Dedicated Fleet - To own or not to own?

  Hugh's thoughts

  1. The "cheaper" argument:  Well the CFO might have a point here. Can you stand your ground when it comes down to your Value quotient?

  2. Current infrastructure is not a concern as professional carriers will be expected to handle this sensitive issue

  3. There is a whole lot more to managing contracted professional carriers, than service delivery

  4. The 'flexibility' argument: Rest assured, professional carriers are not 'flexible', you only get what you pay for

  5. You can bet that, as fleet manager, you will be left out of this one and only hear about it from external sources or when you are asked to leave your car keys on the way out!

  6. Yes, professional carriers do operate dedicated contracts, and they have one huge advantage, that of being able to handle seasonal demand a lot easier than a dedicated fleet operator.

  7. The National Road Traffic Act No 93 of 1996 and Regulations does not distinguish between a Professional Carrier or a Dedicated fleet operator.

Why this Topic?

This Topic was chosen as it is probably highest on the agenda among privately owned dedicated fleets. In a developing economy these fleets seldom exceed three figures, with the majority being more in the category of small fleets comprising 100 or fewer vehicles. Consequently, fewer resources in terms of skills and support facilities are a major setback in terms of optimising operating costs relative to derived Value.

In trading conditions such as our present economic climate, where the focus is on cost reduction and greater operating efficiency, it is inevitable that criticism will arise relating cost-effectiveness and performance of privately-owned dedicated fleets, with consequent criticism/lobbying for and against contracting out this critical function.

Traditionally, these fleets are considered to be an overhead expense (a cost of doing business) with lack of attention to effective KPIs for measuring stand-alone value scrutiny. It is therefore our intention to focus this conversation on how these fleet owners should consider the effectiveness of justifying their decision to own or not to own a fleet.

At the outset it begins with establishing the Value Quotient (Vq) of the existing operation (fleet). By this we mean that Vq = function/cost, which of necessity must be >1,00.

Logically this means setting metrics to measure what constitutes cost versus derived benefits. The major setback in applying this logic however is these fleet operators neglect to set metrics that quantify the benefits in terms of cost.

Let’s get the conversation going on how dedicated fleet operators should tackle this complex challenge.

Which is the key to success?

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Only first names and an initial will be used as an identifier so that people can speak freely.

 

Index to Conversations

 

Johan S's Question 

We have a problem justifying ownership of our fleet because we only need it for deliveries, which means that each vehicle is only doing 75km - 200km's a day. There is a lot of time where the wheels aren't turning, that pushes up our cpk like crazy. The basic question is, what is the cheapest, most reliable way of getting our products to our customers?

Hugh's thoughts

The first thing you need to look at is who schedules the fleet? This is a very common situation in the dedicated fleet environment. If dispatch is given a 100 vehicles they will 'share' the work out to keep everyone busy and avoid down-sizing the fleet. Next, have a look at how you can move some of the 75km deliveries to the oldest vehicles in the fleet - or out-source this work to a carrier. Depending on the outcome of this, look at scheduling the 75km deliveries less frequently, even consider negotiating FOB pricing - in otherwords these dispatches could be replaced by the customer collecting the goods. 

Philip F's Thoughts

Maybe Johan should look at his reporting system. This is quite common among fleets that are considered as an overhead expense where fleet expenses are allocated to the distribution division. In this case, Johan should move to setting up a fleet costing system that operates much the same as if his division was a contract carrier. "Distribution only 'gets what it pays for" - identify VALUE approach. This will only work if he sells it to the CEO who formally instructs the policy to be initiated. 

Abhijit Mitra's Question

The key question that we face in the domestic logistics space is the choice between being an asset owner and using a service provider. Can an effective express service be provided with a leased out fleet, especially when return loads are uncertain? What should be the incentive structure for the fleet owners to stick to a schedule? Is the B2B/B2C space moving towards express incrementally?

Hugh's Thoughts

Hi Abhijit, Thanks for your interesting question. I take it you are referring to a sort of “Uber” commercial vehicle service provider. While I am sure there are, what we refer to as “Common Carriers” who provide such an on-demand service, another way is to resort to Third Party Service Providers (3PL) as they are equipped to handle this sort of ‘on-demand’ service by out-sourcing (brokering) loads on the basis of connecting/grouping less-than-full-load (LTL) deliveries to smaller carriers, such as Owner-drivers.

This is a very difficult situation to recommend any one right way that satisfies the vast variety of shippers’ random requirements.

I suggest that you go to www.talkingtrucks.co.za and click on the link button that says “Choose another Conversation”. It will take you to Dedicated Fleets, click on the link button to take you to, Dedicated Fleet - to own or not to own. And from there, you can reference extensive comment on this Topic.

