Presented below is a white paper authored by two executives with Argo, Inc., a performance-improvement consulting firm.
Authors James Mourafetis, vice president of Argo and Uday Kamat, director of Argo, detail how, in their view, private fleets can contribute to the top-line growth of their parent firms by acting to ensure both fleet reliability (a combination of availability and asset quality) and fleet utilization…
Is Your Fleet Contributing to Top Line Growth?
By James Mourafetis, and Uday Kamat
Manufacturers and distributors tend to view private fleets as a necessary cost — a cost that’s continually rising due to higher fuel prices, competition for drivers and stiffer regulations.
But by taking a “big picture” perspective — by leveraging trucks as revenue capacity generators through overall network optimization — a necessary cost can instead become a contributor to the top line.
Here’s one example. A $12 billion transportation company — one of the largest in the United States — was experiencing steady volume growth and wanted to maintain service level excellence for new and existing customers. The initial plan for achieving this involved significant fleet capital investment and an increased fleet operating expense. A larger fleet would allow them to keep up with demand, as would decreasing fleet downtime by improving maintenance processes.
Before proceeding, they invested in a system-wide fleet effectiveness assessment — an evaluation of the fleet, the network, the workers, and all the relevant systems and processes. The assessment showed that only 15% of fleet downtime was due to maintenance, whereas 50% was related to network design, asset turnaround at distribution/terminal centers and fleet/crew scheduling. In other words, even if the company improved its maintenance processes to cut maintenance-related downtime in half, the overall impact would have been minor.
Instead, the company realigned its strategic initiatives to support a “big picture” approach to minimize asset effectiveness losses — losses caused by assets doing things other than delivering goods to customers. They achieved savings of $100 million in less than three years, and are on track to realize long-term savings of more than $1 billon.
And with the new asset effectiveness plan, the company will generate additional load capacity of 3-5% within two years, 10-12% within 5 years, and 28-31% in ten years — increasing revenue as the organization handles demand growth without investing in additional assets.
Now, the company above was a Class 1 railroad, but the same lesson applies to all transportation firms — by taking a holistic view, the right operational improvements can not only reduce costs, but allow for additional revenue.
From Asset Effectiveness to Top Line Growth
The effectiveness of a private fleet (what we call the AEI, or Asset Effectiveness Index), is the percent of time that trucks are doing what they’re supposed to — delivering goods. AEI is the product of three components: asset availability, quality and utilization. Availability refers to the percentage of assets that are available for use (as opposed to, say, languishing in a repair facility). Quality is the first time quality associated with the manufacture or repair of a product or service. If certain model trucks tend to break down within a month, they’re of low quality. If a repair service gets the trucks out on the road but doesn’t prevent another breakdown the following week, it’s of low quality. Utilization is how often the asset is adding value, getting goods to customers rather than returning empty to a warehouse.
In the trucking industry, AEI is generally in the low 60s — higher than the typical AEI for a railroad or airline company — though there are differences between individual fleets, as well as between private fleets and companies like UPS.
The key is to increase AEI by decreasing the amount of time trucks spend empty, idling or sitting in maintenance. This requires a company-wide framework enabling constancy of purpose and the alignment of resources to projects relevant to improving asset effectiveness. Bottom-up improvements need to be guided by a top-down strategy that ensures the right improvements are being made at the right times and in the right places. For example, there’s not much point in investing resources to improve maintenance procedures at a distribution center in Kentucky if it turns out improvements at a center in Missouri would make the Kentucky facility unnecessary or redundant.
This holistic view of operational improvement will lead to an aligned organization where trucks are more efficient. The result? Fewer trucks and/or facilities needed to perform the same or even greater amounts of work, contributing to greater margin capacity and allowing the firm to offset major capital expenses.
How Fleets Contribute to the Top Line
A fleet’s contribution to the top line comes down to two factors: fleet reliability (a combination of availability and asset quality) and fleet utilization.
Optimizing fleet reliability requires:
- Rapid turnaround maintenance to get trucks out of a repair facility faster.
- Managing supplier relationships to cut waste and ensure reliability.
- Consistent methods and procedures for maintenance and repair.
Optimizing fleet utilization requires:
- Predictable work flow through service centers: Determining the one best way to accomplish a task (changing the oil, replacing a tire, etc.), breaking it down into a step-by-step process, and ensuring that everyone follows the process. The goal is for each specific process to take the same amount of time every time, so that managers know when a truck will be ready to go as soon as the issue is identified.
- Optimal route planning and scheduling.
- Fleet “right sizing” by volume and mix.
- Fleet productivity, focusing on factors such as fuel, tires, crew, load density, empty miles, revenue per tractor day, cost of ownership, and fleet turnover.
- Network plan optimization: Planned idle time is usually the greatest cause of poor asset effectiveness and needs to be minimized — not solely by reducing asset turnaround time, but by optimizing the overall plan. For example, by setting truck delivery zones to a maximum 500-mile radius around the distribution center, the truck can return to the home distribution center the same day, eliminating idle time caused by an overnight stay at a remote location.
- Having the right footprint in the right location: Focus on improving those centers where greater asset effectiveness will allow decreasing the overall footprint.
Putting It into Practice
Developing an objective company-wide framework may require an outside resource to assess the current state of fleet reliability and fleet utilization and come up with an actionable plan for improvement. Before investing in an outside resource, make sure they have experience working with various constituents — executives, managers, union labor, etc. — to develop collaborative solutions from both a top-down and bottom-up perspective.
Having the right information is critical, but information alone won’t lead to improvement if fleet managers aren’t sure how to act upon it. Plus, the measures being used may be inaccurate, incomplete or driving the wrong improvement — they need to be objectively assessed as well.
To really initiate change, the key drivers of an asset’s performance must first be understood. The next step is to implement a simple asset performance measure that can be intuitively understood by employees at every level. This measure should directly correlate with trucks’ associated operating expenses and fleet size to ensure that it will have everyone’s attention.
This performance measure is an integral component of the company-wide framework, and helps align resources to improve the “intended purpose” of the fleet. People may be involved in different projects doing different things, but are these projects truly aligned with increasing the amount of time the trucks are performing work? By identifying and categorizing time losses — reasons why trucks lose time to non-work activities such as maintenance — resources and funds can then be aligned to reduce such losses.
As the percent of time that trucks spend delivering goods increases, the need to have as many trucks decreases — allowing fleets to handle increases in demand without spending money on more trucks and resulting in more revenue.
All too often, there’s a heavy emphasis on improving fleet productivity — just one of six components of fleet utilization — without looking at how fleet productivity fits into the bigger picture of overall asset effectiveness. Don’t ignore all the other factors that determine if a fleet is a cost-center or a contributor to the top line — not if you want your fleet to help generate revenue.