft., 20ft., or 30ft., and the number of containers regularly forwarded over a route by the customer (Scale A—less than 1 container daily, Scale B-1 to 4 daily, Scale C-5 or more daily).
This system of charging throws up the classic dilemma as to the best way of charging for freight in a competitive situation.
Freightliner charging has the advantage of simplicity. Anyone can have access to the charges scales, a customer knows precisely what it is going to cost him between any two points on the network, and he knows that all other users of the system (including his competitors) are subject to the same scale of charges. A forwarder has easy access to Freightliner container designs, dimensions and load capacities and can easily work out what his .unit costs are going to be.
On-the-spot quotations
From the selling point of view the simplicity of scales means that salesmen are able to quote rates on the spot for use anywhere on the network and they do not have to resort to lengthy negotiations in arriving at a rate level acceptable to the buyer. It also enables the Freightliner company to budget fairly accurately the revenue it will obtain per foot of train on each route because in charging on a per-container basis, as maximum container height and width is a constant 8ft., the charges can be directly related to the length of container; and these are 10ft., 20ft., and 30ft. modules, and the rail chassis has 60ft. "pay-length" and can take a combination of any of the three lengths of container, it is easy to calculate revenue per foot, per wagon and per train. This does have decided advantages over private rates when it comes to revenue forecasting as well as facilitating the maintenance of a steady cost/revenue ratio.
Nevertheless there are disadvantages in this simplified method of charging.
The main drawback of such a system is that it prevents the operator from taking full advantage of the market situation. In deciding on a simple per-vehicle or per-container charge regardless of the kind of traffic carried, one can only look at all the rates being charged for different traffics and charge the average.
Let us suppose that the charge for a 301t. container (max. load 20 ton, approximately 1920 cu.ft.) between two main centres is £20.
To a customer who can load 20 tons in that container the effective rate is £1 a ton whereas for someone else whose goods are bulky and who can load only 5 tons the rate charged becomes £4 a ton. This May seem perfectly reasonable, each customer having filled the container to its tonnage or cubic capacity and paying the same price for the container. After all, the cost to the operator of providing and carrying that container will be more or less the same whether it has 5 tons or 20 tons in it.
But there's the rub. The container itself has to be strong enough to take the load of 20 tons and a road or rail chassis has to be used that is capable of taking a 20-ton payload in addition to the tare weight of the container itself, whereas traffic which only loads 5 tons to 1920 cubic feet does not really require such heavy and costly equipment. Competitive market rates tend to reflect these differing requirements whereas a fixed scale does not.
Therefore the result of Freightliner rates being on a fixed basis is that for heavy-loading traffics such as steel the rates per ton are generally lower than the going market rate, whereas for light-loading traffics, such as glass bottles, the rate per ton tends to be higher than the market rate. One can reasonably conclude therefore that because of scale rates Freightliner is charging less than it need for its heavy traffics but is too expensive to attract very bulky traffics.
In view of the height limitations on railway routes which make the transport of bulky traffic costly the Freightliner pricing system is no doubt a deliberate policy, and I only . discuss the method of charging to illustrate the pros and cons of scale charges.
Private rates
For large flows of traffic it is usually practical to produce a fairly accurate costing, and therefore, while market rates will influence the price charged, the rates tend to be quoted privately for the specific traffic flow. These are usually given as a written quotation stating the conditions attaching to the rate—such as minimum consignment weights, number of drops. There may be a clause stating the length of time the rate is valid if not used, but generally quotations can be withdrawn or cancelled at any time.
Whereas the vast majority of private rates are simple quotations with no other commitments or obligations implied or accepted, there is an increasing tendency to formalize rate quotations and to include them in some kind of traffic agreement. This has probably developed as a result of (a) inflationary conditions causing rapidly rising costs and inevitably, rates, (b) the levels of competition in the freight industry forcing the operator to seek ways of tying traffic to his service, and (c) the necessity for transport users to forecast and budget for transport and other costs for long periods ahead.
The aim of an incentive rate is to attract additional traffic from a customer by financial inducement. For example, the quoted rate may be reduced by 6d a ton after the first 10,000 tons per annum, or a staged reduction may be offered at 5,000 t.p.a., 10,000 t.p.a. and 15,000 t.p.a. or it may be a two-part tariff whereby a fixed sum is paid per month or per annum (sometimes called a service charge) and then a small charge per ton for all traffic carried.
Whatever the method used—and there are hundreds of ways of compiling incentive rates—a careful assessment needs to be made as to their effectiveness. One can start by asking the fundamental question: "Has the customer the ability to take advantage of the incentive rate?" It is not much use quoting a rate reduction after the first 50,000 if the customer manufactures only 30,000 t.p.a. Secondly, is it necessary? If the customer is satisfied with your service and rate why should you give a rate reduction to obtain more traffic? Perhaps you can get more on the strength of the quality of service and price you are already offering.
Where incentive rates are often used to good effect is when trying to encourage economic payloads. The railways may quote a rate equivalent to £1 a ton for a train load of traffic but 40s a ton for 20-ton lots, to encourage the economical use of their equipment, but again the quoting of such rates will be dependent on the customer's ability to produce sufficient traffic to take advantage of the reduction.
Undoubtedly there are many instances where incentive rates are necessary and produce results, but the results must be seen to be beneficial as there is no fun in giving money away unnecessarily.
A tariff is a scale of rates but in the context of private rates is usually a scale compiled for the specific use of one customer.
