Should your private fleet consider third-party hauling?
Key takeaways
- Third-party freight can generate revenue and reduce deadhead miles when private fleets identify profitable return-trip lanes.
- Lane profitability depends on driver hours, equipment condition, freight demand, and potential out-of-route mileage.
- Financial analysis helps private fleets weigh third-party hauling opportunities against added costs and outsourcing alternatives.
The senior leadership of your parent company will continue to be pitched alternatives to the private fleet, such as dedicated services from carriers or third-party logistics service providers (companies that provide logistics services such as transportation, warehousing, and inventory).
This article is part of a five-part series on adding third-party hauls to private fleets. The next entry will be linked here when published.
Transportation procurement consultants will never turn down a meeting with executives at your parent company, and they will most likely advocate their “request for quote” and “annual bidding” processes as a lower-cost alternative to your private fleet. These alternatives can be quite tempting for parent company C-suite executives because they enable them to move fleet assets and fleet-related payroll off the financials, not to mention reducing the risk of exposure to lawsuits due to accidents and violations.
It also allows the company to be less vertically integrated and focus on its core competencies. This means that the parent company is able to focus on its competitive advantage and not peripheral business, such as logistics. The stronger the positive impact the private fleet has on the parent company, the less likely senior leadership will be to seek an outside alternative. Without a strong list of reasons why the fleet is necessary, support for it can be waived.
Third-party hauls are an avenue to bring in additional income to the fleet and, by proxy, to the parent company. There are other alternatives, such as renting out private fleet drivers to other carriers or loaning private fleet equipment to local driving schools in exchange for offsetting maintenance costs, but those options generally are not as effective in controlling fleet costs and are not within the scope of this series.
It is possible to have one third-party freight customer on one particular route and have it be financially viable to have a third-party freight process. Some of the lanes that the private fleet takes on a consistent basis might have a large upside for a return trip that can generate tens of thousands of dollars of revenue. There tends to be a lot of low-hanging fruit that can be found very early after starting third-party loads, and quick wins can be key to shareholder adoption/approval.
The parent company may want to complete a financial assessment before agreeing to allow the private fleet to take third-party loads. This can be a simple internal rate of return (IRR) analysis using standard freight rates and assumptions about out-of-route mileage, staff training, the need for additional staff, and other key factors in comparing additional cash outflows with reductions in overall cash outflows plus additional cash inflows.
This series will outline strategies and factors for a private fleet, which can serve as a baseline for the IRR analysis. It will also provide practical application to third-party freight operations once they begin. At the very least, it will allow a private fleet to have an understanding of what they are getting into if they were to decide to perform third-party hauls with their private fleet.
Lanes that are ripe for third-party hauls:
- The driver returns to the truck yard with spare hours of service, resulting in the loss of utilization for the private fleet or a loss of potential wages for the driver.
- The return trip is a lane in a market that has too many loads to send to the destination and not enough trucks to cover the need.
- The private fleet’s parent company loads are live loads for product that could potentially be drop trailer instead.
- The parent company of the private fleet tenders loads to other carriers in lanes because of lower service costs (the private fleet might take these loads if there are third-party loads, lowering the cost of service).
- The lane has driver downtime, which causes low equipment utilization.
- The driver has a high percentage of deadhead miles (pulling a trailer without a load).
Lanes that are not ripe for third-party loads
- The driver barely makes it back in time within the hours of service, and any delay will result in the loss of another day of driving. There is also valuable driving capacity that would have otherwise been covered.
- The return trip is in a lane that has too many trucks available to carry loads (saturated market), and the revenue per mile is so low that it is not cost-effective for the fleet to take on any out-of-route miles.
- The tractor or trailer used for this route is not in the best working condition and is subject to breakdowns or other downtime.
There are other non-monetary reasons to increase third-party loads, such as sustainability. Pulling empty trailers means energy expended without value. The higher the utilization rate of carriers in a company, the less waste.
In future blogs of this five-part series, we will explore the subject in greater detail.
About the Author
Uriah CliseUriah Clise
Uriah Clise is an associate professor at Cleary University in Howell, Michigan, where he instructs and creates content for operations and supply chain courses. He is also the director for the Center of Instructional Innovation. He has worked for 4 companies with private fleets, with sizes ranging from a three-truck fleet to a top-20 U.S. private fleet. He has spent over 20 years in supply chain roles, primarily in analysis and continuous improvement.