Planning for Profit
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MAXIMUM USE PAYS OFF
More Intensive Working of Appropriately Sized Vehicles Can Permit both Attractive Rates and Adequate Returns : Coach Rates Discussed With Reference to Petrol 31-seater •
LAST week, when discussing rate-cutting, I pointed out that this term was not necessarily synonymous with the quoting of a lower rate than a competitor, and to avoid accepting traffic at rates which do not give an adequate margin of profit it was essential that operators should be fully conversant with the principles of commercial-vehicle costing. Only then could they estimate and record their costs sufficiently accurately to form a basis for profitable scales of charges for
quotation to customers. .
Such knowledge, however, would not, on its own, be sufficient to substantiate complaints that competitors were obtaining traffic by offering unfair rates. Even if the actual rate quoted by the alleged offending competitor were known to. be below -one's own operating costs, it might be that there Were factors so advantageously in the competitor's favour that despite his lower rates he was still able to show a profit on the traffic.
There could be many such factors, but because of the urgency and multiplicity of day-to-day traffic arrangements they could tend to become obscured by their very inherentness in practically every journey made. This is because seldom, if ever, do all the optimum conditions coincide in the operator's favour when scheduling vehicles for duty.
Attractive Rates
The operating costs of three vehicles were examined in my previous article, namely, 3-, 5and 7-tort oilers. With an average weekly mileage of 400, the operating cost per mile was shown to be 13.53d., 15.51d. and 18.09d. respectively. Corresponding recommended minimum charges per mile were Is. 7d. for a 3-tonner, Is. 94d. for the 5-tonner and 2s. 14d. for the 7-tonner. When the load fitted the vehicle, that operator of any one would be better placed to offer more attractive rates than his two competitors and still make a better margin of profit than if a less suitable vehicle had been used.
Even when competing hauliers operate similar types of vehicle, however, there can be wide—and legitimate--ditierences in their respective operating costs and subsequent charges. Many reasons can account for these variations. The individual efficiency of each haulier may well decide the difference between profit and loss. Such efficiency can, in turn, result from a combination of both ability and experience of the operators.
Competitive Conditions
Another factor which has a large bearing on cost and rates, but over which operators have comparatively little control when they first set up in business, is the amount of work done each week. Unlike the ancillary operator, who is usually guaranteed a minimum of traffic from his parent organization, the professional operator must inevitably suffer some under-employment of his vehicle when he first sets up in business. This would be reflected in his total operating costs per mile, although, unfortunately for him, competitive conditions would seldom allow the charge he makes to his customers to be adjusted.
Vehicle under-employment is shown in low average weekly mileages or more precisely loaded mileages. It is surprising, however, how many inquiries from readers who ask for advice on costs do not make any mention of the average, or anticipated average, weekly mileage, apparently being unaware of the significance of this important item.
To emphasize this point the 10 items of operating cost of a 6-ton platform oiler are examined to show the wide variation in the cost per mile as the weekly mileage increases. Taking the average cost price of £1,960, the unladen weight is assumed to be 2 tons 19 cwt., giving an annual licence duty of £45 or 14s. per week. Wages are assessed at £9 6s. 3d.. after making a2S
allowances for annual insurance and employers' voluntary liability insurance contributions, as well as holidays with pay.
The rent and rates incurred in garaging the vehicle are assessed at 10s. 6d. and vehicle insurance at 14s. per week. This latter item is calculated on an annual premium of £42 payable for comprehensive insurance in a medium-risk area. The last of the five items of standing costs—interest—based on 3 per cent, of the initial outlay adds a further 19s. 7d., making the total weekly standing costs £12 4s. 4d.
Fuel costs per week are reckoned at 2.88d., assuming a consumption rate of 16 m.p.g. with oil fuel costing 3s. 10d. per gallon. Lubricants add a further 0.24d. per mile. With a set of tyres for this particular vehicle costing about £180, tyre cost per mile is reckoned at 1.58d.
Original Equipment With a weekly mileage of 600 or more, maintenance is reckoned at 1.98d. per mile. To obtain the cost of depreciation, it is necessary to deduct the cost of the set of tyres fitted to the vehicle as original equipment from the initial price of the vehicle. In addition, residual value, arbitrarily assessed at 12+ per cent., is also deducted, leaving an amount of £1,560 to be written off. Assuming a vehicle life . of • 125,000 miles, depreciation cost per mile therefore amounts to 3.00d., making the total running cost 9,68d. per mile, -still assuming that 600 miles per week or more are averaged.
When the vehicle is less intensively used, these last two items on maintenance and depreciation will require some adjustment in terms of cost per mile. Whilst the increase or decrease in the overall cost of•repairs will he approximately relative to the mileage covered, there is also included in the term maintenance the cost of routine services, such as washing and greasing, which are commonly done as much on a time basis as on mileage.
Mileage and Maintenance
As a result, the overall cost of maintenance per mile tends to increase slightly as the average weekly mileage diminishes. In this instance, it is assumed to be 2.09d. per mile at 400 miles per week and 2.53d. per mile at 200 miles per week.
An adjustment also has to be made in the estimated cost per mile of depreciation when the average weekly mileage is unusually low. This is because in these circumstances the vehicle is likely to be disposed of on the score of obsolescence rather than literal depreciation of the chassis and body. Any such adjustment must necessitate an arbitrary estimation, and it is here assumed that when the average mileage drops to 200 miles per week the depreciation cost per mile will be 3.30d.
The total running cost per mile for 200 miles per week will, therefore, be 10.53d. and 9.79d. for 400 miles per week.
