Improving Cost Absorption in Private Fleet Transportation

The massive supply chain disruption caused by the pandemic made many organizations rethink their transportation strategy. This has led to an increase in the use of private fleet transportation, as companies look to gain control and de-risk their supply chain in the event of (inevitable) future disruptions. 

Whether they use third-party carriers or dedicated transportation within the for-hire market or take a private fleet approach, companies have traditionally viewed supply chain and transportation as a cost center, a business expense that doesn’t contribute to the bottom line.  

But that view is changing. More forward-looking organizations are realizing an optimized supply chain, including the ability to drive cost absorption within transportation management, can be wielded as a competitive weapon. This is especially critical in the current inflationary environment, with costs spiraling upward at a greater rate. And as in many other functional areas, technology is the path to leveraging transportation assets as a differentiator and success factor. 

According to the Cass Freight Index in May 2024, increases in freight volume are largely being handled by intermodal and a growth in private fleet transportation. This has been keeping for-hire truckload rates down as demand is reduced and private fleets compete for backhaul volume. It was also a main contributor to a 9% decline in for-hire volume in April. 

ACT Research also noted that a 5.8% year-over-year decline in freight shipments via truck was due to insourcing of private fleets as well as consolidation of LTL into truckload. “The ongoing private fleet capacity expansion … continues to defy our expectations,” ACT states in its June 2024 freight and transportation forecast report. 

During the prolonged freight recession, the low market cost for freight, while a boon for shippers, has put thousands of private trucking firms out of business because they can’t cover operating expenses. The resulting freight vacuum and market uncertainty are incentives for even more companies to start or expand their private fleets. 

Cost absorption in transportation management involves distributing expenses across operational activities in order to reduce them. This improves cost efficiency, particularly during inflationary periods, through optimizing logistics and resource utilization. 

Within private fleet transportation in particular, companies have greater control over — and responsibility for — cost absorption. It means finding ways to reduce their controllable costs through more efficient routing, scheduling and loading. 

Mat Witte, chief executive officer of ORTEC Americas, says while traditional metrics like cost per mile and cost per stop are important indicators of a company’s ability to harness transportation cost absorption, delivery failure rate is also a critical KPI. 

“If your deliveries are failing at a 10% clip every day, for some larger companies that means incurring significant costs for redelivering products that should have been delivered right the first time,” Witte says. “Addressing that is true cost absorption.” 

For example, he says, a large beverage company’s deliveries were failing at a 15% rate every day. Considering the company was logging 80,000 stops per day, it was a significant cost and a huge waste. The company was sending out well over 100 trucks a day just to re-deliver the previous day’s failures. 

“Looking at the data helped them optimize based on volume and feedback to build more optimized, achievable routes,” Witte says. “This created a huge improvement that saved this company about $20 million per year, just by getting some control over those SLAs and their overall performance.” 

Focus On Controllable Costs

Mike Mulqueen, partner and strategy practice lead at JBF Consulting, says companies need to focus on what’s controllable as part of a cost absorption strategy. “I'm very leery about cost per mile when putting together metrics to measure the efficacy of a fleet,” he says. “That’s because they're going to naturally go up and down based on externalities that are outside the control of an organization.”

The current inflationary cycle has had a significant impact on transportation costs, such as fuel, labor and fleet maintenance. Drivers include supply chain disruptions, increased consumer demand and geopolitical conflicts. The past few years have seen inflation rates reaching levels not observed in decades, affecting all sectors of the economy. And fleet managers are challenged to find cost-effective solutions in order to improve efficiency and maintain service levels.  

Inflationary pressures are actually creating separation in the market between fleet operators that are able to gain efficiency and absorb costs, and those that can’t, Mulqueen says — and the former see it as a competitive weapon. “There are high costs for insurance, for fuel, for labor, and for the (transportation) assets themselves,” he says. “And the delta between a really good operating fleet and a mediocre or poor one is increasing. So, for a good operator, I like bad times because it's increasing the relative distance between myself and the competition. 

One area of waste in fleet management is a company’s tendency to not revisit generous service levels offered in an initial contract. For example, a food service company eager to land new business may structure a deal that over-services a customer at the expense of fleet efficiency. Three years in, the customer may no longer require five delivery days, for instance, but the issue is never revisited, and an opportunity for cost absorption is lost. 

The strategy, then, is to employ technology that leverages algorithms and analytics to determine the optimal service level for each customer, in the context of the entire network and customer base. “There’s a historical inertia of SLAs, where the company says, we have a big, new account, so let’s make sure to get there five days a week,” Witte says. He added that this issue is especially pronounced in food and beverage, “and it’s never readdressed.” 

Successful fleet operators, Witte says, are the ones solving this problem in a data-driven fashion. Technology can be applied to calculate the optimal SLA and delivery schedule based on volume, history and forecast demand, and companies can use that data-backed intelligence to inform more equitable contract terms. 

