RATES-STABILIZATION DIFFICULTI :REATED BY DIVERGENT COSTS
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One of the Several Trying Problems Involved in Agreement on a Countrywide Scale is Big Divergencies in Costs : Some Preliminary Figures are Given in this Article Solving the Problems _
of the Carrier
HAVE before me a note from a friend which, Oriel though it be, raises a question of considerable import ance. He refers to the fact that there are outstanding difficulties in agreeing rates for haulage, brought about by wide divergencies in costs as between those experienced by one operator and those of another, also as between one district and another. These divergencies are not, neces= sarily, due to contrasting efficiencies of operation, hut to causes beyond the control of the ihdividual operator.
His particular reference was to tyre costs, and he quoted two cases. In one instance the life of tyres approximated to 35.000 miles each. In the other the figures given by the operator in the same town showed an average tyre life of only 9,000 miles. This, my friend points out, is but one of many items of operating costs and a typical example of the differences we may expect to find.
• Where Greater Costs Differences Exist • The point raised is an important one, and the problem arising from it will be found most difficult, although not incapable, of solution, as I hope to show. In my view, however, it is more likely that in overhead and establishment costs greater differences will be found. In turning that over in my mind, I recall that I have not yet dealt with the answers I received to the little problem I set in an article which appeared in the issue of The Commercial Motor, dated March 9.
In that article I set out a series of lists of establishment costs: Each list was, in fact, derived from the books of an operator. •There were three given, one relating to a fleet of three vehicles, another ts a fleet of eight, and the third to a fleet of 15.
The only amendment I made to these schedules was to bring them all into line, in respect of the items included. If one schedule contained an item which was missing from the others, I included that item in them, and took a figure' which I thought reasonably applicable.
I did observe that all three had omitted one item. It was not one of great importance. in so far as the amount was concerned. It would mean only from 35s. to 35s. per annum per vehicle. That, admittedly, does total, in the three examples, as much as £4 10s., £12 and £22 10s. respectively. Even so, that is but a small fraction of a percentage of the total.
The reason I stressed this omission, and drew special attention to it by asking readers to send me letters giving their views on what was omitted, was because, in my opinion, a matter of principle was involved.
• An Item That is Not an Operating Cost Many hauliers have expressed the view that the item omitted—the cost of an A or B licence—is something which ought to he included in vehicle operating costs. With this I entirely disagree. I do so because the amount is not one which is affected by the type and size of vehicle, and its inclusion would upset any comparison as between one vehicle and another. Its inclusion is in contradiction to the principles I have so often stressed, namely, that the operating costs of a vehicle must comprise certain welldefined items if we are to be able to deal with the costs in a sound manner.
The correspondence which arose was interesting, in that it gsowed there were several omissions from the schedule of items which I had gathered.
Actually, two only of the many who wrote me selected the correct item. Nine additions were made, as follow :— Maintenance of buildings, insurance of buildings, bad debts, claims, interest on capital invested in the business, postage, A or B licences, heating, and advertising. The
addition of these nine to the 19 already included makes 28 items in all.
Some suggestions were made which are nOt admissible at all. One correspondent suggested the addition of (a) Road Fund tax, and (b) vehicle insurance. Both these, as should be well known, are actually included in the vehicle-operating costs; they are not establishment costs or overheads at all.
Another suggested that I had omitted (a) foreman's wages, and (b) National insurances. These are not overheads. The foreman's wages must be included in the maintenance costs of the vehicle, which are running costs. The National insurances are included with the item driver s wages, which is a standing charge.
• Relation of Net Profit to Rates as Apart from these errors, and considering only those additions which I accept, the point that immediately arises is this. Assuming that my friends have not, as may be the case, included some, or possibly all, of these additional items in those already scheduled, then clearly the amount of net profit that they are actually earning is less than they imagine it to be. Their haulage rates are lower than they should be, in that proportion.
Moreover, nine out of 28 items is a considerable percentage, although, perhaps, the amount involved is nothing like so much as might appear from a consideration of the number of items omitted.
Now, the establishment costs, as shown in the original article, and short of these nine items, were equivalent to 12s. per week per ton of carrying capacity. That is about £3 per week for the usual types of 5-tonner. That seemed excessive to many hauliers, especially those who have never kept accurate records of their establishment costs, or set them on a proper basis. Yet, according to the corrections put forward by these many readers, that figure must actually be too low. In that there is considerable food for thought.
Now I must return to the subject of costs variation, taking first of all this serious item " establishment costs." There are two ways in which to look at it—first, as between operators engaged in the same traffic but in different areas, and, second, operators in the same area but carrying different traffics.
The former is clearly the more important. If we be considering the establishment of a country-wide system of haulage rates, wide diversions of costs are, in my opinion, an insuperable barrier to such stabilization, in so far as • purely local traffic is concerned.
• High-cost versus Low-cost Areas If the rate be set high enough to show a reasonable profit to those operators working in an area where establishment costs, and other expenses as well, are high, it will be impossible for the man in a low-cost area to accept them, for if he charges them to. his customers they will reply by buying their own vehicles and carrying their own traffic. On the contrary, if the rates be set at a level to comply with the conditions in a low-cost area, they will be uneconomic, so far as the man in a high-cost area is concerned.
Some time ago in this series of articles. I showed what a tremendous difference there could be as between the cost of operating vehicles of the same size and type, engaged in similar traffics, and to all outward appearance subject to the same conditions of operation. The total divergence in costs is considerable, if, in addition to differences in operating conditions, there be, as is inevitable, variations in establishment costs and overheads.
I shall show, in a subsequent article, that in establishment costs alone there can be such a difference as between an operator in a high-grade area and one in a low-grade area, as would make a profit for the latter and convert it into a loss for the former. S.T.R.