Should you turn back to dedicated trucking service?

Shippers increasingly are turning to dedicated contract carriage to solve complex problems and minimize service risks.

By John D. Schulz, Contributing Editor -- Logistics Management, 1/1/2007

Back in 1987, this magazine ran an article about dedicated contract carriage, often referred to as simply “dedicated trucking” or “dedicated service.” Under this type of arrangement, equipment and drivers are “dedicated” to a particular shipper’s specified, predictable routes. It is most advantageous on short-haul (under 500-mile) “loops” where return loads can be scheduled in advance.

Dedicated service has obviously been around for a couple of decades, but it’s currently experiencing a surge in popularity. That’s because shippers are increasingly using it to help them solve an array of complicated logistics problems, counter rising transportation costs, and respond to ever-higher service requirements.

And at a time when spending on for-hire trucking has slowed, carriers say they like dedicated contract carriage because of its predictable freight levels. They also like its penchant for producing “driver-friendly” freight, which helps them retain qualified drivers.

Those are just a few of the reasons many shippers and carriers favor dedicated services. A closer look shows why this approach to doing business is likely to grow even more popular in the next few years.

The Appeal for Shippers

Dedicated trucking services can take nearly as many forms as there are types of freight. Sometimes it’s only a matter of dedicating a certain number of drivers and trucks to a designated route. Other times it can include backhauls from different customers to help keep the trucks filled. A carrier may provide and maintain the power units that pull trailers adorned with the customer’s logo. In a full-service arrangement, drivers may wear the customer’s uniform and perform product set-up work at retail stores. In short, dedicated service can be whatever the customer wants it to be, as long as the carrier devotes agreed-upon resources to the shipper.

Dedicated’s flexibility has become even more appealing as shippers’ logistics requirements have become increasingly complex. From the shipper’s point of view, in fact, the whole idea behind dedicated service is to guarantee sufficient capacity and an extra service edge where normal for-hire carriage may not be enough, or is simply not a good fit economically.

The drive to maintain less inventory, for example, has shortened the average length of haul, which plays well for dedicated but isn’t a good match with traditional truckload service. Gordon Hale, senior vice president of dedicated services for Schneider National, the nation’s largest truckload carrier, says that this fundamental industry trend is helping to make dedicated a growing portion of his company’s business. “While we’ve had success in long-haul, dedicated addresses a higher percentage of freight in that shorter-haul segment,” he says.

That was the case for Diageo PLC, the $16 billion, London-based spirits, wine, and beer company, which uses dedicated carriage for scheduled shuttles between its manufacturing plants and various facilities. “When we examined the common carriers’ rates for short lengths of haul and compared them with the minimum charges, a dedicated fleet made more economic sense,” says Erik Snyder, vice president of logistics in Diageo’s Americas Supply division.

Ensuring sufficient capacity has also become a big issue as changes in hours-of-service restrictions and tighter availability of drivers have made it difficult for shippers to get what they need when they need it. Dedicated can help there, too.

“It’s an advantage to convert to dedicated because you don’t have to bring in another carrier for coverage when the need for more capacity arises,” says Larry Ravinett, senior vice president for transportation at National Retail Systems, which handles transportation and logistics for large retailers.

That gives shippers peace of mind. “Dedicated enables shippers to sleep at night because they know their supply chain is covered,” observes John G. Larkin, managing director of the transportation equity research at Stifel, Nicolaus & Co. in Baltimore, and a veteran trucking industry analyst. Relying on traditional for-hire truckload capacity has become “too risky” with respect to service quality, capacity availability, and cost variability, Larkin adds.

Diageo’s Snyder agrees: “Dedicated allows us to control our own destiny from a capacity standpoint,” he says.

The assured availability of capacity is one reason why service quality with dedicated carriage is often stunningly high. “We’ve had accounts with service levels at 99.7 percent,” Ravinett says. “There are some extraordinary things we can do in terms of service.”

Worries about costly new emissions regulations and the stubbornly high cost of fuel are also making dedicated services more attractive. That’s especially true for companies that operate private fleets. Just like for-hire carriers, private fleets face increased capital commitments (for newer engines), rising costs (for fuel, insurance, and wages), and a tighter driver market.

But simply switching to common carriage isn’t always the best option. For one thing, it doesn’t necessarily save money: For-hire carriers have been raising rates, and they’ve become more selective about what freight they will haul. And it can be a difficult transition, especially when products’ delivery requirements are not a good fit with the single-stop carrier model. Instead, a combination of in-house and outsourced, dedicated services may be the best option.

