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Fleet Costs are Getting Crazy. How Did We Get Here?

Freight transportation costs are spiraling out of control. Last-mile delivery costs in the B2C sector are now estimated at between 28% and an astonishing 55% of the total cost of goods. With delivery emerging as a competitive differentiator in the B2B sector, too, it seems inevitable that costs in that industry will follow suit.

This means your fleet operations costs are in danger of sucking substantial profits out of your company. Many businesses are grappling with how to defend their profit margins as transportation costs climb at nearly double the inflation rate; some as high as 15% year-on-year, according to The Journal of Commerce.

True, your private delivery fleet has always been a cost center, but it hasn’t typically been the biggest one. The good news is that, by automating routing and scheduling, companies can reduce fleet operations costs by 10% to 30% and bring those escalating costs under control.

But let’s take a look at what’s driving these delivery costs upward. How did we get here?

More frequent deliveries

As supply chains get leaner, companies have been competing to see who can book the lowest inventory carrying costs. Because this means less inventory on the shelf, in the warehouse and on the production line, it also means smaller, more frequent shipments delivered just in time – and that translates into higher fleet operations costs.

In a Paragon-sponsored 2017 survey of private fleet operators, one typical comment, from a furniture supplier, was: “We have gone from offering delivery 5 days per week to 7 days per week in our largest market due to customer demand.”

Meanwhile, the products companies offer are changing too. A good example is what’s happening in the food-service industry. Restaurants and other catering businesses are responding to customer demand for fresh, not-frozen food by reducing the amount of frozen food they buy, thaw and serve. As a result, food businesses need to replenish inventory far more frequently and make sure that freshness is maintained throughout the delivery cycle. More frequent deliveries tend to result in trucks that are less than full driving more miles – pushing costs upward.

Rising fuel costs

Diesel prices are currently hitting a three-year high, with little sign of relief. In the US, the average price for diesel fuel rose to $3.277 per gallon in May, up nearly 74 cents from a year earlier, and the highest since December 2014.

Fuel is one of the biggest fleet operations costs, accounting for some 30-40% of the cost of a truck-mile. The heat is on to make the most of every single mile driven in order to mitigate the prohibitive financial effect of diesel fuel cost hikes.

Tighter time windows

Retailers, from the big box chains on down, are demanding tighter delivery time windows; sometimes where there were no delivery windows at all. A typical scenario is that large suppliers are required to deliver full orders within a specified time window 85% of the time – up from 75% — or face a fine of 3% of the cost of delayed goods.

In our Paragon survey, one food supplier commented: “Customers continue to have more specific delivery requirements with regards to time of day and blackouts when we can’t deliver.”

In general, there’s an “Amazonization” of freight – with customer expectations of fast deliveries that hit smaller windows of time. Successfully meeting these demands drives up fleet operations costs; so does failing to do so, because of fines and customer dissatisfaction.

More information required about delivery status

Many companies, especially retailers, don’t just want delivery to tighter time windows; they also want increased visibility about when their deliveries are actually going to show up.

Take the case of a small, inner-city retail outlet such as a convenience store. Often, there’s a limited number of staff, and there might just be one employee working the till, restocking the shelves and supervising deliveries. They may well need to put cones out on the street to reserve space for a delivery truck to unload. Knowing that the truck is ten minutes away, or is on schedule to turn up at exactly the reserved time is crucial in order to minimize the amount of disruption to their other duties.

Real-time visibility of delivery status has long been the desire, but it’s becoming a necessity. Three-fourths of supply chain decision-makers interviewed for a 2018 study by American Shipper cited freight visibility as a critical factor for their enterprises, coming in second only to cost reduction. The delivery segment of the supply chain is arguably the most important when it comes to transparency. But gathering and disseminating reliable and timely data about progress in delivery is expensive.

Increasing environmental factors

The freight industry contributes an estimated 7% of total US greenhouse gas emissions, according to the Environmental Defense Fund, and freight movement has a disproportionate impact on air quality around railyards, ports, and highways. Freight has been identified as a significant source of local air pollutants that contribute to asthma, some types of cancer and thousands of premature deaths per year. More aggressive regulations intended to reduce emissions add costs for fleet owners needing to upgrade to more fuel-efficient equipment.

Meanwhile, as the population increases, and people move back into cities from the suburbs, there is more urban congestion than ever. In our customer survey, 10% of respondents cited congestion as the biggest transportation challenge facing their business in 2018. Working around traffic snarls and truck route restrictions inevitably means more time spent, more miles driven, and higher costs.

Driver shortage and the ELD mandate

The congressionally mandated electronic logging device (ELD) rule was intended to improve road safety, and make it easier and faster to accurately track, manage, and share records of duty status (RODS) data. But of course, in reality, it means an end to pushing the envelope on hours of service (HoS), and will often result in the need to bring on another driver to complete a journey, or delay a delivery while a driver takes the required rest.

“With the ELD mandate,” noted a Paragon customer that delivers retail and wholesale fresh produce, “Our customer still expects to send an order at the same time and receive it at the same time, even though some transit times may have changed.”

Often, in the past, managing driver shifts, including HoS, meal breaks and estimated unloading times was habitually left to the drivers to handle themselves. Now, with punitive fines targeted at not only drivers but the companies that employ them, the heat is on to do the math and number-crunch shifts and routes in the most efficient way; very difficult without routing and scheduling optimization software.

More than a third of Paragon customers surveyed said that a shortage of drivers and driver skills was their biggest transportation challenge for 2018. Driver pay is, naturally, increasing as fleet operators try to find and retain drivers, often with five-figure signing bonuses.

Taken together, these two factors mean fleet owners need to squeeze every last drop out of their driver hours and capacity. Leaving this to a manual planning process is not going to work.

Throwing more people and trucks at the problem isn’t the answer

Over the next months and years, pressure from all of these cost-driving factors will get worse, not better. With manual planning, it’s no wonder fleet operations costs are spiraling out of control. Routing and scheduling automation can not only reduce those costs now, it is the “gift that keeps giving”, keeping them to a minimum in the future.

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