Shippers appear dedicated to getting ahead of potential truck capacity constraints in 2011.
Trucking operators and industry observers say interest in dedicated contract carriage is growing as warnings increase about various regulatory and market dynamics that will put surface line-haul capacity at the forefront of concerns in the coming year.
A rewrite of hours-of-service rules, the Comprehensive Safety Analysis 2010 program, new emissions standards and the rising costs of replacing fleets that have been aging through the downturn all add to the jitters of cost-strapped shippers.
Directory: 2010 Dedicated Contract Carriers.
That has many suggesting some private fleet operators will turn to dedicated contract carriage to preserve cash and hedge risks in what many believe remains a fragile economic recovery.
There was definitely more traction in the dedicated sector in 2010 than in 2009, said Herb Schmidt, president of Con-way Truckload. He said Con-way is negotiating with companies that reached out during the recession, and capacity concerns are driving other shippers to explore or expand use of dedicated contract carriage.
“We will have some opportunities for dedicated business in the first quarter of 2011 that we couldn’t even sniff last year,” Schmidt said. “Business tends to spike when shippers are concerned about capacity.”
Deals will hinge on reaching agreement with shippers on reasonable margins and ensuring that costs remain transparent. “It’s not rocket science,” Schmidt said. “You have to have a good way to measure cost and share savings with shippers.”
Interest in dedicated operations tends to track the economy. In boom times, dedicated carriage can account for up to 20 percent of Con-way Truckload’s revenue, and as little as 1 to 3 percent during downturns as rates fall and capacity soars.
Shippers of commodity goods or products with fewer specialized service requirements tend to drop or curtail DCC services during the lean days of the recession. “They will go to annual contracts or the spot market,” Schmidt said.
DCC customers are showing a new willingness to embrace longer-term agreements that allow carriers to leverage their relationships with multiple shippers to drive down costs. That comes from reduced dwell times, consolidated shipments and fewer empty miles. “The only way to do that is through more collaborative relationships,” Schmidt said.
Armstrong & Associates, a Stoughton, Wis.-based research and consulting firm, estimates the dedicated contract carriage sector counted about $10 billion in revenue in 2010, up about 10 percent year-over-year. That isn’t saying much considering that 2009 was one of the worst years in memory for the sector.
“Last year was such an aberrant year for dedicated contract carriage that it’s easy to get fooled by the big numbers,” said Richard Armstrong, chairman and CEO of Armstrong & Associates.
Three-year contracts are standard, but that could change as companies, wary of a capacity crunch, seek longer, more strategic agreements with carriers. As capacity tightens, there could be a surge in DCC deals in the early part of 2011, Armstrong said.
The dedicated sector, like much of the transportation industry, underwent fundamental changes during the recession in terms of practices, costs and strategies, said Dan Van Alstine, senior vice president and general manager for the dedicated services division of truckload operator Schneider National.
“A lot of past practices and paradigms were broken,” he said.
Schneider’s dedicated business is expected to generate about $550 million in revenue in 2010. It is focused on value-added services, including specialized equipment, shorter hauls, direct-to-store deliveries and private fleet enhancement in a post-recession environment in which companies trying to preserve cash are deploying much smaller shipments to retail end-users.
“That is now a huge part of what retailers are doing, and DCC providers are moving into that space,” Alstine said.
Private fleet conversion depends on a company’s specific needs; the only generalization is a bunch of exceptions. It could be that the product or commodity has a unique equipment profile or baseline capacity requirements. Dedicated carriage might be deployed as an extension of a sales organization with guaranteed levels of service.
Dedicated fleet services offer total costs savings in the range of 10 percent to 15 percent while enabling companies to reduce operational risk and retain control. Driver pay and benefits, which average about 38 percent of fleet costs, are reduced by an average of 10 percent, fuel costs between 3 percent and 8 percent, and operational costs such as freight integration by an average more than 10 percent, according to Schneider.
And now that logistics and transportation staffs have been cut to the bone, shippers are warily eyeing the capacity situation and starting to focus on creating long-term solutions.
