Demand for US dedicated truckload service is greater than any time in the last decade, according to carriers, as shippers evaluate any option to keep their goods moving off the docks. Rising demand and tightened truck capacity, exacerbated by the electronic logging device (ELD) mandate, has pushed up spot rates by double-digits and contract rates by high-single/low-double digits. That's spurred some shippers to look at other options such as dedicated, less-than-truckload, and intermodal services.
Dedicated truckload service, also known as dedicated contract carriage, is different than the traditional capacity contracts that are often widely discussed. Capacity contracts do not guarantee trucks, but rather dictate a rate the two sides agree that will be paid when the next driver is available. These contracts typically run for one year.
On the other hand, dedicated contracts guarantee a predetermined number of trucks and drivers every week for a rate. But they are almost always multiyear contracts. So if a shipper is an ardent believer in rebidding freight annually, this is not the solution for you.
The dedicated contract model is popular in the retail sector. Grocery stores and other retailers across the United States use dedicated trucks to feed their stores, but also suppliers will rely upon the service because of its nearly flawless on-time performance. As receivers are enacting tighter delivery windows on suppliers, the dedicated product is becoming even more popular.
Other sectors will also depend on this service if it is just-in-time cargo.
So how do you know whether a dedicated contract carriage solution is right for you? Here are nine questions that will shape your review:
1) Are you looking for dedicated service only until the capacity crunch passes, or will you commit long term?
A strong US economy is translating into more goods being transported within the United States. The Cass Freight Index reports the number of shipments in March grew 11.9 percent year over year and expenditures jumped 15.6 percent.
“The current level of volume and pricing growth is signaling that the US economy is not only growing, but that level of growth is expanding,” said Donald Broughton, managing partner of Broughton Capital and author of the Cass Freight report.
But for every capacity crunch like 2018, there is also a 2016 when trucks were easy to procure because carriers were willing to move any available freight. While the economy may remain strong this year, one day the winds will shift in the other direction.
A shipper entering into a dedicated contract, though, is making a long-term commitment with often a minimum length of two years.
Covenant Transportation Group and Werner Enterprises Inc. require two- to three-year contracts. NFI Industries will not accept business on anything less than a three-year agreement. Lily Dedicated Logistics Systems, which exclusively handles dedicated business, locks up shippers on five-year deals.
“We’ve had folks come to us recently looking to do a one-year deal or a two-year deal, looking for capacity because they cannot find anyone to haul their product, but it doesn’t meet what we do and so we turn it down,” said John Simourian II, CEO of Lily Dedicated.
Dedicated contract carriers will not work for shippers looking to secure a truck today and then leave when the market swings back in their favor.
Werner and NFI, for example, have relationships going on two decades and only wish to take on new customers who share in that long-term vision.
2) Are you willing to renegotiate mid-contract?
Times change, conditions change.
The shipper may not need as many trucks when business slows down, so the carrier can discuss the issue and reassign trucks to other customers. If business improves, the same is also true: the carrier will allocate additional assets to your account.
“[There is] a range that we're putting in place and to make sure that our customers don't have the ability to use you and abuse you ... So ‘X’ percent can come out per quarter on both sides, if we wanted to exit it. So there are protections of both sides,” said David Parker, CEO of Covenant, in an April earnings call.
He added, “We do have the ability every year to sit down and discuss pricing with our customer. So we don't have it where to say a two-year contract that we can't talk rates for two years, every one of them has the ability to be able to discuss rates.
3) How much time can I devote to finding a truck?
Within our job we have a lot of tasks to complete and are often juggling multiple projects. How much time do you really have to find an available truck on the open market?
A few years ago, one or two calls would have done it, but that is no longer the case.
NFI CEO Sidney Brown asked one of his customers in the manufacturing sector about the issue.
“He said, ‘That’s my problem. I’m spending a lot of time and I don’t really have the time, so that’s why I’m thinking about reconfiguring some of my freight into a dedicated model,’” Brown recounted.
If you don’t have the bandwidth to find a truck, then consider dedicated.
4) Are your shipping patterns and volumes predictable and consistent?
“If you have repeatable trips that are regionalized in nature and relatively dense in terms of volume, then dedicated is certainly worth taking a look,” said Derek Leathers, CEO of Werner Enterprises.
The keyword in that quote is repeatable. If you are regularly sending freight out on a Wednesday, for example, to the same destination week after week, then dedicated may be a good option. But if your schedule is sporadic and shipping dates frequently shift from a Wednesday to a Friday without notice, then dedicated might be a bad idea.
Wild swings in freight volumes also are a telltale sign that dedicated is not a good idea, according to the fleet executives. Fleets such as Werner or NFI can flex up or flex down based on occasional surges in volume, but frequent and unplanned shifts in tonnage may be better covered in the one-way market.
5) Is your freight typically moving short distances?