Frank W's Question

Sales Manager

Why lease?  The truck is never yours? You can only deduct monthly premiums from Profit before Tax (PBT). Whereas with a normal Instalment sale you can deduct depreciation, interest and maintenance from PBT and claim VAT back in month 3-4. So why lease if you don’t have risk. This is not the case with listed companies of course.

 

Hugh's thoughts

In answer to your question, Why lease?, perhaps we should start with why own? This is a fundamental management decision about where to put your money (well actually shareholders money) to get the best return. There are two main questions management have to ask to make this decision:

Do we see the fleet as a revenue-generating asset or a continually increasing liability? If we believe the fleet is an asset, we should want to own it and keep it on the balance sheet because it's producing a return, like our factories or stock without which we wouldn't be in business. If we think it is a liability, something that costs us a large amount of money to buy, depreciates rapidly and is expensive to run, then we would definitely not want to own it and rather see it as someone else's problem. So this boils down to mind-set, which mind-set does your company/customers have?

Do we have the skills and capability to own and operate a fleet or the skills and capabilities to manage a supplier who will do it for us? Either way we need skills. One of the primary reasons I see companies opting out of a dedicated fleet is lack of fleet management skills both in the company and in the market. With a Full Maintenance Lease (FML) all the technical skills required to keep the vehicle running are provided. So when companies lease they are "buying" the skills along with the vehicle. Sometimes it goes even further and they'll add on logistics services which means you really only have to say where you want what delivered and when.

This is where it is useful to have a formula to work out the right option, I call it the Value Quotient.

Value = Function (What I get)/Cost (how much it cost me)

 

Determining the Value Quotient of Out-sourcing

Function: What I get 

  • I get guaranteed vehicle availability,

  • skills I don't have or need to manage (reduces potential labour issues),

  • the ability to put my money somewhere where I get a better return

Cost: What it costs me

  • Vehicle lease agreement (which will cover the fixed cost of the vehicle, the interest on the capital and a profit margin for the supplier),

  • time it takes to manage a supplier (this can be much higher than anticipated),

  • loss of flexibility (e.g. to re-route a vehicle to an important customer),

  • integration costs (docking, loading etc.),

  • usually new systems for fleet management.

If what you get is greater than what it is going to cost, in time, energy, technology, emotional upheaval, then it makes sense to lease, if not, then it's better to own.

You also mention "if you don't have risk" you would be able to access the capital to buy a vehicle. Almost all companies that are not listed have continual risk in a market that has such small margins as a result of low barriers to entry (hence an over supply) and reducing demand (due to low economic growth). Thanks for the question, it's a very interesting debate.

Norman E's Question

Dedicated Fleet Manager Retail

I am curious to know why you have not included vehicle variable cost in your list of  What it costs me?

Hugh's Thoughts

Hi Norman, this is a very important and valid question thanks for bringing it up.

As the topic is essentially around - to own or not to own - the discussion thus far has been in the context of ownership cost i.e. fixed cost, and fleet management skills. Your very astute observation has however focused attention on how well the fleet is managed. I am referring to Vehicle Capacity Utilisation (VCU) that can affect the FIXED COST RECOVERY PER UNIT OF PAYLOAD DELIVERED. Let me explain; when a dedicated fleet is taken to be a cost centre in the financial accounts i.e. an overhead expense, it can lead to neglect in managing  Value Recovery.  What I am referring to is under utilisation of a vehicle (be it Mass-km or Volume-km). 

 

Poor routing and scheduling, can also exacerbate the situation in terms of minimising variable cost. Remember transport is not simply Mass kg and/or Volume m3 - as it consists of mass/volume being moved over distance km. This is particularly true with all dedicated fleets that are prone to empty back hauls.

 

Neil J's Thoughts

Fleet Manager Retail Distribution

I have never heard of a fleet budget being set around Mass-distance (Ton-km) as a Value KPI. As long as I have managed fleets it has always been set on km (cpk). In fact, we don't even distinguish between the different vehicles - it's mostly set on what  we spent the previous year +- adjustment for inflation. Even then, the CFO looks at my budget and cuts it to suit his consolidated budget and tells me I am "spending too much on the fleet". What's more, I am told that all Capex has been put on hold, so we will have to make do with what we've got.

Hugh's Thoughts

Well Neil, that's where dedicated fleet managers are in trouble. It's not a "one-size-fits-all" situation. I always make the point that one simply can't generalise when it comes to intelligent fleet budgeting. Let me explain it like this: "averages make good things look bad, bad things look good and all things look the same" Furthermore, no two identical vehicles in the same fleet will cost the same to operate over one financial period. Besides, what have last year's cpk figures to do with this year's actual? I will go one further: even if cpk is the Value marker, what happens when the market calls for more or fewer km? Is your budget adjusted accordingly? Furthermore, what has financial year costing got to do with fleet costing? It begins with Vehicle LIFE-TO-DATE costing - be that monitored in cpk or ton-km for each individual vehicle.

