Private fleets: reports of their demise have been greatly exaggerated
July 1, 2005
Many members of the trucking media and other industry analysts spent much of the past 15 years predicting the death of the private fleet. It never did happen, of course, and the experts have been spen...
Many members of the trucking media and other industry analysts spent much of the past 15 years predicting the death of the private fleet. It never did happen, of course, and the experts have been spending the last couple of years eating crow.
Sure several businesses did outsource some of their fleet duties while others looked to third-party logistics providers to provide dedicated cartage services, but the size of the Canadian private truck fleet in relation to the for-hire fleet never really changed substantially. And by 2003 Canadian private trucking operations were estimated at $24.4 billion, almost $2 billion more than the revenues generated by the for-hire trucking sector.
How could so many people be so wrong?
I think the speed with which supply chain management practices were shown to contribute to a company’s financial performance, and the growing understanding among executives and the stock market of this reality, caught industry analysts by surprise. While it was once common practice for companies to spend their money ensuring they had the best engineers and sales people to create and market their products in a competitive market place with scant attention paid to how their products reached their eventual destination, industry leaders such as Dell, Home Depot and Wal-Mart showed that not only should the transportation function not be ignored but that it could be used a strategic weapon against competitors.
There have been a number of impressive studies conducted recently that have been able to show a direct link between supply chain performance and financial performance. A Canadian study, published a couple of years ago, is one of the most impressive in showing the link. The study was conducted by the University of Western Ontario and the Georgia Institute of Technology. What the study was looking to do was document the real cost of a glitch in the supply chain. A glitch was defined as anything that led to a major production or shipment delay.
The study tracked 861 examples of major supply chain glitches announced by publically held companies over a 10-year period. It found that, on average, the stock market penalized public companies announcing supply chain glitches with nearly a 9% drop in stock price. The average destruction in shareholder value for the 861 glitches analyzed ranged from $120 million to $140 million. Put those 861 glitches together and the overall destruction in shareholder value was estimated to be between $103 billion and $120 billion. Nor was this a hole that was easy to climb out of. The study found no evidence of recovery in stock price for the next 60 trading days (90 calendar days).
And, by the way, it didn’t matter who in the supply chain caused the glitch – if it was the company’s own logistics practices, or its main for-hire carrier being involved in a strike and causing the disruption in the supply chain – the stock market still penalized the shipper with a significant drop in value.
Such clear evidence of the importance of a company’s transportation and logistics function is impossible to ignore and brought about another significant change many analysts may have been slow to appreciate: the changing face of the private fleet manager. With so much at stake companies could no longer place the responsibility of their private fleets in the hands of people capable of only ensuring the fleet had a satisfactory record on safety and maintenance. The new private fleet manager had to understand the “bigger picture” of how the transportation strategy contributed to the company’s overall competitiveness and financial performance.
As our profiles of two successful private fleets (see pages 26 and 32) indicate, today’s private fleet managers are no longer caught up in pure private fleet versus pure outsourcing scenarios. They have become masters at understanding all the options and financial implications of everything in between. They have learned to embrace outsourcing of their transportation needs in areas where it makes sense – linehaul in some cases, equipment leasing in others. And they have learned to hang on to their assets in cases where they need to ensure long-term capacity, cost control or customer satisfaction.
In other words, private fleets are no longer bound to any one model of management but are constantly searching for the best way to run their business. And that’s why they will be with us for a long time to come.