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Recently, I attended the PeopleNet user’s conference in Naples, Fla. During a private fleet roundtable discussion, the topic of driver fuel incentive programs came up. I gained some valuable tips from private fleets about how to roll out a successful driver mpg program.

The variance in mpg among vehicles nearly always is due to driver behavior, mostly regarding shifting, speed and idling. Significantly improving mpg requires engaging drivers in the process.

A textbook-style management approach for engaging drivers is to set an average fleet goal for mpg and offer drivers a financial incentive to exceed this goal. Such mpg incentive plans are notorious for hiccups, however. For starters, drivers are leery about incentives tht they feel are unobtainable due to their vehicle model, maintenance needs, geography, payload, weather and other factors.

One proven path to successful mpg improvement and incentive programs is to begin by establishing baselines for each business group and equipment type. Baselines create different categories or groups for measuring mpg. Examples include terminal locations, sleeper cabs, day cabs, trucks with and without auxiliary power units (APUs), etc.

Next, set goals and incentives for the entire group based on the actual results from the top tier of drivers. One of the fleet managers at the meeting, who works for a large flooring manufacturer, said that his company sets mpg goals based on what 25 percent (the top quadrant) of drivers in each group already have met. Its goals aren’t limited just to mpg; they also include idle time.

This company also uses descriptive statistical analysis to determine what vehicles fall outside the 95th percentile of predictability. For each group or baseline, drivers’ mpg follows a normal bell-shaped curve. Statistically, the few trucks that fall outside of the 95th percentile are in the same group, but they are the special cases you should really look at.

Trucks on the low end of the mpg curve might have a mechanical issue. In this case, you could make the operational adjustment and remove a driver’s mpg data from the time period in question, thus returning his average to normal. On the high end, you’ll want to locate the driver or equipment that is performing well, determine why, and then roll out these best practices to the rest of the fleet.

An automated measuring system is another component of successful mpg programs. Drivers should be familiar with your onboard computer system, if you use one, in order to monitor thier own mpg in the cab. It also helps to use healthy and creative competition to motivate drivers to improve. For example, you could post a chart in the office and label the group of drivers in the lowest quadrant the “catfish” for being the bottom dwellers. The next group could be the snails, the lions and then the cheetahs in the top quadrant.

With the right technology tools, analytical skills and even some creative competition, you too can have an effective driver incentive program, attain significant fuel savings and leave no room for driver excuses.

According to the recently released 2008 Benchmarking Survey from the National Private Truck Council, 37 percent of private fleets are incorporating dedicated contract carriage and other third-party alternatives into their corporate transportation plan.

Of the private fleets that use dedicated carriers, 34 percent of their companies’ inbound freight and 19 percent of outbound freight is transported by third party dedicated carriage.

The survey also found that most private fleets say they have first choice of company freight. This would seem to give the private fleet an inherent advantage over third parties in maximizing fleet utilization and revenue.

If your fleet is among the ones that gets the first choice in freight, why would you even consider outside carriers to be your competitors? Wouldn’t they be more like dogs sitting around the table waiting to see what scraps you decide to throw their way?

I don’t get the impression from the NPTC survey that private fleets are really worried that their cost and service is threatened by third party solutions from dedicated and for-hire carriers. That’s probably just because the survey was designed to take a snapshot of the current status. My impression from people I’ve spoken with, however, is that the competitive position of the private fleet is an ongoing concern to fleet managers.

Most of the fleets I speak with say they are always worried that someone else can come in and do the same job for less. Come on, it has to get under your skin when a third party meets with you or your board of directors and proposes replacing some, even all, of your private fleet with a dedicated solution.

In many cases, the NPTC says, private fleet managers have become responsible for implementing “blended” fleet solutions, which means using the resources of the private fleet along with dedicated and for-hire common carriers.

Comparing this year’s survey to last year, the private fleet seems to be in about the same position in terms of cost and service against these third parties. The survey said that private fleets haul 61 percent of their companies’ outbound freight and 39 percent of total inbound freight.

