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CAN YOU JUSTIFY A PRIVATE FLEET?
Lisa H. Harrington

Three years ago, Gemini Coatings, a lacquer-manufacturer in El Reno, OK with 2000 gross revenues of $36 million, shipped product to its customers via for-hire motor carriers. "The job was getting done, the product was getting delivered, but not to our satisfaction," recalls Gary Miller, fleet manager for the company. "We were experiencing a lot of damaged and late deliveries, and our customers were complaining." Gemini’s customers include industrial manufacturers as well as large paint retailers.

Looking for a better solution, Gemini’s top management decided to try its hand at making its own deliveries. The company started small. It leased one truck from Rush Truck Leasing Inc., the local PacLease franchise, and hired Miller to drive the new unit—and run the fleet. "Our chief priority was to improve our customer service," Miller says. "We needed timely deliveries, and we also wanted to gain that personal touch with our customers that you get when your drivers call at their locations. We wanted to use our drivers to solidify our relationships with our customers."

Today, Gemini operates a fleet of five air-ride tractor trailers, all leased under full-service contracts with PacLease. Last year, the fleet hauled 55% of the nearly 2.5 million gallons of paint and lacquer Gemini shipped.

"We started with one truck to see how it was going to work out," Miller reports. "We analyzed our costs to see if we were breaking even or making money. The numbers looked good, so we added more trucks."

The Gemini fleet makes regularly scheduled delivery runs to customers in Indiana, Ohio, Missouri, and Kansas. Each customer has a designated delivery day during the month. Periodically, Miller compares the cost of making these runs to LTL freight rates to see whether the fleet is cost competitive.

"As everyone knows, you’ll never get rich from transportation," the fleet manager observes with a smile. "The whole point of running our own fleet is customer service—to eliminate the product damage that was occurring with the for-hire truckload carriers, and give us an added sales tool.

"Before we started the fleet, we had a lot of customer complaints," Miller says. "By our second year of operation, 99.9% of those complaints went away. Today, we have customers that say to us, ‘If it doesn’t come on a Gemini truck, we won’t place the order.’"

Gemini’s decision to launch a private fleet in the hopes of improving customer service is far from unique. Many companies, big and small, operate a delivery fleet for just this reason. But as the economy softens, fuel prices escalate, and money gets tight, will companies continue to back their private fleets? How, in fact, do you justify a fleet in this uncertain economic environment?

A lot to consider
Unquestionably, private fleets are under more pressure than ever to demonstrate that they add economic value to the corporation. Frequently, this task is complicated by the fact that top management views the fleet in a negative light—as a "necessary evil," little more than a capital-intensive cost center.

With the best-run private fleets, nothing could be farther from the truth. These fleets deliver superior customer service and compete with the best of their for-hire counterparts on cost management.

But top management won’t take such assertions on faith. A corporate fleet must prove itself year after year, as Dan Smith, corporate director of transportation for Smart & Final of Commerce, CA, and president of the National Private Truck Council (NPTC) explains.

"The decision to operate a private fleet (with either leased or owned equipment), outsource it to a dedicated contract carriage provider, or use for-hire transportation is an entirely individualized one," Smith says. "There is no one-size-fits-all formula. Nor is the matter an either/or decision. We’re starting to see a lot of combination fleets, where a company operates a proprietary fleet in one area of its business, uses dedicated carriage in another, and perhaps even for-hire trucking in yet another part of its business. The choice depends on the company’s operations, facilities, product type, location, and a list of other factors."

Many elements factor into a company’s decision to operate a private fleet. Smith discusses some of the more important issues to address:

Fleet mission or purpose. What is the fleet’s mission in light of overall corporate strategy? Is the fleet primarily a customer service tool? Or is it an advertising/marketing medium? Does the value created via better customer service or improved brand visibility balance out the costs associated with operating a fleet? When financial numbers alone can’t justify the cost of a private fleet, the answers to these questions may tip the scales in the fleet’s favor.

Labor. A private fleet can be a labor/resource-intensive operation, requiring some combination of drivers, dispatchers, maintenance, and administrative personnel to operate. Assessing the fleet’s full labor costs—including benefits—is critical to developing a true picture of overall fleet costs.

Capital investment. Private fleets are, by their nature, capital intensive. There are numerous options for shedding or transferring the cost of any investment in fleet equipment—i.e., leasing and outsourcing. These options must be fully considered on a regular basis.

Maintenance. Maintaining a private fleet in house usually makes sense for only the larger corporate fleets, where economies of scale come into play. Otherwise, most companies outsource their fleet maintenance so as not to be saddled with maintenance/parts inventories, maintenance facilities, and related labor costs.

Internal resources. Operating a corporate fleet requires dedicated internal resources. These resources include everything from management personnel and facilities. . .even paper clips. Does the company want to commit such resources to a non-primary business function?

Control. A private fleet gives companies the benefit of complete control over product delivery. The fleet may be able to provide unique or personalized delivery services not readily available on the for-hire market. Most companies also use the fleet as a tool with which to solidify customer relationships. The driver becomes the company representative, ombudsman, and salesperson all wrapped up into one. Is this added value worth the price of running a fleet? Or would the company be just as well off entrusting these aspects of customer relationship management to a third party in the interest of potentially lower costs?

Corporate philosophy on outsourcing. The decision to operate a corporate fleet or outsource it may depend entirely on one factor: the corporation’s philosophy on outsourcing. Some companies’ strategy is to outsource everything except primary business functions. Others take just the opposite tact.

When reviewing the need for a private fleet, the chief logistics or transportation officer must address all of these issues, suggests Smith. "The answers will guide you toward a decision on whether to have a proprietary fleet, use a third party, or employ a combination of both."

