Solving the Problems of the Carrier
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Some Further Points on Milk Haulage
Two Actual Examples of Costing Which Show the Mistakes That May be Made; How to Allow for Mileage Covered by a Vehicle on Other Than Milk Haulage
IN the previous article I dealt with some of the difficulties which arise in connection with milk haulage and I gave some figures which had come to me in the course of investigation into costs and rates.
The example quoted in the previous article arose from a request made by a milk haulier for an increase in the rates which he was being paid. His request had to go to the Milk Marketing Board , which adjudicates on these matters although, whenever any question arises other than on rates, the Board is always at pains to point out that the • contract is between the farmer and the haulier.
A few weeks ago some of the figures shown in Table H were sent to me by a milk haulier friend of mine. I say some of the figures, because the actual data for gallons per month and pick-ups on the route during each month, were not included; the first I calculated from the revenue, whilst the figures in the Column giving the number of pick-ups are largely assumed..
I should like again to emphasize, as I did in the previous article, an important point in connectMn with milk haulage, and that is the widely fluctuating gallonage. Looking at these figures it will be noted that, whereas between August and January the gallonage per mouth is in the region of 9,000 to 10,000: in May it rises to 19,988, which is double the minimum.
Heavy Maintenance Costs Leave a Negligible Profit This operator told me that he had been approached in this case by the M,O.W.T. to supply a lorry for the collec. tion of milk over a district in his area, for delivery to a point some 30 to 35 miles away, and apparently there were two journeys per day for which he told me that the daily mileage fluctuated between 120 and 140. The vehicle used was purchased for £650 and, after a period in which, for reasons well known to most operators, it suffered considerably from burnt-out valves, it settled down and has since given reasonably good service. Nevertheless, the trouble which did occur took tip a fair proportion of the time covered by the figures in Table II, and involved not only heavy maintenance cost but considerable expenditure on the hire of another vehicle to.take its place while it was being repaired.
He had contracted to do the work at a price of 2d. per gallon, this, as usual, being fixed by the Milk Marketing Board. He asked me for my view of the figures,and for an indication as to what rate he ought to obtain, assuming that he took on the contract for another year.
My immediate . reaction, when glanced at the figures, was expressed in my letter to him,, in which I said that, without making any calculations at all, it was clear that he was running this contract at a considerable loss, for, ivhilit the difference between payments and receipts,' as shown in Table .II, is aefnally £3 Ss 6d.—prbfit Over the year—there is no provision whatever in that part of the table ,beaded "pay
ments " for annual taxation, insurance of the vehicle, garage rent and rates, or for depreciation. These are bound to make a substantial difference and will certainly more than wipe out the negligible profit of £3 5s. 6d. per annum. It seemed to me that the best way to deal with the problem was to compile a fresh set of figures for " payments," including in it the items omitted, as well as those expenses, already set down.
Following that course, and dealing first with fixed expenses, my assessment iS: Tax, £30 per annum: wages (from Table II), £336-1 omit the odd shillings and pence as they make no material difference to the total; garage rent, say, £13; insurance, 235; overheads, £90—this is taken from Table II but seems tip me to be insufficient; hire of vehicle, £120—total, £624.
Operating at a Loss of £282 Per Annum
In assessing the running costs per mile. I have followed the same., course, that is, I have accepted the fignres given to me in Table II, although I am of the'opinion that further experience will showy they. ought to be modified somewhat in accordance with the comments given below, First, as regards petrol, 1.77d.; lubricants, 0.15d,; tyres, 0.35d. (this figure will not stand for long when my friend gets down to using present-day tyres); maintenance, 1.35d.; depreciation, 1.00d.—total, 4.62d.
As the daily mileage is given as 120 to 140 it seems reasonable to take the average figure of 130 miles per day as the basis for calculation of cost. Taking seven days per week and 52 weeks to the .year, the annual mileage is thus 47,320. At 4.26d. per mile the total of running costs to the nearest pound is £911. The total expenditure per annum, therefore, is £1,535, which indicates that my friend is operating at a loss of £282 per annum, which is not good. Before giving him any advice as to the rate he should obtain for this work, it is necessary to agree on the percentage. of profit to which he is reasonably entitled. On that, as I have repeatedly pointed out in these articles, the Milk Marketing Board has some extraordinary views. They are so extraordinary that I see no reason why I should give further publicity to them. My, opinion, as is well known, is that no haulage contractor can operate for less than 15 per cent, on his expenditure and, left to my own devices, I should use that percentage as a Means for assessing the rate. However, my friend is evidently somewhat diffident in his commercial dealings and, in order to meet his views, I. decided to work the figures.out in the first instance on the basis of 10 per cent, and then, in the second, on 15 per cent.
Adding 10 per cent. to £1,535 we get £1,685: approximately, and that is the revenue he must earn. The annual gallonage, hitherto, has been in the region of 150,000, and if the total of.£1,685 be divided by that total gallonage we get the figure of 2.7d. per gallon, which could be taken as 2iti.
In the course of his letter, however, my friend pointed out that the district from which 'he collected the milk was not really a milk-producing area, the land being more suitable for root growing, and it seemed likely that, in subsequent years his gallonage per annum would decrease. He asked me to make provision for that in my calculations.