So basically you’re looking at a 60/40 rule (60 percent outbound and 40 percent inbound) for the private fleet, year after year. Perhaps this is the unwritten ratio for what a blended transportation solution should look like. You should outsource 40 percent of your outbound freight and 60 percent of your inbound. Perhaps this is what the market has determined it takes to balance the competitive forces of private fleet, dedicated and for-hire transportation.

On this point, I’d like to get some feedback. Between dedicated and for-hire carriers, which do you see as more of a competitor to your private fleet? Along the same lines, which is the greater threat to your “private fleet pride”? And lastly, which one are you focused more on beating back and eventually replacing with your own private fleet solution?

Sometime in the next week or so, I will send everyone a copy of a “white paper” that I am finalizing. The paper will detail what key metrics private fleets are using to grow their fleet by increasing competitiveness in both service and cost.

Two of the most complicated metrics covered in the paper will be return on invested capital (ROIC) and Economic Value Add (EVA). To get some help on this topic, I turned to George Carpenter, CTP, Logistics Systems and Technology Manager for the Army and Air Force Exchange Service (AAFES).  

I thought it might be helpful to pass on Carpenter’s advice through this blog for how he uses these metrics as benchmarks in his private fleet.ROIC is defined as the cash rate of return on capital that a company has invested. ROIC shows how much cash is going out of a business in relation to how much is coming in. In a nutshell, ROIC is the measure of cash-on-cash yield and the effectiveness of the company’s employment of capital.
 

The formula looks like this:

ROIC = Net Operating Profits After Tax (NOPAT) / Invested Capital.
At first glance, the formula looks fairly simple.  However, in the complex financial statements published by companies, generating an accurate number from the formula can be complicated.
To keep things simple, start with invested capital, the formula’s denominator. Representing all the cash that investors have put into the company, invested capital is derived from the assets and liabilities portions of the balance sheet as follows:

Two years ago, a 64 year-old driver for Linde Gas received a safety award for 3 million accident-free miles. Soon afterwards, a manager noticed a sudden change in the driver’s behavior.

The driver had two rapid deceleration events in the same month, signifying a behavior problem with vehicle spacing. The concerned manager had an idea: ask the driver when his last eye exam was. After a doctor’s visit, the driver’s depth perception was corrected with a new prescription.

“He is still working for us,” says Joe Gomes, director of safety for Linde Gas, a national supplier of industrial gases. The largest division of Linde’s private fleet, the North America Bulk Distribution, operates 750 power units and 2,000 high-pressure gas trailers.

Identifying and correcting the root causes for a sudden change in driver behavior is not always so easy, however. More recently, a manager noticed a driver had an unusual amount of speeding and rapid speed changes. After noticing this behavior for three to four weeks, an incident occurred before managers could get to the driver and intervene. The driver later acknowledged he was having marital problems. His wife left and he was rushing home each day to take care of kids.

The driver’s behavior returned to normal once he received counseling through Linde’s employee assistance program (EAP), a confidential service.

The transportation industry, including private fleets, has traditionally waited for incidents to happen before disciplining or terminating drivers, Gomes says. “We try to use leading indicators to catch the behavior and modify it before it becomes an incident.”

To closely monitor the leading indicators of driver safety and performance, Linde created a Driver Risk Index. The DRI is a database tool that enables managers to efficiently score driver risk on a 1 to 100 scale and monitor any changes in driver performance. Data for the DRI is downloaded daily from each vehicle through the company’s onboard computing system from Xata.

The DRI has 6 different leading indicators for driver behavior: speed, rapid speed changes (9 mph or more per second), miles per gallon, over-RPMs, idle time and brake applications. Linde evaluates each indicator on a 6-month basis to pinpoint any trends or changes, Gomes says.

At least once a week, management reviews performance with drivers that score in the lower range. Rapid speed changes are considered an aggressive and violent behavior and merit an immediate conversation with the driver, he says.

“The driver is not going to come running to you. You’ll start to see more brake applications and hitting the throttle harder,” says Mike McDonald, Linde’s national distribution maintenance and engineering manager.

“A lot of times, the stress that hits guys is not something that comes from within the job function but from their family,” Gomes says. “The DRI identifies it. You can see really quickly that something is going on and pull the driver in and talk to him.”

