Solving the Problems of the Carrier
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RATE-CUTTING or cost-cutting?
Denationalization, Rateis being Practised by Some ?rs Who are Anxious to • Traffic Quickly and .fish Themselves Before the -mile Limit is Abolished
NEWCOMERS to the industry who have entered it by way of a special A licence, and, perhaps to a less degree, re-entrants to the industry, are, as I foretold, endeavouring to obtain business by underquoting their competitors. These beginners are in a hurry to get going in the field of their choice before others come into the market.
They are working the old trick of asking what the present carrier is getting, and quoting lower rates. Sometimes their quotation is accepted and they make a start; quite of ten, however, the transport managers of the customers they seek are aware of the situation—having experienced it before and they know how they can turn it to their own advantage. They offer the haulier less than any.rate that is likely to be quoted, and the haulier takes the traffic. Up to now, shall we say, the B.R.S. rate for a particular traffic has been £2 17s. per ton. First of all, there comes a fairly sensible haulier who knows the rate that has been in operation for some time. He has, in fact, a copy of the schedule, and he knows, within a reasonable margin, the amount traders in the area are paying for the traffic.
He is not ignorant of costs because he was fully engaged on the same traffic before his busiless was nationalized. He decides that, with his iess expensive organization, he can operate at rates slightly lower than this current standard and, being wishful of getting on, quotes £2 15s. He does not get the traffic, and it goes to another operator similarly situated, but without any real knowledge of costs. What this operator gets for the work is not disclosed. The customer who placed the order is, however, well-known as having declared that the most he would pay is £2 per ton.
The traffic is obtainable in large quantities, and the original quotation of £2 155., made by the first man mentioned, was based on the belief that the vehicles used would be 10-ton six-wheeler& The lead distance was 200 miles and the prospect of return loads was about 60 per cent. These return toads were not readily available; sometimes it took quite a while to get one and was difficult to load at that.
What The Traffic Will Bear
In my articles I have always stated, most emphatically, that the rate for any haulage contract is what it will fetch and that, whilst I can calculate fairly accurately what a rate ought to be if an agreed profit is to be obtained, I cannot ensure that the haulier will receive that rate. I have also emphasized that it is frequently the fault of some short-sighted and usually ignorant haulier that the rates prevailing in a particular district are too low.
Such a haulier is either foolish in that he takes upon himself the responsibilities of vehicle and business ownership without endeavouring to obtain a better return than that which he could get as a driver, or he is ignorant of what his vehicle is actually costing him to run, and thinks he is making a profit when, in fact, he is working at a loss. Against foolishness there is no remedy. Even if he is shown where his folly lies we do not get any further. Nine times out of 10 he remains unconvinced and stays so until the collapse of his ill-run business proves he has been wrong.
There is a fairly obvious reason why an operator will not attach much importance to the persuasive efforts of competitors for, after all, they may very well be trying to put him off the business. That is why these articles are written.
Now there is always a certain amount of hope in dealing with the man who is honestly ignorant Show him where he is wrong, and where he is losing money at the rates he is charging and, sooner or later, he will take notice. There is need for patience in dealing with a case of this sort, for it is rarely possible to revise rates without some delay.
Give him time, therefore, to put his case before his customer before giving him up as a bad job. In the meantime, give him information as to the running costs of his vehicles and the extent of his expenditure on running his business thus providing him with knowledge which should make him mend his ways. Show him "'The Commercial Motor' Tables of Operating Costs ": they, at least, are B32 unbiased and arc specially designed to help in such cases. What little these Tables may fail to achieve in that direction, I try to make up for in these articles.
That is probably the.reason why a correspondent sent me the data to which I referred earlier on: he thinks I may be able to help him to convince the competitor of the error of his ways.
In this case, the operator anticipates that the vehicle will make two round trips per week. He can rely on the outward load twice per week for each of the two vehicles he has bought. There is not always a return load. His average back-loading is 60 per cent. That means that he picks up, on the average, 24 tons per week on the return journey_ His total tonnage thus averages out at 64 per week, Now we need some data concerning costs of operation.
To do so I start, as usual, with the preliminary figures for depreciation, and am at once up against a snag. The new operator has acquired two vehicles for £6,500, out of which he reckons to have paid £2,500 for the special A licence, equivalent to £125 per ton of unladen weight.
He has probably examined -the prospects of taking over some of the work which the vehicles had been doing for the B.R.S. and he therefore feels fairly confident of getting some of the right sort of goods at a rate which he knows B.R.S. has been getting. Instead, he finds that the transport manager of the customer has been learning many things, one of them being the way to bluff a haulage contractor into accepting a rate which will not do the haulier much good.
Our haulier behaves as the traffic manager expected he would, and has accepted £2 per ton when he knows quite well it should be more. However, he is willing to give it a trial in the hope that when things have settled down a bit he will be able to get more.
In holding that belief, he is surely wrong because, in the few months to go before the 25-mile limit is removed, there will be quite a batch of chaps with special A licences all of whom have the same idea.
