For years, when a trailer door closed at a private fleet, another opened in dedicated contract carriage. That’s changing as economic retrenchment chokes billion of dollars from supply chains, slashing shippers’ transportation budgets even as transportation rates hit lows not seen in years.
Some companies offering dedicated contract carriage are expanding. Others are spinning their wheels, hoping an economic recovery will strengthen anemic freight flows.
It’s a mixed picture that underscores how relentless economic pressure is changing trucking.
Some carrier and logistics executives say shipper interest in outsourcing private trucking operations waned in 2009 as rate wars push for-hire pricing below the basement. Others say shippers struggling to cut costs are more interested than ever in dedicated services.
It’s clear, however, that a business long isolated within transportation purchasing operations now is being blended and balanced with private fleet operations and becoming more thoroughly integrated with contract warehousing and non-asset transportation management services. In that process, dedicated carriage is becoming less focused on replacing private fleets and more on lowering total transportation costs.
Shippers are looking to dedicated contract carriage to find innovative ways to control costs, take private carrier assets off their books and take control of the often fluctuating world of truck capacity. Companies that provide dedicated services — which include an array of third-party logistics providers, warehousing and equipment leasing companies, truckload and less-than-truckload carriers and specialized fleets — are diversifying to survive.
The recession has been particularly tough on business in the congested, expensive Northeast. Even in one of the nation’s worst industrial markets, companies are finding niches and areas of growth. That’s what is pushing Lily Transportation’s expansion.
“Our business continues to grow, and I’m not sure why except that we’ve just found ways to grow our business by either saving people money or by improving their service to their customers,” said John Simourian II, president and CEO of the Needham, Mass.-based company, which has been involved in dedicated carriage for more than 50 years.
Privately held Lily has expanded in the grocery and paper industries, Simourian said. “We seem to be growing with the right customers who are adding the right customers. We do a fair portion of grocery, but at the same time, we also do some auto parts, some construction.”
With its diverse customer base, Lily isn’t dependent on any one industry. “I would say we’ve been lucky so far,” Simourian said, “and sometimes it’s better to be lucky than good.”
Some carriers might envy that luck — especially those serving the recession-battered retail industry.
“It’s been very hard for us to make any profits,” said Raymond Wisniewski, president and CEO of National Retail Systems, which provides dedicated fleets for some of America’s largest retail chains. “We just have to watch and control everything and make sure that we’re not running fat,” he said. “We’ve slimmed everything down, and we don’t add any more costs into the pipeline than we have to.”
Responding to the downturn, NRS is diversifying its business, adding customers in industries that haven’t suffered as much as retail, such as pharmaceutical suppliers. “We bought some reefers and went out and got refrigerated freight just to keep things going,” Wisniewski said.
Talk to carriers, and “keeping things going” quickly becomes a theme.
“When there is less stuff moving, it is going to have an impact,” said Todd Jadin, senior vice president and general manager of dedicated services for Schneider National, the fifth-largest trucking company in the nation in 2008 by revenue. “We’ve tried to do some things with customers, in particular verticals who are less impacted by the economy.”
When it comes to converting private fleets to dedicated contract carriage, “I think private fleets are always under threat of being outsourced,” said Richard Armstrong, chairman of market research and consulting firm Armstrong & Associates. However, he said, in this area most of the low hanging fruit already has been picked, and depressed common-carrier rates make private fleet conversion less attractive.
“The other thing is that DCC is a very mature business,” he said. “To the extent that dedicated was encroaching on private fleet activity, I think an awful lot of that momentum has passed. Most of the takeover of private fleet operations has been done, and to the extent that you have private fleet operations now, there are far fewer real opportunities for someone to take them over and make money as a dedicated contract carrier.”
For private fleet conversions, the low-hanging fruit is gone, Simourian said. “I think there is fruit out there that is still waiting; those will come along in their own time. They are the best-of-the-best private fleets,” he said.
He believes growth in third-party outsourcing will continue. But dedicated operators will gain not from converting private fleets but from converting less-than-truckload and truckload volume to third-party operations. “It’s the piece that makes the most sense. Everybody in the industry knows that within a 250-mile radius of origin if there is a concentration of enough volume there, so it usually makes the most sense to go to a private or third-party fleet to handle that movement.”
Still, some DCC providers have seen increased interest in private fleet conversion during the downturn.
“The impact on the dedicated contract carriage side of the business has not been large,” said John Williford, president of Global Supply Chain Solutions at Miami-based Ryder System. “Our DCC business serves industries such as retail, food, and industrial products, which have been impacted by the economy, but our business levels have only been down about 5 to 7 percent, year over year, in the past couple of years. Also, this year, we have a very strong pipeline for new business.”
Williford believes the downturn has spurred interest in changing fleet strategies. “More than ever, companies are looking to outsource their fleets so they can focus on their core competencies. A DCC solution frees up capital and management to work on more strategic issues, which is where many companies feel their focus needs to be right now. We’ve seen a definite increase in prospects this year,” he said.
Schneider’s Jadin also has seen an uptick in inquiries. “As the economy has worsened, companies are deciding to concentrate on their core competency rather than continuing to operate a private fleet,” he said. “Outsourcing to a transportation provider whose core competency is transportation makes good economic sense from the standpoint of a preservation of capital to their core competence, and also from a risk-mitigation perspective as it relates to the potential liability associated with running a private fleet.”