Alstine expects the regulatory matters — CSA 2010, hours-of-service rules and environmental mandates — could take as much as 10 percent of available truckload capacity out of the market. “These changes could have a lasting impact on our industry and will continue to force new thinking as it relates to outsourcing,” Alstine said.
The dedicated contract carriage business fluctuates according to the health of the economy, but the recent downturn had more companies hunkering down than changing distribution strategies, said Raymond Wisniewski, president and chief operating officer of National Retail Systems, a logistics provider based in Hasbrouck Heights, N.J. Few NRS customers abandoned dedicated operations for the low rates that marked the spot market, and the recession didn’t bring many new customers into the fold.
“If there’s money in the budget, you look at doing something different, and if not, you tie everything down,” Wisniewski said.
NRS provides dedicated services through Keystone Freight, its full truckload and dedicated fleet division. The keys to its success include the company’s extensive network, its dynamic work force and the ability to be highly flexible to handle fluctuations in demand and specific customer needs. With its focus on retail customers, the company has executed nimble operations such as “pop-up fleets” dedicated to a single customer over a short time to help launch a single store, distribution site or product.
Companies that change from private fleets to dedicated carriage often do so after glitches or missed opportunities that force them to re-evaluate their networks. They might be operating in areas where backhauls are difficult to find, and start exploring options for capacity at a flat rate for a fixed period of time.
For the retailing community that NRS serves, it’s all about getting products on the shelves at the right time; if products aren’t in stores, they can’t be sold.
“That’s basically the dedicated contract carriage model,” Wisniewski said.
According to a June 2009 survey of the DCC industry sectors compiled by consulting firm SB Hirsch, companies that relied on private fleets and drivers viewed them as marketing assets and competitive differentiators and as less costly than DCCs.
“Those guys have been the face of the company for a long time,” said Bennett Hirsch, president of SB Hirsch. “They don’t know how they can possibly change that.”
Among industry segments, manufacturing and retailing present the greatest opportunities for private fleet conversion, but experts say that sort of change usually means a directive from the top of the company. These days, that person often is a chief financial officer who may be crunching numbers on the real impact of truck operations over time.
Factors that bode well for increased DCC usage include ongoing cost-cutting and paring down of staff, and fundamental shifts in the economy. Clouding the outlook for the sector is a general lack of funds for sales and marketing to get the DCC message out.
“Trucking companies are struggling to maintain their existing business,” Hirsch said. “It’s hard to find dollars to increase dedicated business.”
At the basic level, dedicated carriage involves a decision on how to treat capital, said Michael Eaton, principal with Chainalytics, an Atlanta-based logistics consulting firm.
The private versus dedicated fleet debate is one that is ongoing in many companies. Among Chainalytics clients, the balance these days is tipped in favor of DCC as concerns grow about capacity constraints, CSA 2010 and an aging, shrinking driver work force.
For most startup operations, there’s no question companies should use dedicated carriage. For established companies where private fleets are an inherent part of the organization and can be part of customer service teams, there is tilt toward private fleets.
“It’s very hard organizationally to replace a true private fleet with dedicated carriage,” Eaton said.
The biggest impact of the recession on the DCC sector has been the deflation of contract rates.
Because of falling returns and cost pressures, many trucking providers reduced their dedicated fleets, particularly in the food and consumer products sectors. Those fleets now are being rationalized again as the economy improves, and there is little talk these days about further dedicated fleet reductions.
The most successful DCC relationships are based on the premise of value over time, as long-term commitments enable carriers to build economies of scale into their networks, Schmidt said. Dedicated networks tend to become more efficient as gain-share agreements based on backhauls develop, giving carriers flexibility to ramp volume up or down and tie in shipments from multiple customers.
When DCC is done right, it’s a win for shippers and carriers. Shippers get guaranteed capacity, better service and less cargo damage, while carriers get lower turnover, lower fuel costs, more predictable maintenance cycles and dependable revenue streams.
Given what Schmidt calls the capacity “headwinds,” many shippers probably are better off with dedicated carriage except for the most critical, core business shipments. Few if any new private fleets are being rolled out, and only the largest retailers are expanding their fleets.
“I’m not seeing any shippers look at the costs of running an asset-based fleet and saying that the math works,” Schmidt said.
Contact David Biederman at email@example.com.