Over the last few years, the combined forces of rising energy, equipment and commodity prices have created a strain on transportation budgets. Simply put, the costs of acquiring, fueling and operating a fleet continues to rise. Logistics managers face competing pressures to reduce internal costs, without sacrificing service levels required by value-conscious customers.
Not surprisingly, in-house fleets are under significant pressure to justify their effectiveness vs. available alternatives. Options generally include the increased use of common carriers or conversion from a private fleet to a dedicated contract carriage arrangement with a logistics provider.
Shippers in service sensitive applications tend to view private and dedicated fleets as the most practical options to deliver the operational performance required to be competitive in their particular industry.
Determining Private Fleet Costs
The easy part tends to be the identification of raw operating costs such as wages for truck drivers, fuel, equipment, and equipment maintenance. To benchmark the overall costs there are other factors to consider:
Cost of Capital – determining the opportunity cost in having funds tied up in equipment assets.
Driver Benefits – some benefits costs are held above-the-line in corporations, and those expenses may not be allocated from the corporate level down to line item P&L’s in operating units.
Empty and Out-of-Route Miles – assuming a cost of $4.00 per gallon and a consumption rate of 6 miles per gallon, the fuel cost alone in running a tractor trailer equates to $0.67 per mile.
Legal and Insurance Costs – fleets operating tens of thousands of miles inevitably have accident claims, and these costs must be considered in comparing private vs. for-hire fleet options.
Downtime – when drivers are on vacation or absent, or when in-house fleet vehicles are out-of-service due to maintenance issues, loads may be shipped on third-party carriers, yet the associated carrier payments generally hit another line in the P&L.
Determining Dedicated Fleet Costs
Computing the cost of a dedicated fleet also requires careful consideration, given the nature of the arrangement as a bundled or all-in solution. Operating as a for-hire carrier under its own operating authority, dedicated carriers most commonly charge in by the mile, fixed and variable or cost-plus formats.
In addition, there are often accessorial charges embedded in agreements for dedicated contract carriage. These generally include:
Stop and Detention Charges – fees that are based on an anticipated average time spent loading or off loading while making deliveries and pick-ups.
Fuel Surcharges – a mechanism to charge or credit the shipper accordingly, as fuel prices fluctuate.
Additional Equipment and Driver Costs – charges levied to flex up service capacity in peak seasons.
Comparison Results
Recent and past experience making these comparisons tells me there is little difference in cost between a well-run private fleet and a dedicated fleet operation. In today’s market, well-run means that there is little, or no leakage, in any of the critical performance areas listed below:
Fuel Management – to remain competitive fleets must be expert in all aspects of managing fuel
Routing and Load Selection – rising costs have escalated the impact of running empty miles
Safety and Compliance – CSA and the current litigation environment have raised the compliance bar for private fleet operators; mistakes in this area can be very costly
Asset Utilization – Given a rising cost basis, fleets are challenged to better utilize equipment, more hours of the day, more days of the week
Technology – Systems that capture operational data create an environment where decisions are based on facts vs. anecdotal comments
When is Dedicated Not Quite Dedicated?
The same cost factors affecting private fleets have impacted common carriers. This has caused many truckload carriers to enter the market for dedicated carriage services. This sudden proliferation of dedicated carriers has clouded the meaning of the word dedicated.
But how can shippers compare the services offered by would be dedicated carriers vs. their own private fleet? One method is to understand how the dedicated carrier will dispatch the drivers. If the driver’s activities are solely within the execution of the shippers, rather than the carrier’s network, it is a good bet the comparison is reasonable.
If drivers would alternate between the shipper’s loads and those where the carrier is servicing other customers, it is time to pause and reconsider if primary service objectives can be met.
Top Considerations for Shippers
- Start by clearly defining both quantitative and qualitative expectations around the service mission, as a baseline deliverable for a private or dedicated fleet.
- To establish the cost of the in-house fleet, gather input across the management team, including leaders in transportation, risk, human resources and administration.
- Challenge the team to explain how technologies utilized in either scenario might improve customer service and impact overall supply chain costs.
Well-run private fleets, and properly structured and monitored dedicated fleets, represent two good options for shippers in service sensitive businesses. In some cases, a combination of the approaches makes the most sense based on the dynamics of a given shipper’s distribution needs.
By Andy Moses
Moses is senior vice president of global products for Penske Logistics and can be reached here. He is based at the company’s Reading, Pa. headquarters.