The Overestimation of the Benefits of 3PL Versus Private Fleets

Executive Summary

Companies maintain private fleets and they have important advantages.
The largest private fleets are concentrated in specific areas.
Specific areas of logistics are more prone to outsourcing.
Private fleets are shrinking. Interestingly, outsourced transportation is highly promoted while it is infrequent to promote private fleets.

Introduction to the Overestimation of 3PL vs Private Fleets

There is a general misimpression presented that outsourced transportation has taken over private fleets, or that private fleets are configurations from a bygone era. This freedom oversold as a trend. It is true that roughly 80% of companies use some form of outsourced transportation, this does not mean that many of these same companies do not also have a private fleet.

See our references for this article and related articles at this link.

Where are the Largest Private Fleets Concentrated?

Today the largest private fleets tend to be in specialty transportation, such as cable companies or gasoline distribution, but not always. Wal-Mart is an example of a retailer that has a very significant private fleet. According to World Trader 100, Wal-Mart’s fleet consists of 8,000 drivers, over 7,600 Class 8 tractors (95 percent with sleeper units), and over 30,000 rolling-billboard trailers (both 48-foot and 53-foot equipment). Clearly being so large, and having such high delivery time accuracy requirements, they are a natural fit for running a private fleet.

Even when Wal-Mart was starting out, they also employed a private fleet as many common carriers were unwilling to truck material to many of the small towns that Wal-Mart started out in. Private fleets are also prevalent in grocery distribution, which should provide some insight as to why companies keep private fleets. The top reason named is to attain performance levels often not available from conventional carriers. The cost of transportation is only one aspect of the expenses related to goods movement. Less solid carriers can create larger costs related to synchronization with the business operations. For instance, with many companies reducing inventories, this means transportation has less leeway in the delivery window. Less freedom translates into higher costs. One can either have fewer stocks or less expensive transportation, but not both.

“Swinehart at Bridgestone Firestone notes the company’s drivers are critical to supply-chain efficiency. “We get high marks (from our customers) for our clockwork operation, since our customers always know when our truck will arrive so they can have the proper staffing at the right time to unload the truck when it arrives,” says Swinehart.”

Because of this, it makes little sense for a company only to focus on costs of transportation. In fact, contrary to what is often claimed, private fleets tend to exist when the demands are simply too high or too specialized to be performed by a common carrier.

Advantages of a Private Fleet

Some of the advantages of a private fleet noted by Inbound Logistics Magazine:

“Guaranteed capacity. This is often the prime reason shippers use a private fleet. “Companies simply can’t get enough capacity from common carriers,” says Beth Enslow, Aberdeen Group.
Enhanced customer service. Third-party trucking carriers may not place the same level of importance on customer service as a company’s own truck drivers. Private-fleet drivers have frequent interaction with a company’s customers and can act as a customer service asset.
Scheduling flexibility. Rather than depending on a carrier to pick up and schedule shipments, private-fleet operators set the timetables themselves, which gives them more control over on-time deliveries.
Can design fleet to meet specific needs. True Value’s private fleet, for example, is heavy on high-cube trailers so that the company can maximize cubic space for its unusually sized items. This ability makes its shipments more effective.
Free advertising. Plastered with ads, a private fleet’s trailers act as “rolling billboards” for the company, says Bridgestone Firestone’s private fleet manager, Ron Tartt.”

Several disadvantages to private fleets are higher capital outlays (although this can be mitigated by leasing the equipment) as is described in the quote below from Supply Chain Brain.

“Another way that MADC (which is a logistics/trucking and warehousing co-op for 1400 Dunkin Donuts stores in the Northeast) tightly manages its DC operations is with intense use of its private fleet that it leases from Ryder Transportation. The fleet consists of 62 road trucks and 110 trailers in its road division. In the route division that serves stores directly, there are 95 tractors, 108 trailers and 12 straight trucks. Most of the 300 employees at the DC are drivers and driver helpers. In fact, only 40 employees are receivers and pickers, so the trucking operation is a critical part of the MADC operations.”

This shows an inability to run as efficiently by picking up other freight on the return trip. Although part of this is a myth, as will be discussed further on in this post.

What Areas of Logistics are Most Prone to Outsourcing?

Common carriers tend to compete in the commodity space of the freight market. This quote is from the National Private Truck Council.

