Notes and Comments Evaluating the Private Fleet

Notes and Comments M. THEODORE EARRIS TERRANCE L. POHLEN

Evaluating the Private Fleet Private fleets account for approximately 75 percent of the trucks operating on U.S. highways, representing 4.5 million ofthe approximately 6 million tmcks moving freight, and include roughly 50 percent of all heavy-duty trucks currently in use (Gallagher 2007). Private trucking accounts for 56 percent of the freight, about 4.45 billion tons annually, moved by motor carriers (Weart 2007). In 2008, private fleet revenues are projected to exceed $300 billion. This figure includes revenue from for-hire operations (Schulz 2008). Prior to the Motor Carrier Act of 1980, the Interstate Commerce Commission regulated motor carrier rates, service, and competition. Many corporations operated private fleets to obtain lower rates or higher service levels than available from for-hire carriers. The Motor Carrier Act of 1980 deregulated the industry and fundamentally changed the operating environment by unleashing aggressive price and service competition. Many logistics managers found for-hire carriers could provide the same levels of service at a lower cost and abandoned their private fleets (Cooke 2002). Logistics costs as a percent of gross domestic product fell sharply during the 1980s from over 16 percent in 1980 to almost 10 percent by 1990 (Wilson 2008). The American Tmcking Association estimated that by 1998 the cost of forhire trucking had fallen approximately 25 percent below the costs of running a private fleet (Minahan 1998). Shippers have begun to reevaluate the private fieet decision as part of their supply chain strategy. Large shippers can derive substantial economies of scale by running a private fieet and avoid paying for for-hire carriers" profit Mr. Farris, EM-AST&I-, is associate professor. University of North Texas, Oak Point, Texas 750682261; e-mail [email protected]. Mr. Pohlen, EM-AST&L, is associate professor. University of North Texas, Dentón, Texas 76203-5017; e-mail terrance.pohlen@unt. edu.

margin. Rising fuel prices have forced many small for-hire carriers out of business, and reduced capacity may drive up for-hire prices. When the economy rebounds, strong demand and limited capacity may make transportation equipment a scarce commodity. In addition, many shippers have begun to recognize the value created by private fieets. Companies may have gone through a period when they wanted to outsource what they have now come to realize was a core competency and it becomes part of value proposition. We are seeing a growing appreciation and awareness among companies of how private fieet builds shareholder value. They see the proportionality of transportation, over time, shifting back to the private fleet market, especially where those fleets have a proven record of cost control and even profitability. So where private fleets are able to demonstrate not only a lower cost per mile to the company but [also] are able to have greater control of the total capacity requirements of their retailer or manufacturer a greater portion ofthe transportation solution will become private fleets (Gallagher 2007). Although cost savings are frequently used to justify a private fleet, customer service and control are the principal factors driving the decision. "The impetus to starting a private fleet is due to corporations wanting the control they cannot get from for-hire fleets'" (Cullen 2(X)5). In a recent survey, the National Private Truck Council found that 72 percent of the respondents maintained a private fleet because an in-hou,se operation could provide better service to key customers (Weart 2007). The primary purpose of this Note is to identify the key issues associated with maintaining a private fleet and to provide a decision framework for evaluating whether to outsource or not. The discussion of the issues begins by analyzing the advantages and disadvantages of

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maintaining a private fleet. Many external factors influence the private fleet decision, and these factors are described in the following section. A framework that integrates these issues, environmental factors, and costs is then developed to assist managers in evaluating whether to maintain a private truck fleet. ADVANTAGES AND DISADVANTAGES OF MAINTAINING A PRIVATE FLEET

Private fleets simultaneously offer a mix of advantages and disadvantages. The primary reasons for operating a private fleet are improved service and lower costs. The key reasons for not maintaining a private fleet paradoxically include higher costs, improved service, transportation not being a core competency, and avoidance of labor unions. Management must determine the most appropriate trade-off of the advantages and disadvantages of maintaining a private fleet. Table 1 summarizes these trade-offs. Advantages Customer service remains the principal driver behind a private fleet (Gallagher 2007). Many shippers recognize the necessity of maintaining a private fleet to obtain a consistent service required by their customers. Private transportation has received renewed recognition as a core competency since product distribution frequently is as important as the product itself. Product availability has become a key part of the value proposition expected by the customer. A private fleet must demonstrate some additional value that management cannot purchase from a third party. More often than not, the extra value involves superior customer service (Cooke 2002). Private fleets provide greater control and flexibility for management to respond to customer requirements (Coyle. Bardi, and Novack 2006). Tailored customer service requirements may make for-hire carriers an infeaslble alternative due to short response times, delivery frequency, and erratic or small piece counts per delivery. Management can exert direct control over the dispatching, routing, and scheduling of their private fleets to better meet these requirements. The desire to achieve stability and reliability is an important motive for private truck operations. The ability to control shipments from when they are loaded until final

Fall

delivery often proves critical in responding to changing customer requirements. For instance, shipments to unmanned delivery locations often require that the driver be a company employee. A for-hire carrier may be unwilling to accept the responsibility of security and any damage regarding the delivery without a company representative to receive the shipment. Transportation managers often tailor fleet equipment to match their commodity or freight pattern. Privatefleetsensureavailability of this specialized equipment. For-hire carriers may be unable to ensure availability or may not offer due to specialized use or design (Morgan 1970). Many shippers employ private fleets to reduce damage and claims. Company drivers have greater accountability and take greater care in handling and transporting freight. Their familiarity with the product, routes driven, and customer facilities enables them to avoid situations that could damage shipments. Company drivers eliminate the costs of filing claims against for-hire carriers. Employee drivers provide a unique advantage. They routinely interact with shipping and receiving personnel both within their firm and in their customers' operations. These drivers gain a thorough understanding of their customers' operations and can improve customer service by streamlining the pick-up and delivery process, establishing a rapport with customer personnel, and anticipating customer requirements. In many instances, the driver becomes an extension ofthe sales force and may be used to promote new services or products. Due to direct contact with the customer, drivers can be an invaluable source of information regarding customer requirements, changing business practices, and perceptions of service. Private fleets offer the "last resort" advantage when no other acceptable for-hire carrier or transportation offering exists (Coyle 1994). Firms requiring unique equipment or transporting fragile products may resort to a private fleet to ensure their products arrive without damage and avoid paying higher rates for insurance or specialized for-hire equipment. In other instances, management may maintain a private fleet to ensure availability of equipment when needed and for-hire capacity is limited or uncertain.

