The Problem Of Those
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FLAT RATES
BY coincidence it happened that not long after I wrote the articles showing how the size of vehicle was a determining factor in the appropriate rate I met a
country haulier in trouble over a similar problem but in different guise.
He had been engaged, I gathered, rather spasmodically in the conveyance of artificial manures from the local goods station to farmers. He said, "You are just the man I wanted to meet. I have a difficult problem and I would like you to help me solve it."
"What is it?" I asked.
I am trying to work out a system of flat rate charges for the carting of artificial manure," he said. "I collect the manure from the rail head at the local station and make deliveries over a 10-mile radius,"
Not a True Flat Rate
"What basis have you in mind for your flat rates?" I asked. "Is it to be a rate per ton for any distance within the 10-mile radius or a charge for any tonnage within the capacity of your vehicle, or what?"
As a matter of fact," he said, "it is neither of these. 1 am new to this business and there is a competitor already in the field, who has such a scheme in operation and what I am really anxious to know is whether I can operate at his rates or at rates less than his or otherwise. What it really boils down to is the planning of a flat rate per ton per mile."
"That is not what I would call a flat rate," I objected. " It is merely an ordinary schedule of charges per ton over a specified range of mileages."
"There is a little more to it than that," he said, "for I want the rate to apply no matter what the load is, so long as it is within the capacity of my vehicle."
" It does not sound a very good scheme to me," I replied. " What size vehicle are you using?"
"I have two," he said; "one is a 30-cwt, and the other a 4-tonner,"
Influence of Vehicle Size
"That is going to make it extremely difficult to work out a scheme of what you call flat rates, which is what I call a schedule of rates per ton for different mileages. There is tremendous disparity in the cost per ton of traffic carried in a 30-cwt. vehicle and the same material carried in a 4-tonner,, and if you persist in this idea you are going to land yourielf in all sorts of trouhle. You.will find that, after a little while most of your loads will be small ones."
Why should that worry me?" he asked.
"Well, this is why," I answered. "First of all think how you are going to calculate your flat rates as you call them. There are three possible methods. You may assess the rates on a basis .which will give you a reasonable profit on small loads; you may calculate them in such a way that you will make no more than a reasonable profit on large loads, or again, you may take the middle course and calculate your rates so that medium loads will be reasonably profitable."
"I still don't appreciate," he said, "what your objection is and why I should worry if people prefer to give me small ioads instead of large."
" It is really very simple," I answered. "The rates for small loads are bound to be higher than those for large loads, so that if you adopt the first scheme you will have to put your rates up to a figure which those who really want to offer you large loads will not pay. On the other hand, if you fix your rates in such a way as to make a reasonably and possibly narrow profit on the carriage of large loads, there will not be enough revenue from small loads to cover your costs. People having small loads to offer will seize upon that advantage and you will find yourself carrying a majority of small consignments and you will be working at a loss which cannot be offset by any gains you may Make from time to time on large consignments because you have fixed your profit ratio on the carriage of large consignments only."
"Well," he said, "isn't there yet another way of doing the job, by calculating the rates on the basis of small loads and offering reductions to those who offer me larger consignments?"
In that case," I said, "your whole scheme of flat rates goes by the board and you might just as well save yourself the trouble of building it up. "That," I continued, "disposes of the first and third methods of working out your flat rate. If you adopt the second method, that is to say, take medium loads as a basis for your calculations, you will, as it were, miss both boats. You will be offered large loads only if you agree to a small rebate on account of the fact that they are large loads. You will obtain a few medium loads which will give you the profit you aim to get but you will have plenty of small loads on which the profit will be practically nil.
Consignments Little and Often
"You must bear in mind," I went on, " that farmers aim to make use of transport to relieve them of tile necessity of carrying large stocks. They prefer their consignments _ to be little and frequent so that in that way they may reduce the amount of capital locked up in stocks and be more or less assured that their goods are nearly always fresh.
"If you encourage these people by charging them the same rate per ton for small consignments as for medium or large, you are in effect encouraging them to apply that principle even more widely and at your expense."
"But what if,! told you that there is a competitor in the field who is already doing what I wish to do," he said. ." He i3 charging the same rate per.ton for any load up to and including 6-tons and he is using a 6-ton lorry for the job."
"What are the rates like?".! asked. • , . . He produced a printed hand-bill headed "For the Cartage of Basic Slag, Phosphates, Nitrate of 'Soda and Other Artificial Manures from Station to Farm in 3-ton lots ":— "But this schedule quotes a minimum of 3-tons per load," I pointed out. " Yes," he said, "but they don't stick to that and every farmer knows that he can get a ton carried at the 3-ton Ilrrate if he insists."
" It seems to me," I said, "that the best thing we can do is to get down to figures and see how your rates would work out applying them to your two vehicles. "Let us take the 30-cwt. vehicle first. What mileage do you get per gallon?"