For its part, Smart & Final thinks a corporate fleet is well worth the effort and expense required to run it. The fleet, which consists of 180 tractors and 300 trailers, serves two purposes: to deliver merchandise to the company’s retail stores and to service its broadline foodservice division. The Smart & Final fleet handles 99% of the company’s transportation needs.

Smart & Final, which marked its 130th anniversary this year, operates primarily in the western United States—California, Nevada, Arizona, and Oregon—but also has stores in Florida and Mexico. The fleet services all US locations. A third party handles Mexico.

"Our fleet is viewed as a very important part of our distribution and logistics," says Smith. "It not only delivers product to our stores, but also brings purchased goods from our vendors to our distribution centers. We do a tremendous amount of backhauling of our own inbound freight."

Additionally, Smart & Final uses the fleet as an advertising tool to foster greater name recognition for the company.

Every year, through the budgeting process, Smith justifies the existence of his company’s fleet. "If we meet our budget expectations or improve actual over budget, that goes a long way toward justifying the fleet," he notes. "We identify all the costs by line item and explain what those are for and why. It’s the same thing that every company goes through with budgeting. You look at your chart of accounts, identify what your costs are, look at your past years’ costs, and estimate what your anticipated costs for the coming year will be. You address equipment costs as well as variable cost trends—especially fuel, which was a major item this year.

Smart & Final leases all of its tractors and trailers under a full-service lease agreement. This means the leasing company — not Smart & Final — handles all of the equipment maintenance. "Our rationale for leasing is simple," Smith explains. "We don’t incur the capital investment outlay, and we don’t incur the cost of running a maintenance facility. Also, leasing companies buy thousands of tractors every year, so their purchasing power is greater than ours. They can get us a better deal on new equipment than we could ourselves."

Leasing on the rise
As vehicle purchase prices continue to rise, companies look for increasingly creative ways to finance any new equipment acquisitions. This is good news for the leasing industry, according to Tim Henebry, executive vice president and general manager of PACCAR Leasing Company (PacLease). "Just two decades ago, leasing was a financing novelty," he reports. "Today, it accounts for 39% of all new Class 7 and Class 8 trucks registered to private and for-hire fleets, according to the Truck Renting and Leasing Association."

Henebry thinks the demand for leasing will continue to rise. "Government regulation, service, equipment acquisition, and the cost of technology will drive this growth," he explains. "Environmental and safety regulations add to the price of equipment and the cost of maintenance." For example, in many municipalities, the expense to install required storm water runoff and treatment systems to process water and detergents used in truck wash bays is prohibitive.

Another contributor to the cost of equipment is technology. "New technology allows greater efficiency and customer service," Henebry observes, "but it comes at a price that must be calculated into your vehicle cost. Through flexible lease terms, technology can be financed into the lease and upgraded over time as new technologies are introduced. With this flexibility, customers are never at risk of having outdated technology bolted to their trucks."

Leasing also helps companies weather the economy’s ups and downs. "The toughest thing private fleet managers have to deal with in today’s environment," the PacLease VP notes, "is the value of their fleet. Can they trade their vehicles in on their schedule — or will they have to operate that vehicle a year or two longer than anticipated because of the state of the used truck market?

"Full-service leasing is a good insurance policy," Henebry continues. "A year and a half ago, a private carrier that wasn’t in full-service leasing could sell its used trucks at a good price, which meant that depreciation costs were low. In the past year, those depreciation costs have spiked dramatically. Companies currently in full-service leasing are protected from the ups and downs of the market, streamlining their cost of operation."

Outsourcing all the way
For those companies that want to get out of the corporate trucking business altogether, there’s outsourcing—or dedicated contract carriage. "There are very compelling reasons to consider dedicated contract carriage today," asserts Richard Hoehn, vice president of Averitt Dedicated, a third-party provider in Nashville, TN. "Companies want to concentrate on their core business. They also want freedom from liability and freedom from worrying about staying abreast of regulations."

The most common reason for outsourcing, however, is the company’s desire to free up capital. "Our biggest selling point is savings — enabling the company to move assets off its books and instead, pay a fee to us," says Frank Reuwer, president of USF Logistics of Long Grove, IL.

Additionally, outsourcing eliminates the headache of hiring, training, and managing drivers and other fleet personnel. "That’s our core competency," says Reuwer, "so why not turn that headache over to us?" The smaller fleets, in particular, often encounter problems attracting qualified drivers, Hoehn adds.

And thirdly, outsourcing insulates a company against unpredictable cost fluctuations. "If we provide the fuel, and the price of fuel skyrockets, then we have to worry about it," the USF president explains. "Sometimes we implement a fuel surcharge. If fuel goes over $1.35 a gallon, for example, we take an increase. But if it increases from $1.25 to $1.30 a gallon, the customer gets the benefit of the nickel."

When considering dedicated contract carriage, companies have several pricing options. "In one option," explains Reuwer, "the customer is responsible for both outbound and inbound miles. Alternatively, the customer can pay for one-way trips and it’s up to us to fill the empty return-trip miles. This is good for customers because they only pay one way. We can fill the empty miles and that becomes profit for us. When we do an analysis of a project, we understand where we’ll end up regarding empty miles, we make an evaluation on our ability to fill those miles, and we price the bid accordingly."

Some companies fear that if they outsource their fleets, they will lose control over their service. "With a good service provider", says Reuwer, "this fear is unfounded. If I truly represent my customer, then I need to be my customer. Our trucks can have your company logo on them, our drivers can wear your uniforms, and your customers won’t know the difference.

"If you can service your customers as well or better, while providing a better financial return for your shareholders [by outsourcing the fleet], isn’t that the best option?" Reuwer asks. "If your fleet is worth $10 million, what could you do with that $10 million if it wasn’t tied up in your equipment?"


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