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NOTES AND COMMENTS

53

Table L Factors to Consider When Maintaining a Private Fleet INTERNAL FACTORS Advantages

Disadvantages

Improved Service: • Cotivetiience • Flexible operation • Greater control • Lower transit times • Reduced damage • Driver as a salesperson • Last resort (special need)

Higher Costs: • Emply backhaul • Lack of management talent • Added overhead and burden • Capital requirements • Liability for cargo damage and theft • Liability for accidents • Increased paperwork and administrative costs • Breakdown on roads • Labor unions

Lower Costs: • Reduced transportatioti cost • Lower inventory levels • Reduced real estate costs • Advertisitig • BargainJEig power

EXTERNAL FACTORS Volatile fuel prices Regulatory changes: o Hours of Service o Restrictions on equipment Driver shortage Technology innovations Changing emphasis on environment Concern for national security Congestion Deteriorating infrastructure Adapted lrom Coyle. John J., Edward i. Bardi. and Roben A. Novack, (1994). Transportution. 4ih ed.. St. Piiul. MN: West Publishing Company.

Lower transportation costs represent the other principal reason for a private fleet. Transportation costs may be reduced because the private fleet eliminates the for-hire carriers' proflt margin. SYSCO, Pepsico. and Wal-Mart maintain some ofthe country's largest private fleets for this reason. These companies move substantial amounts of freight and paying even a small margin to a for-hire carrier over a very large volume accumulates a major expense to (he flrm. Managers can further reduce logistics costs by exercising greater control over transportation. By directly controlling the routing and scheduling of their internal fleets, they can reduce the length and variability of in-transit lead times. Shorter and less variable lead times produces more reliable demand forecasts and require less safety stock to achieve the same.

or higher, service levels. Reductions in safety stock provide a permanent reduction in inventory levels and free up working capital for other requirements. In other instances, private fleets are used to produce high availability with lower inventory levels. These flrms depend on private fleets to continuously replenish perishable products, ensuring high turnover and product freshness. A private fleet enables management to exert the control required for a high-velocity supply chain and to optimize their network (Cooke 2002). Innovative applications of private fleets have been used to reduce warehouse requirements and real estate investments. In an area where real estate is extraordinarily expensive, one company runs two 24-foot trucks several times a day from a New Jersey warehouse to its signature store in Manhattan. These trucks

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TRANSPORTATION

serve as a rolling stockroom, enabling the store to be replenished frequently and avoid using very high cost square footage for storage (Schulz 2007). A Dallas-Fort Worth flrm has eliminated a transshipment distribution center by using a private fleet to dray store-ready containers directly to its stores from an intermodal rail yard. In addition to avoiding the need for a field warehouse, this strategy avoids the costs of drayage, multiple handlings, and in-transit inventory carrying costs. Private fleets often serve as rolling billboards. The advertising may provide significant value to the flnn, especially if the truck has a clean appearance and is operated safely (Morgan 1970). The advertising space on the sides of a truck represents a unique by-product of private transportation. A tractor-trailer provides a moving billboard with exposure to millions of potential customers. Executives attach significant value to this advertising, and dedicated for-hire carriers often are required to paint their equipment with their customers' advertising. A private fleet can provide significant leverage negotiating with for-hire carriers. Freight moving on the private fleet represents lost revenue to the for-hire carrier. The private fleet preserves the option to divert freight from forhire carriers if rates become too high or service declines. Some firms tiiaintain a small private fleet to preserve an in-house competency to effectively negotiate with carriers or to expand their transportation operations if the need should arise in the future. Disadvantages Higher costs paradoxically can represent a key disadvantage to operating a private fleet. Costs may increase when sufficient expertise or economies of scale do not reside within the firm. Where balanced outbound and inbound movements do not exist, empty backhauls or empty mileage may significantly increase transportation costs. An empty outbound or inbound movement doubles the transportation cost. Some private fleets operate as a for-hire carrier on their empty backhaul (front haul) movements to reduce their transportation costs. However, for-hire operations can create a new set of costs to the firm and divert management attention away from the primary objectives of the private fleet.

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Administrative and managerial overhead often accompanies a private fleet. Management expertise and staffing must exist to manage a private fleet. Senior executives may view these costs as an unnecessary burden when transportation does not differentiate service or produce a substantial cost savings. Transportation costs may increase if in-house personnel lack the talent required to effectively operate the fleet. Management attention may be diverted from important issues to manage the private fleet. Administrative staffs frequently expand to keep pace with requirements for driver recruiting and retention, safety training, hazardous materials processing and reporting, hours of service compliance, permits and licensing, state and federal DOT reporting, accident investigations, insurance, claim.s for for-hire services, payroll and benefits, and supervision. Accounting systems frequently "bury" these indirect costs and do not provide the visibility needed to manage the total costs associated with a private fieet. Fleet equipment and facilities require a significant investment, and many managers would prefer to invest capita! in core areas generating a greater return. Capital is generally a scarce commodity and should be invested where the flrm can create the most value. Management must carefully assess whether the private fleet provides sufficient savings to warrant the investment. Financial measures such as return on assets or economic value added (EVA) tend to make private fleets unattractive unless capacity is fully utilized and substantial savings are obtained. Outsourcing and leasing may provide alternatives that can conserve capital. In addition, the firm can write off the lease payment and does not have to reflect the lease on the balance sheet (Harrington 1996). Losses due to damage become the company's responsibility when operating a private fleet. The company will require insurance coverage when it cannot absorb any losses resulting from damage. Damage will affect customer perceptions as well. Customers receiving damaged goods will seek reimbursement, and damaged goods will directly reflect on the seller, as opposed to a for-hire carrier. Accidents involving the private fleet may pose a major liability for the firm. Insurance can mitigate this risk, but high premiums and

