What Is An Economic Write-off ?
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T the annual conference of the British Association of Overseas Furniture Removers this month I had the
A. opportunity of discussing, operating problems with members from the Commonwealth. Despite the many and great geographical differences that exist between Britain and Canada or Australia, for example, there was a significant similarity in their basic transport problems, even though details, and sometimes solutions, might differ.
The conflict between economic running and compliance with licensing restrictions provides the same persistent problem for Canadian as well as British operators. Additional complications arise in North America from the variations in inter-state laws, necessitating multiplicity of licensing. These could well be a foretaste of the difficulties which could retard the.interchange of vehicular traffic which should result from a
realization of European Free Trade. .
Decisions directly under operators' control, however, concern the policies to be adopted regarding the method of vehicle purchase and subsequent replacement. A Canadian representative told me that in his opinion operators in the United States were the leading advocates of frequent replacement of vehicles. This was understandable, as that country was generally accepted as the original home of mass production to which a policy of frequent replacement is closely allied.
Not unnaturally, the concomitant to the general and continued adoption of such a policy has been a surplus of used vehicles with resulting tow, if not give-away, resale prices. This situation has evoked a secondary trend. If it is to be a foregone conclusion that the residual value will in any case be virtually nil, there is then no incentive on the operator to preserve his vehicle beyond the condition sufficient for his own immediate needs. In such a situation persistent overloading as a short-term policy is considered an economic proposition, both in an endeavour to increase profit and offset high depreciation costs.
Partly because of the influence of British tradition, Canadian operatofs tend to adopt a midway policy as to the period of fleet renewal. Whilst the American trend is accepted for the more destructive types of traffic such as is generally occasioned by tipper work, the importation of the heavier type of -British vehicle has resulted in periods of operation more in line with those applying in this country,
• Operators in Britain have always had to face the decision as to the most suitable time to replace a vehicle, even though this might have been done only in the negative sense, namely that the vehicle had literally been driven to destruction. Under modern conditions, few traffics are so lacking in urgency that operators could risk the breakdown which such a klicy must entail.
At the outset the problem arises as to whether the period of replacement should be determined on the basis of time or mileage. There are protagonists for both methods and exceptional conditions can be quoted to show disparity between the two. When compiling " The Commercial Motor Tables of Operating Costs," and in view of the wide range of vehicles included, it was decided that a mileage basis would be the most appropriate. For the lighter type of vehicle a mileage life of 125,000 was assumed, rising to 250,000 fertile heavier class.
Delay in supplying readers with advice on operating costs is regularly occasioned by the omission of one or more important items of information. The most common of all is the absence of any reference to the anticipated average weekly or annual mileage. On inquiry it is often stated that this is not known. Yet, however difficult it may be to give an estimation of probable mileage, particularly where the reader is setting up a business for the first time for example, no operating costs can be determined unless some forecast is made.
This admitted difficulty in estimating probable annual mileages has been put forward in favour of calculating depreciation on a time basis. It is contended that the procedure is thereby simplified if one divides by five years, for example. It may be superficially' correctthat the division of the balance remaining of the initial cost of a vehicle after deduction of the cost of the original set of tyres and ultimate residual value by five provides a simpler calculation than by corresponding mileage over that period.
Yet when using the term " year " in this sense some notional mileage is implied even if it is not stated. No experienced operator would adopt a five-year replacement policy literally regardless of wide variation in total mileage involved. In practice, partly because smalland medium-sized operators, at least, tend to specialize on a limited class of traffic and type of operation, the annual mileage of each of their vehicles tends to be similar. In effect, therefore, where depreciation is calculated on a time basis in these circumstances, a standard average mileage is, at the same time, implied.
Although, basically, replacement of a vehicle is normally determined by its mechanical condition, the influence of the urgency of the traffic carried, or the competitiveness of that particular industry, may have an equal, or even greater, influence. Thus, the haulier of perishable foodstuffs using the same class of vehicle and operating under similar conditions might consider it economic, in the sense of the overall goodwill of his business, to renew vehicles more frequently than if he were engaged on less expensive traffic, even though higher depreciation costs must thereby be borne.
Similarly, a coach may be fit, mechanically, for many more miles' service but is replaced by one with more modem body styling because this may be paramount in attracting custom during the holiday season. Because it may then do further years' service successfully with an operator in a less populated area does not necessarily imply a wrong assessment as to its value by the original owner. Rather it is indicative of the many factors which can determine replacement policy in addition to the basic mechanical condition.
