Grouping Should Prevent RATE-CUTTING
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IWAS glad to learn that the Road Haulage Association is sponsoring grouping schemes for free hauliers. They will need something of the sort to help them in the time to come, when the Transport Act is fully implemented—if ever it is ! The free hauliers will be " encircled." They will be cramped in their efforts to earn a living by the limit of the 25 miles radius. Within-that circle there will be, in-every district, a number of operators all competing for the strictly limited amount of work available, and the competition, amopgst themselves alone, will inevitably be keen. In addition, of course, they, will also have to face the competition of the Government-owned vehicles in the same area.
Grouping should at least have the effect of ensuring that the competition amongst themselves is fair" it should also be helpful in countering that of the Road Transport Executive.
Fierce competition amongst the free hauliers is bound to bring about a recrudescence of, price-cutting, unless some means is found of controlling it, and it is in that direction that I hope that the influence of grouping will be of value. If I know anything of the rank and file of the haulage industry, the group leaders, as they will no doubt call themselves, will have a full-time job in dealing with that problem alone.
Rate-cutting—by Instinct
The natural, almost instinctive reaction of most operators, when faced with the probable loss of a job of haulage, is to cut the rate; the only means, they argue, of avoiding that foss. Without some proper guidance from the group, and some assurance that his competitors are not going to cut the rate, price cutting will become the general rule. Indeed, to judge from my letter basket, the rot has already set in in some quarters, especially in connection with quotations for the haulage of things like road-making materials.
In one of these letters a point was raised which, although not altogether new, does indicate the existence of a fallacy which should be exposed. The subject was raised by a practical haulier who wrote: " . . . some hauliers seem to think that because some jobs—county council contracts, for instance—run into two, three or even five thousand tons, the work can be done for less than half price . . ."
The suggestion is that 5,000 tons can he carried at less Cost per ton than 50. and that a haulier is, therefore, safer in n18 quoting a cut price for a big contract than if he were giving a price for a small one. Presumably, he goes on the principle that what he loses per ton he makes up in the quantity he carries.
That is the fallacy which needs correcting: it is a fallacy which is particularly prevalent among small hauliers with the average small -hauliers' resources. For them, it is Practically as expensive, per ton, to haul 5,000 tons as it is to haul 50, for the simple reason that he has no means of organizing a big contract in such a way as to cheapen the process.
Objects of Groups am not going to suggest that the undertaking of the larger contract by a group of hauliers, which might perhaps make it practicable to cut the cost to some slight degree, should be regarded as one of the purposes for which groups are formed. The group should use its resources for other ends, such as the taking on of large contracts which are beyond the capabilities of the individual, who might be tempted into unnecessary and objectiveless rate-cutting.
To return to my point, let us consider, very briefly, the build-up of the cost of such haulage (and, therefore, the rates) to see what economies might possibly result from the undertaking of such a large contract as against a small one, and how little, in fact, the rate could be cut as the result of obtaining the maximum benefit from such savings.
First, operating costs. The conditions of this kind of work--the haulage and distribution of road stone for county councils—are usually such as to preclude the economic use of vehicles larger than the familiar 5-6-tonner—usually loaded to six tons ! It may be concluded, therefore, that th!. same size of vehicle will be used for either contract. Its cost per mile, provided the weekly mileage remains the same, will be unaltered whatever the size of the contract.
The operator's establishment expenses will remain the same, for it will not be safe for him to close his office, dispense with the telephone or otherwise behave as though he will never need to look for business again. If that be done, then heaven help that haulier when the contract is completed and further work is wanted. He will have to start all over again Then comes the question of profit. The haulier who is hink.ing_of a cut in rates mot ask, himself this one question: Am I prepared to forego any of my legitimate profit In rrder to obtain this contract 7" If his reply to that be in the iffirtnative; if he be prepared to give some of his living iway to his local council or road contractor; then the next ime he quotes he will find that one or two things wilt lappen. Either he will be expected to give-up a little more )f his hard-earned cash, or some competitor, even more !clash, will do it and so get the contract.
There is, of course, a limit beyond which that process ;annot be carried. Unfortunately, when rate-cutting is rife, is it invariably is when jobs are in short supply and lorries ire plentiful, there are many operators who are prepared
o " go the limit." Curiously enough, my correspondent, vhile inveighing against the, practice of working for less than minimum of profit, is not, on his own showing, making ranch out of the very job he quotes as an example-or at east he would have made very little profit if a rate-cutting :ompetitor had not undercut even his low price.
Quotations for Council Work He refers to a job on offer by the local council. It was for he cartage of road material from a station to one-and-threewaster miles each side of the station entrance, This, 1 ake it, means that the road was being remade over a stretch hree-and-a-half miles long, the station being in the middle. or this work he quoted 2s, per ton. Another contract on )ffer, also for the haulage of road stone, was from the same .tation to the next section of road, the haulage distance being 'rom two to four miles. For this he quoted 2s. 6d. per ton. [he contractor who did the job was paid at the rate of Is. 9d per ton for the lot, that is, for carting the stone for he two lengths of road.
