Consider 3 Logistics Options When Making Capital Decisions
Decisions that positively or negatively affect your manufacturing or distribution business are made every day. As the demand for your products increases, so does the need for a transportation plan that delivers to your customers, while at the same time keeping your business in the black. There’s no question that investing in transportation, whether it’s one tractor and trailer, or numerous tank trucks, is a significant capital investment; determining the risk and opportunities that exist with each option is critical to making the most cost effective decision for your company.
Fortunately, there are a number of different options available that can provide value for your business. Investing in your own private fleet of assets, developing a partnership with a logistics provider on a dedicated contract basis, or utilizing the for-hire marketplace offer both risks and opportunities. A thorough assessment of your business’ logistics needs, and evaluation of the available options is essential to developing the best logistics plan.
Determine Your Needs
An important first step in evaluating how to invest your transportation dollars is to understand what your logistics needs require. Depending on your business, you may have consistent movement of product that requires on-time delivery between your production plant and customer warehouse. Seasonally-driven businesses, agriculture for example, may need a truck and driver only during specific months of each year.
The needs of your specific business can lead you to assess what investment is the most cost effective, provides the appropriate level of risk for your comfort and most importantly, gives your business the best opportunity to grow.
There are three transportation options that require proper consideration as you determine the best investment for your logistics needs.
1. Private Fleet
Investing and managing your own private fleet provides the opportunity to maintain the overall control and increased flexibility in managing your transportation and supply chain. But private fleet ownership does not come without cost:
- Equipment costs –the cost of one tractor and tank trailer can vary between $150,000 to $250,000 each, not including maintenance. Maintenance fees can be terribly expensive, so be sure to when assessing the total cost of your equipment needs, you include regular maintenance costs.
- Labor costs– hiring and managing a fleet of drivers is critical to the success of owning a private fleet. According to the American Transportation Research Institute(ATRI) driver wages represented the second largest share of total average marginal costs in trucking operations, second only to fuel costs. The driver shortage and cost of maintaining a safe, well-trained, crew of expert drivers must be considered.
- Liability/Insurance costs– while safety is a top priority in transportation, accidents inevitably happen. Your business assumes increased liability risk, at an increased cost, when employing a private fleet of trucks and drivers.
2. Dedicated Fleet
A dedicated relationship with a professional logistics company can provide an option for your business, especially if you have limited capital available for investment in rolling assets.
In a dedicated relationship, you can negotiate with a logistics provider for a specific amount of delivery capacity. This relationship is contractual, but there are usually no minimums, no specific requirements and no penalties. In a dedicated capacity situation, the logistics company agrees to provide a certain amount of
trucks at a certain price.
The dedicated contract carriage option is a more formal contractual relationship. In this instance, the logistics company deploys both employees (drivers) and assets (equipment) for the exclusive use of the shipper for a specific period of time. This relationship is typical when there are specializedneeds or requirements of the shipper that cannot be met in the open “you call-we haul” market. In addition, the shipper must promise a certain amount for freight.
The dedicated relationship mitigates risk for your business by eliminating overhead equipment, maintenance and labor costs and reduces the liability risk for your company. Utilizing a dedicated relationship allows you to focus on your core competencies to increase revenue, gain efficiencies and enhance overall business performance.
3. Transactional Common Carrier
A transactional, common-carrier, also called a “for-hire” carrier is available to transport your businesses goods on an as needed basis. These carriers have both assets and drivers available for your transportation needs.
Shippers use for-hire carriers for a number of different reasons; some have an inconsistent need for transportation; other businesses may already have a private fleet, but experience a surge of demand on occasion that require them to hire additional carriers.
Transactional common carriers can provide you with the flexibility of a private fleet without the overhead cost, and the availability of drivers without the labor hassle. Yet, the cost of hiring a common carrier is based strictly on market value. Typically, you’ll pay more for each truckload using a for-hire carrier on an interim basis, than you will using a private or dedicated fleet over the long-term and common carriers generally provide the most generic of services which may not meet the special handling requirements of your products
How best to deploy your business’ capital is a decision that cannot be taken lightly. As you consider which transportation and logistics option best mirrors your overall strategic plan, be sure to consider all of the potential risks and opportunities that each option presents, placing high value on cost reduction and enhanced efficiency.