In order to obtain the total operating cost per mile, it is necessary to add standing costs to running costs, but as the standing ccists are given as a fixed total per week, the cost per mile will vary directly with the average weekly mileage. Thus, the standing cost per mile when 200 miles per week are operated will be 14.66d., dropping to half that figure, 7.33d., when the weekly mileage is increased to 400. At 600 miles per week, standing cost per mile will be reduced to 4.89d. and 3.67d. at 800 miles_ At 1,000 miles per week the cost is only 2.93d., whilst at 1,200 it becomes 2.44d. per mile.
Added to the appropriate running costs per mile, total operating costs per mile then become: 25.I9d. per mite at 200 miles per week, 17.12d. at 400, 14.57d. at 600, 13.35d. at 800, 12.6Id. at 1,000 and 12.12d. at 1,200 miles per week. Before charges are quoted to a• customer, however, it is still necessary to add a Snitable proportion of Overhead or 'estaber lishinent costs. to the operating costs: of the vehicle. These can include a wide range of expenses and according to the size of the -business, might include such items as managerial salaries
and car expenses, office staffing, equipment and maintenance; -whilst, with larger establishnients the. cost of running branch depots and auxiliary fleets of replacement vehicle's, service vans
and breakdown recovery vehieles would also have to be included. Finally, a profit margin has to be added, sufficient not only ttip provide 'an_ adequate return but also: sbnie reserve against adverse contingencies inseparable from the HSI( entailed In private enterprise.
With these two items added, the corresponding minimum charges per mile for the 6-ton platform oiler Would be: 200 miles per week, 2s. 114d,.; 460 miles, 2s.; 600 miles, Is. 83d.; 800 miles, Is. Rd.; 1,000, Is. 534.; and 1,200, Is. 5d.
In first comparing the varying operating costs per mile it will be noted that in the extreme example the amount of 12.12d. at 1,200 miles per week is Only fractionally Thigher than half the cost at 200 miles per week, namely, 25.19d. But even at a more modest weekly Mileage of 600, there is a reduction of I0.62d per mile as compared With The operating cost at 200 miles per week. Significant to the relative claim's on ratecutting is the comparison of bare operating costs of 17.12d. per mile at 400 miles per Week and the minimum charge of Is. 5d. at 1,200 miles per week,
'Anglo of Profit
In effect, the operator. who was •able to obtain and organize sufficient work for this 6-tanner to average 1,200 miles per week could quote a rate to a customer which, whilst allowing a reasonable margin of profit, was actually lower than What it cost his competitor to operate his vehicle with no such allowances for overheads or profit margins.
This competitive advantage may not necessarily be an indication of the relative efficiency of these two operators, but might be solely due to one having a greater range of customercontacts as a result of being in business over a longer period. Alternatively, he may have a more virile sales policy.
The significance of this comparison between low and high employment of vehicles is equally applicable in passenger work. In conversation with the secretaries of sports club and similar organizations, I have repeatedly been told they are nonplussed at the wide disparity between rival quotations from competing coach operators. Here, again, whilst this Could result from rate-cutting it may equally stem from a legitimate difference in the respective operating costs of the competitors. Of all types of commercial vehicle, probably few have such a Wide variation in average weekly mileages as coaches. The small coach proprietor, for example, particularly during winter Months, may do little more than one or two eVening trips and a week-end sporting event. At the other end of the scale, larger operators may, in addition, have substantial contract work ot even use vehicles on occasion on bus' or coach services. ' Briefly running through the 10 items of operating cost of a popular type of coach, a 31-seat petrol-engined version costing 12,900 will carry an annual tax of £56 or 11 5s. 2d. per Week. Wages are assessed at £10 per week and.rent and rates at 14s. An annual insurance premium of 169 lOsjgives a standing cost per week of £1 7s. 10d. for this item. 'Interest adds a further El 12s; 16(1., making a total weekly standing cost of1i4 19s, 10d.
Cost per Mile
Assuming a fuel-consumption rate of 9 m.p.g. for this petrolengined vehicle, a resulting fuel cost per mile of 5.00d. is obtained where supplies are delivered in bulk at 3s. 9d. per gallon. Lubricants are assessed at 0.27d. per mile and tyres at 1.20d. on a basis of a cost per set of £150.
Where the weekly mileage is 600 or more, maintenance. including washing and greasing, is assessed at 2.11d. per mile, • but is increased to 2.40d. at 400 miles per week and 3.17d. at 200 miles per week. Similarly, depreciation is assessed at 4.88d. per mile at 600 miles per week, 5.37d. per mile at 400 miles per week and 5.I9d. per mile at 200 miles per week. Total running costs per mile of 15.55d., 14.24d. and 13.46d. are thus obtained for ZOO, 400 and 600 miles per week respectively.
The addition of these standing and running costs then gives • the following`operating costs per mile: 200 miles per week33.54d.;‘ 400-2313d.; -600-19.45d,; 800-17.96d.; and 1.00017.05d.
With the addition of an appropriate proportion of overhead costs and profit margin, the following minimum charges per week are obtained: 200 miles per week-3s. lid.; 400-2s. 83c1.; 600-2s. 33d.; 800-2s. lid.; and 1,000-2s_ Taking two examples at random from these figures, it will be seen that the coach proprietor who is in a position to be able to operate his vehicle 1,000 miles per week would be able to quote a rate of 2s. a mile, which is only ffactionally above half what his competitor would have to charge if the latter were to make the same proportional profit, yet limited to 200 miles per week. Alternatively, the actual operating cast of Is. 113-d. when operating 400 miles Per week would place that operator in an adverse competitive position with his neighbour operating 800 miles per week and able to quote a rate of 2s. 14d. per mile to his customers, after having made an allowance for overhead costs and profit margin. S.B.