All of Linde’s driver managers must complete an internal course called “Transport Leadership.” The course focuses on interpersonal and coaching skills. Driver managers are specifically trained to coach drivers using only documented performance data.

Linde Gas trains all drivers with the Smith System driving techniques. Drivers that follow these techniques are not only safer but more fuel efficient as well. The DRI gives managers a quick way to determine if drivers’ habits and skills are meeting the requirements of the Smith System. Most of the time, a drop in performance requires simple coaching to correct. Other times it is more complicated. Linde’s managers are trained how to be extra sensitive to drivers’ personal problems.

“Personal problems are not something you want to delve into,” Gomes says. When discussing performance, drivers will sometimes voluntarily disclose aspects of their personal lives.

“A lot of times, drivers don’t want to come out, but our managers are pretty good. They’ve worked with these guys for 10 to 15 years. They know who their families are. They will open up about what the issue is,” McDonald says. For any personal issues, such as money, sickness and family, managers suggest using the company’s EAP program called Lifeworks. If the driver is in the office with the manager, the manager will call Lifeworks, hand the phone to the driver, and walk out.

“If you’ve got a guy with 10 to 15 years invested in the company, we know it is going to be very difficult to find a replacement. We go the extra mile,” Gomes says. Since the DRI was created in 2005, managers are putting more emphasis on helping drivers get in touch with Lifeworks, he says, but “you can’t force them.”

Like any private fleet, Linde is focused on improving fuel efficiency as well. Its process for modifying driver behavior to improve mpg is identical to its process for managing safety risk. The company uses the DRI system to monitor drivers’ fuel efficiency. Rather than track mpg, the company has established standards for what each indicator should be to maximize fuel efficiency.

“If drivers meet certain standards, we know their mpg,” Gomes says. “If they are driving efficiently, they are using the Smith System.” The company has piloted its fuel efficiency training at two locations. One location has seen a 3.5 percent increase in fuel economy. The other has improved between 5 and 6 percent.

For Linde Gas, nothing is left to chance in driver performance and safety. It can’t be–their customers, many of which are hospitals–depend on oxygen and other medical and cryogenic gases to be on time, everytime, to save lives. The company is another example of a private fleet leading the way in developing professional drivers with best-in-class management skills.

As a private fleet, everyone understands the risk–whether perceived or real–that an outside carrier can do the job for less. Rather than letting this fear demoralize the company, savvy fleet managers know how to use this to their advantage. Drivers and other employees already know their roles; they just need a little education now and then on what they can do to help save money. 

Stationed in Maine, the private fleet for Poland Spring–a division of Nestle Waters–transports spring water to bottling facilities in the Northeast. The company wants the public to see the fleet as environmentally friendly and save money in the process. Management is always testing different fuel-saving strategies, such as B5 biodiesel, new tractor aerodynamics, synthetic oil, daily tire pressure checks, a “tornado” add-on for the air filters, and recapping tires three and even four times, says Chris McKenna, the Northeast inside manager. 

Using a resevoir of data collected by the fleet’s Cadec Mobius onboard computers, McKenna is able to benchmark any fuel saving initiative–particulary whenever drivers change their driving behaviors.

Two strategies that have made a big difference in improving mpg are posting a list of drivers in the office, ranked by fuel efficiency, and reviewing weekly performance reports with drivers, individually.

“Drivers know we are going to ask. A large portion of them want to do the right thing,” he says.

With its fleet of 40 tractors, from January through May, the company acheived a 41 percent reduction in idle time–a total of 2,300 hours of idle time, or a run-rate of 5,100 hours annually. That’s the equivalent of taking 12 cars off the road in terms of carbon emissions. In addition, Poland Spring saved more than $9,000 in fuel during the 5-month period and is on track to save over $21,000 this year.

The company’s goal for overall fuel efficiency is to reach 7.0 mpg. It is already consistently improved from 6.0 to 6.5 mpg and is well on its way.

“Results have exceeded our expectations, and we were able to affect change much more quickly than we thought possible,” said McKenna.

Having just finished some research and writing for a “white paper” about private fleet metrics that I’m doing for LaneLinks, I wanted to share what I consider to be some of the more interesting topics.

