November 8, 2010
transportation report | Dedicated/Contract Carriage

Will shipper jitters spark revival of dedicated carriage?

Trucking's dedicated contract carriage model was hard hit by the recession. But backers say the winds have shifted in their favor.

By Mark B. Solomon

The past four years have been a rough ride for U.S. trucking, and the segment known as "dedicated contract carriage" was dinged up like the rest.

The business model, which has been around for decades, is aimed at shippers who want the advantages of a private fleet without the attendant headaches. Under a dedicated service arrangement, a shipper outsources its fleet operations to a third-party specialist that "dedicates" rigs, trailers, and drivers for that customer's sole use. The standard dedicated contract runs three to five years, and usually requires the customer to compensate the provider for an agreed-upon number of miles driven on a round-trip basis. Companies with enough freight to justify round trips—often from DCs to stores and back—may find dedicated a better value proposition than paying for one-way truckload service.

For shippers and their customers, the dedicated model has two-tiered appeal: Not only does it shift a non-core competency to a third party, but it enables users to lock in dependable and consistent truck capacity at predictable rates for a multi-year period.

However, the trucking environment of the past four years has worked against the model's success. Freight demand began declining around 2006 and then plummeted following the financial crisis and broad-based downturn in 2008 and 2009.

Carriers responded by taking capacity out of play as fast as they could. Despite that, space remained so abundant that shippers often found it cheaper to contract for one-way hauls than pay for round-trip service and worry about filling backhaul miles in a weak economy. One trucking executive, John Simone, president and COO of Dallas-based dedicated service provider Greatwide Logistics Services, LLC, describes the past four years as "the longest period of overcapacity I've seen in 28 years in the business."

Annual data on third-party logistics providers (3PLs) from research and consulting firm Armstrong & Associates Inc. give some indication of how hard the segment was hit. In 2009, gross revenues for the nine asset-based dedicated service providers Armstrong tracks declined 16 percent year over year. Net revenues—or revenues after paying for purchased transportation—fell by 15.9 percent in the same period.

The firm expects dedicated gross revenues to grow in 2010 by 6.6 percent over 2009 levels. By contrast, it forecasts 13.4 percent year-on-year gross revenue growth for the 3PL sector as a whole.

Armstrong believes dedicated will continue to lag behind other types of outsourced services when it comes to growth. The dedicated segment is a "mature market" with "very limited" growth potential, says Evan Armstrong, the firm's president. "The large private fleets that were going to be outsourced have already been outsourced," he adds.

Difference of opinion
Those in the trenches take issue with the idea that the dedicated category has little life left. With trucking capacity continuing to shrink, a looming shortage of qualified drivers, and one-way rates on the rise, shippers and their customers will increasingly turn to dedicated carriage to secure predictable service at fixed rates, they say.

Some shippers are already moving in that direction. RockTenn Co., a Norcross, Ga.-based producer of paperboard, containerboard, and corrugated packaging, is looking to expand its use of dedicated from its current 15 percent, according to Josh Webb, the company's supply chain manager. "We are adding dedicated fleets to avoid increasing freight rates and tightening capacity," says Webb. "We feel this is a long-term sustainable transportation solution."

Simone of Greatwide says his largest customers are growing more and more concerned over the outlook for capacity, and are seeking certainty in what is becoming a clouded market. That anxiety has in part fueled a 15 percent year-over-year increase in Greatwide's dedicated revenue, he says. Simone estimates that 80 percent of Greatwide's customer base came from private fleets, while the rest had been relying on irregular route truckload capacity.

Transport logistics giant J.B. Hunt Transport Services Inc. has also seen a pickup in its dedicated business. During the third quarter, revenue and operating income from Hunt's dedicated services rose 18 percent and 17 percent, respectively, from year-earlier levels. (Dedicated accounted for slightly less than one-fourth of Hunt's total revenue in the quarter.)

As Hunt sees it, that's a positive sign not just for the dedicated segment, but for the economy as a whole. "Load volume in our [dedicated services] segment, which we believe is a strong indicator of current customer demand and the general direction of the freight economy, continues to point toward steady business activity," said company CEO Kirk Thompson in a statement announcing Hunt's third-quarter results.