Now then, in preparing to assess the cost of operation he comes up against trouble so soon as he tries to assess the amount on which to calculate depreciation.
Allowing For Depreciation
His net figure for the price of each vehicle is £2,000. His figure for depreciation must be such that, by the time his vehicles have become too expensive to maintain he will have put by £3,500, as a sinking fund for the purpose of renewing his fleet as and when required.
He takes a good look at the machines and finds that, at the price he paid, they are not by any means bargains. He reckons that the most he will get out of each is about 100,000 miles. In running off that 100,000 miles, he must, therefore, save £3,500 per vehicle if he is to be in a position to buy new machines when that becomes necessary.
Normally, that sum will be available out of the sinking fund which is accumulated savings provided for in the item "depreciation" Instead of 300,000 miles in which to save that amount, he has only 100,000 miles. Spread over this mileage the figure for depreciation will have to be practically 8fd. per mile, whereas the proper amount, based on the expectation of life of a new vehicle need be only 138d.
If his total of operating costs Plus 2.38d. for depreciation be 2s. per mile this would become 2s. 6d. per mile wiich, in all probability, would be much too much. He will, therefore, have to content himself with 2.38d. per mile towards depreciation, regarding that as being a sinking fund or a new vehicle, and he will then have to find the balance of 6d. per mile, out or his profits. There is no real harm in that providing he keeps aware of it. Having, I hope, made my point about that always difficult item," depreciation," I now propose to deal with the operating costs as a whole. The initial cost of a new vehicle has been stated to be £3,500. Tyres will cost £170 so that the net cost of the vehicle, without tyres. is £3,330. Now take away the residual value—the price of the vehicle when it is sold—and I get £2,970 as the net amount on which to assess depreciation. On that basis it works out at 2.38d. per mile as already mentioned. Interest may be calculated on the actual price—£2,000—and is £1 4s. per week.
For the standing charges take the following amounts as being approximately correct: Tax, £2 4s.; levy, 7s. 6d.; wages (for two men and including provision for insurance and holidays with pay), £15; garage rent and rates, 13s.; insurance, £1 10s.; interest, £1 4s. The total for standing charges is thus £20 18s. 6d.
Now for the running costs, in pence per mile. First, fuel, 4.29d.; engine oil, 0.25d.; tyres, 2c1.; maintenance, 2d.; depreciation, 2.38d. The total is thus 10.92d.; or, say, lid, On the assumption that each vehicle runs two trips per week, the mileage will be 840 per week per vehicle. The running costs per week per vehicle at 11d, per mile will be £38 10s, The total of operating costs per week, made up of the standing charges, £20 18s. 6d., plus the running costs, £38 10s., is thus £59 8s. 6d.
That is not, however, the total cost per week; there are other items to be included. First of all, there is the cost to the haulier of running his business—establiihment Cost— which I take to be £5 per week per vehicle. Then there ere the expenses of the driver and mate, another £5, and a further £5 for sundries, making £15 per week. Thus we get a figure of £75 per week to the nearest pound. .
Finally, there is need to make provision for profit. On the basis of 20 per cent. on costs, the minimum profit per vehicle per week should be £15, and the rates for traffic must be enough to return a revenue of £90.
Each vehicle runs two journeys per week, carrying, one way, 10 tons each journey, and an average of 6 tons each journey on the return. Now I must make this clear. In putting forward that figure of 6 tons per return journey I am not claiming that the vehicle carries that tonnage every time; I mean that the possibility of getting a return load amounts to an equivalent of 60 per cent. of the outward journey—which-is not regular loading.
Sometimes the lorry will come back empty and at other times it will bring back a full load of 10 tons. The 60 per cent. is this haulier's experience of the chances of getting return loads, and the total expectation of revenue of £90 per week is based on an average per week of 20 tons out and 12 tons return.
As there are two trips per week that means that the tonnage carried per vehicle is 32. The rate should therefore be £90 divided by 32, which is £2 16s. per ton.
All the operator can do is persuade his potential customer that he should pay not less than £2 16s. per ton if he wishes to take advantage of the regular and efficient service which every merchant expects. The haulier cannot, of course, offer to do the job for less if the standard of service be reduced, as it inevitably will be if the rates are not sufficient to enable him to keep up his expenditure on maintenance, to renew his vehicles when that becomes necessary, and so on.
What I must emphasize is that there is no need for the panic which is exemplified in the method of quoting that I outlined at the beginning of this article. It should be remembered that, apart from C licences, the .number of vehicles on the road is now no more than before nationalization, and there will not be any surplus of vehicles for some time to come. The proper policy for the haulier to adopt is to demonstrate the excellence of the service he renders, and not to try to establish himself by giving away his profits.
The minimum rate for the route and traffic in the case I have dealt with is properly calculated to be £2 16s, per ton. The operator's profit at that rate is about 9s. per ton. The rate-cutter who is carrying the goods at £2 per ton is losing 7s. per ton. S.T.R.