According to my correspondent, the second of these two obs would involve working as follows:-He would be ab;c:
o make five deliveries of six tons each per day, with a ample of loads on Saturday., The average distance per load vould be six miles and the total mileage per week 162. Tv),) nen would be employed on each vehicle, and they would vork about 50 hours each per week, that is, six hours over:ime each. In his viennthe outplit at that rate would be easonable, and difficult to improve on, and with that I roust tgrce His weekly tonnage, as can easily be reckoned, is 162, and his revenue, at 2s. 6d. Per ton, would thus have nen £20 5s.
What Might Have Been Before dealing with the case of his rate-cutting competitor. et us see how my friend would have made out if he had .ot the job. We must assess his cost of operation as the irst step. 1 will take the average price of a 5-6-ton tipper 0 he £800. The tyre equipment should be 34 his. by 7 iris. rn the front wheels and 36-in. by 8-in, twins on the rear. [he cost of a set will be 1105. I must deduct that from he £800 initial cost of the outfit in order to calculate depre:iation. Presumably the vehicle ill run for 120,000 miles nfore the operator replaces it; getting, say, 195 in part ;xchange for a new one.
The net value of the vehicle is thus 1800 less £105 less :95, which is £600. Depreciatiog 160d over 120,000 miles iives I.2a, per mile. There must be an additional allowance 'or obsolescence, which I calculate at 20 per cent., so that ny actual figure for depreciation, including obsolescence, s 1.44d.
I can now assess the running costs altogether. They sill mproximate to the following, in pence per mile: Petrol; assume 9 m.p.g. and Is. lid. per gallon . 2,22d, Lubricants; engine oil at 64. per gallon 0.18d.
Tyres; 20,000 miles per set, 1.105 per set 1.26,1.
Mairsienance 1.78d.
Depreciation and obsolescence I 44d.
Total running cost per mile 6.88d.
Now for the fixed costs, including establishment costs. fhese are calculated on a weekly basis. My correspondent las already told me that he would have expected to work 50 hours per week and I am going to take that as a basis or my calculations, providing for that amount of overtime The vehicle was run 162 miles per week and the cost of that mileage. at 6.88d. per mile, is £4 13s. (to the nearest penny). Add the £18 for fixed charges and we get the total of his expenditure per week on the one vehicle to be £22 13s. We have shown, however, that his revenue would have been only £20 5s., so he was not going to make any profit.
It is of interest to see what he should have charged. In order to assess this we must first agree upon a fair profit. In my view that should not be less than 20 per cent. of his expenditure, which is £4 lls. per week. His revenue from this contract for ea'uls vehicle employed should, therefore, be at least 127 4s. For that he carries 162 tons, so his rate should be at least 3s. 4A. per ton. Even if he disagrees with me as to the percentage profit, and earns what I regard as the absolute minimum figure for any class of haulage -15 per cent.-his profit will need to be £3 8s, and his rate per ton 3s. 2td.
Seven Runs a Day
• It is fairly obvious that his competitor, with a flat rate of is. 9d. per ton for the combined contract, is in a worse state. Let us go into the figures and see just how he stands.
Assuming that he manages to make an average of seven runs per day over the whole contract, this means, of course, that I am taking into consideration the fact that he is doing the short hauls as well as the long ones, so that, over the short runs, he will get in more journeys per day than were reckoned on by my friend, who considered only the longer distances. I will allow for three runs on the Saturday. The total number of journeys per week will thus be 38 •and the tonnage carried, at six tons per journey, will total 228.
The average length of toad should be two miles, that is, a distance of four miles per average trip. The total weekly mileage will thus average 152 and the running cost at 6.88d. per mile, will be £4 8s. Add the £18 per week for fixed charges and we get a total weekly expenditure of 1.22 8s. His revenue is what he gets for the haulage of 228 tons at Is. 9d. per ton, and that is only £19 19s. He is, therefore, making a greater loss than the other fellow, which is \shirt we expected to find.
A Profitable -Charge Now to assess the rate which he °tight to have charged.. His cost has been shown to be £22 8s. Add 20 per cent. to that and we find that his weekly revenueshould have been £26 I8s„ showing a profit per vehicle of £4 10s. per week, His rate, to earn that revenue, must be very nearly 2s. 4A. per ton. If we take the pereentage profit to he 15 instead of 20. the weekly profit is reduce to £3 7s, 6d. the total essential revenue being ..£25 15s. 6d. and the rate per ton, accordingly, a fraction over 2s. 3d. per ton.
Another instance quoted in this letter is worthy 'of reference because it is obviously one of those cases in which each
haulier in an area tries to outbid the other Haulier succeeds haulier in quoting less and less than his predecessoi until eventually the work is done at a giving away price by the successful C?) tenderer: This was another contract for the cartage of road materials. The distance was eight miles. My friend quoted 4s. 1 Id, per ton, and from the experience gained in the preparation of this article I should imagine that even that was a rock-bottom price. A sornpetitor offered to do the work for 4s, 9d. and a third thought 4s. 6d. enough. None of them got the job and the inference is that it went for 4s, per ton.
It will be interesting to go into that next week and see what the rate ought to have been S.TR,