Penny Wise Pound Foolish?

3rd May 1963, Page 183

3rd May 1963

Page 183

Page 184

Page 183, 3rd May 1963 — Penny Wise Pound Foolish?

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AKEY factor of the road haulage industry is its multiplicity of small units. It has undoubtedly provided --and continues to provide—opportunities for persons wall initiative to set up in business on their own account. Compared with other opportunities the initial capital outlay involved when starting in haulage is not excessive. Moreover, the greater availability of credit finance in recent years has facilitated the initial purchase of vehicles.

Nevertheless, there continues to be a substantial proportion of would-be operators who, for one reason or another, prefer to commence with used vehicles. With limited capital resources they may consider it a better proposition to own outright a used vehicle than buy a new one on credit terms. Alternatively, they may claim that the lower initial cost of a used vehicle provides economic advantages which would prove invaluable, competitively, in that difficult initial period when the new operator is trying to build up a remunerative clientele.

As with so many other problems associated with road transport operation no clear-cut decision can be made as to whether starting with new or used vehicles is a better proposition in all circumstances. The initial comparison of the price of the new vehicle with that of a used model will obviously appear attractive in favour of the latter. But the subsequent effect of this purchase decision on operating costs must not be overlooked. Moreover, such effect will be continuous and accumulative. Thus even in the first year of operating a 3-ton petrol-engined goods vehicle averaging 400 miles a week, the total operating cost for the year could be more than double that of the initial cost of the vehicle, even when purchased new.

In contrast, if a used vehicle were operated under similar cNeumstances, this ratio would inevitably be greater. Not only would the' initial cost be lower but the operating costs, as will be shown later, will be higher. Consequently, any condition which is going to affect the operating costs of a used vehicle will have a relatively greater effect on the overall profitability of the operator's entry into haulage.

Those operators who claim that overall saving can be achieved by the employment of used vehicles contend that the reduction in depreciation and interest charges brought about by the lower initial outlay will at least balance, if not actually more than offset, any increase in the running cost of a used vehicle, such as for example in the items of fuel and maintenance.

Before dealing specifically with this contention, general comments on road transport operation and costing will provide the opportunity to put this matter into perspective. Whatever type of carrier's licence the would-be operator hoped to secure, it would be a reasonable overall assumption to base all costing on his presumed intention to remain in business for a long, if not an indefinite, period. Without entering into the contentious subject of transfer from contract A to open A licences, this assumption of continuance in business might reasonably be considered valid even if, initially, the would-be operator has planned to set up in business on the basis of the offer of a year's work from one customer.

To the newcomer this aspect of continuity may seem to have

been over-stressed, or alternatively that the whole matter is virtually self-evident. But as will be shown later it has a vital effect on the real cost of operation, and particularly in the case of used vehicles.

Another factor which has to be borne in mind is the standard of service to be provided. Undoubtedly competitive rates are a major asset in attracting new business but nevertheless a consistently good standard of service must be provided if the custom is to be retained. Whilst it would be natural for the would-be operator to assure his potential customer at the initial canvas of his ability to provide such a service, the ultimate proof would be in practice rather than in precept. And this basically demands a reliable vehicle.

DEGREES OF URGENCY

Nevertheless there are degrees of urgency and standards of reliability demanded for varying types of traffic. Obviously extreme urgency and reliability are demanded when perishable foodstuffs are being delivered, possibly to the timed opening of a market. In other instances machinery and equipment have to be delivered to the starting point of a mass-production line, in sequence at precise timings because the day's total intake and output is so great that warehousing in a buffer depot would be quite impracticable.

Conversely, in some types of building and civil engineering contracts the relative consistency of movement coupled with low costs rather than urgency or speed are the chief requirements. Alternatively, older vehicles might be considered satisfactory on local collection and delivery work.

Although this grading of traffic relative to suitability of vehicles may not commonly be considered, as such, in specific terms, it nevertheless forms the basis of the used commercial vehicle market. The fact that the first user considers a particular vehicle no longer economic for the purpose for which he required it does not necessarily mean that the second buyer is making an unfortunate purchase, nor subsequently with further purchasers. In every case the use to which a vehicle is being put must be the determining fact to whether it is economic to run it at a particular age. In this context, of course, "age" could imply not only a deterioration in the mechanical condition of a vehicle, but also that it has reached a stage of obsolescence when it is no longer attracting custom or is a discredit to the operator compared with vehicles of his competitors.

Therefore, when a would-be operator is considering entering the industry with a used vehicle he should be in no doubt first as to the type of traffic he will be carrying and the standard of vehicle determined by the level of service associated with that particular type of traffic. It is these factors, and not his possibly limited financial resources, which will decide whether or not a used vehicle would be acceptable for the job on hand. It is convenient to divide the cost of operating commercial vehicles into 10 items which are further segregated into two groups—standing costs and running casts. But although such divisions have proved satisfactory for over 50 years when

compiling The Commercial Motor Tables of Operating Costs and in this associated series of articles, it must never be overlooked that this division of the total cost of operation is one of convenience. Strictly speaking there can never be a literal, clear-cut division of overall cost because several of the items are inter-related.