That is son ewhat difficult without having sons' real idea of what the
animal gallonage is lileely tobe. and the mesteI could da was to point out, as he probably already appreciated.
that when the gallonage drops' the rate. per gallon must go up. For example, if instead of 150,000 gallons he collects only 120,000 per annum; 'then he will have to obtain 30. per gallon in crder to earn that minimum amount ei £1,685.
In my view, a proper rate for this contract is one which shows a profit on
expenditure of 15 per cent. Adding 15 per cent; to £1,535—the net figure 'for expenditure—we get £1,760 as the revenue which ought to be earned. With gallonage at 150,000 per year, the revenue must not he less than 2.8d. per gallon, and if the gallonage drops ta 120,000 then the rate must be 31il.
No Reduction in . Operating Costs Possible Looking through his figures, it does not appear 'that there is any way in which he can reduce his costs in order to bring down the rate. Admittedly, the maintenance cost is high, butI. think the tyre cost is low. I am surprised, too, that the expenditure on petrol is as low as 1.77d.; I should have expeCted it to be 2id. at least, afiel I am wondering if there is not a mistake there. At any rate, any possible saving in cost of maintenance is more than likely to be offset in the future, in the increases in cost of tyres and fuel.
Some opportunity for saving may
arise, assuming that the need for repairs diminishes, in the figure for hire of a vehicle to replace the normal machine while-it is undergoing repairs, but even if -the whole of that amount were taa.be wiped out, as is most unlikely, the saving would amount to no more than id. per gallon.
. Actually, I would regard £60 per annum as a minimum to be set aside for occasional. hire, and if the figure be brought down to that the saving would arnounfto only *d. per gallon. One thing is perfectly clear, beyond the shadow of a doubt, and that is that my friend is better without the contract at 2d. per gallon. '" The other figures, which I reproduce in Table III, arise from a conference I had with some South Wales operators in the earlier days of the war, when I had the pleasure of conferring with a combined meeting of A.R.O. . and C.1V1.U.A milk hauliers in Carmarthen. The areas from which the milk was collected,' and in. which most of the operators resided, were rural, but as the milk was taken into a Grade II town the operators had to pay the Grade H scale of wages.
It was necessary to deal with the problem from two angles First, taking the case of vehicles covering an average mileage of 400 per week "and solely engaged on milk haulage and, secondly, vehicles covering an average of 500 miles per week, of which mileage the vehicle was running
100 on work other than milk haulage. The gallonage I was asked to take as "the basis for calculation was 4,000 per week.
As usual, the operators were somewhat vague as to the actual amount of some of the essential items of operating costs, so that I had to take some figures from them and supplement them by my own, taken from "The Commercial Motor" Tables of Operating costs. As an example of how far out their ideas were, -one or two of them wanted to suggest to me that id. per mile would cover maintenance costs. During a " cross-examination " they admitted that they were paying approximately 10s. a week for washing and cleaning the vehicle, and when 1 pointed out that 10s. per week on the hasis of 400 miles per week was, in itself, more, than, id. per mile, they weie intensely surprised.
However, in the end, we did agree on a series of operating costs;" not those in Table III, but some corresponding to them, for I have taken the original figures and modified them in order to bring them up to date.
Little explanation of the figures is necessary, except that, for the sake of
simplicity, I have assumed that the driver normally works 48 hours per week, of which eight hours is on Sunday, so that he is paid at time-atid-aquarter for eight hours of the 48. That may not be strictly correct, but the difference between that and the actual amount is not sufficiently large seriously to affect the result of the calculations.
Having arrived at the totals, namely, £19 lfis. 10d. cost for 400 miles per week and £22 7s. 8d. for 500 miles per week, I proceeded to deal with them in this way First, for vehicles covering 400 miles per week The total cost is 4,762d., which, for 4,000 gallons per week, is 1.19a. per gallon.
Insufficient Payment
Complaint was Justified Taking an approximate figure f
15 per cent. for profit, and assessing that as £3 as. 2d, per week, the revenue should he £23 per week, and the charge 11380. per gallon, say lid. That is :he conclusion regarding the vehicle running 400 miles per week and solely engaged on milk haulage.
Incidentally, the operators were getling what is now equivalent to Id. per gallon. They had thus ample justification for their complaint that they were being insufficiently paid.
As regards those vehicles covering
500 miles per week, with a total cost of £22 7s. Rd., I deemed it reasonable to deduct one-fifth for the 100 miles' run on traffic other than milk, bringing the total to £17 18s. 2d. as the cost of milk haulage. To this I added £3 Is, 10d, for profit, making the figure for minimum revenue to be £21 per week, and that, for 4,000
gallons, is 1.22d. per gallon, or lid. _
I see that I was correct in a prophecy I made, early in 1940, when I gave a warning on the question of the rise in maintenance costs. I warned operators ,tat the cost of material and labOur would increase; that difficulty in obtaining spaee parts would be likely to involve considerable delays ju effecting repairs, with ensuing expense because vehicles would be out of commission and others would have to be hired in their place: that vehicles, then owned, would have to be in commission much longer than hi,therto because of the probable difficulty of obtaining new machines, thus, again, increasing maintenance costs; and of the likelihood of the higher cost of new vehicles when they could be acquired.
The moral of these stories of milk hauliers is largely this: that a country-wide stabilized rate is impossible.
Any basis for calculation of the rate must take into consideration the three principal factors of time, mileage, and gallonage, each ass6ssed on average figures collected over
a year's working and revised yearly. S.T.R.