2008

NOTES AND COMMENTS

déductibles may prove too expensive. Fleets with high accident rates or safety infractions will experience another disadvantage. State inspection stations will require vehicles from fleets with unsafe records to stop more frequently for inspections. These stops extend transit times, increase variability, and reduce driver and equipment utilization. Finally, a private fleet increases the potential exposure of the firm to organized labor. The Teamsters frequently attempt to represent drivers, as well as other non-driver employees (Coyle, Bardi, and Novack 2006). Firms with unionized drivers generally have restrictive work rules that negatively affect productivity and flexibility. External Influences Many external factors will influence management's decision whether to maintain a private fleet. External influences include variables that affect private fleet operations but over which management can exert little control. External factors that must be considered include volatile fuel prices, regulatory changes, driver shortage, technology innovations, environmental concerns, security, congestion, infrastructure constraints, and characteristics unique to specific industries. Volatile Fuel Prices - Fuel prices have risen approximately 448 percent in the last ten years and 169 percent during the last year (Figure 1 ). The major contributing causes include political instability in the Middle East, damage to refining capacity from natural disasters along the U.S. Gulf Coast, no significant additional domestic refining capacity since 1972, and increased consumer demand (Transportation Management Trends 2006). Fuel has been ihe second largest expenditure behind labor for most transportation companies (Table 2), and fuel costs in some cases have exceeded labor as the highest expense for some truckload carriers (Schulz 2008). The increase has dramatically changed transport economics for both for-hire and private fleets (Transportation Management Trends 2006). Many private fleets have difficulty controlling fuel costs (Cullen 2005). Despite rising fuel prices, the trucking industry faces new regulations that increase emissions standards for truck engines. A key challenge is whether engine makers can develop technology that can comply with the

55

regulations while providing the same towing power and improved fuel efficiency (Transportation Management Trends 2006). Telematics has emerged as one ofthe newest tools for combating fuel consumption. Telematics is the term applied to a wide range of recording and communications devices. These devices enable private fleet managers to better understand the drivers of fuel consumption. The onboard devices monitor fuel usage, driver performance, methods of operation, and the effect of truck and equipment specifications. The technology may help achieve a 3/10th per gallon (0.3 mpg) improvement in overall fuel economy. This improvement translates to a savings of about $2,000 per year per tractor (Cullen 2005). Using the average miles per gallon (Table 3), a 0.3 mpg improvement in fuel consumption translates to a 5 percent improvement in efficiency. Driver Shortage - A shortage of drivers has increased the costs of hiring, training, and retaining drivers (Gallagher 2007). This issue will only worsen from a current shortage of approximately 20,000 drivers to 120,000 by 2012. The shortage stems both from economic and demographic trends, including a diminishing pool of available driver talent and competition from the construction industry for the same labor pool. More stringent hours of service regulations will further reduce available driver work hours (Transportation Management Trends 2006). Private fieets have maintained higher driver retention rates due to better pay, benefits, and human resource policies (Cuilen 2005). Private fleets have an average employee turnover of only 16 percent, while national truckload carriers have average turnover rates exceeding 100 percent (Leavitt 2006). Although private fleets have had lower turnover rates, some experts suggest caution. Low attrition rates may indicate that the job is too easy, or the pay cannot be duplicated elsewhere. Both situations may contribute lo higher fieet costs (Harrington 1991). Regulatory Changes: Hours of Service - Private carriage provided a means to avoid the restrictions on for-hire trucking that limited how many customers a carrier could serve and over what routes they could operate (Schulz 2007). Although deregulation has eliminated

TRANSPORTATION JOURNAL™

Fall

Figure 1. Monthly Diesel Prices (March 1994 - .lune 20081 Diesel Prices

http://tonto.eia. doe.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm

Table 2. 2007 Cost Breakdown of Transportation Costs 44% 22% 19% 15% 100%

Labor Fuel Vehicle Operating TOTAL

Source: Establish Inc., Herbert W. Davis and Company

these restrictions, safety-related regulation has increased. Private trucking appears poised for a "renaissance" since for-hire carriers will experience less productivity and higher costs driven by regulatory operational changes spurred by hours of service rules as well as greater security demands posed hy anti-terror legislation and security regulations. The tonnage carried by corporate fleets is projected to grow 50 percent hy 2020, fueled by primarily by rising trucking costs (Schulz 2001). Hours of service (HOS ) regulations have impacted the productivity, labor requirements, and routing of private fleets. Federal regulation mandates the maximum time a truck driver may be on duty. HOS regulations were revised in August 2005 and remain an active legislative

topic. The current HOS are shown in Table 4. In 2007, the Bush administration attempted to relax these restrictions by increasing the maximum driving hours of truck drivers to 77 from 60 over 7 consecutive days, and to 88 hours from 70 over 8 days (Labaton 2007). In July 2007, a U.S Court of Appeals rejected the changes, defaulting to the 2005 regulations pending revision. Regulatory Changes: Limitations on Equipment - Longer and heavier trucks have resurfaced as a major topic of legislative debate due to rising fuel costs and the driver shortage. Carriers argue that raising weight limits to 97,000 pounds would reduce truck vehicle miles by 11 percent and save 1.9 billion gallons of fuel a year. They further contend that bigger trucks would be safer due to the reduction in vehicle miles resulting in fewer accidents and fatalities (Natter 2008, Collins 2008). Allowing larger trucks will influence the economics of transportation costs and have a major effect on the private carrier decision. Available Techtiology-Technology continues to develop and assist in improving productivity and efficiency. Most telematic systems

2008

NOTES AND COMMENTS

57

Table 3. Combination-Truck Fuel Consumption Number registered (thousands) Vehicle-miles traveled (millions) Fuel consumed (million gallons) Average miles traveled per vehicle Average miles traveled per gallon Average fuel consumed per vehicle (gallons)

1980

1990

2000

2004

1,417 68,678 13,037 48,472 5.3

1.709 94,341 16.133 55.206 5.8

2,097 135,020 25,666 64,399 5.3

2.010 142.370 24,191 70,819 5.9

9.201

9,441

12.241

12.033

2005

2.087 143,662 24.411 68.845 5.9 1,698

Freight Facts and Figures 2007. Office of Freight Management and operations, U.S. Department of Transportation, Federal Highway Administration, 2008.

