By Clifford F. Lynch
Logistics Quarterly, June/July 2007
Unless you’ve got purchasing power the likes of a Fortune 500®
company, the economics of private fleet ownership for medium-sized businesses do
not justify the investment. Companies should focus on their core competencies
and leave transportation and supply chain management up to the experts instead
of spreading resources thin and mismanaging the complex issues relative to
Billion dollar businesses are built solely around flexible shipping and
logistics solutions for a reason! The majority of companies just don’t have
the resources to manage costs and meet fluctuating volume demands, particularly
given today’s ever-shrinking capacity due to the nearly impossible feat of
attracting and retaining qualified drivers.
Managers of private fleets for these companies are trying to figure out how
to transport freight from point A to point B, never mind focusing on customer
service, liability, fuel costs, training, capital costs associated with a
trucking fleet and other expenses.
This article will address some popular myths about dedicated transportation
services and review why mid-sized companies are trending toward outsourcing
Myth #1: Running a private fleet makes more economic sense
For some of the largest companies, that may be the case — the behemoths
with the size to achieve economies of scale on expenditures like fuel, equipment
and insurance. But for everyone else, especially mid-sized businesses, the
headaches and unpredictable costs of operating a private fleet can make it
unpleasant and — worse — unprofitable. They can’t match the buying clout
of the big guys but they’re up against the same financial pressures the common
carriers are. Not a winning proposition.
And then there’s that not-insignificant issue known as the bottom line. The
capital costs of carrying transportation assets on the books loom large when
there are better investments to be made in most companies’ core businesses
that could draw a far greater return on capital. If the difference between the
cost of the fleet and the cost of handing it to a dedicated carrier is less than
the shipper’s operating margin, the private fleet makes no economic sense at
all. Add in the increasing challenges sparked by changing hours of service (HOS)
regulations and EPA requirements and you’ve got a strong argument for
outsourcing to a dedicated carrier.
More threatening than most realize is the oft-overlooked issue of liability.
Typical liability insurance is dauntingly expensive and rendered virtually
irrelevant by sky-high deductibles. At the same time, vehicular accidents
account for more than a third of all wrongful death suits, and juries frequently
award plaintiffs upwards of $10 million per verdict. With both insurance
premiums and jury awards rising, businesses must face the fact that one major
accident could spell imminent financial ruin. Why not transfer that burden to a
major carrier with the means to bear it?
Myth #2: Private fleets mean better customer service and greater visibility
Again, not so fast. Yes, private-fleet drivers run familiar routes to
familiar customers carrying familiar products, and in trucks branded and
designed to function as rolling billboards crisscrossing the continent. Drivers
get to know the unique service requirements of their accounts and positive
customer relationships develop accordingly. All that would give private fleets
the upper hand over common carriers — if common carriers didn’t share the
same exact capabilities.
Dedicated carriers assign drivers to accounts exclusively, to function like
regular employees of the hiring companies. Those drivers can run the familiar
routes to the familiar customers carrying the familiar products like private
carriers would, and it’s just as easy to outfit one trailer with
company-branded graphics as it is another. Many companies find that service
levels measurably improve after a private fleet conversion … just as the
company’s bottom line does.
Myth #3: The driver shortage hardly affects private fleets
As we are all painfully aware, a national driver shortage is one of the top
challenges facing the trucking industry today. Given the variability of our
economy and the advanced average age of current drivers, the situation will only
get worse. This is as true for private fleets as it is for dedicated carriers.
The solution? Aggressive programs to recruit and train new drivers and retain
the ones already on board.
In an industry that typically faces turnover rates of more than 100 percent,
this is no easy task. Who better to take on the challenge than large nationwide
carriers with the expertise and infrastructure to develop and maintain
large-scale recruitment, training and retention programs? Common carriers are
rising to the occasion with innovative programs aimed at enticing new drivers to
a life on the road. Advertising campaigns targeted to demographic groups not
commonly represented in the industry are widespread, and economies of scale make
them far less costly than individual companies could arrange.
The common carriers also have the advantage of existing relationships with
railroad, freight brokerage and logistics companies, often lines of business of
the carriers themselves. If capacity becomes an issue, they can go to Plan B …
and beyond. A private fleet, in the same situation, would face a more complex
set of options.
Myth #4: Common carriers offer nothing private fleets can’t do for
This is a dangerous misconception that costs shippers money and opportunities
to improve service every day. New technologies have opened up a brave new world
for the transportation industry. From satellite communications to trailer
tracking systems, shippers have options that were unimaginable just a few years
ago. Better tracking and visibility cuts costs and increases customer
satisfaction. Why take chances on lost or empty trailers and frustrated
customers when a dedicated carrier can transform you into a true 21st-century
Investing in these tools for a small private fleet would be cost-prohibitive
for most companies. The capital outlay would outweigh any benefits — benefits
that would accrue quickly under a dedicated carrier with the size and scale to
justify the investment.
Common carriers also offer state-of-the-art supply chain engineering
capabilities far beyond the reach of most private fleets. With expertise in
logistics, transportation management, industrial engineering, network
optimization and process improvement, they are masters of finding opportunities
to reduce costs, improve service and minimize both trucks and miles. Vehicle
routing and scheduling, inventory optimization and improved operating margins
are just a phone call away. In the competitive global marketplace the
transportation industry serves, topnotch engineering can make a real difference
in the bottom line.
Myth#5: Running a private fleet has no negative impact on the rest of the
Some private fleet managers subscribe to the philosophy that if you want it
done right, you’d better do it yourself. That’s fine in theory, but can be
downright dangerous in practice. After all, you wouldn’t say that if you
needed a root canal — you wouldn’t go to dental school, get a license, buy
all the equipment and hire a staff just to have control over the procedure.
Like dental practices, private fleets are complex operations with their own
unique set of requirements and regulations. They take time, energy and, above
all, money to run efficiently and at peak performance. There is no way that
level of expenditure wouldn’t affect the rest of the business — the physical
assets alone weigh down balance sheets and detract from a company’s overall
financial health. Shippers wouldn’t become dentists just to get a root canal
and they shouldn’t maintain private fleets just to ship their freight.
There are several large carriers with dedicated shipping and logistics
management as their core competencies. Choosing one of them frees up assets so
shippers can invest more in the competencies of their own.
Myth #6: Private fleet conversion means local drivers will lose jobs
Some private fleet managers balk at converting to dedicated carriers because
they think the local drivers will lose their jobs. Not so, according to industry
trends. Most carriers make efforts to retain drivers already trained and
knowledgeable about routes and customers. And why wouldn’t they? Safe,
reliable drivers are hard to find — and safe, reliable drivers with
institutional knowledge are a precious resource. Dedicated carriers assuming
shipping responsibilities for private fleets are well aware of that and
motivated to take advantage of it.
Running private fleets might initially seem like a good freight management
solution for companies concerned about cost, capacity and control. But for many
— especially mid-sized companies — that simply isn’t the case. Converting
to dedicated carriers brings better customer service, more flexible capacity,
less risk exposure and an improved bottom line. Shippers must calculate the true
costs and risks of running a private fleet and weigh them against the many
advantages and economies of scale a large dedicated carrier can provide. Once
they do, they might be surprised to find that they can’t afford not to
convert their private fleets.