Private fleet managers often face the need to find capacity on the fly when surge or out-of-area volumes demand. With coverage areas that are often limited by their own fleets, managers must quickly find efficient, cost-effective ways to deliver freight without compromising service. They must also venture outside their comfort zones and tap into unknown service providers that are already overwhelmed with requests for capacity.
Supplementing your private fleet with a dedicated team can take the pain out of this process by building in reliable, flexible capacity solutions-solutions that leverage the purchasing power of America's largest, most reliable truckload transportation providers.
The overarching advantages of managers supplementing their private fleets with dedicated teams include improved service, flexible capacity and lower costs.
Private fleet operations divert valuable resources away from a company's core business. For a private fleet to make financial sense, it must be large enough so that the difference between the private fleet's total cost and a dedicated carrier's cost is less than the shipper's operating margin.
Augmenting private fleets with dedicated capacity allows fleets to reduce their capital investment since the dedicated carrier can assume ownership of some portion of the private fleet's equipment. Thus, shippers can reserve and better utilize their capital in more profitable ventures within their core business, increasing overall return on capital.
If your company is operating at 20 percent margins then the capital investment in your private fleet should instead be utilized in new store, plant, equipment or other core business needs. And, if your margins are lower than the average trucking company, there are far greater uses of capital in your company than a private fleet. Most companies ought to have a better return on their capital than trucking, yet this is a way of looking at the business that is foreign to many fleet managers. Today's fleet managers need to think like a CFO-otherwise the CFO is likely to start thinking for the fleet manager.
In most organizations, it is difficult to determine the actual cost of operating a private fleet. Because fixed costs are commingled with other corporate operations, it is often difficult for private fleet operators to have the requisite visibility required to measure costs and return. As a rule-of-thumb, fixed costs account for 15 to 20 percent of total fleet costs. These would include licenses, truck leasing expenses, inbound and outbound drayage costs, road taxes and truck, driver and cargo liability as well as insurance, purchasing department time, management wages and attorney fees, to name a few. Supplementing private fleets with third-party dedicated fleets offers some relief.
In addition, return on capital will continue to be undermined by the increased challenges and expense posed by changing hours of service (HOS) regulations. Moreover, new engine specifications to meet EPA regulations in 2007 will require new equipment and increased costs. Add to that the increased federal pressure to implement electronic logging, and it's easier to understand how the overall landscape for operating private fleets will continue to become more complex and expensive.
Fuel is the second-largest cost to transportation companies and fleets alike. In the wake of Hurricanes Katrina and Rita, oil refinery and pipeline capacity was significantly affected and prices spiked. In early October, fuel prices in affected markets were still up more than 80 cents per gallon and nationally prices were still up 50 cents per gallon. While prices will normalize over time, they will do so very slowly. Even in light of natural disasters, fuel prices continue to rise amid strong demand and tight global capacity.
Private fleets find a fuel safety net when augmenting with dedicated teams. Large transportation providers enjoy economies of scale since they purchase up to one million gallons of fuel per day-at that volume, they see price incentives that private fleets alone could not achieve. These volume-based savings on fuel are passed on to private fleets when dedicated services are employed.
Very few companies correctly account for the liability endemic in operating a fleet of trucks. Most companies are typically not large enough to handle the economic blow of a serious accident. Multimillion-dollar lawsuits for one accident are not uncommon in today's environment. As a result, companies must absorb increasing insurance premiums and higher deductibles, not realizing how much liability risk they are actually exposed to from an accident. Insurance costs in the transportation industry have been rising dramatically and show no sign of a reversal.
Incorporating the dedicated services of an established transportation provider allows fleet managers and their companies to reduce liability risks since the dedicated carrier assumes some of the existing private fleet's assets and drivers. If the dedicated carrier provides world-class driver training, for example, the shipper's accident and litigation rates lower, helping keep insurance costs, claims and attorney fees lower.
Throughout the year, companies experience promotional or seasonal "surge," or a sharp rise in demand for transportation services. Given the prevailing driver shortage, it can be extremely difficult to find sufficient qualified drivers to keep pace with surge, which frequently coincides with industry-wide spikes in demand. Companies can insulate against capacity shortages by augmenting their fleets with dedicated services. Large carriers can not only tap their own resources, but those of qualified partner carriers as well. Being able to bundle capacity from many sources together to quickly add capacity, without having to purchase more equipment and hire more drivers, creates extraordinary flexibility when surge occurs.
Dedicated carriers also provide flexibility in the types of driver expertise and specialized equipment they can bring to the table. It takes more resources (e.g. training, licenses, equipment, etc.) to handle unique loads like chemicals, glass or other special freight. A dedicated carrier can help segregate out parts of private fleets that require specialized equipment. Dedicated carriers should be flexible enough to cater to requests for refrigerated, roll door and side door trailers, light weight trailers or extra axle trailers. This brings stability to the private fleet, allowing it to focus on its bread and butter freight.
A critical factor facing private fleets and carriers alike is the ability to hire and retain trained drivers consistently. The driver shortage is one of the toughest challenges facing the transportation industry.
There are many costs associated with maintaining an adequate driver force. How do you effectively recruit drivers? How do you ensure driver training instills operating skills and safety? How do you retain your drivers and keep turnover down? Industry figures for driver turnover average more than 100 percent per year, requiring ongoing recruitment and training efforts. Many private fleets overpay their drivers in an effort to slow turnover, and are still unable to meet capacity demands.
In addition to the ongoing challenges associated with driver recruitment and retention, in the wake of Hurricanes Katrina and Rita, fleets will be competing for employment with high paying construction jobs in the South. The nation's southern states have traditionally been a great source for driver recruits, but with the predicted demand for construction jobs in the region we can expect the labor market for drivers to be even tighter.
President Bush recently suspended the Davis-Bacon law on all federally financed construction in areas hit by the hurricanes. That law requires the federal government to pay the prevailing wage on construction projects, which is often higher than the local minimum wage. Suspension of Davis-Bacon will result in good paying jobs that will compete with driving positions. It will therefore be more challenging to lure job seekers to driving positions when they can find employment that not only pays well but also gets them home each night.
Large transportation companies have the infrastructure and expertise to recruit, train and retain hundreds of drivers each month, again enjoying greater economies of scale than private fleet operators. By tapping a dedicated carrier, private fleets can enjoy easy access to much needed driver capacity.
By utilizing state-of-the-art technology specifically designed for the transportation industry, dedicated carriers can help increase a private fleet's revenue and level of customer service. Dedicated carriers equipped with satellite communications and trailer tracking, for instance, enable private fleets to immediately benefit from greater visibility into their shipments, and real-time load location and status. Improved visibility and tracking can help private fleets reduce costs by reducing waste and losses (e.g. empty loads, lost trailers and long waits at loading docks).
Investments in technologies like these are not reasonable for most private fleets. Rather, private fleets benefit from the size and scale that a larger dedicated partner can provide. As with so many other purchases, dedicated carriers enjoy economies of scale by purchasing higher volumes of technology licenses at deeper discounts. And by augmenting a private fleet with dedicated services, your company can immediately realize the benefits of that technology.
There are many reasons why a company would enlist the dedicated services of a third-party carrier to augment its private fleet. By doing so, shippers can successfully deliver their freight using dependable solutions that are designed to meet today's most variable capacity demands, increase return on capital, achieve higher service goals and increase company value. Because transportation is not a core competency for most companies, the best choice for expanding their private fleets is to take advantage of the dedicated services of transportation experts.
Gordon Hale is vice president, dedicated operations, at Schneider National Inc., Green Bay, Wis. Visit www.schneider.com for more information on the company.
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