Table 4. 2005 Hours of Service Regulations May drive a m;iximum oí 11 hours ufter 10 consecutive hours off duty. May not drive beyond the 14th hour after coming on duty, following 10 consecutive hours off duty. May not drive after 60/70 hours on duty in 7/8 consecutive days. A driver may restart a 7/8 consecutive day period after taking 34 or more consecutive hours off duty. Commercial motor vehicle drivers ii.sing a sleeper berth must take at least 8 consecutive hours in the sleeper berth plus two consecutive hours either in the sleeper berth, off duty, or any combination of the two. http ://www.rnit:sa.dot.gov/rules-regulai ions/rules-regulalions.htm

provide a combination of global positioning and remote communication. Fleets adopting tracking and communications systems have reported positive results, with 83 percent indicating the systems helped improve perfonnance. The systems provide greater visibility over fleet operations, enabling optimized routes and improved fuel management, Drivers tend to perform better and more responsibly since their activity is being closely monitored (Private Fleet Management Survey 2006). Increased Environmental Emphasis - A key environmental issue facing trucking today is air pollution. Diesel engines continue to be major producers of nitrogen oxides (NOx), which contribute to ground-level ozone (smog) and regional haze. Although reductions in NOx emissions have been achieved, continued pressure prompted the U.S. Environmental Protection Agency to mandate that 80 percent of the on-road diesel fuel must be ultra-low sulfur compliant, with no more than 15 parts per million (Moskowitz 2006). The transition to ultralow sulfur diesel fuel has raised concerns throughout the trucking industry. Ultra-low sulfur diesel costs five cents a gallon more to refine compared low sulfur diesel fuel. Another economic concern is that ultra-low sulfur diesel

contains less energy than today's diesel fuel and reduces truck fuel economy by about 1 percent (Moskowitz 2006). National Transportation Security — Domestically, a major focus is on hazardous materials transport, which relates primarily to highway and railroad operations. Information about the ownership and integrity of containers, hazardous materials, and other sensitive freight is crucial to improving the security of the freight transportation network. A system of tracking the freight and identifying custodians of the cargo is now being developed. Smart cards that contain biométrie identifiers and cargo information connected to an electronic manifest may be used to establish a chain of custody. Other technologies that offer the potential to enhance security and supply chain efficiency include supply chain software that can accommodate security applications, electronic cargo seals, wireless vehicie-to-roadside data communications devices, and wide-area communications combined with global positioning systems or other global location technologies. The private fleet manager will need to stay current on changing requirements and must plan for how these changes will affect fleet operations (U.S. Department of Transportation 2002).

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TRANSPORTATION JOURNAL^"

Congestion and Infrastructure Capacity Constraints - Roadway congestion reduces the capacity of freight movement. Projections suggest current congestion problems are just scratching the surface, and the number of trucks on the nation's highways will double by 2020. Increased congestion and traffic slowdowns will force logistics managers to consider alternative routes or times to take advantage of low traffic density (Transportation Management Trends 2006). The control offered by private fleets may offer more opportunities to exploit alternatives that can best deal with congestion. Influences Unique to Speciftc Itidustries Each industry will also have specific external influences that may be unique to that industry. For example, safety requirements, risk, and liability may be a strong influence. Some industries are more likely to embrace private fleets to maintain control when shipping hazardous materials. FRAMEWORK FOR ANALYSIS

Whether it is a for-hire fleet seeking to boost profitability or a private fleet trying to rein in costs, proper analysis of a trucking operation may lead to implementing a strategic plan that uses strengths to correct weaknesses (Cullen 2005). The decision to use a private fleet must foremost be a strategic decision. As with most decisions, the ability to replace qualitative considerations with quantifiable measures will enhance and strengthen the quality of the decision. To assist logistics managers, an analytical framework, integrated from previous research efforts, is provided for quantifying many of the key decision variables. An organization should consider an approach consisting ofthe following steps to fully evaluate the private fleet option (Vreeland 1968): 1. Define the goals 2. Develop transportation objectives 3. Collect pertinent information 4. Determine present costs 5. Analyze present operations 6. Develop alternative 7. Determine private fleet costs 8. Consider indirect factors 9. Summarize alternatives 10. Make the decision

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Analysis Step 1: Define tbe Goals Management must identify and prioritize the strategic and tactical goals for the private fleet. These goals will most likely emphasize cost or customer service. When developing the overall goals, logistics managers should recognize that the main driver behind maintaining a private fleet remains customer service. To achieve the desired level of service, many shippers may have to grow their own fleets to obtain the consistent service that their customers expect (Gallagher 2007). These goals represent cost and service tradeoffs with other functions in the firm. The goals set for the private fleet should recognize and reflect these trade-offs and not be developed in isolation. "Service" refers to the quality of transportation. It includes such operational characteristics as speed, damage, night deliveries, reliability, visibility, flexibility of schedules, and spot deliveries (Walter and Hurter 1965). These features, or attributes, are related to. but are not an essential part of, the spatial movement of goods. Taken together, they constitute the quality of the transportation activity (Morgan 1970). Analysis Step 2: Develop Transportation Objectives The objectives for the private fleet should include a statement outlining past, current, and desired service levels, as well as consideration of the business environment, including legal restrictions and general economic trends. These objectives should center on two measures: customer service and cost. The customer service level should consider the consistency and speed of delivery as well as any additional services external or internal customers may require. Cost objectives should recognize how the private fleet will affect total cost and not just focus on transportation. The objectives for private fleet will affect multiple logistics processes and functions—order processing, communications, warehousing, inventory, transportation, and the return of damaged goods. Managers need to determine how these areas interact and ensure the goals for each area are aligned with the strategic objectives for the firm. Although the private fleet may be justified solely on customer service, transportation managers will need to define the service levels and

