Fleet & Distribution Outsourcing
Should a water quality company consider distribution or fleet outsourcing? The question already has been answered. Companies in this field have been outsourcing fleet and distribution in some form or another since the industry began. In the fleet function, the tire service dealer, the body and paint shop and the electrical component rebuilder all are examples of outsourced fleet vendors. FedEx, UPS and Consolidated Freightways are core transportation service providers but, in fact, they also outsource many of the elements of their own transportation requirements. The question, therefore, should be presented in terms of degree, so as to ask, "How much fleet/transportation outsourcing is right for my company?"
Let’s begin with an overview of the current environment for business, with a particular interest in fleet and transportation, and follow with a discussion of some of the quantitative and qualitative considerations that should be considered in an analysis of "own vs. outside" in your fleet function.
It’s no revelation that we are competing in an ever more difficult business environment. We face larger and more aggressive competitors with many companies now acutely driven by annual reports and daily stock prices. The comments of an industry analyst on Wall Street ultimately can affect a company’s survival. We also must be prepared to compete with a constant flow of new and hungry smaller competitors, some with a lower overhead to carry, and some pricing below reality for the chance to gain a foothold with volume at any price. Water quality industry owners and executives live with the constant potential of a buy-out, re-organization, downsizing or bankruptcy. The day of the "safe" job is gone.
Customers are demanding a constant array of new and innovative products, more intensive and flexible service options and higher quality, all at a lower price. One individual’s problems may create another’s opportunity. Alvin Toffler’s book, Future Shock, predicted "acceleration in the rate of change" back in the early ’70s. Who among us could not confirm this premise? You will never be sure that what sells today will sell tomorrow. Today’s free market capitalism is a marvelous economic engine, but it is not going to stop to let you off the train for a breather.
Water quality company fleet management is dealing with a host of new issues that include changing operating and environmental conditions, revolutionary and evolutionary new vehicle equipment and hardware, and new vehicle management control systems. One also should acknowledge the exciting growth of the relatively new concept of "supply chain management," which seeks to integrate production scheduling, marketing, financing, warehousing, material handling and delivery of inbound and outbound materials. It depends on increasingly sophisticated information management systems and management techniques.
Private fleets in the United States are under increasing pressure to justify their existence. No longer can the fleet remain secure in the service niche that existed prior to trucking de-regulation in 1982. With the waning of the various protective tariffs and operating authorities controlled by the ICC, there emerged a competitive and dynamic market that reduced the influence of the old regulated carriers and the organized labor groups who were their employees. Not only did rates fall for freight bills and transport labor, but new and innovative carriers entered the marketplace providing specialized services previously unavailable from anyone but private fleets.
These competitive pressures also allowed many alert private carriers to negotiate less punitive labor agreements and to appropriately complement their operations with specialized contract carriage and rigorous back-haul solicitation. Today’s remaining private fleets are indeed the fittest survivors of the species. Many other fleets were forced into a brutal comparison-shop environment for which they were ill prepared. Some private fleets have ignored the changes, to their current and future detriment. Many companies have failed to separate their transportation labor costs from other components of their business, resulting in higher cost indexes than in transportation-specific industries in the de-regulated, competitive trucking industry.
In today’s environment, American business has increasingly adopted a philosophy of "core business competence" and has become suspect of its former vertical integration and diversification. Support services of all kinds are being analyzed for alternatives, and the option to "outsource" to competent contractors is even more attractive. The emergence of a large number of knowledgeable and competent outsourced fleet and transportation service providers has made this possible, providing value by lowering costs and maintaining or improving service levels. An ever-expanding array of outside contract services has emerged, with increasing competence and specialization, and is focused on providing a complete soup-to-nuts menu of options at competitive cost, service level and shared risk.
The attraction of outsourcing also is being driven by the increasingly complex and specialized nature of operating a fleet today. Let’s take a look at the new environment including the legal restrictions and changes in vehicle operating conditions.
- Air quality is a public concern that drives many vehicle-related issues. The Federal Clean Air Act and the Energy Security Act both are focused on reducing exhaust emissions from motor vehicles as well as utility and industrial plants. In connection with various individual state regulations, California, New York, Texas and Massachusetts are driving up the cost of new equipment, requiring significant time for in-service testing of emissions and requiring eventual purchase of alternative-fuel vehicles in certain weight categories.