However, Jadin said, one reason these companies are turning to dedicated providers is that for-hire common carriage is sometimes not a viable alternative. “With many of the private fleets that we converted, the freight that they’re moving wouldn’t be conducive to a one-way or a spot brokerage type of environment,” he said.
Michael Eaton, principal with the Atlanta-based logistics consulting firm Chainalytics, said shippers are re-examining their private fleet and DCC operations, reflecting a blurring of the distinction between the two. “We have seen a couple of clients getting completely out of private fleets altogether and moving that volume into dedicated operations, but it’s been tweaking — perhaps a 5 percent shift,” he said.
“The common carrier market has continued to get cheaper, and that’s caused many of our clients to convert volume out of private and dedicated activity and back into the common carrier market,” Eaton said. “Most of our larger and more sophisticated shippers use private and dedicated carriage as some portion of their total shipment delivery portfolio.” As much as 20 to 30 percent of their total freight spend might be in dedicated and private carriage, he said.
“They want to maintain some presence there, and what they’re really looking at more closely is how to reallo-cate what they are using,” Eaton said. “If they are committed to 300 pieces of equipment, they are asking how they can most cost-effectively utilize that equipment in the context of everything else that’s going on in the common carrier rate market. We have seen a step up in this kind of activity.”
Based on comparison with service available in the for-hire market, most private fleet owners have discovered they are burdened with private fleet assets, Eaton said. However, he noted, as happened in the past, this cycle in for-hire trucking overcapacity will eventually end.
“The pendulum is going to swing. As the market begins to recover, common carrier rates will go up and private fleets will begin to look more cost competitive against their common-carrier alternatives,” Eaton said.
He said that in 2004-05, when for-hire trucking capacity was tight and freight was moving at high rates, “corporations were screaming at their fleet managers about why their private fleets weren’t twice the size they were. For the last couple of years, my firm has helped folks look at rationalizing those fleets because, with what’s happened to common-carrier rates, they are typically overpositioned on fleet equipment.”
John M. Smith, president and CEO of CRST International, Cedar Rapids, Iowa, has seen the phenomenon first hand.
“We’ve seen our (DCC) business fall off quite a bit, both in terms of it being difficult to add new contracts and in our current contracts where we’ve seen our customers ask us to bring down the amount of equipment we have dedicated to them — if they have 10 trucks they may be asking us to bring them down to two or three,” Smith said. “One of the reasons we’re not able to add contracts is because the spot market rates are so low now that it just makes more economic sense for some customers looking at converting to dedicated fleets not to do so.”
Still, Smith believes it makes sense to target private fleet conversions in the tight economy. “Some of the reasons we haven’t been able to make fleet conversions haven’t been price-driven; it’s been because of their concerns about service. Now price may make a bigger difference, so where we can offer reduced costs we have a potential to make some other conversions,” he said. “I think there are some real opportunities there.”
Penske Logistics has found challenges and opportunities in the new economic reality, according to Joe Gallick, senior vice president of sales. “Consistent with the industry, our DCC revenues are down approximately 13 percent, year over year, while our domestic transportation management net revenues (total revenue generated from shippers less direct expenses paid to carriers) are down slightly less.”
He said Penske’s aggressive fleet planning, along with stringent operational management and disciplined spending, allowed the company to offset a fair amount of these shortfalls in its dedicated operations, while the company’s non-asset-based transportation and logistics management services have actually done quite well.
Gallick also sees the economy driving greater outsourcing and private fleet conversion, noting his company has capitalized on businesses that began to view their fleet operations as non-core, as well as look for ways to solve increasingly complex logistics problems and satisfy their customers’ higher service requirements.
“The economics of operating a private fleet often come under heightened scrutiny during difficult times. Evidence of this trend can be seen in the increasing number of RFQs we’re receiving from potential customers, as the role of procurement in logistics outsourcing and contract negotiations attempt to drive commoditization in the logistics industry.”
Gallick cited the recent example of his company landing a long-term contract with Cardinal Health, where Penske Logistics assumed control of a 450-tractor fleet and 600 drivers, while offering Cardinal improved efficiencies in managing its network planning, fleet optimization and technology.
Wisniewski also has increased interest beyond fleet conversions. “We’ve gotten more inquiries where it appears that they have even broadened the spectrum of things they would like us to do for them,” he said, “such as controlling the freight, taking over what their transportation departments did and relying on us more — actually getting rid of a few people in their area and saying, ‘You guys do it; you’re the transportation experts.’ ”
“We haven’t seen a lot more conversions of private fleets, but we have had a lot more conversations about it,” said Karl Meyer, chairman and CEO of 3PD, based in Marietta, Ga. With 500 locations in North America, 3PD uses independent contractors with 1,700 trucks to provide last-mile delivery and logistics services for large appliances and business equipment.
3PD’s reliance on owner-operators makes it an unusual provider in the DCC market. “Everybody has seen a significant reduction in their business — our business has been off 20 to 30 percent with some customers, but being non-asset-based has allowed us to react much better than some of our competitors who are asset based,” Meyer said.
He believes some companies are simply used to having private fleets being a part of their operations and are reluctant to take the step.
“We actually have some service offerings where we are getting traction with interest from companies in better management of their private fleets. But as for outright conversions, there are hurdles there, and if those were eliminated, I think we would have seen a tremendous amount of conversion. Because they have cultural issues that are combined with assets they are still liable for, that conversion becomes difficult.”
Contact David L. Sparkman at email@example.com