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At the National Private Truck Council’s annual meeting on April 23, one of the educational sessions was about the difference in strategy between private fleets that operate as a cost center versus a profit center. In case you were not able to attend the meeting, below is a summary of the topics that the presenters discussed, and how they might relate to your backhaul operations.

George Carpenter, systems and technology manager for AAFES Logistics, gave the perspective of a cost center. The AAFES private fleet distributes goods to the troops at military stores located domestically and oversees. The primary reason for having a private fleet is service, he said. No surprise there. Fleet performance is expected. The fleet is seen as an expensive cost center by management, but ironically its very existence means it is a low-cost leader.

AAFES uses a transportation management system (TMS) that optimizes and tenders loads to the low cost carrier, whether the carrier happens to be the private fleet or an outside carrier. The private fleet’s rates are the net operating cost per mile, which includes “cost avoidance” backhauls. The fleet doesn’t haul freight for third parties, but it does haul backhauls from its suppliers to its distribution centers. By doing so, the fleet often helps the company purchase products for less since suppliers can subtract transportation costs from the price of their goods.

“The key is to help them (executives at the parent company) reach a goal,” Carpenter says. “Take part of the credit and you’ll be in the forefront of their mind.”

For budgeting purposes, Carpenter says that he uses a formula to help the private fleet and the company’s senior management determine if the fleet is a cost center or a cost avoidance center. You want to be the latter, of course. The formula is to compare total fleet cost to the cost to outsource the entire operation. The difference is the net fleet cost and also the basis for calculating a ratio called Return on Invested Capital (ROIC), Carpenter says.

ROIC is the net fleet cost divided by transportation assets. This ratio should be more than 20-25%, he says. “If it is below, you have a hard time justifying the fleet.” In these economic times, equipment is more expensive. If ROIC is not growing, then it is difficult to justify purchasing new equipment.

Following Carpenter’s remarks, Bob Drygas, the general manager from PV Transport spoke about the advantages of operating a private fleet as a profit center. PV Transport acts as a third party logistics provider for Hatfield Quality Meats in Hatfield, PA. The fleet operates 90 tractors and 150 trailers.

The company has to meet or beat the rates from for-hire carriers to stay in business, as it can’t increase rates with its base customer. The company has separate revenue streams for its backhaul operations: refrigerated, frozen, livestock, cross-dock and truck wash. For each of these, the company has an internal and external rate.

In 2006, Hatfield Quality Meats spun off its private fleet into a profit center. That year, 93 percent of the fleet’s revenue was from Hatfield Quality Meats. In 2007, PV Transport diversified its backhauls to pick up more outside revenue. Eighty three percent of revenue was from Hatfield and it brought in approximately $700,000 in revenue from third party backhaul and other external sources.

If the company finds backhaul freight that is more profitable than company freight, it will take the backhaul and hire another carrier to delivery company freight. If it can’t find another carrier, it will haul the freight to maintain its service level guarantees.

“You are a supply chains solutions provider,” he said. “We’re all profit centers; it’s just a mentality.”