Ratio of Costs
Another aspect of this problem applicable to haulage relates to the ratio of transport costs to the total unit cost of the product. This brings one more variable, superimposed on the differences of approach occasioned by urgent or, alternatively, less valuable traffic. Regardless of whether a traffic is exceptionally urgent or not, in the sense that it is perishable or semi-perishable, modem conditions are necessitating more and more frequent deliveries, often to a timetable. The additional transport cost which this involves has, in many instances, been readily absorbed where the ratio between this cost and the total cost of the unit is high. Thus, if the total cost of the unit is 300s. and the transport cost, when delivered to a timetable, is 6s. or 5s. at the carrier's convenience, the comparatively small difference of Is. per unit may well be considered a small price to pay to avoid the warehouse extensions which would otherwise be necessary.
Whilst such decisions may be the responsibility of sales or distribution departments, rather than transport, they could ultimately affect the rate of vehicle replacement, as maintenance of delivery to a strict timetable would demand high vehicle fitness. However good the standard. of vehicle servicing might be, this would have to be supplemented by a more frequent renewal of fleet.
This aspect of overall distribution costs may explain, to some extent, the anomaly of widely varying policies of vehicle replacement being adopted by users under similar operating conditions yet, apparently, with equally successful results. Only the operator himself can precisely a'ssess the true worth of the prompt dzlivery of his traffic and its subsequent repercussions on operating costs.
Re-assessment of vehicle-replacement policy could also be occasioned by changes in the supply and availability of suitable labour. Whilst the care with which driving staff were initially selected will undoubtedly have subsequent repercussions on a transport Company's profitability, they do not hold the same key positions as do skilled fitters where it is the company's policy to undertake all their own maintenance. The reason for this still being carried out may be, to some extent, determined by the existence of suitable repair shops and equipment provided when firstclass labour was more readily available.
Competition for labour stemming from the expansion and increased prosperity of some manufacturing industries has compelled many long-established operators radically to re-assess their maintenance programmes. They have been helped in this by the increasing range of exchange units now available, thereby reducing the amount of skilled work required to a minimum. Even so, the opportunities to withdraw Vehicles from service for this purpose continue to diminish as the demand by trade and industry for timetable deliveries increases.
Under such conditions it is understandable that many operators are finding that the economic solution to meeting the more exacting demands on their services at the same time as the availability of skilled maintenance staff decreases is by the more frequent replacement of vehicles. This, in effect, is considered to be a logical extension of the unit exchange plan.
Labour Replacement
In areas where competition for skilled labour is not so keen, operators may, nevertheless, come to similar conclusions, though for different reasons. Their improved labour position would normally imply that they were based in less populated areas and, if it followed that the availability of public garages was correspondingly reduced, it would seem prudent for them to provide their own maintenance. Even for a small fleet, however, adequate repair facilities would entail substantial financial outlay.
This may seem justified by the limitation of alternative facilities and the current availability of suitable local labour. The absence of competition for labour, however, may be offset by the extreme difficulty of replacement in sparsely populated areas, should the occasion arise. With large sums laid out in garage and equipment, this could develop into a serious situation for the operator if replacement could not be found locally or induced to leave the greater amenities of urban life.
Because residual value has its effect on the cost of depreciation, it is also a factor to be considered relative to vehicle replacement. In contrast to the American example quoted: where vehicles were run to destruction, the present position of supply and demand in this country gives a comparatively high value to used commercial vehicles of low mileage. This again is an inducement to replace vehicles frequently for operators who are financially in a position to afford the initial outlay and whose type of operation demands a high standard of vehicle fitness,
The judicious balance of stocks of spares adequate to meet day-to-day emergencies, but without overstocking, is always difficult, if not impossible, to achieve. Particularly does this apply to the small operator who has to keep several items of slow-moving spares out of proportion to the size of his fleet. Here, again, this is a problem which, along with any substantial ontlay on spares, does not have to be met, at least, to anything like the same extent, when vehicles are renewed at frequent intervals.
The cost, in time and service-van 'mileage,. occasioned by the seeking and collection of spares could also be substantially
reduced if not eliminated altogether. S.B.