PrivateFleets.com

In one article, I could never cover all the pros and cons of operating private fleets versus outsourcing to third party logistics firms (3PLs) and/or dedicated contract carriers. One thing is certain, however: To a corporate boardroom, the existance of a private fleet requires that its service levels and costs are remarkably better than would-be transportation providers. With that said, it’s no secret that many for-hire trucking companies and 3PLs see tremendous growth potential in offering dedicated contract carriage.

As transportation costs (including risk) continue to steadily rise for private fleets, and as for-hire truckload and LTL capacity loosens in 2007, this will be a very interesting year to see how private fleets will find new ways to become more productive and efficient to meet this challenge.

One of the most interesting success stories I’ve come across for cost justification is from Atrium Companies, a large manufacturer of aluminum and vinyl windows and patio doors. The company’s innovative method for tracking its ongoing success is in the January 2006 issue of CCJ. But there were several details that were left out of the story, since a lawyer got a hold of it before we published it. Since this blog on private fleets is totally unfiltered, I will fill you in on the scoop.

I first met Jim Angel, director of fleet operations, in August 2005. Jim told me how earlier that year, he and his boss, Harold Crane, launched a 60-truck private fleet from the ground up in less than 90 days. This dramatic turn of events was a result of rejecting the bids from several major 3PLs for a multi-year dedicated carriage contract. The 3PL with the lowest bid happened to be the same company that currently had the contract. As Harold Crane told me, the service levels had deteriorated and the companies were continually at odds with eachother.

“There is a tendency for a lot of companies to let a third party manage their logistics operations. I think it’s a tremendous mistake. They talk about partnerships, but they are not. What is good for one is not good for another,” Crane told me. “To let someone else come in and manage your operation is total foolishness.”

While dedicated fleets and 3PLs may talk about “win-win” partnerships, the truth is they are not going to sacrifice their own profits for the benefit of their customers. This is especially true for backhauls. A 3PL and/or dedicated carrier typically retains control to arrange their own backhauls and keeps most, if not all, of the revenue.

To get to the point: The innovation of Atrium Companies was turning the lowest bid from a 3PL as an internal benchmark in their day-to-day operations.

To benchmark its cost savings, Angel uses the same invoice and spreadsheet the 3PL used. He uses these tools to calculate, week by week, a “proposed cost factor” for Atrium’s third party transportation costs, using the lowest bid. The lowest bid included a $1.2 million increase for 2005 over the previous year.

“What we decided to do going into 05 was to monitor our performance over what a 3PL would have charged,” Angel says.

On a monthly basis, the P&L statement for the private fleet shows the fleet’s margin between actual expenses and how much Atrium “billed” each division using a third-party delivery rate. This margin is credited back to each division, such as a manufacturing facility, that the private fleet services. To calculate the credit, Angel uses the percentage of the fleet’s total mileage for the month that is attributed directly to the mileages consumed by each division.

For example, if Atrium’s aluminum extrusion facility in Wiley, Texas, accounted for 11 percent of the miles driven by the fleet in a month, the division would receive 11 percent of the margin as a credit to offset its delivery expenses on its own P&L.

“I’m operating on a zero budget,” Angel says. “The company’s board of directors can see they made the right decision on a monthly basis when looking at the profit and loss statements of each division.”

The private fleet also compares its actual expenses for 2005, month to month, with the actual money Atrium spent in 2004 for third party transportation, not counting the $1.2 million increase. Up through the end of August 2005, year-to-date expenses were $446,000 under the 2004 numbers — even with the increase in fuel costs. When factoring in the proposed $1.2 million increase for 2005, Atrium has saved $811,000 in four months, Angel says.

One of the largest reasons Atrium is saving money is by increasing its backhaul income. When the contract was under third-party management, Atrium received credits for each backhaul — since the contract was based on roundtrip miles, but only after the company took out significant margins, Angel says.

“Any extra revenue really belongs to the customer,” Angel says. Compared to 2004, Atrium is beating its backhaul numbers by an average $35,000 a month.

“When you start looking at those numbers, you justify the hesitation the corporate world has about assuming liability,” Angel says. “That is really the only thing a third party provides that you try to associate a cost with it. We well proved that we’re better off without third party provider in today’s economy.”