An operator carrying all the traffic from a manufacturer or distributor who has a national distribution but no regular heavy traffic flows may be asked to supply a tariff which reflects a reduction from scale charges because of the quantity of traffic passing, but offers the simplicity of a scale of charges. Such a tariff for that firm's traffic could take the form of a mileage or zonal scale or rates for individual principal cities or counties. Such conditions as the operator wishes to apply, such as minimum consignment weight or traffic to be excluded from the tariff, docks traffic, etc., can be printed on the tariff.
Often used for small consignments, flat rates have the advantage of simplified accounting procedures for both customers and operators. For example, the charge may be lOs a parcel or it could be based on a rate of so much a ton. The charge is usually computed by taking consignments for a sample period, applying the scale rates to them and then working out the average rate per package or per ton. This then becomes the flat rate until the next test.
The conditions necessary to operate a successful flat rate system are packages or consignments of a fairly consistent weight, otherwise there are likely to be large fluctuations in the level of a flat rate each time a test is taken and the advantage of having a , flat rate is then lost. Customers dislike large fluctuations after each test—unless they are all downwards!
Flat rates are usually associated with an agreement which guarantees that a customer gives the operator all his traffic or all that traffic in certain weight ranges or to certain specified areas. This excludes the possibility of the customer, having been quoted a flat rate, deliberately sorting traffic to different carriers with the object of "beating" the flat rate.
Quoting rates
Always provided that your rates structure has the overall effect of producing the total amount of revenue required, the actual type of rate quoted should be tailored to the needs of the market or individual customer.
For example, for full-load traffic you may require £40 for a 20-ton or 2,000 cu.ft. capacity vehicle or £500 for a train load,
but the rate to the customer can be quoted on a per vehicle, per train, per ton, per cube or per pallet basis so long as the quotation is conditioned to meet the operator's minimum requirements, e.g. "£500 per train load of 500 tons of sand" or "£1 2s 6d per ton, minimum of 450 tons per consignment", "L2 lOs Od a ton of packaged detergents, minimum 16 tons per load", "£2 per pallet (48in. X 40in. X 48in.) glass bottles, minimum of 20 pallets per load".
A customer likes to relate his transport costs to a unit of production, and although tonnage rates are usually applied to raw materials and some semi-finished commodities, many customers talk in terms of units of production, often converted into pallet loads.
It has the advantage to the manufacturer that he has a common unit cost from the point of production to the point of consumption. If he is loading on to pallets at the end of the production line, he has in-factory movement cost per pallet load, a pallet load warehouse cost, transport cost, distribution depot cost, and delivery cost, each individual cost being related to the same unit load.
It is not uncommon for railway rates to be quoted on a per wagon basis and if other operators are quoting on a per-ton basis or per-vehicle basis, the customer has to calculate payloads for different capacity vehicles before he can get a straight comparison of rates, so that by insisting on all transport suppliers quoting on a like basis he is able to get a better comparison of rates as between one operator and another. Rate increases
There are three ways of obtaining rate increases: (a) telling your customer the rate will be increased by x amount, (b) negotiating an increase, (c) including a built-in periodic increase in a rates agreement (price variation clause).
If (a) can be applied nationally, that is if your competitors take the same action at the same time, it can work successfully. A customer is more likely to accept an across-the-board increase if he knows his competitors are having to accept the increase too.
However, in a competitive situation it is unlikely that everyone will increase rates at the same time and by the same amount, and therefore an individual operator choosing method (a) will have to face up to the likely reaction from a customer. The disadvantage of this way of imposing increases, especially if done in letter form, is that you are unable to gauge the effect of the announcement on your customer, or at least until it is too late to do anything about it. The normal reaction to such an announcement is either he pays the increases or you lose the traffic.
Method (b) has the advantage of a face-to-face confrontation and proposals can be made and reaction measured before a final commitment on either side. It is important that you talk to the decision-maker because if the contact has to refer your proposals to higher authority it then becomes similar to method (a) with all the risks that such an approach involves.
Method (c) is becoming more popular as a means of keeping rates up with costs. It has the advantage of avoiding an annual wrangle and it also enables the customer to budget his future transport costs, as well as giving him a degree of stability in that the basis for the increases (or decreases) has been predetermined and written into the agreement.
The most common method applied is by basing charges on an index that will reflect changes in costs. The actual index to be used is negotiated with the customer as there are many official indices available reflecting different cost changes. The operator will naturally be aiming to apply a fast-moving index, e.g. wages, whereas the customer will want to apply a slow-moving index, e.g. raw material prices. A compromise can usually be reached, sometimes by applying a percentage of two or more indices, e.g. 40 per cent retail prices, 40 per cent wholesale prices, 20 per cent wages. The indices applied are usually the official ones appearing monthly and annually in the Digest of Statistics published by the Central Statistical Office, but alternatively an index can be agreed based on your own and your customer's operations. A word of warning—indices can go down as well as up.
Care must be taken when tying a rate to a price index to ensure that the base rate is at a satisfactory (i.e. profitable) level to start with, because once the level and index have been fixed they will remain in operation until the agreement is terminated.
One major drawback to index-related rates is that major changes in the operator's cost situation may take place that are not reflected in the index. For example, the haulage industry has been subjected to abnormal cost increases in the past year or so, but this would not be reflected in a national, price index such as retail or wholesale prices, and therefore a rate tied to such at index would not fully compensate the carrier for his additional costs.