“Retail grocery stores, for example, often operate a private fleet to facilitate efficient delivery of products to their stores. Their private fleet places them in the trucking business as a means of enhancing their primary business, which is selling grocery goods.”

Large long-haul trucking is the most visible part of the trucking industry, but is only one component, as is brought out in NAICS report:

“To the general public the truck transportation subsector is associated with large fleets of long-haul trucks run by common carriers. The subsector is much more complex and diverse however. Its diversity can be meaningfully understood by the size of freight being shipped (truckload, less-than-truckload), industry specialization (electronics, produce, high-end goods), the size of the trucker’s market (regional, national), trip origins and destinations (ports, regional distribution centers, warehouses, retail outlets) and the availability of the trucker’s services to shippers (common, contract, or private).”

The Size of Private Fleets

In 2011 there were roughly 1.2 million straight trucks and 429,000 trailers that were part of private fleets. In fact, the only area where common carriers are dominant over private carriers is long-haul trucking. Although even companies that employ private fleets do not use them exclusively. As described by the NPTC report

“Private fleets handle nearly two-thirds (65%) of their company’s total outbound freight while hauling 31% of the inbound freight volume.”

This combined use of private and about carrier fleets is referred to as “blended fleets.” Also in the short-term private fleets are not seeing continued declines in freight carried.

“Private fleets strengthened this side of the business, hauling 32.5% of all freight, compared with 31% last year. These gains came at the expense of dedicated contract carriers and for-hire carriers as capacity constraints began driving up rates.”

Blended fleets are important because they allow the private fleet owner to rely upon a certain component of their trucks during specific times according to the quote from WT100.

“But, Olds advises companies might not want to do all its own trucking. “It’s like the 80/20 rule, where 80 percent of the time your combination of company trucks and hired carriers will work just fine,” he explains. “But 20 percent of times there could be an emergency. You want to be able to handle that emergency with your own trucks. This is our philosophy in a nutshell.”

The Real History of 3PL Logistics

The long-haul trucking companies spend money on advertising to describe how superior their offering is, as do 3PLs. In fact, 3PLs are some of the most aggressive marketers in the supply chain space. Private fleets do not spend money on advertising. Therefore, the information available on private fleets versus the outsourced logistics options tends to be highly skewed. In fact, as I write this article, I know there are so many individuals in 3PLs with a bias towards outsourced transportation (particularly those with a sales quota), that any. This casts outsourced transportation in a negative light may elicit strong negative feedback. If instead, the article was to take a dim view of private fleets, very few managers that work in private fleets would care, and I would probably never hear about it. Furthermore, the growth of outsourced logistics has been consistently overestimated for quite some time. This is highlighted by the quote below from Supply Chain Digest:

“Regardless of the region, companies expect the percent of spend that goes to logistics outsourcing will grow in 2010-2012. For example, North American respondents expect the outsourced percentage to rise from 47% of spend today to 55% over the next five years.

There’s just one problem. Respondents to this survey have been predicting the same thing for many years, and the increases just haven’t materialized. As shown in the figure below, spending on logistics outsourcing as a percent of total spend has remained basically flat for all regions, despite yearly projections for growth.”

Moving Towards Private Fleets a Positive Development

The movement towards fewer private fleets has not necessarily been all that positive. The State of Outsourcing Report also notes that many customers are dissatisfied with the technological capabilities of 3PLs, which has been a constant problem with 3PLs. Of course, 3PLs also tend to have small profit margins, which brings up the topic if whether they can afford all the expensive investments that their customers expect. The following quotation, which is from a well written, although a one-sided article by Clifford F. Lynch in Logistics Quarterly on the topic is representative of many of the benefits that should accrue from outsourced transportation (that is they are logical in the abstract) often do not result.

“Common carriers also offer state-of-the-art supply chain engineering capabilities far beyond the reach of most private fleets. With expertise in logistics, transportation management, industrial engineering, network optimization and process improvement, they are masters of finding opportunities to reduce costs, improve service and minimize both trucks and miles.”

The Reality on Private Fleets?

Again, the advertising on these topics does not match the reality. Clifford denies that private fleets have better driver retention, lauding the recruiting practices of the big common carriers. The industry is in major denial as to the causes of the driver turnover. It is a tedious and undesirable job, and therefore, requires excellent treatment of the drivers to keep them at the wheel.