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NOTES AND COMMENTS

demonstrate the value provided. The linkage between service and value is not always clear, but some firms have developed performance measures that capture both the service and cost objectives of their private fleets (Cooke 2002): • Show that the private fleet has a better ontime delivery record than an outside carrier. • Deveiopdetailed key perfoimanee indicators such as cost per case or cost per pallet that offer additional evidence that the in-house operation provides more value than a forhire competitor can. Objectives for the private fleet should consider inbound as well as outbound freight. The majority of companies use their private fleet to haul products or materials outbound to end customers and goods inbound from the company plants to warehouses or distribution centers. The private fleet can provide additional value by hauling inbound freight to keep overall transportation costs down and to minimize empty backhaul mileage (Cooke 2002). Other objectives may include equipment availability and security. Many firms use private fleets to minimize their risk and to ensure transportation availability during peak shipping periods (Cooke 2002). Security and regulatory concerns will lead shippers to expand their use of private fleets just to ensure the availability of capacity. The combination of HOS regulations and increased security and screening requirements may force the exit of 100,000 owner-operators out of the trucking industry (Schulz 2007). Analysis Step 3: Collect Pertinent Information The collection of infonnation relevant to management's specific goals and objectives includes capturing inventory data, shipping procedures, product characteristics, origin and destination, volumes, weight, and cost associated with each type of shipment. Analysis of this information should take the perspective ofthe customer's viewpoints when evaluating customer complaints, quantifiable service level data, and competitor's actions (Stock and Lambert 2001). It is not unusual that the focus of the analysis is on just the private fleet portion; however, this step is critical to ensure that the impact on many non-transportation factors is also included in the analysis.

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Analysis Step 4: Determine Present Costs Logistics managers should adopt a total cost approach when determining the cost of transportation. Many transportation decisions affect costs in other logistics functions and viceversa. The determination of operating costs should include the cost of order processing, packaging, shipping, transportation, and damaged goods and returns. In addition, the current cost of inventory investment, insurance, taxes, inventory risk, and building cost directly associated with the inventory function should be included. Ifthe analysis only includes the direct costs ofthe private fleet, the results will probably show that a private fleet costs approximately 60 to 75 cents more per mile. Private fleet proponents argue that costs considerations go far beyond simply direct costs. Incorporating indirect costs and offsetting cost reductions in other functions will provide a more accurate comparison between for-hire services and maintaining a private fleet (Schulz 2(X)7). Analysis Step 5: Analyze Present Operations This step requires management to analyze their transportation operations against current and future requirements. The analysis examines customer order patterns, inbound and outbound transportation flows, capacity and equipment needs, cyclical or seasonal patterns in traffic volumes, empty mileage, and the potential for backhauls. This analysis may occur at multiple levels such as by lane, supplier, or customer. The analysis should reveal whether a private fleet can support current and projected transponation needs, where gaps exist, and whether a private fleet or for-hire carrier provides the best solution. In many instances, a combination of the two will probably be required. Analysis Step 6: Develop Alternatives While many good reasons exist to operate a private fleet, managers should identify and consider the potential options to ensure the firm obtains the best available solution. This step begins with a review of the existing costs or service levels. Management then identifies alternatives capable of improving performance or resolving any problems currently encountered. The alternatives should not be exclusive to transportation and should include changes

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TRANSPORTATION JOURNAL™

to order processing, negotiating new carrier rates, or improved packaging. These alternatives may yield the same benefits of a private fleet but at a lower cost (Stock and Lambert 2001). Alternatives to a private fleet include the use of brokerage services, dedicated fleets, or use of ' "pop-up' ' fleets. Many firms operate blended fleets. They use their private fleet to serve core customers and use for-hire carriers where they have insufficient capacity or shipment density. Others use "pop-up" fleets to handle surge demand during peak seasons (Cassidy 2005). Analysis Step 7: Determine Private Fleet Costs An evaluation of the private fleet requires a thorough understanding of the total costs incurred^indirect as well as direct costs. Actual operating costs, fixed and variable, should be used whenever possible. However, reliable estimates for some costs may be used where actual data cannot be obtained. Management should include all costs associated with the private fleet as well as costs elsewhere in the firm affected by transportation. For example, any savings or costs in inventory, personnel, or production attributable to the private fleet should be incorporated into the analysis. Managers can employ worksheets (see appendix) to identify the relevant fixed and variable costs. This step may identify areas where management action can produce immediate savings. An area warranting attention includes driver wages and whether the compensation appears to be consistent with the local market and operation. Other areas where management should focus include fuel prices, idle time, fuel consumption, and whether vehicle types match service requirements. Many flrms with private fleets do not capture the right data to conduct a complete and proper review of their costs. They need to be able to capture all costs including all fixed and variable costs such as leasing, maintenance, tires, fuel, driver wages, and permits. Costs such as support staff should not be overiooked. Wages and benefits, fleet buying/leasing expenses, and fuel will most likely be the major expenses, but other costs such as driver uniforms, training log books, meals, and lodging need to be considered as well.

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Table 5. Cost of Operating a Tractor-Trailer

Cost Items

Cents per Mile

Fixed Costs Depreciation on vehicle Interest on vehicle Depreciation and interest on other item.s Managetnent ;ind overheads Total Fixed Operating Costs Fuel Drivers Maintenance Insurance License Tires Miscellaneous Total Operating Costs

105.3

TOTAL COSTS

135.2

8.7 2.9 1.6 16.7 29.9 21.0 38.6 15.7 10.7 9.9 2.6

6.8

U.S. Department oí Agric-ullure. Fruii and Vegetable Truck Cost Report. Vol. 18. No. 4. (April 19971.