" It averages about 16," he said.
"And what do you pay per gallon?"
"I pay 2s. Old.," he said, because I have no facility for bulk storage and am buying at the retail rate."
" That is 11d. per utile for petrol as near as makes no matter," I said. "I will allow id. for oil.
"Now as to tyres. What are they, and how much do you pay for a set?"
They are 32 in. by 6 in.," he said, "and cost me £42 per set. I have to do a lot of travelling on had roads and tyre wear is rather heavy.. I reckon on an average of 14,000 miles per set." I worked that out in front of him and showed him that the cost per mile was, within a very small amount, 1d. He was agreeable to my allowing Id. per mile for maintenance.
"Now we must calculate depreciation," I said. "How much did you pay for the vehicle new?"
"Four hundred and eighty two pounds," he said.
"First," I said, "you take £42 away from that as being the cost of tyres, leaving £440 and I will assume that when you have done with the vehicle you get EGO for it in part exchange for a new one and £60 from £440 leaves £380."
I allowed 120,000 miles as the life of the vehicle and showed hint that that was equivalent to Id. per mile for depreciation.
"Now," I said, "we have the total of your running costs. lid; for petrol, Id. for oil, Id. for tyres, d. for maintenance and 1d. for depreciation. The total is 31d."
Then together we worked out his fixed charges as follow: Licences, 12s.; wages, in a Grade II area, £4 7s.; employee's insurances, provision for holidays, 5s.; insurance (he told me he was paying £26 per annum), 10s.; garage rent, 5s.; interest at 21 per cent, per annum on the capital outlay, 5s.; and overheads (this after a little argument), £2 per week. The total is £8 4s. per week.
"Now," .1 said, "what we must do is get that down to a figure for cost per hour and we have to base that on a 44-hour. week and if we divide £8 4s. by 44 we get very .nearly 3s. 9d. per hour. • "The next thing I want to know," I said, is how much profit you expect to make with this lorry."
" Well," he .said, "I reckon on earning £3 10s. per week with it:" "Right," 1 said, "that is another Is. 9d. per hour,
"Now what L propose to do is put the whole of the profit under the fixed charges so that no mailer how little the mileage May be you will still make your £3 10s. a week. We must therefore work out your rates in such a way that they bring you in 5s. 6d. per hour plus 31d. per mile.
"Now how long does it take you to load 30 cwts.?"
"Oh, a quarter of an hour," he said, and the same to unload."
" Very well, then," I said, "I will take your figure of half an hour as being the total of terminal delays. That means that ever, load must be charged up with 2s. 9d, for that half hour's time.
"Now," I said, "take a one-mile lead for a start. How long is it going to take to run that one mile out and another mile back again? Can you do it in five minutes each way?"
"Yes, I think so," he said.
"Well, then, you have ten minutes, that is one-sixth of an hour, at 5s. 6d. per hour for travelling time, which is 11d. To that you have to add 31d. per mile for two miles, 71d., and the total is thus Is. 61d. Add is. 61d. to 2s. 9d. and you get 4s. 31d., the charge you must get for carrying 30 cwts, of manure one mile; that is almost 2s. 10d. per ton, so that you are 10d. above your competitor already in the first mile. However, let us go on.
"I think it reasonable to take it that the second mile of a two-mile lead will be covered a little more quickly than the first mile and I will allow four minutes each way, that is eight minutes altogether."
I then worked out for him the cost of eight minutes at 5s. 6d. per hour and showed him that it was 9d.
"To that 9d. you must add a further 71d. for the two miles at 31d. and you get ls. 41d. and that is equivalent to an addition of I Id. per ton for the second mile and your must therefore charge for the two-mile lead, 3s. 9d. per ton.
"I will take it," I said, "that every mile after the second is covered in three minutes, that is six minutes for the total distance. Six minutes at 5s. 6d, is worth 61d. and that plus the usual 71d. means you must charge Is. 2d. for 30 ewts_ for every additional mile over and above two. That is equivalent to 91d. to be added per ton. That would mean the rate for a 3-ton load would be 4s. 61d. We don't want odd half-pence so we will add 10d. to this third mile, 9d. for the fourth, 10d. for the fifth and so on, so as to keep that 91d. in mind all the time."
The upshot was that we arrived at a table corresponding to his competitor's, as follows:
"Now," I said, "we will see what we can do if you use the 4-tonner and calculate your rates for a 4-ton load."
I went through the figures with him in the same way as I have done with the 30-cwt. vehicle, arriving at-basic figures of 6s. 2d. per hour and 5d. per mile. We took the same times, except that, of course, the terminal delay for 4 tons was an hour and a quarter instead of half an hour, and in this way arrived at yet another schedule of rates as follows: "Now if we suppose." I said, ' that you are going to fix on a 3-ton rate, then you will have to increase that schedule as follows: It looks as though I shall have to leave him to carry his manure," he said," and stick to the work I already have."