Given the right technology, data analytics and proper driver buy-in, fleet operators can structure a compensation plan based on completed stops that incentivizes performance. As route optimization reduces missed stops and improves capacity, it creates a virtuous flywheel: higher productivity, increased delivery accuracy, a willingness to take on more volume, lower churn and fewer assets in use. “Where companies fall short in these programs is failing to properly engage drivers, who have no true sense of expected productivity,” Witte says. “Also, utilizing simple historical models is not enough. It requires proper modeling, clean data and the right optimization technology to determine what is possible.”  

Supply Chain Costs as Strategic Advantage 

One area of cost absorption that can yield significant benefit for private fleet operators is in reducing empty miles, a perennial issue across trucking.  

A consolidation of industry statistics from 2020 put the overall average of empty miles at about 15% for asset-based carriers, and 25%-32% for independent owner-operators and private fleets. The National Private Truck Council put it at 20%-30% for its members. Regardless, that’s a lot of wasted dollars and opportunity lost. 

Major retailers, food service giants and CPGs leverage their vast freight networks and technology to increase backhaul miles, either internal or external via load boards. Mulqueen says there are opportunities in both primary and secondary networks, but it requires tight synchronization of inbound and outbound transportation. A modern routing software solution can utilize algorithms to analyze load patterns and identify backhaul opportunities. 

“Their first priority, instead of using third-party freight, should be to do internal backhauls,” he says. “I have some product that I need to bring back to my manufacturing plant or some finished goods that I'm going to bring back directly to my DC after I do the front haul to my customers. The ability to increase backhauls, people who can master it, that's a competitive advantage.” 

When it comes to mitigating inflation, Witte says fleet operators need to look to cost absorption strategies. With inflation impacting everything from fuel to insurance to wages and new asset purchases, fleets have to run leaner and meaner. “It becomes a question that companies forget to ask,” he says. “Instead of just accepting these costs, why don’t we run fewer miles, and buy fewer trucks? And you can't just answer that question arbitrarily. You’ve got to look at the data, do the math and really dig into playing the ‘what if’ game. If I have a 5% increase in business, how do I not buy 5% more assets and hire 5% more people?” 

Sometimes, Witte says, the data will point up the need to make hard choices, like giving up unprofitable routes or dialing back where you’re over-serving accounts. “It’s a tough discussion to have because in the distribution or LTL world, we're in the service business,” he says. “But at the end of the day, if we keep doing things that are losing money, why are we doing them? At the very least, it generates customer conversations on pricing and frequency of service levels.” 

As for fleet transportation as a cost center, Mulqueen says that’s not necessarily a bad thing; it can be used as a competitive weapon if run efficiently. For instance, major food service fleets exist to provide a high level of service. The objective becomes minimizing costs but within the customer’s operational constraints. This can include metrics like percentage of delivery windows hit, adherence to vehicle restrictions and the efficiency of driver execution. “The fleet that does this best, especially in commoditized environments, has a big advantage,” Mulqueen says. 

Seeing Cost Absorption Success 

Witte points out two route optimization solutions as examples of cost absorption success stories. 

The e-commerce arm of a multinational grocery retailer was looking for a way to optimize routing on its 85,000 delivery stops a day. The company was running 950 trucks over 415,000 miles weekly to 29 fulfillment centers. As demand for e-grocery exploded during the pandemic, they needed to improve routing, yield management and time-slotting technology. With tech-infused cost absorption planning, the organization was able to meet its requirements for dispatch and execution, daily optimization, appointment scheduling and more. 

Within seven months of implementation, the company was able to earn back 200% of the projected savings, shaving off $1 per order on average. Metrics such as orders per hour and miles per order both improved significantly. 

A worldwide dairy producer and distributor faced challenges in a northern European country, where it operates 300 vehicles and delivers dairy products to 3,000 customers daily. The company needed a solution that could help it meet tight customer delivery windows and provide them with transparent schedules. 

With the implementation of tactical routing technology, the company was able to reduce total kilometers driven by 8%, provide accurate ETAs for customers, and lower time spent calculating new tactical plans by 50%. In addition, the overall improvement in delivery quality led to fewer customer complaints and support hours logged.  

With more companies turning to private fleet transportation to mitigate risk in the for-hire space, and inflation threatening profits, the need to reduce insourced costs runs high. While some variables are non-controllable, such as fuel and insurance, there are routing and scheduling strategies and technologies that can yield significant benefits in terms of cost absorption. 

Through deep analysis of historical and real-time fleet transportation data using algorithm-driven tools, patterns emerge leading to keen insights and better-informed decisions. As a result, things like over-serviced accounts can be revisited, backed by solid analysis. Also, reductions in empty miles yield savings as well as revenue opportunities in backhauling. 

Resource Link: https://ortec.com/en-us/route-optimization-foodservice-beverage