Back Haul Opportunities May Lower Costs One consideration to lower costs is to manage a private fleet while offering back haul trip leases to other companies to avoid empty miles. Approximately 25 percent of all private fleet miles are rtin empty, creating tremendous exposure and tremendous opportunity. The longer the one-way length of haul, the greater the possibility to reduce empty mileage ("White Paper on Backhaul Networking" 2008): • For fleets operating an average length of haul greater than 500 miles, empty miles averaged 17 percent • Fleets with a length of haul 250-499 miles, empty miles averaged 28 percent • Fleets with a length of haul 100-249 miles, empty miles averaged 31 percent • Fleets with a length of haul less than 100 miles, empty miles averaged 34 percent Considering Leasing versus Buying - Leasing provides an option for shippers that want to maintain the level of customer service provided by a private fleet but not own the equipment. Shippers can obtain equipment from leasing companies or turn to third parties including trucking companies for dedicated contract carriage (Gallagher 2007). Seventy-four percent

2008

NOTES AND COMMENTS

of private fleets consist of company-owned equipment and company drivers. The remaining fleets use a combination of leased drivers, leased equipment, and owner-operators (Cooke 2002). Analysis Step 8: Consider Indirect Factors In addition to the legal, economic, and technical factors identified earlier in this Note, many nonmonetary factors may influence the decision to switch to a private carriage operation. Although not directly translatable into cost or value, many indirect factors will affect management's decision, including company image, competition, the advertising value of the vehicles, effect on employees and unions, management skills required to develop and control the system, carriers' willingness to accept remaining freight, potential for rate renegotiations, and corporate policies regarding equipment selection, maintenance, and replacement (Stock and Lambert 2001). Analysis Step 9: Summarize Alternatives During this step, the alternatives are summarized for a decision by senior management. The summary should outline the cost, capital requirements, and indirect factors (advantages and disadvantages). The alternatives presented for a decision should include ( I ) the present method, (2) an alternative method that may not be a major change from the existing operation but may be an improvement, and (3) a private carriage operation (Stock and Lambert 2001). Any financial analysis presented to senior management should consider the time value of money. Management must calculate the net cash inflows (cash inflows minus cash outflows for the life ofthe investment decision and discount them, using the company's minimum acceptable rate of return on new investments). The sum of these discounted cash flows is then compared with the initial capital requirements to determine if the investment is financially sound (Lambert, Stock, and Ellram 1998). Analysis Step 10: Make tbe Decision The final step requires a decision based on the summary as well as the other inputs from sources such as internal management, outside experts, and the experience of other forms that

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have had private carriage operations. Despite the quantitative information available, no decisions can be cut and dried, A large number of factors depend on the decision maker's willingness to assume some ievel of risk (Stock and Lambert 2001). Completing this analysis likely will identify pockets of opportunity where a change in fleet operations makes sense. It is unlikely that the analysis will result in an all-or-none answer, rather, a hybrid solution tapping into the best of both situations. As fleet operations evolve, periodic review may identify further improvements. IMPLKMKNTATION AND MANAGEMENT ISSUES

If the decision is to engage in private carriage, the next step is to devise an implementation plan and a procedure for performance measurement and control. Implementation begins with a review of the structure of the organization or group responsible for operating the private fleet. Management assigns the activities to be performed to groups or individuals, and formulates a timetable for phasing in the project. Because of the risk involved, most firms start with a low level of activity, followed by intermediate reviews of results, and subsequent modification of the plan. The process is repeated until the finn achieves full implementation (Lambert, Stock, and Fllram 1998). An essential part of managing the private fleet is the establishment of peribrmance measures and organization for financial reporting. Most firms use on-time service, customer satisfaction, and cost per mile to measure the performance of their private fieets. Due to the focus on customer service, private fleets generally are managed as cost centers (not a profitgenerating primary business unit). Fleets operating for-hire operations are often organized as profit centers (Cooke 2002). The performance measures used to evaluate the private fleet should be based on the firm's strategy and transportation objectives. The most common peribrmance measures include miles operated, loaded miles, and loads. But many fleets do not formally take into account the use of their fleet on a time basis as well. Al! operating statistics need to be generated for the specific periods that the financial data

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report, whether it is weekly, monthly, or quarterly. Each fleet has equipment available for use during a given time frame and it is probably safe to say that it is never fully utilized. There is down time for maintenance and repair, as well as idle time when the driver is out of service. It is important to understand the realistic availability of the equipment and establish a target utilization rate to meet company goals. In the old days, the industry focused on reducing percent of empty miles as a way to increase revenue opportunity. But that is changing as carriers recognize that all miles have to be paid for and all time the equipment is in use has to go toward covering fixed costs. This does not mean that reducing empty miles is not important, but there are new strategies in pricing and routing to maximize a fleet's revenue (Labbe 2006). Control of the private fleet should emphasize the measurement of performance against standards, with the ability to identify specific problem areas. If management desires to use a total

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cost approach in order to charge cost against the product and customer, it can calculate a cost-per-mile, identifying the fixed costs associated with distribution ofthe product and then adding the variable cost-per-mile. This information may be useful to compare budgeted with actual expenditures, or to compare the figures for the private fleet operation with those of common or contract carriers (Lambert, Stock, and Ellram 1998). SUMMARY

The decision to use a private fleet first must be a .strategic decision as there are many unquantifiable elements that factor into the decision. This Note has identified strategic, tactical, and operational factors to consider. Detailed analysis specific to the firm is required to reflect pockets of opportunity, which will result in a hybrid solution incorporating regional, operational, and economic factors.

