Taking the company private
With truck and driver shortages wreaking havoc on their supply chains, some companies find themselves contemplating what was once unthinkable: starting their own fleets.
It wasn't too many years ago that private fleets seemed to be under siege: In the corner office, they were often viewed as a burden on the balance sheet and a cost center whose operations were completely tangential to the company's core mission. But private fleets have proven resilient, and as for-hire carriage gets more expensive and trucks get harder to find, they seem to be making a comeback. Private fleets may not be cheap to run, but they do offer substantial benefits for some businesses—particularly those with predictable routings, the potential for backhauls, and prickly customers who won't tolerate late or missed deliveries.
It's not that private or dedicated fleet managers are exempt from the problems that plague common carriers—a dwindling supply of drivers, hours of service regulations, astronomical fuel costs (60 cents a gallon over year-earlier costs in mid-June), and so on. But the DC manager who knows he controls his trucks may just sleep a little better at night.
Given the climate, it's probably no surprise that observers are reporting a resurgence of private fleet operations. Gary Petty, president and CEO of the National Private Truck Council (NPTC), a trade group whose members operate and manage private fleets for U.S. businesses, reports that most of his group's members (who represent about 500 private fleets) are expanding or plan to expand their private fleet capacity. In many cases, he says, they're using their fleets to generate cash, selling unused fleet capacity on the open market. At the same time, he reports, some businesses that had given up their private fleets are beginning to explore reviving their fleets.
Desperately seeking trucks
Petty sees several reasons for the revival of interest in the private fleet option. "It's increasingly difficult to get capacity that meets [customers'] delivery expectations," he says. "It's often hard to get at any price. And in cases where you can get it, the price is going up dramatically. Price is in the hands of the carriers. They can pick and choose their customers. That puts the manufacturer or the distributor or the retailer in the unenviable position of being at the mercy of the market."
As a corollary, Petty says some businesses are seeing captive capacity as a component of shareholder value—not only as an assured means of moving freight, but as a valuable marketing tool via the advertising on the sides of the trucks. "That sends a powerful message as well as meeting the transportation needs of the company," he says.
Though he acknowledges that private fleets face the same difficulties finding and retaining drivers that bedevil their for-hire counterparts, Petty believes that private fleets enjoy a few advantages. "The pay is usually better in private fleets," he says, "and working conditions are better. Institutionalized care and feeding programs make private fleets more favorable than others." As evidence of that, Petty points to the results of a survey conducted by NPTC of 200 companies with private fleets. The survey results showed annual driver turnover in the range of 11 to 16 percent—far better than truckload carriers, many of which have turnover rates of 100 percent or higher each year.
Executives whose companies manage dedicated fleets for their customers agree that the capacity shortage is motivating companies to reconsider the private and dedicated options. Gordon Hale, vice president of dedicated operations for Schneider National Inc., says that over the last 15 months, he's seen an explosion of demand for dedicated contract carriage, in which a customer contracts with a third party for exclusive use of fleet drivers and equipment. "People want to lock up capacity," he says, "particularly after the surge of '04. They want to tie up capacity before the surge of '05.
"The second thing I've seen is private fleet owners struggling to find drivers, and they're seeking folks like us to help supplement the fleet," says Hale. "That's driven by the driver shortage." The driver issue affects dedicated carriers, too, of course, although Hale says that for Schneider, finding drivers for those fleets has been an issue only in some regions, like the Northeast and Midwest.
Hale adds that he believes some businesses are turning to companies like Schneider because they want providers that can offer not only trucking, but also the ability to integrate with intermodal, third-party and one-way fleets. He cites the example of one customer with a DC-to-retail operation that needs 10 trucks on Mondays, five each day Tuesday through Thursday, 15 on Friday, and 10 on Saturday. "In the old days, we would size that to a 10-truck fleet. Drivers would sit idle Tuesday to Thursday and some of the Friday freight would be delayed. Now, we can meet the requirement with a baseline of five trucks dedicated. We take the next piece of the surge with a third party, saying we need five trucks on Monday, Friday, and Saturday, giving them three days' worth of freight. For the extra five on Friday, we can cover that with our one-way drivers."
David Bouchard, senior vice president of U.S. supply chain for high-tech and consumer products for Ryder, has also seen an upsurge in the dedicated-fleet business. "We have seen more activity this past year than we've seen in the past several years," he says. "I agree that the capacity situation in the overall market is a factor."