This is similar to the concerns about the continual nursing shortage that hospitals decry, yet so few hospitals to anything to improve the working conditions of nurses, including possibly giving the nurses more autonomy vis-a-vis the doctors.

In medicine, maintenance of the existing hierarchies is more important than alleviating labor shortages (notice there is almost never a shortage of doctors because it’s a great job). Therefore, most of the articles on the topic of driver retention enjoy skirting the issue. Addressing the issue would mean, well describing the companies could make the jobs better, and that is a big no-no in the business press. Logic is secondary to telling your readers (and advertisers) what they want to hear.

Common Carriers and Poor Pay and Working Conditions

Back to Clifford’s article, he describes that the common carriers

“Common carriers are rising to the occasion with innovative programs aimed at enticing new drivers to a life on the road. Advertising campaigns targeted to demographic groups not commonly represented in the industry are widespread, and economies of scale make them far less costly than any programs individual companies could launch.”

Good jobs don’t have to be advertised. Bad jobs do. Again, nowhere in this article is the job quality addressed.

Therefore, 3PLs and common carriers cannot be used as great examples of why outsourcing other services is a good idea. Manufacturing outsourcing has been far more successful. The jobs created in both outsourced transportation as well as outsourced manufacturing end up being worse. Manufacturing outsourcing means moving the jobs to very low wage countries, however, even with transportation and logistics outsourcing, it also means decreasing standards of living. Therefore, much the reason for outsourcing in both areas is cost reduction rather that a drive for quality or taking advantage of “economies of scale.” According to the NPTC benchmarking study,

“Average pay for drivers in the private fleet community was reported at $58,784, as reflected by the annual W-2 earnings statement. Starting pay for drivers held the same at just under $50,000 this year.”

Shrinking Private Fleets

While private fleets shrank from their heyday as a percentage of the total trucking industry, they are still a major component, as described by the NTPC below:

“Private fleets are the largest part of the trucking industry,” says Gary F. Petty, president and CEO of the National Private Truck Council (NPTC), an Alexandria, Va.-based trade group that represents private fleet operators. “There are approximately 33,000 private fleets in the United States with 10 or more vehicles,” he notes.

The degrading of private fleets by the outsourced transportation companies has gone on for some time, and while logically seems to make sense, in reality, the benefits do not match the proposed benefits of outsourced logistics. Therefore, a blend of private and outsourced transportation is likely to be with us for some time. Some of the significant benefits that are often proposed by common carriers, which includes the ability to avoid deadhead miles (miles are driven empty or mostly empty) could also be mitigated by more advanced freight brokering. This would mean that private fleets could publish their deadhead routes ahead of time, conform to some standard delivery contract, and essentially perform a common carriage for another company using their private fleet truck. This system would be far more efficient that anyone 3PL or long-haul trucker could accomplish because it could allow the sharing of freight across all participating common carriers and private fleets.

A Technology Backend

Therefore, given the right technology backend, coordination of loads across multiple private fleets is possible. With the internet, this design is entirely feasible. I am surprised someone has not come up with and commercialized this idea already. Although there are not freight boards specifically targeted towards private carriers, there are sites like The SuperBoard, which allow loads to be posed for only $5 per month. There is no reason that private fleets could not avail themselves of these sites if they wished.

There are some web-based load boards like this. They mostly come across an amateurish. Also, it’s probably not a good thing to have many different web boards as this means the companies looking for trucks or private fleets looking for loads have to search multiple sites, which is inefficient.

Industry Popularity

<p “>Given the opportunity, one would think 4PLs would have already set their sights on this market. Not so. Performing a search for fourth party logistics providers and service or spare parts brings few results. We found remarkably little published and surprisingly little focus on the part of companies attempting to build this market. So whatever the opportunity, it is not anything close to an industry trend as of yet. <p “>It is clear that 4PLs and service parts go together. A search on Google for “service parts” and “fourth party logistics providers” brings up our blog on 4PLs for the first four results. Many of the other results below don’t cover the issue and are false matches. Why aren’t more companies focused on this?