Appendix Private Fleet Analysis Worksheet' Fixed Costs Depreciation (lease) - Trucks, Trailers, Garage, Office Interest on investment - Vehicles. Garage, Office Salaries, fringe benefits, FICA, workmen's compensation - Managetnent. Office, and Garage Office and Garage Costs - Utilities, Supplies, Infonnation Technology, Travel and Entertainment. Rent or Property Co.st

Operating (Variable) Costs Wages, fringe benefits, FICA, workmen's compensation, layover allowance - Drivers Vehicle operating costs - Fuel. Oil, grease, filters. Maintenance (labor + parts). Road service, Tolls Insurance - Liability, Collision and comprehensive. Cargo License and registration fees - Highway User Taxes, Fuel, Ton-mile, Federal Use Tax

Fixed Costs

Operating (Variable) Costs

Equipment Costs Lease payments on equipment (fixed and mileage) Licen.se costs Sales tax on leases Property tax on leased equipment Equipment repairs for damages, accidents Painting or decal expense Hazardous placards, reflective tape, other markings cant. ' Worksheet compiled from multiple sources including U.S. Department of Agriculture, Fruit and Vegetable Truck Cost Repart. Vol. 18. No. 4. (April 1997); Morgan, William J. "The Financial Aspects of Private Truck Fleets Capital/ Operating Cos( Analysis." Transportation Joumal, Summer 1970. pp. 48-56; Harrington, Li.sa H., "Logistics Asset.s: Should You Own or Manage?" Transportation and Distribution. Vol. 37, No, 3 (March 1996). pp. 51-54; and Barnes, Gary and Peter Langworthy, The Per-Mile Costs of Operating Automobiles and Trucks, St. Paul. MN: Minnesota Department of Transportation, June 2003

2008

NOTES AND COMMENTS

Roadside inspection costs to include lost time Hazardous waste disposal (batteries, waste oil, antifreeze) Fuel spill remediation (fuel spill from truck or accident) Depreciation: Tractors Depreciation: Trailers Maintenance: Tractors Maintenance: Trailers Total Equipment Costs Material Handling Equipment Pallet Jacks Fork lifts Forklift maintenance Load bars Straps and tarps Handtrucks Depreciation: Material handling equipment Total Material Handling Equipment Costs Driver Costs Wages Payroll taxes Workman's compensation Medical benefits for driver and dependents Vacation and holiday pay Holiday bonuses and other incentives Drug, alcohol tests and DOT-required medical examinations Driver qualification. CDL, etc Hazardous training, certification, licensing Security training and certification Transportation Workers Identification Credentials (TWIC) Training Log books Meals and lodging Uniforms Disability pay Pension or 40IK plan Life insurance Total Driver Costs

63

=^^^=^=^

^^^^^^^^

^^^^^^^^

—

—

Insurance Liabiliiy insurance Physical damage/theft insurance Cargo insurance Cost of déductibles on actual occurrences Attorney's fees in defending legal suits Total Insurance Costs

-=^^^^^^^=

-

Fuel and Road Expenses Actual cost of all fuel used Reefer fuel Fuel taxes Ton-mile and third-structure taxes Tolls and fees Loading/unloading Washing and cleaning Driver's telephone calls, paget^ Total Fuel and Road Expenses

^==^^^

^^^^^^^^ cont.

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Facilities Depreciation on maintenance facility (lease) Utilities maintenance facility Taxes on maintenance facility Other expenses Total Facilities Expenses Information Technology Qualcomm or other communication Routing software/support Other software (scheduling, load planning. tracking)/support Order processing Automated driver log books, engine monitoring, etc. Fleet management software Total Information Technology Costs Management Costs Management wages (fleet manager, dispatcher, non-driver personnel supporting fieet operations) Payroll taxes of managers Vacation and holiday pay o!' managers Workman's compensation for managers Medical benefits for managers and dependents Administrative support (personnel, equipment, supplies, postage) of transportation and fleet managers Cost of processing drivers' payroll Cost of advertisements and recruiting of drivers Warranty tracking and management Vehicle maintenance and replacement tracking Management time in safety meetings/ accident review committees/ OSHA compliance Review of driver logs and support of DOT inspections Environmental compliance—paperwork, training, management and legal review Fines for non-compliance with federal, state, or local regulations such as hours of service Safety and OSHA compliance training classes Purchasing department costs in buying or leasing equipment, insurance, material handling equipment, fuel, outside maintenance and repair DOT reporting requirements Employee training—OSHA, ADA. sexual harassment, etc Operating tax and business tax compliance^tax department time with fuel and road taxes Payable department time with fuel and road taxes Membership and participation in professional organizations such as National Private Truck Council Professional tiiaterials, publications, training associated with private fieet management Top management time in meeting.s to set private fleet policy, review and track performance Arbitration costs, union grievance costs, attorney's fees for labor issues Total Management Costs Tola! Costs

Fed!

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NOTES AND COMMENTS

REFERENCES Cassidy. William B.. "Ship Smarter." The Joumal of Commerce. May 30. 2(H)5. p. 26. "Collins Introduces Bill to Allow Higher Truck Weights - Move Would Take Effect in Light of High Fuel Cost.s." Shipping Digest Reporter. June 15, 2008. Cooke, James A.. "What's h Worth to You?" Uigistics Management. Vol. 41, No. 4. April 2(H)2, pp. 37-40, Coyle, John J.. Edward J. Bardi. and Robert A. Novack (1994), Tratispartation, 4ih ediiion, Wesi Publishing Company. St Paul, MN. Coyle. John J.. Ekiward J. Bardi. and Rohert A. Novack (2(K)6). Transponation, 6th edition. South-Weslem College Publishing. Cincinnati, OH. Craig. Tom, "Out.sourcing. Lei the Buyer Beware." Transportation and Distribution. Vol, 37. No. 5 (May). p. 102. Cullen. David. "Rethinking the Private Fleel." Fleet Owner. Vol, 100. No. 11 (November 2(X)5). pp. 19-24. Gallagher. John, "Private Fleets Seek Return." Traffic World. Volume 271. Issue I I, March 19. 2007, p,24. Graves, Bill, "Congestion Pricing Not the Solution to U.S, Transportation Woes." Logistics Quarterly. Vol. 13. No, 3 (July 20071. pp. 23-24. Federal Highway Administralion. The Freight Stor}\- A National Perspective on Enhancing Freight Transportation. Department of Transportation. November 2002, Washington DC. 2006. p. 25, 27, Fruit and Vegetable Truck Cost Report, Vol 18, No, 4 lApril 1997). Hanson. Kristopher, "Long Beach Port Approves S35%H.) Cargo Fee." Long Beach Press-Telegram. December 17. 2(X)7. Harrington, Lisa H,, "How to Get the Most from Your Privale Fleet Dollar," Traffic Management, Vol. 30. No, I (January 1991). pp. 39-43. Harrington, Lisa H., "Logistics Assets: Should You Own or Manage?" Transportation and Distribution. Vol. 37. No, 3 (March 1996). pp. 51-54. Harrington, Lisa H.. "Should You Outsource Your Private Fleel?' ' Transponation and Distribution, Vol. 37. No. 4 (April 1996). pp. 22-27. Harrington. Lisa H,, "Private Fleets: Finding Their Niche." Transponation attd Distribution. Vol. 37. No. 9 (September 1996). pp. 55-58. Harrington. Lisa H.. "Private Reel Leasing: Cookie Culter Time is Over." Transportation and Distribution. Vol. 38, No. 10 (October 1997). pp. 64-70. Kilcarr, Sean. "Private Fleets Surviving with Logistics," Fleet Owner. Vol, 95. No. 4 (April 2(K)0). Labalon. Stephen. "Court Strikes Down Longer Hours for Truckers," New York Times. July 24. 2(X)7. t-abbe, Martin. "A Closer Look." Fleet Owner, Vol. 101, No. 8 (Augu.st 2006). p. 38, "Land Transportation Strategies," Warld Trade. Vol. 19, No. 8 (August 2(H)6). pp, 22-28, Lambert. Douglas M.. Jame.s Stock, and Lisa Ellram, Fundamentals of Logistics Management. Irwin McGraw Hill. 1998, Leavitt. Wendy. "Learning from Success." Fleet Owner, Volume 101, Issue 7 (July 2006). pp. 16-20. Lynch. Clifford F,. "Why Shippers Can't Afford Not to Convert Their Private Reets,' " Logistics Quarterly, Vol, 13. No. 3 (July 2007). pp. 12-14.

