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Article Excerpt
Private fleets account for approximately 75 percent of the trucks operating on U.S. highways, representing 4.5 million of the approximately 6 million trucks moving freight, and include roughly 50 percent of all heavy-duty trucks currently in use (Gallagher 2007). Private trucking accounts for 56 percent of the freight, about 4.45 billion tons annually, moved by motor carriers (Weart 2007). In 2008, private fleet revenues are projected to exceed $300 billion. This figure includes revenue from for-hire operations (Schulz 2008).
Prior to the Motor Carrier Act of 1980, the Interstate Commerce Commission regulated motor carrier rates, service, and competition. Many corporations operated private fleets to obtain lower rates or higher service levels than available from for-hire carriers. The Motor Carrier Act of 1980 deregulated the industry and fundamentally changed the operating environment by unleashing aggressive price and service competition. Many logistics managers found for-hire carriers could provide the same levels of service at a lower cost and abandoned their private fleets (Cooke 2002). Logistics costs as a percent of gross domestic product fell sharply during the 1980s from over 16 percent in 1980 to almost 10 percent by 1990 (Wilson 2008). The American Trucking Association estimated that by 1998 the cost of for-hire trucking had fallen approximately 25 percent below the costs of running a private fleet (Minahan 1998).
Shippers have begun to reevaluate the private fleet decision as part of their supply chain strategy. Large shippers can derive substantial economies of scale by running a private fleet and avoid paying for for-hire carriers' profit margin. Rising fuel prices have forced many small for-hire carriers out of business, and reduced capacity may drive up for-hire prices. When the economy rebounds, strong demand and limited capacity may make transportation equipment a scarce commodity. In addition, many shippers have begun to recognize the value created by private fleets.
Companies may have gone through a period when they wanted to outsource what they have now come to realize was a core competency and it becomes part of value proposition. We are seeing a growing appreciation and awareness among companies of how private fleet builds shareholder value. They see the proportionality of transportation, over time, shifting back to the private fleet market, especially where those fleets have a proven record of cost control and even profitability. So where private fleets are able to demonstrate not only a lower cost per mile to the company but [also] are able to have greater control of the total capacity requirements of their retailer or manufacturer a greater portion of the transportation solution will become private fleets (Gallagher 2007).
Although cost savings are frequently used to justify a private fleet, customer service and control are the principal factors driving the decision. "The impetus to starting a private fleet is due to corporations wanting the control they cannot get from for-hire fleets" (Cullen 2005). In a recent survey, the National Private Truck Council found that 72 percent of the respondents maintained a private fleet because an in-house operation could provide better service to key customers (Weart 2007).
The primary purpose of this Note is to identify the key issues associated with maintaining a private fleet and to provide a decision framework for evaluating whether to outsource or not. The discussion of the issues begins by analyzing the advantages and disadvantages of maintaining a private fleet. Many external factors influence the private fleet decision, and these factors are described in the following section. A framework that integrates these issues, environmental factors, and costs is then developed to assist managers in evaluating whether to maintain a private truck fleet.
ADVANTAGES AND DISADVANTAGES OF MAINTAINING A PRIVATE FLEET
Private fleets simultaneously offer a mix of advantages and disadvantages. The primary reasons for operating a private fleet are improved service and lower costs. The key reasons for not maintaining a private fleet paradoxically include higher costs, improved service, transportation not being a core competency, and avoidance of labor unions. Management must determine the most appropriate trade-off of the advantages and disadvantages of maintaining a private fleet. Table 1 summarizes these trade-offs.
Advantages
Customer service remains the principal driver behind a private fleet (Gallagher 2007). Many shippers recognize the necessity of maintaining a private fleet to obtain a consistent service required by their customers. Private transportation has received renewed recognition as a core competency since product distribution frequently is as important as the product itself. Product availability has become a key part of the value proposition expected by the customer. A private fleet must demonstrate some additional value that management cannot purchase from a third party. More often than not, the extra value involves superior customer service (Cooke 2002).
Private fleets provide greater control and flexibility for management to respond to customer requirements (Coyle, Bardi, and Novack 2006). Tailored customer service requirements may make for-hire carriers an infeasible alternative due to short response times, delivery frequency, and erratic or small piece counts per delivery. Management can exert direct control over the dispatching, routing, and scheduling of their private fleets to better meet these requirements. The desire to achieve stability and reliability is an important motive for private truck operations. The ability to control shipments from when they are loaded until final delivery often proves critical in responding to changing customer requirements. For instance, shipments to unmanned delivery locations often require that the driver be a company employee. A for-hire carrier may be unwilling to accept the responsibility of security and any damage regarding the delivery without a company representative to receive the shipment. Transportation managers often tailor fleet equipment to match their commodity or freight pattern. Private fleets ensure availability of this specialized equipment. For-hire carriers may be unable to ensure availability or may not offer due to specialized use or design (Morgan 1970).
Many shippers employ private fleets to reduce damage and claims. Company drivers have greater accountability and take greater care in handling and transporting freight. Their familiarity with the product, routes driven, and customer facilities enables them to avoid situations that could damage shipments. Company drivers eliminate the costs of filing claims against for-hire carriers.
Employee drivers provide a unique advantage. They routinely interact with shipping and receiving personnel both within their firm and in their customers' operations. These drivers gain a thorough understanding of their customers' operations and can improve customer service by streamlining the pick-up and delivery process, establishing a rapport with customer personnel, and anticipating customer requirements. In many instances, the driver becomes an extension of the sales force and may be used to promote new services or products. Due to direct contact with the customer, drivers can be an invaluable source of information regarding customer requirements, changing business practices, and perceptions of service.
Private fleets offer the "last resort" advantage when no other acceptable for-hire carrier or transportation offering exists (Coyle 1994). Firms requiring unique equipment or transporting fragile products may resort to a private fleet to ensure their products arrive without damage and avoid paying higher rates for insurance or specialized for-hire equipment. In other instances, management may maintain a private fleet to ensure availability of equipment when needed and for-hire capacity is limited or uncertain.
Lower transportation costs represent the other principal reason for a private fleet. Transportation costs may be reduced because the private fleet eliminates the for-hire carriers' profit margin. SYSCO, Pepsico, and Wal-Mart maintain some of the country's largest private fleets for this reason. These companies move substantial amounts of freight and paying even a small margin to a for-hire carrier over a very large volume accumulates a major expense to the firm.
Managers can further reduce logistics costs by exercising greater control over transportation. By directly controlling the routing and scheduling of their internal fleets, they can...
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