4PL or Parts Hub

In the article on auto service parts networks, we describe the problems that plague these selling and discuss how these networks could be made more efficient. A software vendor saw our article and contacted us to talk about it. After we had spoken with John Snow at Enigma (a software firm focused on service part content management and decision support), we learned that he also came up with a similar concept a year ago. We have since adopted Enigma’s term which is the “Part Hub” to describe this network design where inventory from non-associated dealers is pooled and co-managed. We won’t go into the description and design in this post because it is fully explained in the link.
A part hub would be one way to approach the problem, and it is no doubt the right answer for some sectors. Other areas may instead rely on a “fourth party” to organize and coordinate their part information, and provide a collaborative, unified view. The right approach has less to do with technology and more to do with how much-centralized control there is on the network in question. There are a lot of layers to the present service part network onion, and some ways to peel it. There is no doubt in our mind that this problem will be solved with the development of an IT platform that accepts feeds from multiple sources and can manage inventory at many different organizations as if it were one.

Possible Solutions

There is a continuum on which possible solutions for 4PLs focusing on service parts networks would rest.

For instance on one extreme would be a SAP SCM solution combining Service Parts Planning (SPP) + Event Management (EM) + a web front end. While a favorite of large enterprises, we think this solution would be a bit expensive, complicated and overall too “heavy” for a small, nimble, 4PL. On the other side of the continuum would be the Amazon.com solution. The process flow looks like this:

Dealers would submit their inventory to Amazon by the web, or flat file
Orders are placed on the Amazon.com site and electronically forwarded to dealers
The package is shipped by UPS or DHL or other and the vendor, taking advantage of Amazon.com’s interface to these carriers, and Amazon displays the transit progress through its website to end customers (as with any standard Amazon.com order).

<p “>This solution, which is available to use right now by any dealer network interested in doing so, simply by signing up to sell on Amazon.com, is missing some desired functionality. How to Add What is Missing What is lacking in the scenario above is forecasting and order management – which accounts for things like supersession/interchangeability. For this, other systems would have to be incorporated that would provide this. A 4PL could use the Amazon.com front end and tracking capability – which is free – with a forecasting package and order management decision support system. The Intermediate Design

The 4PL would simply need to get inventory on-hand balances and sales histories from its network, and put them into a forecasting engine. It would then send the recommended order amounts to the system as flat files, which the network dealers can decide to order or not to order. The real on-hand balances are maintained by the dealers, through uploading to Amazon.com. The order management and supersession would most likely be another site, where customers would go. (Service parts have a lot of permutations and complexity, and therefore they require a particular order engine.)

This would be the site where customers would begin. Instead of trying to process the order, each part would simply have a link to Amazon.com within the interface. In this way, the supersession or order management engine is integrated with the order creation and tracking of Amazon. Once the correct part is chosen, the user is taken over to Amazon.com by selecting a buy button. This type of hyperlinking integration is nowhere near enough taken advantage of, as companies continually attempt to create their functionality, rather than using the functionality of large platform providers.

Is this Really Integration?

It may not seem like integration; however, if the user does not need to make extra keystrokes or mouse movements, we propose that it is integration. In our view, many of the ideas of integration are overly IT focused. That is an IT person might say that since the applications are not exchanging data (flat files or XML, etc.) the example above, about the order management to Amazon.com is not integration. Our answer would be — who cares? If the experience is seamless to the user and allows them to use the best of different systems, that is integration. Too much effort is being spent trying to reinvent something that has already been accomplished and mastered. Why not take advantage of it and enhance one’s standing with your customer? No one will mind being forwarded to Amazon.com for order submission because Amazon has a top flight shopping front end, payment, and checkout interface. A final advantage is Amazon has a better order history function, as well as a “wish list” (things not yet ordered but desired), making it even easier for end customers to keep track of and schedule their future orders. To adequately communicate this concept, we thought we would develop a simple graphic which shows which entities are interacting, and what are the major data interactions or interface interactions between them.

A final advantage is Amazon has a better order history function, as well as a “wish list” (things not yet ordered but desired), making it even easier for end customers to keep track of and schedule their future orders. To adequately communicate this concept, we thought we would develop a simple graphic which shows which entities are interacting, and what are the major data interactions or interface interactions between them. This diagram shows which parties or hosted software providers would exchange data with other parties

On Demand and The Web-Centric Throughout

Amazon is already web-centric. It is important, although not necessarily critical that the forecasting and order management/supersession software be web-centric as well. This means that the software providers should offer web-based access to their products. This would allow the 4PL to use the software as a service directly.

Integration would occur via the web with simply FTPing files between the servers of the various software companies, dealers, and Amazon.com. Some of the file transfers would be automated, but some would be manual.