Slicing and dicing
The dedicated model doesn't work for everybody. For one thing, it carries some risk for shippers. In a dedicated arrangement, customers are contractually committed to pay for all their miles—whether they can find the freight to fill them or not. Paying for empty backhauls can be a costly proposition, and in a tough economy, it's a gamble not all companies are willing to take.

In addition, dedicated carriage relies on symmetry—trucks returning to origin—and not every routing is structured in such a fashion.

"The main limiting factor in dedicated is physical connectivity," says Thomas K. Sanderson, president and CEO of Transplace, a Frisco, Texas-based asset-light 3PL whose services include dedicated carriage. Transplace manages inbound flows to DCs for its retail customers and coordinates with a network of truckers—for hire, private, and dedicated—for store deliveries.

Providers have gotten creative in an effort to surmount these obstacles, and are leveraging their entire customer base to execute. For example, Transplace will pair up two different customers operating in the same lane and build a dedicated operation that would not have been possible with the loads from just one customer. Transplace also contracts for 60 trucks with four carriers and guarantees them a certain number of paid weekly miles. It then scans what Sanderson calls its "basket" of freight to find loads that can fill the backhaul and reduce its empty miles.

"If you run enough miles and have fewer empty miles, it's cheaper to operate a dedicated service than it was with one-way freight," Sanderson says. "Shippers get a better price than they would on a one-way move, and the providers like it because their assets are being used."

Cardinal Logistics Management Corp., a Roswell, Ga.-based dedicated service provider, has taken a similar approach to helping clients fill backhaul miles. Jerry Bowman, Cardinal's president and COO, says his company will first look inside the company's customer universe to match empty miles and available loads. Then, if needed, it will go outside its customer base to find freight.

"The advantage of matching lanes with other dedicated customers is that we control the scheduling, we control the drivers, and we control the equipment, so we are able to provide the same service level to both customers as if we were hauling their own product both ways," he says.

Bowman adds that Cardinal focuses exclusively on arranging direct or near-direct backhauls because it's the only way it can deliver quality service while maximizing fleet utilization. "We can't send a unit and a driver on a three- or four-leg move as we don't have excess capacity built into our dedicated operations," he says.

In some cases, shippers themselves get involved in the load matching efforts. RockTenn, which is a Transplace customer, works with the provider to explore what Webb of RockTenn calls "collaborative pop-up fleet opportunities" with other Transplace customers. The strategy, which Webb acknowledges is "non-traditional," allows RockTenn to increase service and capacity as needed to a specific region. Once demand drops off and capacity isn't needed, "the fleet can dissolve," he says.

RockTenn also works with Transplace and other dedicated carriers to fill the empty miles of other dedicated fleets, Webb says. "This provides RockTenn [with] savings over the current baseline and allows carriers and [the] shipper with the dedicated fleet to recover [their] cost."

Greatwide, for its part, has developed two "hybrid" versions of the traditional dedicated model for customers concerned about empty backhauls. In one, a shipper pays for all miles driven, but Greatwide will use its brokerage services to search for other freight—often not the customer's freight—to fill miles that the customer can't. Greatwide and the customer then share the revenue and profit from the traffic.

In the second, Greatwide, rather than the shipper, takes the risk on fulfilling the "empty mile" requirement. The shipper pays a higher rate for the one-way move than it would by using either the traditional model or the first hybrid option; however, it's off the hook for empty miles obligations.

The second option may sound a lot like traditional truckload service, but Greatwide executives point out that with this arrangement, the shipper still enjoys all the advantages of dedicated service. Richard M. Metzler, Greatwide's chief commercial officer, adds that the two hybrid services are best suited to shippers with diverse product lines and who need multiple solutions to give them service flexibility at an affordable cost.

The lure of predictability
For all the providers' bullish talk, no one expects dedicated's growth to return to the heady post-deregulation days of the 1980s when businesses operating private fleets were all too happy to dump their assets, reduce their bloat, and let someone else do the work. Skeptics like consultant Evan Armstrong say that one-way truckload capacity would have to tighten much more than it has for the dedicated model to gain meaningful traction.

Yet those in the dedicated field believe that for the first time in years, the trends are working in their favor.

"I don't know of any other way you can lock in three to five years of predictable costs and higher service levels ... and take the risk out of what your costs will be," says Bowman. "You can't do it in your own private fleet. And you certainly can't do it in the one-way truckload market. It doesn't fit every movement, but for the movements it fits, we still think there's a great market for dedicated."

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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