- Our water supplies are vulnerable to vehicle-related activity, and laws holding vehicle operators and transportation facility owners responsible for surface spills or ground water contamination, which may be tough, and compliance is expensive. Fleets must upgrade the design and control of their vehicles, fueling and storage tank facilities, fleet service garages and parking facilities to minimize pollution risks, and employees must be adequately trained and their conduct monitored for "publicly responsible behavior." Formal "spill response plans" are required. The cost of a contamination clean up can be extraordinary with many companies having paid well in excess of $1 million to clean up a single site.
- The rush to avoid some of the risk has resulted in the permanent removal of thousands of underground storage tanks, which in itself is a costly expense. The resulting need to acquire fuel from outside vendors has increased the net price one must pay. As fuel is a major component of total operation cost, this cost can raise the total cost of vehicle operation by a significant amount.
- Fleet maintenance facilities are faced with increased cost for legal disposal of used motor oil, solvents, anti-freeze, filters, tires and asbestos-based components. Employees must be trained in proper handling of these and other hazardous materials. Painting a vehicle in the open environment is illegal and must be performed only in approved booths, with clean breathing air supplied to the technician, and only low-emission, high solid paints may be used.
- The good news is that today’s manufacturing quality has resulted in highway vehicles with much more dependability and durability than just a few years ago. Given proper maintenance and driven by a trained professional driver, a heavy-duty tractor can be expected to run three quarters of a million miles without overhaul, as opposed to about 300,000 in the ’70s. A well-maintained gasoline-powered light-duty vehicle can achieve engine life double and triple what was obtainable for the same weight class ten years ago. Maintenance costs are actually lower in real terms, and many outsourced providers of maintenance services have been proposing guaranteed rates that are lower than five years ago.
- The development of high technology applications to motor vehicles has made today’s vehicles not only less costly to maintain but more fuel-efficient and extremely controllable for better safety and customer service. Interactive, two-way satellite communication of voice and data has become essential for competitive service levels in the transportation field. Obsolete equipment is more of a liability than ever before. However, today’s equipment does require a new level of technological savvy to maintain and repair.
So, how can someone decide what level of outsourced fleet/distribution to use? The answer to this question requires an honest and rigorous analysis of existing proprietary cost structure and operating profile and a comparison with the various alternative services and costs available from outsourced providers. It also must include a realistic view regarding the company’s cultural prejudices and disposition to support any substantial change from current practice. An analysis of existing contractual obligations for labor and facilities also is necessary. In all cases, be sure to project cost comparisons out at least five years into the future; after all, the current cost is already history.
Outsourcing makes sense, in particular, when the following conditions exist.
- When business is growing at a pace that demands critical concentration on the "core competency."
- Senior management is not averse to considering change.
- When existing fleet/distribution management may not be up to the task now or in the future.
- When capital is difficult and/or costly to obtain and off-balance-sheet financing may be attractive.
- When technology is obsolete and vehicle replacements have not been adequate.
- When the existing labor environment is costly, unproductive or non-competitive.
- When company image, customer service and employee morale is adversely affected by poor vehicle performance and condition.
To insure the success of any outsourced fleet or distribution initiative, be sure to secure the following.
- Senior management commitment.
- Control of the analysis process to maintain strict confidentiality.
- A strategic partnership mentality.
- Clear-cut goals and objectives.
- Input from all departments and personnel affected by the project.
- A specific plan to implement use of high technology on an ongoing basis.
- An appropriate level of due diligence (allow your partner to adequately learn about your business).
Benefits of Outsourcing
- Free up financial and human resources to concentrate on core business.
- Cash management — Lower up-front funds required, lower monthly payments, improved cash flow forecasting, improved reimbursement for regulated industries or federal/state government contractors.
- Income tax benefits — Reciprocity of tax benefits, deductability of lease payments and avoidance of purchase penalties.
- Off-balance-sheet financing.
- Minimize risk and liability.
- Fewer direct employees.
- Financial issues — Lower net present value cost, no impact on line of credit, no restriction of capital budget and option of eventual ownership of asset.
- No labor negotiation requirements.
- Fuel services available.
- Replacement and/or additional vehicles available.
- Governmental compliance.
- Flexibility and convenience — Less acquisition time, one stop shopping, improved asset management, flexible payment options and warranties.
- Expert technicians and emergency road service.