“It is really difficult to do dedicated opportunities when the average length of haul is 1,200 miles, you just cannot attract the drivers,” said Dave Rusch, CEO of CRST International, which has a specialized dedicated unit and a standard dedicated contract carriage operation through Gardner Inc., a subsidiary.
For the driver, the allure of dedicated contract carriage is the ability to go home daily. Turnover in the fourth quarter of 2017 was 88 percent among large over-the-road truckload carriers, according to American Trucking Associations, and has historically soared over the 100 percent mark. These drivers spend weeks on the road without a break; it’s a demanding, tough job.
Turnover is much lower in dedicated contract carriage, however, because these drivers regularly spend time with their families. So if your freight typically clocks out as a two-day or three-day haul, then dedicated may not be the right option. But if your distribution network is configured for shorter hauls, then dedicated could be for you.
“If a quarter or one-half of your freight moves within a 250-mile delivery radius of your shipping point, that’s an application that is possible for dedicated because there is enough volume to run a dedicated fleet and run it more efficiently running freight round trip,” Simourian said.
6) Will you lose money if your freight is not delivered on time? Is it time sensitive?
“What are your service requirements? If you have product or end customers where a high level of service is a core requirement, it’s increasingly difficult to get to the 98 or 99 percent performance in a one-way environment. So dedicated should be part of the conversation,” Leathers said.
This is one reason why more than 80 percent of Werner’s dedicated business is in the retail sector. With nationwide chains such as Wal-Mart imposing fines upon suppliers falling short on benchmarks of on-time in-full deliveries, a dedicated option gives you a better chance to satisfy those tighter windows. The same is true in the supermarket industry in which Kroger and Albertsons fine suppliers for late deliveries.
“The evidence is overwhelming that dedicated service is much more reliable than one-way service,” Brown said. “The same driver is going to the same place most of the time versus an over-the-road driver who is hauling different loads every week. The ability to get a higher level of service is so much easier when you run a dedicated service.”
Remember in the one-way, irregular truckload, you have very little control over which driver is assigned to transport your freight or how much time is left on his or her clock under the federal hours-of-service regulations.
“If you are bound by tight windows on either end, and especially both ends, that is not something you want to leave to the open market,” Leathers said.
7) Are you willing to segment some of your freight into dedicated?
This is not a zero-sum game. Shippers are not required to use only dedicated contract carriage or only one-way, irregular route truckload.
“It may be that you don’t do any more than 10 percent of your freight in dedicated, but any piece of it that you can take off the open market and lock up with a dedicated fleet is one less thing to worry about in this market where it’s very tough to cover freight every day,” Leathers said.
Shippers can go to dedicated carriers to conduct an analysis of what is the best solution for their supply chain. Leathers said that in many cases they find it is a poor idea and will recommend against a dedicated contract.
“We see requests all the time from shippers whereupon further analysis we are pushing back that dedicated would not be a good solution. We’re not going to sign shippers up and devote assets for a service that is knowingly going to fall because it’s bad for us and them,” he said.
Out of every 10 requests, Leathers said that only one ends up meeting all the criteria to begin dedicated service.
8) Are you willing to possibly pay more for better service?
Dedicated contract carriage is not always more expensive than capacity contracts. In fact, if you compare the per-mile rates against each other, typically the dedicated contract is cheaper. There is a catch though.
In many dedicated contracts, the shipper is responsible for bearing the costs for all miles. Deadhead miles are treated the same as loaded miles. But if there are multiple stops or freight is moving bidirectionally through the supply chain, then dedicated might be the right choice.
How does it work?
Let’s take a 600 mile haul. The dedicated contract carriage rate might be $1.25 to $1.50 per mile versus the irregular route of $2.00 to $2.25. Looking strictly at the headhaul, the dedicated option is $450 cheaper. But if you are responsible for paying the backhaul, then double the dedicated total and it’ll be more expensive.
Shippers may be able to offset those costs by moving inbound freight in the backhaul, or by working with your carrier to identify another customer with regular freight on your backhaul route.
9) Are you willing to pay fixed rates?
Most dedicated contracts require a shipper to pay fixed costs in addition to a per-mile charge. In other cases, the carrier will assess a flat rate for the weekly use of the truck and its driver.
In either scenario, the carrier is protecting the driver against wild swings in their paychecks. One allure of the dedicated business to the driver is predictable pay, unlike the fluctuations for one-way drivers.
There is also a value of the truck, which depreciates on a timetable regardless of whether it is driven one mile or 100,000 miles. Naturally, the carrier wants to log as much mileage as possible during the life of the warranty, often 36 months, to generate the revenue to pay the bills.
Fixed costs protect against the truck collecting dust in a parking lot.
Contact Ari Ashe at firstname.lastname@example.org and follow him on Twitter: @ariashe_joc.