This 4PL provider could be located anywhere and could service multiple dealer networks, in many different industries, all based on electronic data transfer from different systems, and all using the same web-centric integrated solution. The pricing could be incremental, allowing both big and small dealer networks to participate. A network may start small, but then add dealers as the network’s capabilities become known and other sellers begin to get interested in joining.

Lack of Original Thinking

“It’s an important fact to face that one’s chosen profession is not filled with people who tend to think “outside the box.” This applies to supply chain management generally but to 3PLs in particular. It has been several decades since the 3PL concept became popular, and what do we have? Do we have some platforms created by logistics companies to enhance the capabilities of their customers? No, we do not.

What Does 3PL Mean

What 3PL seems to suggest is just moving some of the people from the supply chain execution and monitoring function within shippers to the same job at an asset-based transportation or contract warehouse provider. We call this “simple outsourcing”, and it adds microscopic value, and in fact may subtract value. This is in essence accounting trickery. Short term costs go down, but long-term costs and capabilities are about the same or rise slightly. There has been so much written on the 3PL trend, and what is behind it is so modest that it’s amazing that as many articles have been written about it as have been.

Getting it Right With 4PL

3PLs did not add much value to the process and did not make supply chains much better. Much like a shell game, a lot of things were only moved around, so it looked like progress was being made.

Just Say No to Buzzwords

4PLs offer an opportunity to get it right. To do so companies must not only use the concept or buzzword to cover up the same old tired offerings, as was repeatedly done with the 3PL craze. 4PLs must create platforms and capabilities that did not exist before for the term to have any lasting value. No matter what we say, salespeople will use the term 4PL when the business they represent is not one. The beautiful thing about web-enabled systems is they can be tested immediately. No one has to hypothesize or guess what working with Amazon.com’s fulfillment system is like. You can sign up and login in 1/2 hour from now.

Savvy shippers will say…

“Leave the sales rep at home, let us test the system with our people at our pace, and will get back to you.”

Getting Creative

The first order of business is to begin asking how new uses of technologies can be rolled out to improve the transparency of the supply chain. One of the biggest ones is how a universal monitoring system can be built to stitch together different supply chain partners. SAP has a product called Event Management that attempts to do this and has the concept right, but it is tough to implement and is cost prohibitive (not the software, the implementation which is a bear) for many companies. They also are lacking the web-centric concept. You can read more about this web-centric topic here.

Web enablement is one area that needs to be worked on, but there are many others.

We have our favorite technology question that should be answered..

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Conclusion

The increased use of common carriers, or outsourcing of transportation, as well as the rise of 3PLs, is used as an example of why outsourcing is a good idea. For instance, I recently read a simplified version of history in a poorly written “white paper”/marketing collateral by Accenture to justify outsourcing supply chain planning services as well. Outsourced transportation has not been a big success story, and outsourced transportation very strongly tends towards areas of commodity trucking, such as long-haul trucking. Primary drivers for outsourced logistics are often not the high-minded concepts presented by proponents of outsourced logistics. Many times it is just cost.

Furthermore, the promises of 3PLs have mostly not materialized, although 3PLs still tend to market as if they are the newest great thing. In fact, it’s hard to keep up with 3PL marketing, some of which are now marketing themselves as 4PL without understanding that a 3PL providing 4PL services are in 99% of cases an oxymoron. A lot of the technology that is brought up by common carriers as a competitive advantage to them is in many cases not expensive (such as GPS units) or can be provided by service providers such as freight boards, freight brokers, etc. Vehicle routing software is not expensive and is attainable by all by the smallest fleets.

Secondly, both outsourced transportation in the form of long-haul trucking and 3PLs have led to lower living standards for those that work in those companies. Even with these lower wages, long-haul trucking and 3PLs are not that much more attractive than private fleets, which calls into question the “economies of scale” that are often touted as reasons for outsourcing transportation. Furthermore, companies are moving back towards private fleets because while they are not less expensive, they are easier to manage and produce better transportation outcomes.

The Debate Between Private Fleets and Common Carriers

The debate between private fleets and common carriers goes back some time, and will certainly continue for some time. In researching this article, I found a newspaper story on a conference held at Northwestern University in 1962 to debate this very topic. However, while there is an attempt to present a clear-cut answer to the question, the answer continues to be mixed.