The case for private fleets
There’s no question that private fleets are a large, fixed expense, yet some of the nation’s most profitable companies are still operating fleets that deliver on service and hold their own with for-hire competition.
By John D. Schulz, Contributing Editor -- Logistics Management, 11/1/2009
Private fleet managers have heard all the arguments against their very existence: It’s a cost center; they’re inefficient; fleets eat away corporate profits; we’re in the widget business not the transportation business.
“Private fleet justification exercises are a fact of life at many companies—more so perhaps in tough economic times,” says Harry J. Haney, III, associate director of logistics operations for Kraft Foods, the $5.3 billion food giant which operates a fleet of more than 2,500 power units. Haney and other private fleet experts say they have become accustomed to justifying their expenses and welcome the challenge.
There’s no question that private fleets cost money to operate. And there’s little doubt that transportation is more complicated now than it’s ever been since deregulation nearly 30 years ago. However, some of the nation’s most profitable companies—Wal-Mart, Coca-Cola, PepsiCo, Perdue, among hundreds of others—are still operating private fleets that account for four out of every five trucks in the nation’s fleet of nearly four million trucks, according to the U.S. Bureau of Census Commodity Flow Survey.
“It’s all about command and control,” says Gary Petty, president and CEO of the National Private Truck Council. Petty claims private fleets earn their keep through execution and delivery every single day on the highways. In fact, at $300 billion, private fleets command about 45 percent of the total $680 billion trucking industry, according to the Council of Supply Chain Management Professionals’ 2009 State of Logistics Report.
And there are other reasons private fleets hold their own. Fleet managers insist that their operations allow their companies to stay competitive in today’s 24-hour, just-in-time environment where transportation service requirements have never been higher and competition has never been fiercer. Many manufacturers say that they view their fleet drivers as an extension of their sales force, visiting sites every day as the “face of the company.”
But that face does come with a price. According to John Larkin, trucking analyst and managing director of Stifel Nicolaus’ transportation and logistics group, “Ultimately economics will win out. Private fleets will shrink as more and more shippers outsource their private fleet requirements.”
With solid arguments mounting in the private versus for-hire debate, let’s take a look at how some of the nation’s top private fleets have re-invented themselves to navigate through the worst trucking environment in more than 30 years. Who knows, it just may be worth being in the transportation business, too.
Earning their keep
In this weakened economic climate, private fleets have been under pressure to innovate and expand their service offerings. Some companies operate a blended fleet of both private and for-hire carriers, switching back and forth depending on economic conditions. Others are active in the backhaul markets, often turning a profit on providing for-hire services to aligned industries.
Even representatives of trucking’s for-hire sector say they admire how today’s private fleets are constantly fine-tuning their service menu to help cover costs and justify their worth.
“My personal opinion is that the private fleets out there today are pretty well run these days,” says Jim Van Hefty, vice president of commercial development, dedicated, for Schneider National, a 25-year company veteran whose aim is to offer services that most often mirror a private fleet. “Many of those well-run fleets are investing in continuing education, looking for ways to improve, getting the right backhauls, and treating their drivers right. In short, these are the ones who have it figured out.”
Many of these new efforts are being executed by a younger generation of fleet managers who are being asked to run private fleets in a way never seen before, such as operating as a for-hire carrier en route to garnering profitable backhauls.
For example, Indiana-based Batesville Casket Co. earned $1.1 million of its total $2.95 million in backhauls from outside companies last year. “Thanks to that influx of revenue the company was able to ride out the recession very well,” says its central dispatch manager Duane Miner. He adds that it’s a challenge to manage such a large backhaul operation, but it’s been very successful on some lanes, especially in and out of Texas where there is a large backhaul opportunity.
Kraft Foods is among the many private fleets that are proving their worth by simply providing better service and lower cost than what’s available in the for-hire marketplace. “That’s true in all economic situations, but it’s especially the case today where tight consumer purse strings make service and cost all that much more important,” says Michael Cole, director of transportation for Kraft Foods North America. “Our fleet continues to help us meet all those new challenges in many ways.”
According to Cole, one way is through flexibility in handling short lead time orders to ensure products arrive on time. “Another is an on-going focus on reducing the size of its trailer pool,” he says, adding that Kraft recently implemented new trailer tracking technology to help manage its trailers more efficiently.
“This tracking has sustainability benefits as well,” says Cole. “By continuously monitoring trailer status we can ensure trailers are turned promptly and not left loaded with the refrigeration unit running.”
The green factor
Green initiatives like this are also playing a role in the evolution of private fleets and the value they’re bringing to organizations. Many managers are fine-tuning their routes, cutting empty miles, reducing their carbon footprints and offering a more “sustainable” service that they say can’t be equaled by for-hire carriers.
For example, Kroger has reduced its fleet’s top speed to 62 mph and is reducing the weight of its trucks by nearly 1,000 pounds as part of its sustainability initiative. Kroger says it hopes to be able to reduce its total overall miles by 2 percent by the end of next year on the way to saving 1 million gallons of diesel.
Kroger is also redesigning its freight network in and out of its 41 food processing plants by using routing software that’s enabling the company to combine loads and improve backhaul opportunities.
Kraft Foods is among the private fleets using several EPA-approved SmartWay recommended practices and technologies. These practices include using auxiliary power units to reduce idling, employing “smart reefer” refrigeration units, and using more 53-foot trailers. Coles says Kraft is testing several other technologies and practices including trailer side-skirts, nitrogen-filled tires, low rolling resistance tires, and oil filtration systems to boost miles per gallon.
“We are also very proud to have been the first to introduce a hybrid direct- store delivery vehicle for frozen and refrigerated products,” Cole says. “Our customers clearly understand the need to operate in an increasingly efficient and environmentally responsible manner because they face similar challenges in their own organizations.”
The road ahead
So what’s ahead? For sure, there’s uncertainty and higher operating costs coming down the pike. There could be an increase in the federal tax on diesel fuel on the way as well; but there could also be the long-awaited economic rebound. In fact, that recovery could end up putting further pressure on some private fleet operations.
“When the new normal does come,” Schneider’s Van Hefty says, “I believe we’ll find that there’s a tremendous amount of driver capacity that’s left the industry. Once they leave, they don’t come back. Add demographics and normal retirements, and I firmly believe we will be sitting here 12 or 18 months from now and people will be clamoring for capacity. It’s going to be one of those big surprises nobody is expecting.”
So, considering all these elements, is it worth operating a private fleet? Yes, say managers and private fleet advocates, as long as the service levels provide a differentiating value to the company that cannot be matched by using common carriage.
The challenge, private fleet managers say, is staying on top of what can be a challenging transportation matrix. Transportation is more than simply moving product from Point A to B. It is managing a complex web of ever-changing options. Good private fleet managers say they welcome the challenge, and the overall value provides proof of and justification for their worth on a daily basis.
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