Janette O's Thoughts

Road Transport Owner

I do agree that no two vehicles in a fleet are the same, and no two companies are the same. When you tender for a contract at a Mine, you have to declare the number and kind of vehicles the company owns. That gives them (the mine) the confidence to select you because you have the right equipment they require. In this circumstance, it is the best to own.

If you have a contract that needs a certain kind of vehicle for 1-2 years, I would say rather lease the vehicle, as the contract will only last for that period.

If you are a business that needs odd loads to be done from time to time, then my option would be to get a carrier to do that. The vehicle plus driver plus maintenance plus supervisor, would cost the company much more in the end.

I would like to add that, on every vehicle, you should have the basic information at hand to work out the cpk and the R/ton. This is my view point on "To own or not to own".

Hugh's Thoughts

Although Janette's thoughts are those of a Professional Carrier, she makes very valid points that apply equally to Dedicated fleets.

She is correct in that no two vehicles in a fleet are the same: No doubt the major differentiator, being the two drivers.

Of course when the vehicles are in an identical operation, such as a load-haul-dump mining application, it becomes easier to estimate the Fixed and Variable costs. Obviously there are other differentiators, like Years-in-service, Life-to-date km as well as Service, Maintenance and Repair (SMR) history that also apply. 

Having said that, as soon as a fleet comprises vehicles that add additional dimensions to the equation - such as differentiators that effect the situation - this changes the fairly predictable assumptions used in budgeting both the Fixed and Variable Costs. They  become infinitely variable, which can result in the demise of many otherwise successful fleet operators; hence the huge risks associated with small common carrier fleets. The term "common carrier" is used to describe companies that provide random load services on demand.

 

Andrew R's Thoughts

 Dedicated Fleet Manager

Show me a dedicated fleet that doesn't resort to hiring transport to accommodate demand peaks, or replacements when own-vehicles are off the road. So it's not such a "black/white" situation as being discussed here. While the idea of having spare vehicles in the fleet is an absolute "no-no" in today's accounting terms (idle capital), careful consideration should be given to the high risk of graft and corruption entering the chase for business when hiring is integrated into the equation.

Inevitably cohesion develops in relationships between dispatchers and for-hire carriers that is difficult to control in the fast-moving hustle of meeting delivery schedules, just enough to hurt Own-fleet break-even volumes, eventually forcing justification to out-source the entire operation.  

Hugh's Thoughts

Let's do the sums on the point Andrew is making, "hiring transport to accommodate demand peaks." It all comes down to management proficiency  There are many aspects included in fleet management but it begins with two major competencies. The first is asset preservation (technical) and the second is cost-effective road freight transportation. So it all depends on the status given to this position in the organisation. If the task is assigned to a junior position then, with no disrespect to this position, the company can hardly expect the individual to understand the specifics and responsibilities attached to that of an executive post. As explained above, it rests on Asset Utilisation to justify the relationship between the Fixed and Variable Cost per Value Unit associated with moving freight (mass) over a distance.

Example 1) Let's take an example of a large vehicle assigned to a medium-haul urban distribution operation. The vehicle covers say 120 000 km a year and averages 55 km/h. This means it's wheels are turning for 2 182 h/year over say 250 days of availability, which averages 8,7 hours a day and covers 479 km.

Example 2) Now let's see what happens if the distribution round results in the vehicle travelling only 70 000 km/year. This means the wheels are turning for 1 273 h/year over the 250 days, which averages 5,1 hours a day. The shocker is that in both cases the vehicle is "owned" (Fixed Cost) for 8 760 h/year,

 

Example 1) Results in a vehicle utilisation of 2 182/8 760 = 25%. It gets even worse in Example 2) where the vehicle is utilised for only 1 273 hours over the 250 days, so vehicle utilisation is down to 1 273/8 760 = 15%.  Having made the point, let's work out what effect this has on the Fixed Cost per Value Unit. It makes Example 2) nearly 70% more expensive in Fixed Cost per Value Unit (however that may be expressed), than in Example 1). 

Moving on to the Variable Cost, we see that in Example 1) (120 000 km a year) the vehicle covers 55 km/h for 8,7 hours = 479 km/day.

In Example 2)  (70 000 km a year) the vehicle covers 55km/h for 5,1 hours = 280 km/day. So one can see that while the Variable Cost per km is more or less constant, in this case the Fixed Cost per km will be 1,71 times that of Example1), which seriously escalates the Total Cost per km.   

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