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Moore on Pricing: Unbundling fleet outsourcing

The use of dedicated and private truck fleets seams to wax and wane with the economy. I’m referring, of course, to those who are trying to optimize transportation cost through use of dedicated equipment and not those who justify a private fleet primarily as a marketing tool.
By Peter Moore, Adjunct Professor of Supply Chain
November 01, 2011

The use of dedicated and private truck fleets seams to wax and wane with the economy. I’m referring, of course, to those who are trying to optimize transportation cost through use of dedicated equipment and not those who justify a private fleet primarily as a marketing tool. 

I recently completed an analysis of the fleet cost for a consumer products retailer and explained to the CEO that he was paying both a trailer lease cost and near full-market price for hauling his goods—resulting in excess costs of over a million dollars per year. His response was that the fleet was a rolling billboard, and a million dollars was a cheap price to pay for the exposure the company was getting. This column is for those motivated by cost, or those “economic buyers,” rather than this CEO.

As many firms evaluate the fixed vs. variable transportation cost model, we see economic buyers in industry move in and out of the market. In fact, decisions about fleet contracting should be made on factors such as the density of the areas that a logistics operation is trying to serve and the type of contract that the shipper and service provider are capable of supporting. 

When we enter into a fleet management arrangement we’re adopting a significant portion of the risk elements of a trucking company in exchange for a potentially lower annual cost. To achieve a margin of savings, we have to keep the loaded miles percentage high. Thus, the analysis often centers on commercial density in the areas where the fleet is to operate. High density means more orders for our products and a higher chance of backhauls or additional loads within the hours of service limitation of the drivers. If you have not yet considered a dedicated fleet or fleet outsourcing, the developing period of driver and equipment shortages should perk your interest.

Here are two key areas to consider. First, many dedicated/contract carriage providers will help you evaluate the potential to be successful in fleet outsourcing. You can model whether you have the density and market presence to be successful. As in all highway transportation, when contracting it’s important to factor in the major cost drivers of fuel, operator pay, insurance, maintenance, and safety. As you take on the largely fixed cost of a dedicated fleet you will need to be aware of the economic risks and how you will manage those along with the provider.

The second area to consider is whether you and a service provider can create a contract that is designed around a long-term partnership that focuses on mutual profitability. As in other outsourcing areas, the concept of “vesting” in the other party implies a change from the boilerplate, defensive contract the service provider will typically present for your signature. 

It also implies a sharing of common customer service vision and mutual trust. I recently had the opportunity to review some tools that companies were using to see if there’s alignment in terms of whether they’re prepared to outsource—and whether they trust their partner in this contractual relationship.

The results can be quite shocking. I can see why firms who outsource fleets can have buyer’s remorse after one or two years into the contract. In fact, the issue over time is often with the contract reflecting underlying mistrust and misunderstanding that gets in the way of a successful relationship. 

Fleet management contracts are serious business deals. Often public companies have to note these contracts in their financial statements. Thus, your deal can have scrutiny at the highest levels and with stockholders. 

Buyers and providers need to learn what makes a successful partnership built not on dry terms and conditions but on a shared commitment to the delivery of the perfect order to customers. Of equal importance, the partnership has to result in the efficient use of talented people and equipment to perform at below market prices. I encourage those currently in a contract, and those considering entering the fleet outsourcing market, to unbundle the fleet package and make sure each element is supporting your business objectives.

About the Author

Peter Moore
Adjunct Professor of Supply Chain

Peter Moore is Adjunct Professor of Supply Chain at the University of Denver Daniels School of Business, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at .(JavaScript must be enabled to view this email address).

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