Why Carriers Like It

Truckers are embracing dedicated service because it offers a partial solution for some of that industry’s biggest challenges. For instance, Larkin says, it’s a “great fit” for carriers because it guarantees reliable freight volumes with decent margins at a time when demand for truckload (TL) and less-than-truckload (LTL) service is stagnating.

Logistics Management’s 15th annual Masters of Logistics survey (September 2006) has documented that slowdown in demand. The survey, which tracks transportation trends, found that the percentage of shippers’ transportation budgets spent on TL, national LTL, and private fleets has been declining.

One notable finding was that spending on truckload transportation has dropped for three consecutive years. Three years ago, shippers spent 29.8 percent of their budgets on truckload. Two years ago that number fell to 28.9 percent. In 2006 it dropped even further, to 25 percent.

One possible reason for last year’s precipitous drop was that the survey included the category of dedicated carriage for the first time. Respondents said they spent 8.2 percent of their freight budgets on dedicated carriage in 2006.

That’s encouraging news for motor carriers. Probably no other industry in America has higher fixed costs than does trucking. Labor can account for two-thirds of a large LTL carrier’s costs. Throw in the cost of terminals, insurance, equipment, and other essentials, and carriers must find constant streams of profitable freight just to maintain their cash flow.

Dedicated service is just such a source. In fact, it has become a very significant source of revenue for some of the country’s largest trucking companies. Larkin and other analysts estimate that dedicated services currently represent from 10 to 40 percent of large carriers’ total operations. “We would expect that percentage to continue slowly growing over time,” Larkin says.

Some carriers, such as J.B. Hunt Transport Services and Schneider National, market dedicated carriage as a full-service option that can produce healthy margins. At J.B. Hunt, for instance, the dedicated-services unit accounts for about 30 percent of overall revenue, posting $239 million of the company’s $858 million revenue in the third quarter of 2006.

But dedicated accounts for a higher percentage of the company’s profits, according to Hunt’s latest financial reports. The unit enjoyed a 26 percent rise in year-over-year quarterly profits and contributed $30.8 million to the carrier’s quarterly net income of $57.8 million. In addition, dedicated’s operating margin rose while that measure declined for Hunt’s regular trucking unit. One reason is that Hunt’s dedicated services group focuses on specialized freight and equipment, and thus is able to attract higher-margin business. Only about 14 percent of dedicated contracts involve “plain vanilla,” dry-van-compatible truckload freight.

Other carriers say they are content to “nibble around the edges” and use dedicated where they have excess equipment or to fill trucks where the only option would have been empty miles. “For us, as a fill-in for business it’s been excellent,” says Ravinett of NRS. But it may not stay that way for long: Retailers have been a mainstay of dedicated contract carriage, and their use of dedicated is “definitely growing,” he says. He estimates that dedicated service currently represents about 15 percent of his company’s business.

Use of dedicated service by shippers in other industries is also on the rise. Hale says that Schneider National’s dedicated business will increase by a “healthy double-digit” percentage this year. Privately held Schneider National does not release specific numbers for individual business units.

An added bonus for motor carriers of all sizes is that dedicated contract carriage makes it much easier to recruit drivers. Unlike long-haul service, which requires drivers to be on the road for as long as two or three weeks, a typical driver for a dedicated contract arrangement runs a “loop” of two or three short-haul lanes and often is able to sleep in his or her own bed every night or so.

Anything that makes driving more attractive to good, qualified people is a trend carriers are going to encourage. “It provides a better work life for our drivers,” Ravinett explains. “It becomes a win-win for them.”

It certainly makes their employers happy. With dedicated, truckers know that their fixed costs are covered, Larkin notes. “So with more demand for dedicated, favorable operating dynamics, and profit stability at good margins, carriers are growing dedicated as a percent of total revenue,” he says.

The Real Prize

Given the right economic and business circumstances, dedicated service is indeed a win-win proposition for both shippers and carriers. “With dedicated, shippers can have their cake and eat it too,” Ravinett says.

Ultimately, though, shippers’ desire for both operational flexibility and better cost control is the critical driver behind dedicated’s increasing popularity.

Freight rates for dedicated service often are lower than typical contract rates or spot rates in common carriage, but shippers and carriers agree that’s not the important number. The real prize is the total savings that dedicated carriage can bring to the supply chain, they say.

“Every new piece of business I’ve sold has brought improved supply chain value to customers,” says Ravinett. “Their total delivered cost goes down. We’re all about helping the customer to reduce total delivery cost. That doesn’t always translate into a (lower) rate. But it lowers their overall costs.”