To overlook this fact could be the prelude to disappointment. In striving to reduce one or more particular items of operating costs there could be a tendency to neglect the effects of such steps on other items. An obvious example is the inter-relation between the cost of depreciation and that of maintenance. Other things being equal the more frequently a vehicle is replaced the higher would be the cost of depreciation but lower the expenditure on maintenance, and similarly the converse applies.

EFFICIENT MANAGEMENT The essence of efficient transport management is to find and maintain the economic mean in this respect relative to individual operators' individual conditions. But, as claimed recently in the series when dealing specifically with depreciation, there is no near-magical period either in terms of time or mileage, at which it is beyond all question the most advantageous occasion to replace a particular vehicle. It all depends on the particular conditions applying in each and every individual case.

Any attempt to compare the operating costs of a new and used vehicle with any acceptable degree of accuracy is doomed to failure if only because there is virtually no limit to the mechanical condition which could apply to a used vehicle. Nevertheless it can be a useful exercise to consider first the operating costs which would apply with a new vehicle and then consider what items are likely to be affected if a used vehicle were operated instead.

In keeping with the hypothetical newcomer, the operating costs relative to a comparatively small commercial vehicle have been chosen as an example, namely a 3 tonner with platform body and petrol engine averaging a modest 400 miles a week.

Dealing first with the new version, the unladen weight is assumed to be 2 tons 4 cwt., so incurring an annual licence fee of £33. This is equivalent to a standing cost per week of 14s., inclusive of a proportion of the A licence fee, based on a 50-week year to allow for two weeks per annum when the vehicle may be off the road for driver's holidays or major overhaul.

Although this particular vehicle may actually be owner driven, it will be assumed, nevertheless, that the rate of wages paid is equivalent to the current Road Haulage Wages Council Regulations RH(74), Inclusive of contributions to National Insurance and an adjustment to compensate for holidays with pay, the total cost of wages is reckoned at £10 13s. 11d, for a basic 42-hour week. Substantial increases in rates are envisaged as a result of revaluation this year and the cost of garaging a vehicle will now be assessed at 17s. 9d. a week. Comprehensive vehicle insurance, assuming it is based in a medium risk area, would incur an annual premium of £87 12s., the equivalent of £1 15s. Id, a week. With the cost price of the vehicle when new amounting to £881, the equivalent interest charged per week on this outlay at a nominal rate of 5 per cent would amount to 17s. 7d. The total for these five items of standing cost is thereTore £14 18s. 4d. a week or 8.95d. a mile at 400 miles a week.

The major item of running cost-fuel-is reckoned to amount to 3.27d. per mile, assuming petrol is purchased in bulk at 4s. Id. a gallon and a rate of consumption of 15 m.p.g. is maintained. Lubricants are reckoned to add 0-23d. per mile and tyres 0.76d. per mile based on a cost per set of £96 and an estimated mileage life of 30.000. Maintenance is estimated to average 2.12d. per mile and depreciation 1.12d. per mile. This latter calculation is based on an assumed vehicle mileage life of 150,000.

This gives the total running cost per mile of 7.50d. or £12 10s. a week. Adding these amounts to the standing costs, a total operating cost of 16-45d. a mile or £27 8s. 44. a week is derived.

Supposing now, as a second example, that a similar vehicle was purchased used at two thirds the cost when new and in relative condition, the following adjustments might apply. The first three items of standing costs-licences, wages and garage rent-would remain the same, and it will also be assumed here that the insurance premium remains the same although this might depend on individual negotiations as to the acceptability of a used vehicle. Interest charged on the initial outlay would obviously be reduced and in this instance would amount to 11s. 9d., giving an adjusted total standing cost of 8.78d. per mile or £13 12s. 641. a week.

• Taking a generous view of the condition of the used vehicle, it will be allowed that the cost of fuel and lubricants will remain the same. If this vehicle is in fact' in relative condition to the reduced price, or in other words that it has already run a third of its useful life, then by the same token it is fit for another 100,000 miles (in contrast to 150,000 miles when new) before it needs replacement. If it is this newcomer's intention to graduate from a used to a new vehicle at the first replacement, then the cost of depreciation must increase, namely to 1.7641. per mile as compared with the cortesponding figure of I.12d. per mile when new, if funds are to be available when this reduced period terminates. Even if this were the only increase the total operating cost of the used vehicle would then be 16-83d. per mile as compared with 16.45d. per mile for the new vehicle.

Correspondingly, as a third example, if a still older vehicle were purchased, say at one third the cost and in relative condition, by the same process of calculations the operating cost per mile would be 1814d. per mile.

But, of course, depreciation would not be the only item of running cost to be increased when a used vehicle was purchased.

If the operator of the vehicle when new was keeping comprehensive records of costs, then he would have set up a sinking fund to provide, among other items, for the ultimate replacement of a set of tyres and for major overhaul, possibly including the replacement of an engine. Equally -obvious, any balance remaining in such sinking fund would be retained by the first user so that, theoretically at least, at the start the second purchaser should immediately set up a corresponding sinking fund with equivalent balances to provide for the same eventualities. Whether or not he did this at the outset, he would certainly have to meet this accumulated expenditure eventually either directly or indirectly by the premature sale of the vehicle on the grounds that it was no longer economic to run. S.B.

Penny Wise Pound Foolish?

Page 183

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