Companies build their own truck fleets. Is it worth it?

Transporting supply goods or distributing final product through first, middle, and last miles is a challenge at the best of times. But the last 2 years were anything like the known “normal” challenge.  Shortages of transport capacity, trucks, truck drivers, and inventory storage spaces destroyed carefully balanced just-in-time strategies, leading companies to improvise their immediate tactics and rethinking their longer term strategies.

Retailers chartered/bought their own ships, bought/built their own warehouses, and went shopping for their own transport fleets. Previously acknowledged strategies of outsourcing their non-core assets have been swapped for asset build-ups. While ship chartering/ownership seems to be an outlier and building and ownership of warehouses may be justifiable, owning a dedicated transport fleet is a much more complex proposition.

Until the chaotic times of the pandemic, resulting shift in buying behaviors, and the subsequent challenges of e-commerce fulfillment, many companies relied on fully outsourced transportation. This became a challenge, when inventory bullwhip effects, delayed shipments, and swings in freight volumes caused problems with transport outsourcers to fulfill all transportation orders of their customers in full and on time. Thus we made a full circle to many middle-sized retailers considering ownership of their own fleets.

Owning a fleet requires quite a bit foresight in figuring out the best mix, selecting the vehicles, assuring proper maintenance and running the fleet at full capacity day in, day out. A steady demand on known routes makes for relatively easy determination of the fleet’s mix. Location and selection of warehouses, logistics centers, and cross dock facilities has to be mapped into the configuration of the fleet(s). Simulations allow high degree of fleet optimization in advance of the decision to build the fleet. However, unsteady demand with undeterminable delivery addresses, the characteristic of e-commerce delivery, represents a real problem. Rather than relying on simulations, companies must implement real time load and routing optimization maximizing transport assets at their disposal.

The case of the American Eagle Outfitters illustrates complexity of operating own model. Initial acquisition of AirTerra, which specialized in optimization of hauling on the basis of own fleet and warehouses, was followed with acquisition of Quiet Logistics to better control own loads on those trucks and expand warehouse network. If your company intends to follow this model, make sure you match the fleet you are building with the style of your warehouse/logistics centers network.

Uncertainties of owning something outright coupled with worries about the availability of service and capacity drove some companies to establish hybrid models: outsource the more predictable mainhaul transport and in-source the less predictable last mile delivery fleet.

All three transportation operating models (own, fully outsourced, hybrid) have their pros and cons. Clearly, the hybrid model is the most challenging.

One way to run a hybrid system is to own internal fleet to serve all internal transport needs and spot call on a 3rd party transportation company to handle contingencies and capacity demand spillovers at seasonal peaks. This works if all other companies using this approach don’t experience the same wild swings of capacity demands at the same time. That was not the case recently. Even if the costs of calling someone else’s fleet for spot services was not prohibitive, the transporter might not have been able to provide capacity at all for lack of equipment (stuck somewhere else) or/and drivers (quarantining on medical advice). Disruptive capacity brokering platforms like Convoy or Freightlancer in U.S., Cargo 123 or Euro Freight Exchange in Europe, Duckbill or oTMS in China are trying to bring greater transparency to matching transportation demands and supply, but spot buying is inherently more risky when it comes to assuring right capacity at the right time in the right place.

Use of the less predictable spot market (price, capacity and equipment availability) for overflows can be handled by contracting a specialized transportation company for all transport needs and use own fleet to handle contingencies or demand overflows at peaks. Under that scenario, your own transport assets sit in the transportation yard and wait. They could idle for hours, days or weeks. Clearly, they tie up working capital and the whole set up requires greater awareness of demand and capacity optimization. The most common tools to help are the Transportation Management Systems developed for “steady as she goes” times and not for managing unexpected peaks and troughs experienced today.

If your company relies on 3rd party outsources for 100% of your transport needs, you need to consider a few tricks leveraging the data you have to contract smarter. If you decided to run your own transport fleet or run a hybrid ownership model, you need to build your own transport optimization toolkit.

1. Model your fleet usage scenarios. Please, don’t do it in Excel spreadsheet and keep in mind that your current TMS system may not offer sophisticated planning and optimization functions. You ought to be able to run multiple what-if scenarios, so having a logistics optimization tool with the built-in ability to create and compare unlimited fleet utilization scenarios is the right way forward. The big issue is that your fleet needs to be built considering constraints of your infrastructure like warehouses, cross-docks, yards, etc. and transport infrastructure (roads, bridges, streets, re-fuelling stations, etc.) No sense to run more trucks, if they have to queue and idle in front of warehouses with few loading/unloading ramps or get stuck in traffic on narrow streets leading to your pick up and delivery locations.

Advantage of using logistics optimization tool is that it does not only consider known costs, but it enables you to create scenarios with less predictable future costs such as fleet maintenance, drivers’ salaries and benefits, on-road expenses, and many others. Unlike transaction-centric transportation management applications (TMS), the planning & optimization tools allow looking outside of transaction history and take into consideration other financial and non-financial factors.

2. Make sure you can link your what-if scenarios to your business performance KPIs. Managing efficient transport means trade-offs and it is not a zero sum game: what you give up in one KPI, you will not automatically recover it in another. The more competing KPIs you have, the more difficult evaluation of each scenario.

Doing this manually takes a lot of time, so planners are tempted to cut corners by considering limited number of fleet usage scenarios, fewer or aggregate cost factors, and limited number of KPIs. Choosing optimization application with integrated analytical engine can enable observation of change to KPIs in real time and opportunity to see how change in one KPI impacts another. That makes the trade-offs easier to understand and explain to your Finance team, especially when logistics costs start overruning the budget.

3.     Planning means nothing, if your execution fails. There is no plan that survives intact the first contact with the reality. That is the reason why transportation management without integrated optimization fails to control usage and costs, exposing your company to cost shocks which are impossible to pass down to your customers or renegotiate with your providers. Combination of needs forecasting based on data and continuous optimization of fleet capacity to smooth out errors in forecasting ensures that the assets you have in your transportation network are utilized to their utmost potential. If you run your demand analysis on paper and your transport order assignments solely in TMS, you risk multiple execution failures, which no planning can survive.

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