All of the private fleets I interviewed said that customer service (specifically, on-time delivery) is their most important metric. While this came as no surprise, I find it interesting how closely related service is to cost. Service is almost a given, since the private fleet is optimally designed to meet its customers’ service and capacity requirements. However, in this current trucking environment of high fuel prices and generally flat freight volumes, the metrics you use to compare your cost advantage to other carriers is just as important.

As one fleet manager told me, “The day an outside carrier can do the same service for less, I can see the day that the customer says ‘we appreciated your help.’”

In addition to using a consistent model to track the revenue (including backhauls) as well as the variable and fixed costs for each leg of each shipment, fleets need to compare their net cost to the market rate. Problem is, not all trucks cost the same to operate. Some have different lease payments; some get better fuel mileage than others; some are able to bring in more revenue from backhauls.

Generally, the fleets I spoke with will lump the revenue from third-party backhauls for each lane together with the internal revenue they generate from the customer. Likewise, they will use the same value–for example, the same cost-per-mile for variable costs and the same cost-per-day or cost-per-hour for their fixed costs. The metric for net fleet cost, per lane, is therefore actually the average net cost.

One fleet I spoke with uses a weighted average to calculate the fleet’s cost for each lane. He divides the net fleet cost, per lane, by the number of trucks that operate in the lane. This average cost-per-truck for each lane makes for a good comparison with the rates from outside carriers that haul freight in the same lane.

Depending on how often the customer adjusts its rates with outside carriers, the private fleet may see its cost advantage erode for a few months, but most likely this trend will mean that outside carriers will be forced to raise their rates. After all, they are under the same pricing pressures from fuel and other expenses. Still, it may be cause for panic.

Some private fleets are compensated by their customers for every running mile, as any dedicated contract carrier would be, but in order to bid their services at a competitive price depend on revenue from third party backhauls rather than operate at a loss.

I know this brief blog post barely scratches the surface of what it takes to remain competitive in service and cost, and what metrics to use. If you are doing something unique in terms of how you compare your cost structure to outside carriers, I’d like to hear from you. Perhaps we can get a dialogue going. 

Last month, I published a research paper on private fleet backhaul. The research was based on a survey that more than 50 private fleet managers took the time to complete. One of the most interesting findings was that 77 percent of private fleet managers would like to increase the share of company freight that is hauled by their fleet.

The question is, how do you go about increasing your market share? This led me to begin another research project or “white paper,” as I call it. This time the subject will be the metrics that private fleets should use and thus improve in order to succeed in increasing their share of company freight.

To me it seems necessary to grow the size of your fleet in order to give employees a better career path. And the only way to grow the size of a private fleet is to increase the value and competitiveness of the fleet, lane by lane. Therefore, what must these metrics be and what numbers do you need to meet in order to justify expanding the private fleet?

As an obvious example, a fleet’s overall net operating cost and its net operating cost per lane largely determine how competitive it is against outside carriers and 3PLs. Another consideration is whether you operate as a cost center, a cost avoidance center, or a profit center. How you structure the fleet will largely determine what type of accounting methods and metrics you use. And finally, what metrics you choose to focus on will determine what type of backhaul loads and lanes are a good fit for your operations.

The reason I am writing this blog entry is because in the next week or so, I would like to speak with some of you about the metrics you are responsible for and what type(s) of analysis you have done that has proven useful to help your private fleet become more competitive. I am also interested in speaking about third-party backhaul–specifically what type of lane-by-lane analysis you have done to determine what rates to charge for backhauls and in which lanes it makes sense to pursue them for your fleet.

It will only take a few minutes to answer a few questions and, if you would prefer, I won’t use your company name in the white paper. My plan is to distribute the white paper for free to anyone that wants it, so everyone can benefit from sharing knowledge. Please reply and let’s get started.

I know I’m preaching to the choir here, but to understand just how painful fuel prices have become, let’s consider a 500-truck fleet that averages 2,000 miles per truck per week at 5.75 mpg. The fleet consumes 173,913 gallons per week. Using $4.33 for the average retail price of diesel on May 12, at this rate the fleet will spend $753,043 per week for fuel.