McCrea. Bridget, "Return of the Private Fleet," Logistics Management, July I, 2CX)4. www.logisticsmgmt.com. Melbin. Jodi E., '"Supplementing the Private Fleet," Distribution. Vol, 95. No, 8 (July 1996). pp. 36-38. Minahan, Tim. "'Own. Lease, or Outsource? You'll Soon Need to Choose," Purchasing. March 26. 1998. pp. 9(i-91, Morgan, William J.. "The Financial Aspects of Private Truck Fleets—Capital/Operating Cost Analysis." Transportation Journal, Vol. 10, No, 4 (Summer 1970). pp. 48-56. Morton, Roger. "Private Lessons in Fleel Management,' ' Logistics Today. Volume 45. Issue 5, May 2004. pp. 25-27, Moskowitz. Richard, "The Transition to Ultra-Low Sulfur Diesel," Logistics Quarterly, Vol. 12. October 2006, p. 27, National Private Trucking Council. "Filling Backhaul Miles for Private Fieets." White Paper. October 16, 2006. Natter, Ari. "Trucking Weighs In." Traffic World. Vol. 272 Issue 19, May 2(X)8. pp. 10-12. Office of Freighi ManagemenI and Operations, Freight Facts and Figures 2007. Federal Highway Administration. U.S. Departmeni of Transponation. 2(K)S, Payne. Warren. "Private Fleets Come Back." World Trade. Vol. 20. No, 6 (June 2007). pp, 20-24, Petty. Gary. "Alive and Well." Fleet Owner, Vol, 96. No. 12 (December 2(K)1), Petty.Gary. "The ABC'sof DriverPay." Fleet Owner, Vol. liX). No, 3 (March 2005), p. 33. Petty. Gary, "Comeback Fleel," Fleet Owner. Vol, 102. N'O, 6 (June 2007), "Private Fleel ManagemenI Survey." Refrigerated Transporter. August 2(X)6. p. 2. "Reviewing the Private Truck Fleet." Canadian Transportation & Logistics. April 2(K)4. p, 6, Schulz, John D.. "Fuel Eals Away Profits and Capacity." Logistics Managemetu. Vol. 46. No. 7. July 2008. p. 36. Schulz. John D.. "Silent Success," Logistics Management. Vol. 46, No. 4, April 2008, pp. 29-33. Schulz. John D.. ' 'Private Fleets for Hire." Web feature. Logistics Management. July I. 2007. www.Iogisticsmgmt.com, Schul/. John D., "Should You Go Dedicated?" Uigistics Management. Vol. 46. No, 1. January 2007, p. 29-35. Schulz, John D,, "Trucking's Private Renaissance?" Traffic World. Volume 268. Is.sue 18. May 3, 2004. pp, 23-24. Schulz. John D.. "Private Carriage lo Grow Despite Conversions. Outsourcing Trends." Traffic World. May 27. 1996, Shisler. Neil. "The Reader-to-Reader Report: Land Transportation Strategies." World Trade, Volume 19, Issue 8. Augusi 2(H)6. pp. 22-28. Stock. James and Douglas M, Lambert. .Strategic Logistics Management, 4th ed.. Irwin McGraw Hill, 2001, p, 360, "The Rise ofthe Nol-So-Private Fleet." DC Velocity, Vol, 5, No, 4 lAprii 2007), p, 9.

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"Transportation Management Trends: The Gathering Storm," Logistics Quarterly, Vol. 12, March 2006, pp, 1 6 - 17. Swain. Duff. "Driver Shortages and Trucking Fleets," unpublished paper, Trincon Group. Terreri. April. "Shippers are Adding Private Fleets to Their Transportation Mix," World Trade, Vol. 19, No. 2 (February 2006), pp. 22-26, "Tran.sportalion Management Trends: The Gathering Storm." Logistics Quarterly. Vol. 12. March 2006, pp. 16-17.

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Vreeland, Barry, Private Carriage from A to Z, New York: Commerce and Industry Association Instinjte, 1968, Walter. Y. and Arthur P. Hurter. Jr.. Economics of Private Truck Transponation, 1965. p. 49. Weart, Walter. "Privale Trucking: No Simple Answers." LogisticsTodav.Wol.AH. No. 8 (AugustZOOl), pp. 26-29, Wilson. Rosalyn. "!9th Annual 'State of Logistics Report."' National Press Club, Washington, D.C, June 18, 2008,