Trucking – Necessary Evil or Profit Generator?
Without fail, every time I present an educational session on efficiency at a convention seminar, at least one marketer asks my advice on trucking. The most commonly asked question is, “Should I sell my trucks and use common carrier? In my experience, every marketer has three issues in mind when they begin to think about getting out of trucking:
1) Risk reduction
2) Profit maximization
3) Maintaining strong customer service expectations.
Should you sell your fleet to a common carrier and let them haul for you? Let’s look at some creative ways to meet your three goals that aren’t quite so black and white.
Segregation - One of the first things you can and should do to reduce liability risk, and get a clear picture of the exact level of profitability your fleet provides, is to spin all your transportation assets into a separate company, preferably an LLC. While attorneys like the liability separation, I recommend segregation because it also forces you to examine your freight rates, operating costs, efficiencies and true profits.
Segregating your transportation also may provide you with a distinct pricing advantage. You gain leverage if you commonly quote margin above freight – in some markets it allows you to slide a bit more profit into your deliveries.
From the flip side, you will also learn exactly what freight rate you need to cover your current expenses. Is it more or less than what you would pay a common carrier? When you segregate your transportation, include all truck costs – driver payroll and benefits, truck fuel, maintenance and repairs, depreciation or lease payments, insurance etc. Very quickly you’ll have a clear picture of your trucking efficiency and profitability that will allow you precise information to make this very strategic decision.
While a separate division is a good first step, one of the advantages of a totally separate company, is the ability to see your trucking assets on a balance sheet. With those assets clearly delineated, and your monthly profit and loss statement, your return on capital investment will be perfectly clear. You can then compare the return on those assets to your core petroleum business and make an informed decision.
As an interesting side note, I’ve had several clients create separate companies only to discover that transportation was actually more profitable than their other business. Some have even sold their fuel businesses becoming common carriers themselves! Others have discovered their costs are very high compared to commercial carriers and have opted to sell their fleets.
Customer Service – Even if the financial data is pointing towards the sale of your fleet, one of the concerns about moving to common carrier is loss of customer service. Some marketers have conquered this issue by placing time window requirements in their common carrier contracts. The carrier gets hit with reduced fees if they don’t deliver within your time window. Other marketers have negotiated dedicated trucks and even drivers. Particularly if you sell your fleet and drivers, you can stipulate continued use of those assets for your customer base, but the common carrier market is vastly different in different regions of the country. In some markets, you’ll be able to negotiate great contracts. In other marketers, it’s really tough to get any concessions.
Easy Deliveries/Hard Deliveries – Depending on how your economics shake out after you segregate, there are two instances where common carrier usage makes particularly good sense. First, easy full load deliveries on tank monitors. Customer service quality is not as much an issue here, particularly if the customer is already on contract, such as a dealer. The second instance is difficult deliveries where your equipment would get torn up or used up prematurely. For instance, a mining company load drop at the end of a long and bumpy dirt road would be a good one to give to a carrier even if you have your own fleet.
Emergency/Disaster Considerations – Whether you keep you fleet or go 100% common carrier, Katrina and Rita taught many marketers that control was hugely important. By letting go of your fleet, you leave yourself vulnerable during trucking shortages unless you contractually cover disaster contingencies. During those hurricanes, clearly the marketers with their own fleets won this game, followed by those with strong penalty-enforced carrier contracts. Those without contracts often found themselves with no way to haul fuel and angry customers.
Efficiency Counts – Whether you stay or get out of the fleet business, you still must automate to drive costs down in your system. This includes automated dispatch even if that is to your carrier. If you keep your trucks, then GPS and slick order capture that gets beamed to home office immediately after the drop is the way to go.
In summary, if you are in the midst of the fleet debate, take the following steps. First, segregate your transportation assets and costs into a separate company division. Second, using a competent CPA and attorney, move those assets into a separate company, preferably an LLC. Third, maximize profitability and Return on Capital Employed through automation and efficiency. Fourth, after researching common carrier contracts in your area, make an informed decision that pleases customers while maximizing profits. That may mean keeping your fleet, or selling out to a common carrier, or doing both.