But Bouchard thinks there's more to it than just shippers looking for ways to get around the capacity crunch. "At the end of the day in my mind, a prospect decides on a dedicated operation for service reasons. We see opportunities for companies that have not had dedicated in the past or are looking to make changes in modes or providers. ... Where there can be an engineered solution and improvement in the system to reduce total cost, that's where we see an opportunity."
Like Hale, Bouchard believes customers looking at dedicated carriage see it as part of a bigger picture. "The approach Ryder tries to take is not to focus on the dedicated carriage solution, but to examine movement of product. We try to assess that and come up with the best combination of services to meet the customer's service and cost needs. That's usually an integrated solution."
Like nearly everyone close to the trucking industry, he sees the driver shortage as a serious issue. That includes the private and dedicated sectors of the business. "When families sit around the table, I'm not sure that a lot of them are encouraging their kids to pursue truck driving as a career," he says. "The market should do more to recognize the importance of the driver."
Bouchard echoes Petty's opinion that dedicated and private fleets have advantages over common carriers. "One of the benefits for dedicated is that we make efforts to factor in quality of life into our designs. Being able to be home creates value to [drivers] and their families." That, he says, leads to employees who are more attentive to the service requirements of customers. "A lot of benefits accrue from it."
No shortage of problems
Of course, the driver shortage is by no means the only issue plaguing the trucking industry. Exacerbating the driver shortage are the hours of service rules that took effect at the beginning of last year. Those rules placed new limits on driver work hours, forcing changes in carrier, shipping and receiving operations around the nation. A court challenge has left the fate of those rules uncertain. Right now, they're back in the hands of the Federal Motor Carrier Safety Administration, although Congress may step in and impose the disputed rules.
Petty says that his members generally support the rules, and in some cases, have found them to be unexpectedly favorable. "What we didn't expect that has happened is cooperation and a willingness to find a middle ground for getting access to DCs," he says. "People are realizing that under hours of service, there's really an incentive to ... get in and out and optimize the allowable drive time," he says. "I think the argument can be made, although not in all cases, that there are more opportunities for productivity [improvements] under the new rules. I just hope we don't go back to the drawing board."
Hale agrees that the rules have had a big impact on truckers' operations. "Hours of service have definitely changed the way we operate," he admits. "We have to go to the marketplace to cover that cost. It takes a lot of communication to help customers understand those costs."
Rising fuel costs have also spurred private fleets to focus on ways to boost productivity. In mid-June, nationwide diesel costs averaged $2.31 a gallon, more than 61 cents above year-earlier levels, and with oil selling at close to $60 a barrel, there's no relief in sight.
Those skyrocketing fuel prices, Petty says, have led to redoubled efforts to improve fuel economy. "Companies are putting in incentives to ensure that drivers are operating in the most efficient way possible," he says. He notes that the NPTC has launched online fuel economy workshops, sponsored by Cummins Engine, on its Web site.
Other efforts to control costs involve expanding use of on-board technology, Petty says. The goal, he adds, is more than capturing operational data to improve efficiency; the monitoring tools also enable fleet managers to measure their costs against the market. That's especially valuable, Petty says, if the fleet is operating as a profit center. "There's not a lot a trucking company can do about the cost of fuel or insurance, but they can do a lot to mitigate the unnecessary costs that flow from not paying attention to things." One example: he cites a study by the Federal Motor Carrier Safety Administration that showed that tires 2 percent under the correct pressure can add $500 to operating costs through wear and tear and reduced fuel economy.
Heading for a meltdown?
Though private and dedicated fleets may be finding conditions more favorable than they've been in years, that's not to say they foresee a rosy future. They still face severe challenges, as does the entire U.S. transportation network.
Petty is worried that unless industry and policy-makers address many of the issues facing the network and do it soon, the nation could face a transportation meltdown of sorts. "When you look at the long-term perspective, what the volume of freight is going be, and the pressure on the infrastructure in the next 20 years," he says, "you realize we're ... hitting the wall, where with a lack of drivers and the increased demand for goods, we're going to have a logistics crisis. Add to that the huge congestion getting in and out of major markets—especially with some communities not improving access, but figuring ways to restrict access—and there is a time bomb ticking."
About the Author
Peter Bradley is an award-winning career journalist with more than three decades of experience in both newspapers and national business magazines. His credentials include seven years as the transportation and supply chain editor at Purchasing Magazine and six years as the chief editor of Logistics Management.
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